California Water Service Group Annual Report 2003

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FY2003 Annual Report · California Water Service Group

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California Water Service Group 2003 Annual Report

You’re in Good Company

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California Water Service Group / 03

When faced with regulatory delays, our people said,

“We’re not giving up.” When faced with water quality

challenges, our people said, “We’ll do whatever it takes to

keep providing safe water.” When faced with opportunities

to continue to provide excellent customer service, our

people said, “We’ll go above and beyond the call of duty.”

We say,“When you are a part of California Water

Service Group, you are in good company.”

Pictured left to right, Maureen Green, Rodney Ferguson, David Maestro, and Bobby Towle proudly wear the logos of

our four regulated water utility companies: Cal Water, Washington Water, Hawaii Water, and New Mexico Water.

To Our Stockholders

At the California Water Service Group, our success directly reflects the

high caliber of our people. At every level, we work as one team to develop our employ-

ees and provide excellent customer service, which in turn enables us to build stock-

holder value. As we review our 2003 accomplishments, one fact is clear: we have

begun to emerge successfully from a difficult regulatory period in the California water

industry, thanks to the dedication and teamwork of our 813 employees.

Y e a r i n R e v i e w

Fair and timely rate relief is a key revenue and earnings driver for the

Company, so let us begin with the diligent and steadfast efforts of our Regulatory

Affairs team. When our costs increase, we require approval by state utilities commis-

sions before we can increase our rates. In the face of delays and unfavorable decisions

by the California Public Utilities Commission (Commission), our people persevered and

continued to exhaust all means at their disposal to secure rate relief. Their efforts

began to pay off in late 2003, as they gained approval from the Commission to increase

revenues by an annual $26 million, $9 million of which was collected in 2003. They

also received approval for $9 million in one-time surcharges, $3 million of which was

collected by the Company in 2003.

Rate setting in the regulated water utility industry can be complex.

Although we received numerous rate-related decisions in 2003, they all fit into four

categories. The first is the General Rate Case (GRC), which has the greatest impact

on earnings. In September of 2003, we received approval for our 2001 GRC for 14

California districts, adding an annual $12.8 million to revenues. Additionally, the

Commission allowed $4.5 million in surcharges to reflect an effective date of April

2003 for the 2001 GRC. Second, we received $2.2 million in annual revenues from

step rate adjustments, which are authorized in the years following a GRC to cover

certain cost increases until the next GRC is filed. The third is offset and balancing

account recovery, which allows us to recoup certain costs that are beyond our control,

California Water Service Group / 03

R o b e r t W. F o y

Chairman of the Board (left) and

P e t e r C . N e l s o n

President and Chief Executive Officer

including purchased water and purchased power. In 2003 decisions, we received

Commission approval to recover a total of $4.6 million through surcharges for offset

and balancing account costs, primarily due to higher electricity rates dating back to

2001. The fourth is advice letter rate filings, through which we can recover costs related

to certain capital projects; in 2003, we recovered $6.0 million in costs associated with

the Bakersfield Treatment Plant and $4.8 million to cover higher wholesale water rates

in certain districts. We look forward to 2004, when we will realize the full impact of

all of these decisions.

The Regulatory Affairs Department has worked tirelessly, not only

to provide our stockholders a fair return on their investment, but also to secure the

resources that our employees need to provide customers with high-quality water and

excellent service. Indeed, all of our people achieved success in their respective areas

in 2003, including those who work directly with customers in the districts and those

who support them from our corporate headquarters.

California Water Service Group / 03

For example, one cross-functional team of District, Water Quality,

and Engineering employees succeeded in completing our new Bakersfield Treatment Plant,

both on time and on budget. Our largest capital project ever, the $50 million plant began

operations in June 2003 and now produces up to 20 million gallons of water per day.

In addition to supporting this extraordinary effort in Bakersfield, our

Water Quality and Engineering teams installed sophisticated water quality data track-

ing software and completed vulnerability assessments for our water systems. Both

projects will improve our ability to protect the health and safety of our customers.

Our Information Technology and Customer Service professionals

continued the monumental task of converting all 447,100 California accounts to a new

customer information software system. The new software provides more useful informa-

tion to customer service representatives and better billing services to customers.

Our Accounting team installed new cash processing equipment that

allows the Company to process customer payments more quickly and efficiently.

Our Finance group completed a debt refinancing program that will

save an annual $2 million in interest expense, and issued 1.75 million new shares of

common stock, enabling us to pay off debt and strengthen our balance sheet.

Our Board of Directors worked closely with key members of our staff to

continue to implement improvements in our corporate governance policies and proce-

dures. These improvements ensure that our Directors have the information necessary

to make the best decisions for the stockholders; they also ensure that we meet all new

disclosure standards. The effort reflects our ongoing commitment to managing the

business openly and with integrity.

And, with the support of our Human Resources team, we filled three

key positions in 2003. Richard D. Nye assumed the role of Vice President, Chief

Financial Officer, and Treasurer; Stockton District Manager Paul D. Risso was named

General Manager of New Mexico Water Service Company; and William L. Koehler was

hired to manage our Redwood Valley District in northern California.

2 0 0 3 F i n a n c i a l R e s u l t s

Revenue and net income increased in 2003 even though we faced

continuing challenges, the most significant of which was the bottom-line effect of the

Commission’s delay in processing our 2001 GRC. In addition, cool wet weather in the

first half of 2003 decreased water sales. Our moderate financial success was primarily

due to our securing rate relief from other regulatory filings, executing our excess real

estate sales program, and adding new customers.

2003 net income rose slightly to $19.4 million, compared to

$19.1 million in 2002. Diluted earnings per share (EPS) were $1.21, compared to $1.25

in 2002, declining 3% as a result of the 1.75 million new shares issued in 2003. And rev-

enues increased 5% in 2003 to $277.1 million, compared to $263.2 million in 2002.

Sales to new customers added $6 million to revenues, as we continued

to successfully execute our strategic growth plan in 2003. We are pleased to welcome

General Manager Jeffrey K. Eng and the Hawaii Water Service Company team, who joined

us with our acquisition of the Kaanapali Water Corporation, completed in mid-2003.

Our Hawaii acquisition added 500 new customers, including several large resorts and

condominium complexes, while expansion in existing service areas added 6,500 cus-

tomers in California and 300 customers in Washington. Although most of our revenue

is generated in California, our operations in other states continue to have an increas-

ingly positive impact on the bottom line.

California Water Service Group / 03

On the non-regulated side of the business, we leased unused portions

of our properties for six new cell phone antenna sites, bringing our total site leases to

64. More significantly, we continued to execute our excess real estate sales program,

realizing $4.6 million in pretax gains. And finally, we renewed several operating con-

tracts and were awarded a new contract to lease and operate the City of Commerce

water system, which is located in Los Angeles County.

In January of 2004, our Board of Directors increased the dividend for

the 37th consecutive year to $1.13 per share. Our Company has paid a dividend every

year for 59 years.

Although our financial performance does not fully reflect the magnitude

of our accomplishments in 2003, we believe that these accomplishments set the stage

for improved financial performance in 2004.

O u t l o o k f o r 2 0 0 4 a n d B e y o n d

The coming year will find us executing our proven strategy, which has

been effective even through challenging times.

First, we will continue our relentless pursuit of fair and timely rate

relief. At press time, we had numerous rate cases pending before the Commission,

including GRCs for 5 districts requesting a combined annual revenue increase of

$10 million and offset cost recovery requests totaling $5.5 million. Although we

cannot predict the Commission’s reaction to these requests, we can guarantee our

commitment to doing everything in our power to elicit fair and reasonable decisions.

We will also continue to pursue growth opportunities in the western

United States that meet our stringent criteria. In the first half of 2004, we expect

a decision from the New Mexico Public Regulation Commission on our application to

acquire National Utilities Corporation, which will add 1,600 customers.

Finally, we will remain focused on doing the things we do best – developing

our people, providing high-quality water and excellent service to our customers, and

increasing stockholder value through efficient operations, prudent fiscal management,

and disciplined growth.

We certainly have the right team in place to execute the strategy. On

the front line, we have dedicated, highly trained professionals who go out of their way

to meet customers’ needs. In our management ranks, we have award-winning profes-

sionals who are among the best in the industry. And in the boardroom, we have experts

who are recognized leaders from a range of professions and industries.

If time and space allowed, we would introduce you to all 813 of

our people. We cannot do that, but with the following eight stories, we can offer you

a glimpse into the lives of our employees. They illustrate the fact that when you are a

part of California Water Service Group, you are indeed in good company.

We thank you for your continued investment in our Company and wish

you the very best in the coming year.

Sincerely,

R o b e r t W. F o y

C h a i r m a n o f t h e B o a r d

P e t e r C . N e l s o n

P r e s i d e n t a n d C h i e f E x e c u t i v e O f f i c e r

California Water Service Group / 03

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R e l i a b i l i t y a t W o r k

The good people at the U.S. Postal Service have nothing on our employees. Take one of our

Washington Water crews, for example. Last winter, the state was hit by a furious storm that brought

rain and 80 mile-per-hour winds. Roads were closed and enormous fir trees were blown down. The

roots of one such tree caused a water line to break. Although accessing the site was a challenge,

Shawn O’Dell and Dusty Letellier quickly located the broken pipe. They began to dig it up with their

shovels, because they knew that doing so would be faster than getting a backhoe to the site. Shawn

says the surrounding trees “were blowing around like toothpicks” as they repaired the first break.

When they discovered a second break in the line, they called in reinforcements. Don Fechko and

Mark Valentine joined the effort, repairing the second break while Shawn and Dusty secured an

emergency generator and made other adjustments to the system to keep water flowing to customers

over the next three days while the power was out and the storm raged. Why didn’t Shawn and Dusty

wait for the winds to subside? Shawn says, “It was scary, and freezing cold, but we’ve got to

provide good service. Waiting was not an option." Pictured clockwise from upper left: Dusty Letellier,

Shawn O’Dell, Don Fechko, and Mark Valentine.

Q u a l i t y a t W o r k

Tarrah Henrie takes water quality very seriously. In her capacity as a Water Quality Project Manager,

she is responsible for ensuring that one-third of our California Districts meet increasingly stringent

water quality standards. She does not take kindly to contaminators. That’s why, when one of our

Salinas wells had to be taken out of service due to contamination by a gasoline additive, Tarrah went

on the offensive. She discovered the availability of a grant that was funded by contaminators and

administered by the California Department of Health Services, and she went after it. Never mind

that it was a daunting 17-step application process. Never mind that she still had to tend to her other

duties. Never mind that no one had asked her to take on the extra work. She went after it, and she

got it. Now the company has $1 million to pay for a new well for our Salinas customers.

E f f i c i e n c y a t W o r k

Wendy Law was new to the Company, but she was a highly qualified engineer with water system

experience. So when she was assigned the task of developing a plan to enable Cal Water to meet a

new federal water quality standard of 10 parts per billion for arsenic, she got right to work. She and

her team faced a monumental problem: initial testing indicated that 98 of the Company’s 633 wells

produced water that would not meet this new standard, and treating all these wells would cost the

Company $100 million. Like any scientist, Wendy started by gathering new data. The Company’s

water quality team stepped up to the plate, invested in more accurate testing technology, and pro-

vided her with new test results indicating that only 44 wells produced water that would not meet

the new standard. She then worked with a large team, including District Managers and key players

Leah O’Connell, Erin McCauley, Jim Simunovich, and Todd Peters, to analyze every affected water

system and identify the most efficient way to meet the new standard, which becomes effective in

2006. Their plan minimizes the need for treatment by utilizing new sources of supply, blending sup-

plies, and treating multiple sources together to achieve economies of scale. Now the estimated

costs of meeting the new federal arsenic standard are $25 million—a savings of $75 million.

Standing left to right: Erin McCauley and Jim Simunovich. Seated left to right: Todd Peters, Leah

O’Connell, and Wendy Law.

S e r v i c e a t W o r k

The town of Woodside, California has changed. Once rolling hillsides covered with native growth,

it is now a landscape of manicured lawns and green pastures. To meet the needs of an evolving com-

munity, our Bear Gulch District team planned to upgrade the water system to increase water supply

and pressure. They knew the work would be complicated, so they notified customers that their water

service would be interrupted while the construction was underway. That day, William Nathaniel

“Nate” Torsch was one of several employees who went door-to-door to update customers on the

progress of the project. When he reached the home of Mary Hall, she expressed concern about her

horses being without water should the work continue through the night. Nate promised

to do whatever he could to help, so at 10 o’clock that night, he left the work site and drove to

Ms. Hall’s home with 50 gallons of drinking water. Seeing she would have difficulty watering the

horses herself, Nate traipsed back and forth across Ms. Hall’s pasture, his way lit by flashlight,

carrying the water to the stable. Before he left, he even helped her locate an ailing pony in her

pasture and get it into the barn. Ms. Hall later wrote to thank Nate, saying he had restored her “faith

in the service industry.”

California Water Service Group / 03

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California Water Service Group / 03

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D e t e r m i n a t i o n a t W o r k

He knew a triple bypass surgery would be no piece of cake, but Victor Kelaita didn’t hesitate when

his doctor advised it. After all, his stepson’s wedding was a month away and he wanted to be able to

teach his American wife a traditional Assyrian dance for the occasion. Assured that he would recover

in two to three weeks, Victor went ahead with the surgery. But then the unthinkable happened—as a

result of complications, Victor emerged from the surgery paralyzed from the waist down. Many people

would be devastated by such news, but because of his faith, Victor responded calmly, holding court

with visitors and comforting those who wanted to comfort him. Victor says it never occurred to him

to quit working. So after three months, he rolled back into work, resuming his job designing under-

ground water systems, which he enjoys for its mental challenges. He acknowledges how difficult it

is to sit for 15 hours day after day, and he admits that the wheelchair slows his pace of work, but

he focuses on the positive. He speaks enthusiastically about the hand-operated van he bought, with

financial help from fellow employees, which allows him some freedom and lessens the burden on his

wife, whom he worries about more than himself. He notes how the wheelchair brings out the best in

the people around him, even strangers, who are always so kind and helpful. And amazingly, he says,

“I would rather be in this wheelchair than have someone else sitting here, because I have the faith

and determination to handle the situation better than others might.” Today, he is an active member

of the Cal Water Engineering Team, and a leader in the Company’s Continuous Improvement Process.

E x p e r t i s e a t W o r k

Some people choose to spend their vacations ensconced in five-star resorts or cruise ship cabins, but

Eric Charles and Bill Harper chose to spend theirs in Uganda. Granted, it wasn’t very fancy—facili-

ties were crude and uncomfortable, enormous bugs dropped from ceilings onto dinner plates, and a

goat dinner turned out to be the tastiest meal of the three-week trip. But their work was important.

Seven of ten diseases plaguing Ugandans are directly related to water quality, and Eric and Bill were

there to help. In one village, they taught the locals how to clean and flush their water tank, prevent

contamination by covering rain gutters, and use chlorine to disinfect the water. In another, they mod-

ified a cistern to make it easier for people to fill their water pails. In exchange, the Ugandans held

dinners in their honor, featured them in the newspapers, and sang and danced for them. Eric and

Bill say they got much more out of the experience than they gave. Going to Uganda enabled them to

share their knowledge with people in need, people who happened to be the warmest, friendliest they

had ever met. And the two came back to the United States firmly committed to doing all they can to

help educate the Ugandans about water quality. In Eric’s words, “It was a life-altering experience.”

Pictured left to right: Eric Charles and Bill Harper.

C o m m i t m e n t a t W o r k

She’s tough, but she’s compassionate. She works 12-hour days, but she always makes time for

employees who need her. She receives about 150 telephone calls and twice as many e-mails every

day, but she still finds time to write handwritten notes to employees. As Vice President of Human

Resources, Christine McFarlane plays a key role in supporting our people. She does the things one

would expect of a human resources executive, like overseeing personnel issues, managing benefits,

and directing training efforts. She also does things one might not expect. Once, she spent the week-

end with a terminally ill employee, giving family members a much-needed break from caregiving.

On another occasion, she stayed overnight in the hospital with a manager who collapsed during a

meeting, refusing to leave until his family could get there. She has personally ordered and delivered

food to homes of employees who have lost loved ones or suffered misfortune. She has arranged

for seriously ill employees to get second opinions from medical experts. And she has taken it upon

herself to ensure that employees who have special challenges get the help they need. Perhaps most

surprisingly, she knows the names of all 813 of our employees, and in most cases, she also knows

something about their families, their hobbies, and their aspirations. Few people could give so much

of themselves day after day, but Christine is truly commitment personified.

I n n o v a t i o n a t W o r k

They say that necessity is the mother of invention, but at Cal Water, it is the Continuous Improvement

Process (CI) that gives birth to many of our people’s best ideas. One such idea is the “Sample Station

Bibber Protector,” invented by Eric Mar and implemented with the help of CI teammates Jack Beck,

Wendy Bell, RoseAnn Bogard, Vince Mangis, Russ Quast, and Dennis White. The Bibber increases the

accuracy of water quality test results by shielding the sample tap from rain, dust, and other potential

sources of contamination. In fact, Eric won a prestigious award from the American Water Works

Association for the Bibber. Another such idea is the “Wil-lift,” invented by Clifford Wade with the

support of CI teammates Lou Viera, Jyl Carney, and Rob Thompson. The Wil-lift is a slide-hammer

tool that enables employees to remove valve covers that have become embedded in the pavement

safely, quickly, and easily. The list of our people’s inventions goes on and on: there’s the

“J-Coupling,” invented by Jarocho Mendoza and CI teammates Reyes Cerros, Bill McHatton, and

Frank Umekubo, which reduces leaks between plastic water meters and pipelines. There’s the

“Strapper,” invented by Ralph “Rocky” Chavira and CI teammates Estevan Hernandez, William

Crishon, Dave Vela, and James Crawford, a tool used to lift heavy meter boxes out of the ground.

There’s the innovative software, designed by Claude Bell with the help of CI teammates Mike Hassler,

Debbie Machado, and John Whitmore, which helps employees meet new state certification require-

ments. Indeed, it would take hundreds of pages to showcase the creativity and inventiveness of all of our

people. The fact is, when you are a part of California Water Service Group, you are in good company.

Pictured left to right: Eric Mar and Cliff Wade.

California Water Service Group / 03

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Bakersfield

Bear Gulch

Chico

Dixon

King City

Livermore

Los Altos

Marysville

1,300

60,900

59,300

25,200

24,400

2,900

2,800

33,400

33,100

27,600

26,500

6,100

25,900

25,800

4,200

2,300

4,100

2,200

17,600

17,400

3,800

36,100

35,900

3,500

C u s t o m e r s *

District Name

Including

2003

2002

C a l i f o r n i a

Antelope Valley

Fremont Valley, Lake Hughes, Lancaster & Leona Valley

Atherton, Woodside, Portola Valley, portions of Menlo Park

17,600

Hamilton City

Dominguez

Carson and portions of Compton, Harbor City, Long Beach,

Los Angeles & Torrance

East Los Angeles

City of Commerce

Hawthorne

Hermosa-Redondo

A portion of Torrance

Kern River Valley

Bodfish, Kernville, Lakeland, Mtn. Shadows, Onyx, Squirrel Valley,

South Lake & Wofford Heights

Portions of Cupertino, Los Altos Hills, Mtn. View & Sunnyvale

18,400

Mid-Peninsula

San Mateo & San Carlos

Oroville

Palos Verdes

Palos Verdes Estates, Rancho Palos Verdes, Rolling Hills

and Rolling Hills Estates

23,900

23,800

Redwood Valley

Lucerne, Duncans Mills, Guerneville, Dillon Beach and a

portion of Santa Rosa

Salinas

Selma

South San Francisco

Colma & Broadmoor

Stockton

Visalia

Westlake

Willows

H a w a i i

N e w M e x i c o

Wa s h i n g t o n

A portion of Thousand Oaks

SUBTOTAL

TOTAL

1,900

27,700

27,300

5,600

5,400

16,600

16,500

42,000

41,900

33,300

32,200

7,000

2,300

7,000

2,300

447,100

440,500

500

4,100

14,700

14,400

466,400

459,000

* Includes customers from regulated operations and non-regulated, full-system operations in Commerce and Hawthorne.

Financial Highlights

In thousands, except per share amounts

Year ended December 31

2 0 0 3

2 0 0 2

2 0 0 1

2 0 0 0

1 9 9 9

Book value

$ 14.44

$ 13.12

$ 12.95

$ 13.13

$ 12.89

Market price at year-end

27.40

23.65

25.75

27.00

30.31

Earnings per share-diluted

1.21

1.25

0.97

1.31

1.44

Dividends per share

1.125

1.120

1.115

1.100

1.085

Revenue

Net income

277,128

263,151

246,820

244,806

234,937

19,417

19,073

14,965

19,963

21,971

B o a r d o f D i r e c t o r s

Table of Contents

2 Letter to Stockholders 18 Financial Section

59 Independent Auditors’ Report

61 Board of Directors

Industry Overview Like their municipal and privately-owned counterparts, investor-owned water utilities deliver

drinking water to customers’ homes and businesses. After a period of considerable consolidation in the industry,

there are only eleven investor-owned water utilities remaining in the United States. Investor-owned water util-

ities typically appeal to conservative investors because their rates are regulated, their earnings drivers are

straightforward, their dividends are steady, and their product is both essential and irreplaceable.

Corporate Profile The second largest investor-owned water utility in the country, California Water Service

Group provides high-quality water utility services to more than two million people through five subsidiaries:

California Water Service Company (Cal Water), Washington Water Service Company (Washington Water), New

Mexico Water Service Company (New Mexico Water), Hawaii Water Service Company (Hawaii Water), and CWS

Utility Services. Cal Water, Washington Water, New Mexico Water, and Hawaii Water provide regulated services

to more than 100 communities. CWS Utility Services conducts the Company’s non-regulated business, which

includes providing water utility-related services such as meter reading, billing, water quality testing, and full

water system operations to cities and other companies.

Seated left to right, Peter C. Nelson*, President and Chief Executive Officer, Robert W. Foy *, Chairman of the Board, standing left to
right, Bonnie G. Hill§, President of B. Hill Enterprises, L.L.C.; Chief Operating Officer of Icon Blue; on the boards of a number of corporations
and non-profit organizations, Richard P. Magnuson †*‡§ ∞, Private Venture Capital Investor, David N. Kennedy ∞, Former Director of
the California Department of Water Resources, Edward D. Harris, Jr., M.D.‡*§, Professor of Medicine, Emeritus, Stanford University
Medical Center, Linda R. Meier †‡§, Member, National Advisory Board, Haas Public Service Center; Member of the Board of Directors,

Greater Bay Bancorp; Chair of the Western Regional Advisory Board of the Institute of International Education; Member of the National
Board of the Institute of International Education; and Member of the Board of Directors, Stanford Alumni Association, George A. Vera †∞,
Vice President and Chief Financial Officer, the David & Lucile Packard Foundation, Douglas M. Brown †‡§ ∞, President and Chief
Executive Officer of Tuition Plan Consortium.

† Member of the Audit Committee
‡ Member of the Compensation Committee
* Member of the Executive Committee
§ Member of the Nominating/Corporate Governance Committee
∞Member of the Finance Committee

O f f i c e r s

C a l i f o r n i a W a t e r S e r v i c e C o m p a n y
Robert W. Foy 1,2,3 Chairman of the Board
Peter C. Nelson 1,2,3 President and Chief Executive Officer
Calvin L. Breed 1 Controller, Assistant Secretary and Assistant Treasurer
Paul G. Ekstrom 1,2,3 Vice President, Customer Service, and Corporate Secretary
Francis S. Ferraro 2,4 Vice President, Regulatory Matters and Corporate Development
Robert R. Guzzetta 2 Vice President, Engineering and Water Quality
Christine L. McFarlane Vice President, Human Resources
Richard D. Nye 1,2,3 Vice President, Chief Financial Officer and Treasurer
Dan L. Stockton Vice President, Chief Information Officer

Raymond H. Taylor Vice President, Operations

W a s h i n g t o n W a t e r S e r v i c e C o m p a n y
Michael P. Ireland President

1 Holds the same position with California Water Service Group
2 Also an officer of CWS Utility Services
3 Also an officer of Washington Water Service Company , New Mexico Water Service Company and Hawaii Water Service Company, Inc.
4 Holds the same position with New Mexico Water Service Company

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Ten-Year Financial Review
C a l i f o r n i a Wa t e r S e r v i c e G r o u p

(Dollars in thousands, except common share data)

2 0 0 3

2 0 0 2

2 0 0 1

2 0 0 0

1 9 9 9

1 9 9 8

1 9 9 7

1 9 9 6

1 9 9 5

1 9 9 4

S U M M A R Y O F O P E R A T I O N S
Operating revenue

Residential
Business
Industrial
Public authorities
Other

Total operating revenue

Operating expenses
Interest expense, other income and expenses, net

$ 194,903
49,666
11,255
12,789
8,515

277,128
246,894
10,817

$ 184,894
46,404
11,043
12,706
8,104

263,151
232,404
11,674

$ 173,823
44,944
9,907
11,860
6,286

246,820
221,116
10,739

$ 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

Net income

$ 19,417

$ 19,073

$ 14,965

$ 19,963

$ 21,971

$ 19,860

$ 25,757

$ 21,400

$ 16,968

$ 16,635

C O M M O N S H A R E D A T A
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

B A L A N C E S H E E T D A T A
Net utility plant
Utility plant expenditures
Total assets
Long-term debt including current portion
Capitalization ratios:

Common stockholders’ equity
Preferred stock
Long-term debt

O T H E R D A T A
Water production (million gallons)

Wells and surface supply
Purchased

Total water production

Metered customers
Flat-rate customers

Customers at year-end

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

1.21
1.125

93%

14.44
27.40
16,932

9.1%

2.78

1.25
1.120

90%

13.12
23.65
15,182

9.7%

2.73

0.97
1.115

115%

12.95
25.75
15,182

7.6%

2.64

$ 759,498
74,253
873,035
273,130

$ 696,988
88,361
798,478
251,365

$ 624,342
62,049
710,214
207,981

47.0%
0.7%
52.3%

44.0%
0.7%
55.3%

48.8%
0.9%
50.3%

68,416
63,264

131,680

387,579
78,843

466,422

7,434
594
2,313
813

$
$

67,488
64,735

132,223

380,087
78,901

458,988

8,561
579
2,182
802

$
$

65,283
61,343

126,626

371,281
79,146

450,427

6,081
552
2,020
783

$
$

1.31
1.100

84%

13.13
27.00
15,146

10.1%
3.31

1.44
1.085

75%

12.89
30.31
15,094

11.5%
3.79

1.31
1.070

82%

12.49
31.31
15,015

10.8%
3.64

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

85%

10.72
16.00
14,890

11.1%
3.49

$ 582,782
37,161
666,605
189,979

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

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

$ 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

51.1%
0.9%
48.0%

53.0%
0.9%
46.1%

54.6%
1.0%
44.4%

53.8%
1.0%
45.2%

52.7%
1.1%
46.2%

50.9%
1.1%
48.0%

52.9%
1.2%
45.9%

65,408
62,237

127,645

366,242
78,104

444,346

$
$

5,219
554
1,916
797

65,144
58,618

123,762

361,235
77,892

439,127

6,727
539
1,851
790

$
$

57,482
54,661

112,143

354,832
77,568

432,400

4,383
500
1,768
759

$
$

60,964
56,769

117,733

345,307
77,991

423,298

$
$

9,730
502
1,632
740

54,818
57,560

112,378

335,238
78,330

413,568

$
$

2,263
468
1,580
738

53,274
59,850

113,124

332,146
79,159

411,305

$
$

3,325
447
1,520
729

63,736
59,646

123,382

350,139
77,878

428,017

$
$

4,719
529
1,694
752

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
C a l i f o r n i a Wa t e r S e r v i c e G r o u p

F O R W A R D - L O O K I N G S T A T E M E N T S

For 2003, net income was $19.4 million compared to $19.1 million in 2002. Diluted earnings per

This annual report, including the Letter to Stockholders and Management’s Discussion and Analysis,

share for 2003 were $1.21 compared to $1.25 in 2002. The decline in earnings per share was primarily due to

contains forward-looking statements within the meaning established by the Private Securities Litigation Reform Act of

delays in receiving rate relief on our large general rate case filing, higher rainfall which lowered sales and increased

1995 (Act). The forward-looking statements are intended to qualify under provisions of the federal securities laws for

shares outstanding. Partially offsetting these factors were higher gains from property sales additional revenue from

“safe harbor” treatment established by the Act. Forward-looking statements are based on currently available informa-

other rate filings, and increases in customers. We plan to continue to invest in the business, with budgeted capital

tion, expectations, estimates, assumptions and projections, and management’s judgment about the Company, the water

expenditures of $66 million for 2004, which we plan to fund from operating cash flows, additional debt and issuance

utility industry and general economic conditions. Such words as expects, intends, plans, believes, estimates, assumes,

of common stock. Overall, we expect our 2004 operational performance and operating cash flows to improve due to

anticipates, projects, predicts, forecasts or variations of such words or similar expressions are intended to identify for-

the rate increases approved to date.

ward-looking statements. The forward-looking statements are not guarantees of future performance. They are subject to

uncertainty and changes in circumstances. Actual results may vary materially from what is contained in a forward-look-

ing statement. Factors that may cause a result different than expected or anticipated include: governmental and regula-

B U S I N E S S

tory commissions’ decisions; changes in regulatory commissions’ policies and procedures; the timeliness of regulatory

California Water Service Group is a holding company incorporated in Delaware with five operating sub-

commissions’ actions concerning rate relief; new legislation; electric power interruptions; increases in suppliers’ prices

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

and the availability of supplies including water and power; fluctuations in interest rates; changes in environmental

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

compliance and water quality requirements; acquisitions and the ability to successfully integrate acquired companies;

Service Company, Inc. (Hawaii Water). Cal Water, New Mexico Water, Washington Water and Hawaii Water are regu-

the ability to successfully implement business plans; changes in customer water use patterns; the impact of weather

lated public utilities. The regulated utility entities also provide some non-regulated services. Utility Services provides

on water sales and operating results; access to sufficient capital on satisfactory terms; civil disturbances or terrorist

non-regulated services to private companies and municipalities.

threats or acts, or apprehension about the possible future occurrences of acts of this type; the involvement of the United

Cal Water, which began operation in 1926, is a public utility supplying water service to 446,000

States in war or other hostilities; restrictive covenants in or changes to the credit ratings on our current or future debt

customers in 75 California communities through 25 separate districts. Cal Water’s 24 regulated systems, which

that could increase our financing costs or affect our ability to borrow, make payments on debt or pay dividends; and

are subject to regulation by the California Public Utilities Commission (CPUC), serve 439,900 customers. An addi-

other risks and unforeseen events. When considering forward-looking statements, you should keep in mind the cautionary

tional 6,100 customers receive service through a long-term lease of the City of Hawthorne’s system by Cal Water,

statements included in this paragraph. We assume no obligation to provide public updates of forward-looking statements.

which is not subject to CPUC regulation. Cal Water accounts for 96% of the total customers and 96% of the total

O V E R V I E W

operating revenue.

Washington Water started operations in 1999 through the acquisition of two water companies. It pro-

vides domestic water service to 14,700 customers in the Tacoma and Olympia areas. Washington Water’s utility opera-

California Water Service Group provides water utility services to customers in California, Washington, New

tions are regulated by the Washington Utilities and Transportation Commission. Washington Water accounts for 3% of

Mexico and Hawaii. The majority of the business is regulated by the respective state’s public utility commission. Our

the total customers and 2% of the total operating revenue.

California regulated water business comprises the majority of the business and contributed 96% of our revenues and

New Mexico Water began providing non-regulated meter reading services in 2000, and assumed regu-

84% of our net income in 2003. We also have a regulated wastewater business in New Mexico. Non-regulated activities

lated operations in July 2002 with the purchase of the assets of Rio Grande Utility Corporation. New Mexico Water

we provide relate primarily to the water utility business and include operating, maintenance, billing, meter reading and

provides service to 2,400 water and 1,700 wastewater customers south of Albuquerque, New Mexico. Its regulated

water testing services.

operations are subject to the jurisdiction of the New Mexico Public Regulation Commission. New Mexico Water

The regulatory entities governing our regulated operations are referred to as “the Commissions” in this

accounts for 1% of the total customers and 1% of the total operating revenue.

report. Revenues, income and cash flows are earned primarily through delivering drinking water through pipes to homes

Hawaii Water was formed in May 2003 with the acquisition of Kaanapali Water Corporation. Hawaii

and businesses. Rates charged to customers for the regulated business are determined by the Commissions. These rates

Water provides water service to 500 customers on the island of Maui, including several large resorts and condominium

are intended to allow us to recover operating costs and earn a reasonable rate of return on capital.

complexes. Its regulated operations are subject to the jurisdiction of the Hawaii Public Utilities Commission. Hawaii

Major factors relevant to the drinking water industry and our Company are: the process and timing of

Water accounts for less than 1% of the total customers and 1% of the total operating revenue.

setting rates charged to customers; weather; water quality standards; other regulatory standards; water supply; water

Utility Services conducts only non-regulated activities. Included in Utility Services’ operations is a

quality; and level of capital expenditures.

long-term lease agreement with the City of Commerce, which serves approximately 1,100 customers. Non-regulated

The most significant risk and challenge to our business during the past several years has been obtaining

activities are primarily contracted in Utility Services and include contracting with other private companies and munici-

timely rate increases to cover increased costs and investments. We are addressing this risk by having an experienced

palities to operate water systems and provide meter reading and billing services. Other non-regulated activities include

team dedicated solely to pursuing rate increases and managing Commission issues. Our business can also be impacted

leasing communication antenna sites, operating recycled water systems, providing brokerage services for water rights,

by weather, as it was in 2003. Weather risk is partially mitigated by having operations in both northern and southern

providing lab services and selling non-utility property. Due to the different mix of services we provide, customers are

California, as well as in three other states. Another risk in our industry is obtaining adequate financing, as the capital

not tracked for non-regulated activities. Excluding sales of non-operating property, non-regulated activities comprised

expenditures needed for infrastructure may significantly exceed the cash flow generated by operations. Management

6% of the total net income in 2003.

believes that the Company has a strong balance sheet and is capable of supporting the financing needs of the business

Rates and operations for regulated customers are subject to the jurisdiction of the respective state’s

through use of debt and equity. Finally, the water industry is highly regulated, and must comply with a multitude of

regulatory commission. The Commissions require that water and wastewater rates for each regulated district be inde-

standards related to water quality and service. To address compliance issues, we have a highly trained, focused team

pendently determined. The Commissions are expected to authorize rates sufficient to recover normal operating expenses

that uses state-of-the-art technology and works closely with government agencies to monitor supplies and operations.

and allow the utility to earn a fair and reasonable return on capital. Rates for the City of Hawthorne and City of

Commerce water systems are established in accordance with operating agreements and are subject to ratification by the

2% from the 450,400 customers at the end of 2001. The increase in customers is due to normal growth within existing

respective city councils. Fees for other non-regulated activities are based on contracts negotiated between the parties.

service areas and acquisitions of water systems. The addition of Hawaii Water added 500 customers in 2003 and the

R E S U L T S O F O P E R A T I O N S

addition of New Mexico Water added 4,100 customers in 2002. These are included in the customer count increases.

Water Production Expenses. Water production expenses, which consist of purchased water, purchased

power and pump taxes, comprise the largest segment of total operating costs. Water production costs accounted for

Earnings and Dividends. Net income in 2003 was $19.4 million compared to $19.1 million in 2002

44.2%, 45.6% and 45.3% of total operating costs in 2003, 2002 and 2001, respectively. The rates charged for whole-

and $15.0 million in 2001. Diluted earnings per common share were $1.21 in 2003, $1.25 in 2002 and $0.97 in

sale water supplies, electricity and pump taxes are established by various public agencies. As such, these rates are

2001. The weighted average number of common shares outstanding used in the diluted earnings per share calculation

beyond our control. The table below provides the amount of increases (decreases) and percent changes in water produc-

was 15,893,000 in 2003, 15,185,000 in 2002, and 15,186,000 in 2001. As explained below, the decline in 2003

tion costs during the past two years:

earnings per share resulted from these primary factors: delay in receiving rate relief on a general rate case filing, lower

water sales to existing customers due to weather conditions and increased shares outstanding. The effects of these

factors were almost entirely negated by higher gains from property sales, additional revenue from other rate increases

and an increase in customers.

At the January 2003 meeting, the Board of Directors declared the quarterly dividend, increasing it for

the 36th consecutive year. Dividends have been paid for 59 consecutive years. The annual dividend paid in 2003 was

$1.125, a 0.4% increase over the $1.12 paid in 2002, which was an increase of 0.4% over the $1.115 paid in 2001.

The dividend increases were based on projections that the higher dividend could be sustained while still providing

adequate financial resources and flexibility. Earnings not paid as dividends are reinvested in the business for the bene-

fit of stockholders. The dividend payout ratio was 93% in 2003, 90% in 2002 and 115% in 2001, an average of 98%

during the three-year period.

Operating Revenue. Operating revenue, which includes revenue from the City of Hawthorne and City of

Commerce leases, was $277.1 million, an increase of 5.3% over 2002. Operating revenue in 2002 was $263.2 million,

an increase of 6.6% over 2001. The sources of changes in operating revenue were:

Dollars in millions

Customer usage
Rate increases
Usage by new customers

Net change

Average revenue per customer (in dollars)
New customers added

2003

2002

$ (4.6)
12.6
6.0

$ 14.0

$ 594
7,400

$ 6.9
6.6
2.8

$ 16.3

$ 579
8,600

Overall, temperatures in our service areas for 2003 were comparable to 2002. Rainfall in our California

service areas was higher than normal between February and April. Partially offsetting higher rainfall in California was

lower rainfall in our Washington service area during the summer, which had a positive impact on water usage. Higher

rainfall in California was the primary factor for the $4.6 million decrease in revenue from customer usage in 2003.

In 2002, the weather patterns were relatively normal. In 2001, the weather was cooler and more rainy than normal.

Rate increases added $12.6 million to 2003 revenues. The estimated impact of various rate increases

were: step rate increases – $2.2 million; Bakersfield treatment plant – $2.3 million; balancing accounts – $1.9 million;

2001 General Rate Case (GRC) – $3.7 million; 2001 GRC “catch-up” surcharges – $1.3 million; purchased water rate

increases – $0.9 million; and Washington Water rate increases – $0.3 million.

For 2002, rate increases added $6.6 million to revenue. Revenue from GRC decisions accounted for $2.7

million of the increase, $2.0 million came from step rate increases and $1.9 million came from offset rate increases

to recover electric costs included in expense-balancing accounts for four California districts. No new GRC decisions

were authorized by the CPUC during 2002. Washington Water received a GRC decision in 2002. The RATES AND

REGULATION section of this report provides a detailed discussion of regulatory activity.

The December 31, 2003, customer count, including the City of Hawthorne and City of Commerce cus-

tomers, was 466,400, an increase of 2% from the 459,000 customers at the end of 2002, which was an increase of

Dollars in millions

Purchased Water
Purchased Power
Pump Taxes

Total Water Production

amount

$ 80.8
21.9
6.3

$ 109.0

2003

change

$ 4.1
(1.0)
—

$ 3.1

% change

amount

5%
(4%)
—

$ 76.7
22.9
6.3

$ 105.9

2002

change

$ 3.5
1.8
0.4

$ 5.7

% change

5%
8%
7%

Two of the principal factors affecting water production expenses are the amount of water produced and

the source of the water. Generally, water from wells costs less than water purchased from wholesale suppliers. The table

below provides the amounts, percentage change and source mix for the respective years:

Millions of gallons (MG)

2003

2002

2001

% of total

Source:
Wells
% change from prior year

Purchased
% change from prior year

Surface
% change from prior year

Total
% change from prior year

66,009
(4%)

63,264
1%

2,407
221%

131,680
(1%)

50.0%

48.2%

1.8%

68,663
6%

62,811
2%

751
18%

18%

51.9%

64,646

51.1%

47.5%

61,344

48.4%

0.6%

638

0.5%

100.0%

132,225
4%

100.0%

126,628

100.0%

Purchased water expenses are affected by quantity changes, supplier prices and cost differentials

between wholesale suppliers. For 2003, the $4.1 million increase in purchased water costs was primarily driven by

increased wholesale rates charged by wholesale suppliers in the Stockton and San Francisco Bay area districts. Overall,

wholesale water rates increased 5%. Purchased power expenses are affected by water pumped from wells, water moved

through the distribution system, rates charged by electric utility companies and rate structures applied for usage during

peak and non-peak times of the day or season. The majority of the change in purchased power expenses is attributable

to credits received from the electric utility companies (total of $0.9 million) and lower quantities of water pumped

from wells.

In 2002, four wholesale water suppliers increased their rates, which increased purchased water costs.

The increases ranged from 2% to 5%. One wholesale supplier reduced its rate by 9%. The 2002 purchased power

expense increase was caused by higher electric rates paid through May 2002 as compared to 2001’s electric rates and

a 6% increase in well production. In December 2001, wholesale suppliers in the Los Angeles area refunded $1.4 mil-

lion for over-collection of prior period water purchases. The refunds were recorded as a reduction of purchased water

costs. There were no comparable refunds in 2002.

Administrative and General Expenses. The components of administrative and general expenses include

Gain on Sale of Non-Utility Property. Pretax gains from non-utility property sales were $4.6 million, $3.0

payroll related to administrative and general functions, all company benefits charged to expense accounts, insurance

million, and $3.9 million in 2003, 2002 and 2001, respectively. The 2003 gains were primarily from three properties

expense, legal fees, audit fees, regulatory utility commissions’ expenses, board of directors’ fees and general

sold in the San Francisco Bay area. Earnings and cash flow from these transactions are sporadic and may or may not

corporate expenses.

continue in future periods depending upon market conditions. We have other non-utility properties that may be mar-

During 2003, administrative and general expenses increased $3.8 million, or 10%, compared to 2002.

keted in the future based on real estate market conditions.

Payroll expenses increased $0.6 million, or 9%, due to the addition of new employees and wage increases. Employee

Interest Expense. Interest expense increased by $0.7 million (4%) and $0.8 million (5%) in 2003 and

benefits increased $3.0 million due primarily to increases in retirement plan expense of $2.3 million (51%) and

2002, respectively. The increased expense was due primarily to higher borrowing of long-term debt. Refinancing activi-

employee/retiree health expenses of $0.4 million (7%). The retirement plan cost increase was due primarily to changes

ties and lower short-term interest rates partially offset the increase in interest expense. See LIQUIDITY AND CAPITAL

in the pension plan effective January 1, 2003, which will improve benefits to employees. As part of the negotiations

RESOURCES section for more information.

with the unions, lower pay increases were offset by increased pension benefits. Other expense elements contributed to

the balance of the change, but none were individually significant.

During 2002, administrative and general expenses increased $1.2 million, or 3%, compared to 2001.

R A T E S A N D R E G U L A T I O N

Payroll expenses increased $1.2 million with the addition of new employees and wage increases that were effective in

Following are summaries of approved and pending rate filings. The amounts reported are annual amounts;

January 2002. However, the payroll increase was offset by the reduction of consultants who worked primarily on infor-

therefore, the impact to recorded revenue will generally be recognized over a twelve-month period from the effective

mation systems projects. Certain consultants were replaced with permanent employees. As a result of these changes,

date of the decision. Most increases are permanent in nature except for the increases related to the 2001 GRC “catch-

consulting fees decreased $2.1 million. Employee benefits increased $2.3 million due to increases mainly in group

up” and the offsetable expenses, which have specific time frames for recovery.

health ($0.4 million), workers’ compensation ($0.5 million) and retirement plan expenses ($1.3 million). The retire-

2003 Regulatory Activity – Approved Filings. In January 2003, we received approval for step rate

ment plan cost increase was based on an actuarial report that considered asset performance and the cost of an

increases totaling $2.2 million. Step increases allow recovery of cost increases, primarily from inflation, between GRC

improvement in the retirement benefit provided to employees. Partially offsetting these increases was an increased

filings. GRC filings are normally made every three years for each district.

allocation of costs attributable to non-regulated operations of $0.3 million, which are reported in a separate line on

In April 2003, the CPUC authorized a second advice letter filing related to the Bakersfield Treatment

the Consolidated Statements of Income. These allocations reduce administrative and general expenses.

Plant. This advice letter allowed an increase in rates of $1.8 million on an annual basis. The plant became operational

Other Operations Expenses. The components of other operations expenses include payroll, material and

in the second quarter of 2003 and had a total project cost of approximately $50 million.

supplies, and contract services costs of operating the regulated water systems, including the costs associated with

In May 2003, the CPUC authorized the recovery of $5.4 million in offsetable expenses (also known as

water transmission and distribution, pumping, water quality, meter reading, billing and operations of district offices.

balancing accounts), of which approximately $3.6 million will be collected from May 2003 through May 2004 and

For 2003, other operating expenses increased $3.4 million or 10% from 2002. Payroll costs charged to

approximately $1.8 million will be collected from June 2004 through May 2005. Partially offsetting this increase is a

other operating expenses increased $1.1 million, or 6%, due to general wage increases, labor related to the Bakersfield

$0.8 million decrease for one district, effective from June 2003 through June 2004.

Treatment Plant and labor related to customer service in our district offices. Other major cost increases were related to

In September 2003, the CPUC approved Cal Water’s 2001 GRC applications. These filings were submit-

lab expenses of $0.5 million (56%), chemicals and filters of $0.5 million (42%), uncollectible account expense of

ted in July 2001 for 14 of our 24 California districts. This GRC decision authorizes an 8.9% return on rate base and

$0.4 million (73%) and rent expense of $0.4 million (45%). Other expense elements contributed to the balance of the

will add an estimated $12.8 million to annual revenues. In addition, we received approval to collect an additional $4.5

change, but none were individually significant.

million in revenues over 12 months to reflect an effective date of April 3, 2003. The 2001 GRC also authorized the

For 2002, other operating expenses were virtually unchanged compared to 2001. Payroll costs charged

filing of step rate increases for $2.7 million annually for 2004 and 2005 that are effective in January of each year

to other operating expenses declined approximately $1.1 million due to synergies realized from combining four Los

pending approval by the CPUC.

Angeles operating districts at one location and by shifting of labor to support the increase in capital construction

In the September 2003 to December 2003 period, the CPUC approved increases to recover higher

projects. Offsetting the decline in labor costs were increases in non-labor pumping and water quality expenses.

purchased water costs for our districts in the San Francisco Bay area. The total annual amount of these increases is

Maintenance. Maintenance expense increased $1.1 million (10%) in 2003 compared to 2002. For

$4.8 million.

2002, maintenance expense decreased $0.5 million (5%) compared to 2001. The variance is impacted by a variety of

In October 2003, the CPUC authorized a third advice letter filing related to the Bakersfield Treatment

factors. In 2003, we completed more repairs related to leaks and breaks in mains and service lines. We also incurred

Plant. This allowed an increase in rates of $4.2 million on an annual basis. Due to depreciation expense for the new

increased maintenance costs for pumps. Additionally, we expended $0.2 million on a well and treatment plant

plant beginning in January 2004, only $0.4 million was billed in the October 2003 to December 2003 period.

in the City of Hawthorne.

The full $4.2 million annual amount was effective in January 2004.

Depreciation and Amortization. Depreciation and amortization expense increased due to the level of

No filings were approved during 2003 for Washington Water, New Mexico Water or Hawaii Water.

company-funded capital expenditures. See LIQUIDITY AND CAPITAL RESOURCES section for more information.

2004 Regulatory Activity – Approved Filings (through February 2004). In January 2004, we received

Non-Regulated Income, Net. The major components of non-regulated income are revenue and expenses

approval for step rate increases totaling $4.2 million.

related to the following activities: operating and maintenance services (O&M), meter reading and billing services, leases

In February 2004, the CPUC authorized an advice letter for $0.7 million for one district related to

for cellular phone antennas, water rights brokering, and design and construction services. Overall, non-regulated income

increased wholesale purchased water rates.

in 2003 was relatively flat compared to 2002, with increases primarily from O&M and cellular phone antennas offset by

Pending Filings. Annual amounts provided below reflect our requested increases; the CPUC has histori-

decreases in water rights brokerage income. Water rights brokerage income is sporadic and is affected by market oppor-

cally approved increases that are lower than those requested.

tunities and price volatility. See note 3 of the consolidated financial statements for additional information.

Cal Water 2002 GRC Applications – Applications have been filed for rate increases for several districts.

As of this report date, the current proposed settlement is $4.0 million. The amount of the proposed settlement may or

may not be adjusted when final decisions are issued by the CPUC. At this time, we are unable to predict when the final

CPUC’s decision authorizing the holding company structure for California Water Service Group. Gains have been recog-

decisions and rulings will be issued, their composition or their financial impact on revenues for future periods.

nized outside of regulated operations, as the properties sold were not being used in the regulated operations and were

Cal Water 2003 GRC Applications – Applications have been filed for rate increases for two districts total-

excluded from rate base for rate-setting purposes. Also, proceeds from these sales have been reinvested in the regu-

ing approximately $5.7 million on an annual basis. The amount of the filing may or may not be adjusted when final

lated business of Cal Water. The CPUC has requested documentation to determine whether we appropriately removed

decisions are issued by the CPUC. At this time, we are unable to predict when the final decisions and rulings will be

these non-utility, surplus properties from rate base in a timely manner, and has requested documentation on the deter-

issued, their composition or their financial impact on revenues for future periods.

mination that they were no longer used and useful. If the CPUC finds that any surplus property sale or transfer was

Expense Balancing and Memorandum Accounts – Advice letters were filed for recovery of approximately

recorded inappropriately, then this could result in a reduction to rate base used to determine future rates charged

$5.5 million related to balancing-type memorandum accounts. During the initial review process, the CPUC raised

to regulated customers. This could reduce future revenues, net income and cash flows. We are not able to provide

certain issues, requiring us to refile our request, which we expect to do in the 1st quarter of 2004. At this time, we

estimates of the timing or what the ultimate resolution may be.

cannot predict if adjustments will be made during the CPUC review process nor can we predict the timing of the

In Washington Water, New Mexico Water and Hawaii Water, we have not experienced regulatory tardiness

decision on the filing.

or variations to established processes on rate filings.

No filings were pending as of this report date for Washington Water, New Mexico Water or Hawaii Water.

We plan on filing during 2004 for increased rates for New Mexico Water’s wastewater operations and for Hawaii Water.

These filings are not expected to impact 2004 revenues significantly.

W A T E R S U P P L Y

2002 Regulatory Activity – Approved. In January 2002, step increases of $2.0 million were approved by

Our source of supply varies among our operating districts. Certain districts obtain all of the supply from

the CPUC.

wells; some districts purchase all of the supply from wholesale suppliers; and other districts obtain supply from a

In April 2002, Washington Water was granted by the Washington Utilities and Transportation Commission

combination of wells and wholesale suppliers. A small portion of the supply comes from surface sources and is

(WUTC) a $1.0 million increase in annual revenue to cover higher operating costs and capital expenditures.

processed through company-owned water treatment plants. We are currently meeting water quality, environmental

In June 2002, the CPUC authorized an increase in rates for our Bakersfield District of $0.8 million on an

and other regulatory standards.

annual basis related to the new treatment plant being constructed at that time. This decision was based on an advice

California’s normal weather pattern yields little precipitation between mid-spring and mid-fall. The

letter filing to cover approximately $6 million of construction costs incurred as of the filing date.

Washington service areas receive precipitation in all seasons with the heaviest amounts during the winter. New Mexico’s

Regulatory Tardiness and Legislative Initiative. Regulatory delays in obtaining CPUC decisions regarding

rainfall is heaviest in the summer monsoon season. Hawaii receives precipitation throughout the year with the largest

GRC filings have been costly to California regulated water utilities. In recent years, we have experienced significant

amounts in the winter months. Water usage in all service areas is highest during the warm and dry summers and

revenue losses due to regulatory delays. We normally file GRC applications in July, but filed later in 2002 and 2003

declines in the cool winter months. Rain and snow during the winter months replenish underground water basins and

due to the delays in the 2001 GRC. The CPUC’s rate processing timeline provides for a decision within 12 months of

fill reservoirs, providing the water supply for subsequent delivery to customers. To date, snow and rainfall accumulation

accepting a GRC application. When decisions are not issued in a timely manner, customer rates are not increased in

during the 2003-2004 water year has been above average. Water storage in California’s reservoirs at the end of 2003

line with cost increases. As a result, we lose revenue and do not fully recover costs during the period the decisions

was at average levels. We believe that supply pumped from underground aquifers and purchased from wholesale sup-

are delayed.

pliers should be adequate to meet customer demand during 2004 and beyond. We develop long-term water supply

We have experienced significant revenue losses due to delays in obtaining GRC filing approvals in

plans for each of our districts to help assure an adequate water supply under various operating and supply conditions.

California. The estimated loss from CPUC delays was $9.3 million in revenue and $5.6 million in net income. This

Some of our districts have unique challenges in meeting water quality standards; but we believe our supplies will meet

estimate covers the July 2002 through March 2003 period and was due to the delays concerning the 2001 GRC

current standards using current treatment processes. We are executing a plan to meet more stringent EPA standards

application. These figures represent the revenue and net income that would have been collected if the CPUC had

related to arsenic, which will become effective in January 2006. Additional information on water supply is reported

issued its decision on the 2001 GRC in July 2002, which is when a decision would normally have been rendered on a

in our Form 10-K filing.

September 2001 filing. The estimated impact of approval delays on our balancing accounts filings was not permanent

and the loss of the time value of money is not deemed to be material.

California State Assembly Bill 2838 became effective on January 1, 2003, and applies to filings made in

L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S

January 2003 and thereafter. It is designed to preserve the cash flow of regulated water utilities by providing interim

Liquidity.

rate relief if the CPUC has not issued a decision for a requested GRC rate increase in a timely manner. While the CPUC

has not issued formal procedures for implementing the provisions of this bill, we believe interim rate increases will be

Short-Term Financing. Our short-term liquidity is provided by bank lines of credit and internally-gener-

authorized if the CPUC does not issue a final rate decision in a timely manner. In our initial application of this bill, we

ated funds. On a long-term basis, we obtain financing through access to debt and equity markets. Short-term bank

did receive approval to charge interim rates to cover inflation costs and we received approval for establishment of an

borrowings were $6.5 million at December 31, 2003, and $36.4 million at December 31, 2002. Cash and cash equiv-

effective date. While the impact to 2003 revenue was very minor, we view the approval of interim rate and establish-

alents were $2.9 million at December 31, 2003, and $1.1 million at December 31, 2002. Given our ability to access

ment of an effective date as positive indications that the basic provisions of this law will be applied as intended.

these lines of credit on a daily basis, we keep cash balances down to levels required for daily cash needs and use sur-

Review of Property Sales by CPUC. In September 2003, the CPUC issued decision D. 03-09-021. In

plus cash to pay down lines of credit when available. Minimal operating levels of cash are maintained for Washington

this decision, the CPUC ordered Cal Water to maintain and track sales records for each property that was at any time

Water, New Mexico Water and Hawaii Water.

included in rate base and subsequently sold and to share these records with the CPUC. The CPUC’s staff is reviewing

The water business is seasonal. Revenue is lower in the cool, wet winter months when less water is used

our recording of proceeds and recognition of gain on sales of these non-utility, surplus properties. We believe the sales

compared to the warm, dry summer months when water use is higher. During the winter period, the need for short-term

of surplus properties were properly recorded in accordance with the Water Utility Infrastructure Act of 1995 and the

borrowings under the bank lines of credit increases. The increase in cash flow during the summer allows short-term

borrowings to be paid down. Short-term borrowings that remain outstanding more than one year have generally been

converted to long-term debt. In 2003, we used both long-term debt and the issuance of common stock to provide

able to meet financing needs even if our ratings were further downgraded, but a rating change may result in a higher

funding to pay down short-term borrowings. In years when more than normal precipitation falls in the Company’s

interest rate on new debt.

service areas or temperatures are lower than normal, especially in the summer months, customer water usage can be

Long-Term Financing. Long-term financing, which includes senior notes, other debt securities and com-

lower than normal. The reduction in water usage reduces cash flow from operations and increases the need for short-

mon stock, has been used to replace short-term borrowings and fund capital expenditures. Internally-generated funds,

term borrowings.

after making dividend payments, provide positive cash flow, but have not been at a level to meet all of our capital

During the first seven months of 2003, short-term borrowings were used as an initial funding source for

expenditure needs. We expect this trend to continue given our plan for capital expenditures for the next 5 years. We

capital expenditures. This caused short-term borrowings to increase through July 2003. In August 2003, we issued a

believe that long-term financing is available to us through debt and equity markets.

secondary offering of common stock under a shelf registration. These proceeds were used to pay down the short-term

In March 2002, the CPUC issued a decision granting Cal Water authority to complete up to $250 million

borrowings and provide long-term funding for capital expenditures. During 2002, the need for short-term borrowings

of equity and debt financing through 2005, subject to certain restrictions. We currently have raised $206 million

was high due to capital expenditures primarily related to construction of the Bakersfield Treatment Plant. Cash gener-

through additional debt, refinanced debt and a common stock offering. We plan to request an additional authorization

ated by operations was not sufficient to meet cash needs of the business, primarily due to company-funded capital

for $250 million covering the next five years to address future capital needs. In addition to Company funds, construc-

expenditures. Capital was obtained through short-term borrowings and long-term borrowings.

tion projects are funded by developers’ contributions in aid of construction, which are not refundable, and advances for

Cal Water has a $45 million credit facility. The term of the agreement expires in April 2005. This agree-

construction, which are refundable.

ment has a requirement for balances to be below certain thresholds for 30 consecutive days each calendar year. We met

During 2002, we initiated a program to refinance a portion of Cal Water’s outstanding first mortgage

this requirement in 2003 and have already met this requirement in 2004. No other financial covenants apply, such as

bonds. The refinancing was intended to take advantage of the available lower interest rates. The total program was

interest expense coverage or capitalization ratios. The agreement terms include a provision that allows the bank to call

completed in three phases. The first phase of the program was completed in 2002 and included refinancing of Series

the loan and cancel the facility if Cal Water’s debt ratings fall below investment grade (Moody’s Baa3 or S&P BBB-).

S, BB and DD first mortgage bonds, and Series P that matured on November 1, 2002. Including Series P, the total first

Cal Water’s current debt ratings are A2 from Moody’s and A+ from S&P. In addition to borrowings, the facility allows for

mortgage bond principal balance refinanced was $33.9 million. In addition, call premiums and transaction costs were

letters of credit up to $10 million. We had one letter of credit outstanding for $0.5 million related to an insurance

incurred in the transactions. The refinancing was accomplished with funds from the issuance by Cal Water of two lower

policy, which reduces the amount available to borrow. Interest is charged on a variable basis and fees are charged for

interest, unsecured senior notes. Series G Senior Notes for $20 million were issued in November 2002 and Series H

unused amounts. As of December 31, 2003, we had borrowed $4.0 million against the facility.

Senior Notes for $20 million were issued in December 2002. The interest rate on both series is 5.29% and both

A $10 million credit facility exists for California Water Service Group, Utility Services, Washington Water,

mature in 2022. Each series requires annual sinking fund payments of $1.8 million commencing in 2012.

New Mexico Water and Hawaii Water. Until recently modified, the agreement covered only California Water Service

The second phase of the refinancing was completed in May 2003. Cal Water issued $10 million, 5.54%,

Group, Utility Services and New Mexico Water. The term of the agreement expires in April 2005. This agreement has

20-year Series I Senior Notes and $10 million, 5.44%, 15-year Series J Senior Notes. Both notes were unsecured. The

a requirement for balances to be below certain thresholds for 30 consecutive days each calendar year. We met this

proceeds from these borrowings were used to prepay the Series EE first mortgage bond that had an interest rate of

requirement in 2003 and have already met this requirement in 2004. No other financial covenants apply, such as inter-

7.9%. The principal, call premiums and transaction costs were approximately $20 million.

est expense coverage or capitalization ratios. The agreement terms include a provision that allows the bank to call the

The third phase was completed in November 2003. In October 2003, Cal Water issued a $20 million,

loan and cancel the facility if Cal Water’s debt ratings fall below investment grade. In addition to borrowings, the facil-

5.55%, Series N Senior Note. The note is unsecured and matures on December 1, 2013. Payment of principal is due

ity allows for letters of credit up to $5 million. We had no letters of credit outstanding at December 31, 2003. Interest

at maturity. Funds received were used to prepay first mortgage bond Series FF, which accrued interest at a rate of

is charged on a variable basis and fees are charged for unused amounts. As of December 31, 2003, we had no borrow-

6.95% and had a principal balance of $19.1 million. In addition to the prepayment of the principal balance, funds

ings against the facility.

were used to pay a call premium related to Series FF, transaction costs and for general corporate purposes. In

New Mexico Water has $2.5 million in loans that expire in May 2004. These loans do not have an out-of-

November 2003, Cal Water issued a $20 million, 5.52%, Series M Senior Note. The note is unsecured and matures on

debt compliance period. An additional $0.1 million is available for borrowing under the current arrangement. At this

November 1, 2013. Payment of principal is due at maturity. Funds received were used to prepay first mortgage bond

time, we believe these loans can be renewed at market rates. Washington Water has a $0.1 million credit facility that is

Series GG, which accrued interest at a rate of 6.98% and had a principal balance of $19.1 million. In addition to the

currently unused. Hawaii Water does not have a credit facility or other third party loans as of December 31, 2003.

prepayment of the principal balance, funds were used to pay a call premium related to Series GG, transaction costs and

Generally, short-term borrowings under the commitments are converted annually to long-term borrowings.

for general corporate purposes.

Credit Ratings. Cal Water’s first mortgage bonds are rated by Moody’s Investors Service (Moody’s) and

The transactions described above concluded our refinancing program. Based on terms currently available

Standard & Poor’s (S&P). The bank credit facility agreements contain a provision that if Cal Water’s Moody’s or S&P’s

in the marketplace, we have determined that additional refinancing at this time would be cost prohibitive. The refinanc-

senior debt rating falls below investment grade, the credit line may be terminated by the bank and the loan acceler-

ing program encompassed approximately $100 million of long-term debt and we estimate it will save approximately

ated. During the fourth quarter of 2003, management met separately with the two credit rating agencies during their

$2.0 million in interest expense on an annual basis through the year 2013.

annual rating reviews. In February 2004, Moody’s issued a report lowering Cal Water’s senior secured debt from A1 to

In 2002, long-term financing was provided by issuance of senior notes by Cal Water. In May 2002, Cal

A2 and noted the rating as stable. In November 2003, S&P issued a report keeping its rating of A+, but changing its

Water completed the issuance of $20 million, 7.11%, 30-year Series E Senior Notes. In August 2002, Cal Water com-

outlook from stable to negative. Both cited concerns about the lack of timely rate relief from the CPUC and the pro-

pleted the issuance of $20 million, 5.90%, 15-year Series F Senior Notes. These senior note issues do not require

jected capital expenditure requirements for water infrastructure and environmental compliance needs. Moody’s also

sinking fund payments.

issued a report about the water industry, citing the difficulties small operators face in financing needed capital expendi-

In 2003, long-term financing was provided by issuance of senior notes by Cal Water and issuance of

tures and delays in commission rulings as two main concerns. We believe that the rate increases received and pending

common stock by the Company.

will increase revenues, income and cash flows in 2004, which will increase our financial strength. The rating agencies

In February 2003, Cal Water completed the issuance of $10 million, 4.58%, 7-year Series K Senior

may or may not agree with this assessment and may further change their ratings in the future. We would expect to be

Notes and $10 million, 5.48%, 15-year Series L Senior Notes. Both notes were unsecured. The proceeds were used to

pay down short-term borrowings and to fund capital expenditures.

On July 11, 2003, a shelf registration became effective, which provides for the issuance from time to

SEWD contract effective April 2004. SEWD rates include incorporating current year estimated costs and adjustments

time of up to $120 million in common stock, preferred stock and/or debt securities. We may issue any of these types of

related to prior years costs and allocations with other customers. We are unable to estimate price changes beyond a

securities until the amount registered is exhausted, and will add the net proceeds from the sale of the securities to our

one-year period.

general funds to be used for general corporate purposes, which may include investment in subsidiaries, working capital,

We currently have two contracts, one in Los Altos and one in Bakersfield, which contain minimal pur-

capital expenditures, repayment of short-term borrowings, refinancing of existing long-term debt, acquisitions and other

chase provisions (take or pay). These contract payments vary with the volume of water purchased. We plan to continue

business opportunities.

to purchase and use at least the minimum water requirement under these contracts in the future. Both contracts renew

On August 4, 2003, we announced the issuance of 1,750,000 additional shares of common stock from

annually. Obligations were estimated assuming a five-year horizon beyond 2004.

the shelf registration statement. A prospectus supplement and prospectus were filed with the SEC under Rule 424

Capital Requirements. Capital requirements consist primarily of new construction expenditures for

(b) (2) on August 5, 2003. The shares were sold at $26.25 per share. The net proceeds to us were $43.8 million

expanding and replacing utility plant facilities and the acquisition of water systems. They also include refunds of

and the transaction was closed on August 7, 2003. The funds were used to pay down short-term borrowings and to

advances for construction.

invest in short-term money market instruments pending their use for general corporate purposes. After issuance of the

Company-funded utility plant expenditures were $53.9 million, $71.6 million and $53.4 million in 2003,

1,750,000 shares, there remains $74.1 million in securities under the shelf registration, which are available for

2002 and 2001, respectively. A major project during this time frame was the $50 million water treatment plant and

future issuance.

related water transmission and distribution pipelines in Bakersfield, California. Expenditures to construct the plant were

Washington Water has long-term debt primarily from two banks to meet its operating and capital equip-

incurred over a five-year period, with the largest portion, $27.1 million, incurred in 2002. The plant became opera-

ment purchase requirements at interest rates negotiated with the banks.

tional in 2003. Other major components of capital expenditures were mains and water treatment equipment.

We do not utilize off-balance sheet financing or utilize special purpose entity arrangements. We do not

For 2004, company-funded capital expenditures are budgeted at $65.8 million. For years beyond 2004,

have equity ownership through joint ventures or partnership arrangements.

capital expenditures are estimated at $70–$80 million per year for the next 5 years and will primarily be for mains,

Additional information regarding the bank borrowings and long-term debt is presented in notes 8 and 9 in

related water distribution equipment, pumping and water treatment equipment.

the consolidated financial statements.

Other capital expenditures are funded through developer advances and contributions in aid of construc-

Dividend Reinvestment and Stock Purchase Plan. We have a Dividend Reinvestment and Stock Purchase

tion (non-company funded). The expenditure amounts were $20.4 million, $16.8 million and $8.7 million in 2003,

Plan (Plan). Under the Plan, stockholders may reinvest dividends to purchase additional common stock without com-

2002 and 2001, respectively. The changes from year to year reflect expansion projects by developers in our service

mission fees. The Plan also allows existing stockholders and other interested investors to purchase common stock

areas. Funds are received in advance of incurring costs for these projects. Advances are normally refunded over a

through the transfer agent up to certain limits. Our transfer agent operates the Plan and purchases shares on the open

40-year period without interest. Future payments for advances received are listed under Contractual Obligations above.

market to provide shares for the Plan.

We expect to incur non-company-funded expenditures in 2004. These expenditures will be financed by

2004 Financing Plan. Our 2004 financing plan includes raising approximately $40–$50 million of new

developers through refundable advances for construction and non-refundable contributions in aid of construction.

capital. The plan includes issuance of $20–$30 million in senior notes to institutional investors and issuance of

Developers are required to deposit the cost of a water construction project with us prior to our commencing construc-

$20–$30 million of common stock. As currently contemplated, the common stock offering will be accomplished with

tion work, or the developers may construct the facilities themselves and deed the completed facilities to us. Because

one issuance in 2004 pursuant to the shelf registration. The timing of the issuance has not been established. Beyond

non-company-funded construction activity is solely at the discretion of developers, we cannot predict the level of future

2004, we intend to fund capital needs through a relatively balanced approach between long-term debt and equity.

activity. The cash flow impact is expected to be minor due to the structure of the arrangements.

Contractual Obligations. We have contractual obligations which are summarized in the table below.

Capital Structure. In 2003, common stockholders’ equity increased $45.3 million (22.7%), primarily due

Long-term debt payments include annual sinking fund payments on first mortgage bonds, maturities of long-term debt

to the issuance of common stock in August 2003. The long-term debt portion of the capital structure increased in

and annual payments on other long-term obligations. Advances for construction represent annual contract refunds to

2003 by $21.9 million, primarily due to issuance of Series K and Series L Senior Notes, which were $10 million each.

developers for the cost of water systems paid for by the developers. The contracts are non-interest bearing and refunds

See Long-Term Financing section above for additional information.

are generally on a straight-line basis over a 40-year period. The total amount presented for operating leases is for a

Total capitalization at December 31, 2003, was $520.2 million and $453.1 million at the end of 2002.

20-year period.

Contractual Obligations (In thousands)

Total

Long-Term Debt
Advances for Construction
Operating Leases
Take or Pay Purchase Agreements

$ 273,130
121,952
15,324
53,978

Less Than
1 Year

904
4,728
1,417
8,138

1-3 Years

3-5 Years

$ 1,688
8,714
2,656
17,265

$ 1,623
8,279
2,464
18,674

After
5 Years

$ 268,915
100,231
8,787
9,901

Cal Water has water supply contracts with wholesale suppliers in 16 of its operating districts. For each

contract, the cost of water is established by the wholesale supplier and is generally beyond our control. The amount

paid annually to the wholesale suppliers is charged to purchased water expense on our statements of income. Most

contracts do not require minimum annual payments and vary with the volume of water purchased.

The wholesale water contract with Stockton East Water District (SEWD) is a fixed fee contract. The

SEWD payments totaled $3.8 million in 2003. We estimate the annual price to increase $0.8–$1.5 million for the

We expect that our plan for using a balanced approach of common equity and long-term debt, coupled with increased

earnings above dividend growth, will increase the equity portion of capitalization in future years. At December 31,

capitalization ratios were:

Common Equity
Preferred Stock
Long-term Debt

2003

2002

47.0%
0.7%
52.3%

44.0%
0.7%
55.3%

The return (from both regulated and non-regulated operations) on average common stockholders’ equity

was 9.1% in 2003 compared to 9.7% in 2002.

Acquisitions. Although there were no significant acquisitions in the periods presented, the following

acquisitions are reported since they expanded operations into new states.

In July 2002, we acquired certain assets of Rio Grande Utility Corporation (Rio Grande) through New

accounting period. The amount of variability is low at December 31, as this is one of the lowest usage months of the

Mexico Water. The purchase included the water and wastewater assets of Rio Grande, which serves 2,400 water and

year and usage for the previous 30-day period is relatively consistent during this time of the year. Actual usage may

1,700 wastewater customers about 30 miles south of Albuquerque, New Mexico. The purchase price was $2.3 million

vary from this estimate.

in cash, plus assumption of $3.1 million in outstanding debt. Rate base for the system is approximately $5.4 million.

Flat-rate customers are billed in advance at the beginning of the service period. Since these are constant

The results of operations include the operating results of Rio Grande since the acquisition date. Revenue for 2003 was

amounts, appropriate adjustments can be calculated to determine the revenue related to the applicable period.

$1.6 million and net income was $0.1 million.

Estimated Expenses. Some expenses are recorded using estimates, as actual payments are not known or

In April 2003, we acquired the Kaanapali Water Corporation for $6.1 million in cash. After completing

processed by the accounting deadline. Estimates are made for unbilled purchased water, unbilled purchased power,

the acquisition, the entity’s name was changed to Hawaii Water Service Company, Inc. (Hawaii Water). Hawaii Water

provides water utility services to 500 customers in Maui, Hawaii. The final purchase price will be determined after

certain events have occurred, principally the resolution of determining rate base after filing for a general rate case with

the Hawaii Public Utilities Commission (HPUC). A filing is planned for 2004. At that time, the purchase price could

be adjusted, which could result in additional refunds estimated between 0% and 5% of the purchase price. For 2003,

revenue was $2.1 million and net income was $0.3 million. These amounts were for an eight-month period.

In June 2002, New Mexico Water signed an agreement to purchase National Utilities Corporation

(National Utilities) and related assets for approximately $1.1 million. National Utilities serves 700 water customers

located adjacent to the Rio Grande water system and another 900 water customers located 150 miles south of

Albuquerque. The acquisition will entitle New Mexico Water to purchase up to 2,000 acre-feet of water annually as

required for its operations. The purchase is not expected to have a material impact on revenues, net income, or cash

flows. The purchase is subject to the approval of the New Mexico Public Regulation Commission. We estimate regula-

tory approval to be received prior to June 2004.

Real Estate Program. We own more than 900 real estate parcels. From time to time, certain parcels are

deemed not necessary for or used in water utility operations. Most surplus properties have a low cost basis. A program

was 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. Property sales produced pretax gains of $4.6 million, $3.0 million and

$3.9 million in 2003, 2002 and 2001, respectively. As sales are dependent on real estate market conditions, future

sales may or may not be at prior year levels.

C R I T I C A L A C C O U N T I N G P O L I C I E S A N D E S T I M A T E S

We maintain our accounting records in accordance with accounting principles generally accepted in the

United States of America and as directed by the regulatory commissions to which our operations are subject. The process

of preparing financial statements requires the use of estimates on the part of management. The estimates used by man-

agement are based on historic experience and an understanding of current facts and circumstances. A summary of our

significant accounting policies are listed in note 2 of the consolidated financial statements and other notes provide addi-

tional information. The following sections describe the level of subjectivity, judgment and variability of estimates that

could have a material impact on the financial condition, operating performance and cash flows of the business.

Regulated Utility Accounting. Because we operate extensively in a regulated business, it is subject to the

provisions of Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types

of Regulation.” Application of SFAS No. 71 requires accounting for certain transactions in accordance with regulations

defined by the respective regulatory commission of that state. In the event that a portion of our operations were no

longer subject to the provisions of SFAS No. 71, we would be required to write off related regulatory assets and liabili-

ties that are not specifically recoverable and determine if other assets might be impaired. If a regulatory commission

determined that a portion of our assets were not recoverable in customer rates, we would be required to determine if it

had suffered an asset impairment that would require a write-down in the assets’ valuation. There has been no such

asset impairment as of December 31, 2003. Additional information relating to regulatory assets and liabilities are listed

in note 2 of the consolidated financial statements.

Revenue Recognition. Revenue is estimated for metered customers for water used between the last read-

ing of the customer’s meter and the end of the accounting period. This estimate is based on the usage from the last bill

to the customer, which normally covers a 30-day period, and is prorated from the last meter read date to the end of the

unbilled pump taxes, payroll and other types of similar expenses. While management believes its estimates are reason-

able, actual results could vary. Differences between actual results and estimates are recorded in the period when the

information is known.

Expense-Balancing and Memorandum Accounts. Expense-balancing accounts and memorandum accounts

(offsetable expenses) represent recoverable costs incurred, but not billed to our customers. The amounts included in

these accounts relate to rate increases charged to us by suppliers of purchased water and purchased power, and

increases in pump taxes. We do not record expense-balancing or memorandum accounts in our financial statements as

revenue, nor as a receivable, until the CPUC and other regulators have authorized recovery of the higher costs and cus-

tomers have been billed. Therefore, a timing difference may occur between when costs are recognized and the recogni-

tion of associated revenues. The balancing and memorandum accounts are only used to track the higher costs outside

of the financial statements. The cost increases, which are beyond our control, are referred to as “offsetable expenses”

because under certain circumstances they are recoverable from customers in future offset rate increases. In May 2003,

the CPUC gave approval to charge customers for a portion of our offsetable expenses (See Rates and Regulations).

Additionally, we have pending filings with the CPUC for offsetable expenses. The amounts requested may not be ulti-

mately collected through rates, as amounts may be disallowed during the review process or subject to an earnings test.

While the adjustments would not impact previously recorded amounts, the adjustments may impact future earnings and

cash flows. We are not able to provide estimates of what the ultimate collection will be from these accounts.

Washington Water, New Mexico Water and Hawaii Water did not have material amounts in expense-

balancing or memorandum accounts.

Income Taxes. Significant judgment is required in determining the provision for income taxes. The

process involves estimating current tax exposure and assessing temporary differences resulting from treatment of cer-

tain items, such as depreciation, for tax and financial statement reporting. These differences result in deferred tax

assets and liabilities, which are reported in the consolidated balance sheets. We must also assess the likelihood that

deferred tax assets will be recovered in future taxable income. To the extent recovery is unlikely, a valuation allowance

would be required. If a valuation allowance were required, it could significantly increase income tax expense. In man-

agement’s view, a valuation allowance was not required at December 31, 2003. Detailed schedules relating to income

taxes are provided in note 11 of the consolidated financial statements.

Employee Benefit Plans. We incur costs associated with our pension and postretirement benefit plans.

To measure the expense of these benefits, management must estimate compensation increases, mortality rates, future

health cost increases and discount rates used to value related liabilities and to determine appropriate funding. We work

with independent actuaries to measure these benefits. Different estimates and/or actual amounts could result in signifi-

cant variances in the costs and liabilities recognized for these benefit plans. The estimates used are based on historical

experience, current facts, future expectations and recommendations from independent advisors and actuaries.

We use an investment advisor to provide expert advice for managing investments in these plans. To diver-

sify investment risk, the plans’ goal is to invest 60% of the assets in various equity mutual funds and 40% in bond

funds. At December 31, 2003, 57% of the assets were invested in equity mutual funds and 43% in bond funds. Based

on the market values of the investment funds for the year ended December 31, 2003, the total return on the pension

plan assets was 19%. For 2002 and 2001, returns were a negative 3.3% and a positive 2.2%, respectively. Future

returns on investments could vary significantly from estimates and could impact our earnings and cash flows. We would

expect changes to these costs to be recovered in future rate filings, mitigating the financial impact.

For our measurement in 2003, we estimated the discount rate at 6.25%, which approximates the rate

R E C E N T A C C O U N T I N G P R O N O U N C E M E N T S A N D R E C E N T L A W C H A N G E S

of Moody’s AA rated bonds at December 2003. The discount rate used for 2002 was 6.7% using the same method-

The description and impact of recent accounting pronouncements that are effective for the period

ology. We assumed the rate of compensation to increase 1.5% in 2004, 2.0% in 2005 and 4.25% thereafter. Any

reported are described in note 2 of the consolidated financial statements.

change in these assumptions would have an effect on the service costs, interest costs and accumulated benefit obli-

As of the filing date, there were no accounting pronouncements affecting future periods that would have a

gations. Additional information related to employee benefit plans are listed in note 12 of the consolidated financial

material impact on our financial condition, results of operations or cash flows.

statements.

The change in the law concerning Medicare for prescription drugs may have a positive impact on our busi-

Workers’ Compensation, General Liability and Other Claims. For workers’ compensation, we utilize an

ness. We elected to defer incorporating the law change into the measurement of our postretirement plans. At this time,

actuary firm to estimate the discounted liability associated with claims submitted and claims not yet submitted based

we are unable to estimate the impact and have not made any decisions on whether the plan will be amended due to

on historical data. These estimates could vary significantly from actual claims paid, which could impact our earnings

this change in the law.

and cash flows. For general liability claims and other claims, we estimate the cost incurred but not yet paid using his-

torical information. Actual costs could vary from these estimates. We believe actual costs incurred would be allowed in

future rates, mitigating the financial impact.

Contingencies. We did not record any provisions relating to the contingencies reported in note 15 of the

consolidated financial statements, as these did not qualify for recording under SFAS No. 5 or other accounting stan-

dards. If our assessment is incorrect, these items could have a material impact on the financial condition, results of

operations and cash flows of the business.

F I N A N C I A L R I S K M A N A G E M E N T

We do not participate in hedge arrangements, such as forward contracts, swap agreements, options

or other contractual agreements relative to the impact of market fluctuations on our assets, liabilities, production or

contractual commitments. We operate only in the United States, and therefore, are not subject to foreign currency

exchange rate risks.

Terrorism Risk. Since the September 11, 2001, terrorist attacks, we have heightened security at our

facilities and have taken added precautions to protect our employees and the water we deliver to our customers. We

have complied with EPA regulations concerning vulnerability assessments and have made filings to the EPA as required.

In addition, communication plans have been developed as a component of our procedures related to this risk. While we

do not make public comments on our security programs, we have been in contact with federal, state and local law

enforcement agencies to coordinate and improve water delivery systems’ security.

Interest Rate Risk. We are subject to interest rate risk, although this risk is lessened because we are reg-

ulated. If interest costs were to increase, we believe our rates would increase accordingly. The majority of debt is long-

term, fixed-rate. Interest rate risk does exist on short-term borrowings within our credit facilities, as these interest rates

are variable. We also have interest rate risk with new financing, as we may incur higher interest rates on new debt if

interest rates increase.

Stock Price Risk. Because we operate primarily in a regulated industry, our stock price risk is somewhat

lessened; however, regulated parameters also can be recognized as limitations to operations and earnings, and the abil-

ity to respond to certain business condition changes. In the past, we experienced stock price risk because of the impact

on earnings caused by the delay of certain CPUC decisions. The adverse change in our stock price could make use of

common stock financing more expensive in the future.

Stock Market Performance Risk. Although our stock price did not reflect the volatility of the general mar-

ket over the past few years, we could be impacted by changes in the general market that may influence our stock price.

In addition, we could be impacted by changes in the general stock and bond markets in other areas. We provide our

employees a defined benefit pension plan and postretirement benefit plan. We are responsible for funding both of these

plans and a portion of the plans’ assets are invested in stock market equities (excluding our stock) and in corporate

bonds. Poor performance of the equity and bond investments could result in a need for additional future funding and

costs to make up for a loss of value in the equity investments. We believe we would be able to recover these costs

associated with the benefit plans in customer rates.

Equity Risk. We do not have equity investments and, therefore, do not have equity risks.

Consolidated Balance Sheets
C a l i f o r n i a Wa t e r S e r v i c e G r o u p

In thousands, except per share data

December 31,

A S S E T S

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, net of allowance for uncollectible accounts:

Customers
Other

Unbilled revenue
Materials and supplies at weighted average cost
Taxes and other prepaid expenses

Total current assets

Other assets:

Regulatory assets
Unamortized debt premium and expense
Other

Total other assets

2 0 0 3

2 0 0 2

2 0 0 3

2 0 0 2

12,318 $

1,038,058
13,770
14,829

1,078,975
319,477

11,513
927,244
48,624
13,929

1,001,310
304,322

759,498

696,988

2,856

1,063

18,434
5,125
8,522
2,957
5,609

43,503

14,831
9,130
7,969
2,760
5,130

40,883

53,326
9,071
7,637

70,034

46,089
6,798
7,720

60,607

873,035 $

798,478

C A P I T A L I Z A T I O N A N D L I A B I L I T I E S

Capitalization:

Common stock, $0.01 par value; 25,000 shares authorized,

16,932 and 15,182 outstanding in 2003 and 2002, 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 liabilities
Advances for construction
Contributions in aid of construction
Other long-term liabilities
Commitments and contingencies

See accompanying Notes to Consolidated Financial Statements.

169
93,748
150,908
(301)

152
49,984
149,215
(134)

244,524

199,217

3,475
272,226

3,475
250,365

520,225

453,057

904
6,454
23,776
2,074
2,896
27,460

63,564

2,925
38,005
16,676
121,952
90,529
19,159
—

1,000
36,379
23,706
1,365
2,873
24,114

89,437

2,774
31,371
17,201
115,459
77,576
11,603
—

$ 873,035

$ 798,478

Consolidated Statements of Income
C a l i f o r n i a Wa t e r S e r v i c e G r o u p

In thousands, except per share data

For the years ended December 31,

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

2 0 0 3

2 0 0 2

2 0 0 1

$ 277,128

$ 263,151

$ 246,820

80,831
21,921
6,272
40,969
37,476
12,717
23,256
12,898
10,554

76,672
22,897
6,344
37,196
34,073
11,587
21,238
12,568
9,829

73,174
21,130
5,910
35,968
34,109
12,131
19,226
9,728
9,740

246,894

232,404

221,116

Net operating income

30,234

30,747

25,704

Other income and expenses:
Non-regulated income, net
Gain on sale of non-utility property

Total other income and expenses

Interest expense:

Interest expense
Less capitalized interest

Net 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.

2,097
4,603

6,700

2,187
2,980

5,167

1,426
3,864

5,290

19,512
1,995

17,517

18,314
1,473

16,841

16,887
858

16,029

$ 19,417

$ 19,073

$ 14,965

1.21

1.25

0.98

0.97

15,882

15,893

15,182

15,185

15,182

15,186

Consolidated Statements of Common Stockholders’ Equity
and Comprehensive Income
C a l i f o r n i a Wa t e r S e r v i c e G r o u p

In thousands

For the years ended
December 31, 2003, 2002 and 2001

Common
Stock

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Loss

Retained
Earnings

Total
Stockholders’
Equity

Balance at December 31, 2000

$ 151

$ 49,984

$ 149,185

$ (486)

$ 198,834

Net income

Other comprehensive loss

Comprehensive income

Acquisition

Dividends paid:

Preferred stock
Common stock

Total dividends paid

—

—
—

—

—
—

—

14,965

—

14,965

—

220

153
16,918

17,071

(330)

—

—
—

—

14,635

221

153
16,918

17,071

Balance at December 31, 2001

152

49,984

147,299

(816)

196,619

Net income

Other comprehensive income

Comprehensive income

Dividends paid:

Preferred stock
Common stock

Total dividends paid

—

—
—

—

—
—

—

19,073

—

153
17,004

17,157

—

682

—

19,073

682

19,755

153
17,004

17,157

Balance at December 31, 2002

152

49,984

149,215

(134)

199,217

19,417

—

19,417

Net income

Other comprehensive loss

Comprehensive income

—

Issuance of common stock

43,764

—

Dividends paid:

Preferred stock
Common stock

Total dividends paid

—
—

—

—
—

—

153
17,571

17,724

(167)

—

—
—

—

19,250

43,781

153
17,571

17,724

Balance at December 31, 2003

$ 169

$ 93,748

$ 150,908

$ (301)

$ 244,524

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Cash Flows
C a l i f o r n i a Wa t e r S e r v i c e G r o u p

In thousands

For the years ended December 31,

2 0 0 3

2 0 0 2

2 0 0 1

Operating activities:

Net income

$ 19,417

$ 19,073

$ 14,965

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

Gain on sale of non-utility property
Changes in operating assets and liabilities:

Receivables
Unbilled revenue
Taxes and other prepaid expenses
Accounts payable
Other current assets
Other current liabilities
Other changes, net

Net adjustments

Net cash provided by operating activities

Investing activities:

Utility plant expenditures:

23,256

21,238

19,226

2,834
(4,603)

1,292
(554)
(2,876)
(301)
(197)
7,537
(1,374)

25,014

44,431

786
(2,980)

(1,088)
(561)
(86)
(431)
(613)
1,911
(696)

17,480

36,553

2,919
(3,864)

(2,186)
673
(1,913)
(2,461)
571
7,812
(436)

20,341

35,306

Company-funded
Developer advances and contributions in aid of construction

Proceeds from sale of non-utility assets
Acquisitions

(53,884)
(20,369)
4,803
(6,094)

(71,553)
(16,808)
3,006
(2,300)

(53,379)
(8,670)
3,999
(701)

Net cash used in investing activities

(75,544)

(87,655)

(58,751)

Financing activities:

Net changes in short-term borrowings
Issuance of common stock, net of expenses
Issuance of long-term debt, net of expenses
Advances for construction
Refunds of advances for construction
Contributions in aid of construction
Retirement of long-term debt
Dividends paid

(29,925)
43,781
80,114
13,248
(4,838)
9,311
(61,061)
(17,724)

12,435
—
79,718
12,545
(4,597)
7,740
(39,472)
(17,157)

7,402
—
20,507
6,498
(4,166)
10,868
(2,881)
(17,071)

Net cash provided by financing activities

32,906

51,212

21,157

Change in cash and cash equivalents
Cash and cash equivalents at beginning of year

1,793
1,063

110
953

(2,288)
3,241

Cash and cash equivalents at end of year

$ 2,856

$ 1,063

953

Supplemental disclosures of cash flow information:

Cash paid during the year for:

Interest (net of amounts capitalized)
Income taxes

Non-cash financing activity – common stock issued in acquisitions

See accompanying Notes to Consolidated Financial Statements.

$ 17,672
6,188
—

$ 16,527
10,205
—

$ 14,785
11,775
899

Notes to Consolidated Financial Statements
C a l i f o r n i a Wa t e r S e r v i c e G r o u p

December 31, 2003, 2002 and 2001
Amounts in thousands, except per share data and share data

O R G A N I Z A T I O N A N D O P E R A T I O N S
California Water Service Group (Company) is a holding company that through its wholly-owned subsid-
iaries provides water utility and other related services in California, Washington, New Mexico and Hawaii. California
Water Service Company (Cal Water), Washington Water Service Company (Washington Water), New Mexico Water Service
Company (New Mexico Water) and Hawaii Water Service Company, Inc. (Hawaii Water) provide regulated utility
services under the rules and regulations of their respective state’s regulatory commission (jointly referred to as the
Commissions). CWS Utility Services provides non-regulated water utility and utility-related services. The Company
operates primarily in one business segment, providing water and related utility services.

S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S
Principles of Consolidation and Accounting Records. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been elimi-
nated. The accounting records of the Company are maintained in accordance with the uniform system of accounts
prescribed by the Commissions.

Reclassifications. Certain prior years’ amounts have been reclassified, where necessary, to conform to the

current presentation.

Use of Estimates. The preparation of consolidated financial statements in conformity with accounting

principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Revenue. Revenue consists of monthly cycle customer billings for regulated water and wastewater ser-
vice 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.

The Company provides an allowance for doubtful accounts. The balance of customer receivables is net of
the allowance for doubtful accounts at December 31, 2003 and 2002 of $289 and $181, respectively. The activity in
the reserve account is as follows:

Beginning balance

Provision for uncollectible accounts
Net write off of uncollectible accounts

Ending balance

2003

2002

$ 181
833
(725)

$ 289

$ 224
480
(523)

$ 181

Non-Regulated Revenue. Revenue from non-regulated operations and maintenance agreements is recog-

nized when services have been rendered to companies or municipalities under such agreements. Expenses are netted
against the revenue billed and are reported in Other Income and Expenses on the Consolidated Statements of Income.
Other non-regulated revenue is recognized when title has transferred to the buyer, or ratably over the term of the lease.
For construction and design services, revenue is generally recognized on the completed contract method, as most pro-
jects are completed in less than three months. One construction and design project spanned multiple years and revenue
was recognized using the percentage-of-completion method based on a zero profit margin until project completion.
See Note 3, Other Income and Expenses.

Expense-Balancing and Memorandum Accounts. Expense-balancing and memorandum accounts are used

In addition, regulatory assets include items that are recognized as liabilities for financial statement

to track suppliers’ rate increases for purchased water, purchased power and pump taxes that are not included in cus-
tomer water rates. The cost increases are referred to as “Offsetable Expenses” because under certain circumstances
they are recoverable from customers in future rate increases designed to offset the higher costs. The Company does not
record the balancing and memorandum accounts until the Commission has authorized a change in customer rates and
the customer has been billed.

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. When depreciable plant is
retired, the cost is eliminated from utility plant accounts and such costs are charged against accumulated depreciation.
Maintenance of utility plant is charged to operating expenses as incurred. Maintenance projects are not accrued for in
advance. Interest is capitalized on plant expenditures during the construction period and amounted to $1,995 in 2003,
$1,473 in 2002 and $858 in 2001.

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 and are amortized over their useful life. Included in
intangible assets is $6,515 paid to the City of Hawthorne in 1996 to lease the City’s water system and associated
water rights. The asset is being amortized on a straight-line basis over the 15-year life of the lease.

The following table represents depreciable plant and equipment as of December 31:

Equipment
Transmission and distribution plant
Office buildings and other structures

Total

2003

2002

$ 199,157
772,641
66,260

$ 163,946
718,251
45,047

$ 1,038,058

$ 927,244

Depreciation of utility plant for financial statement purposes is computed on a straight-line basis over the

assets’ estimated useful lives as follows:

Equipment
Transmission and distribution plant
Office buildings and other structures

Useful Lives

5 to 50 years
40 to 65 years
40 to 50 years

The provision for depreciation expressed as a percentage of the aggregate depreciable asset balances was
2.5% in 2003, and 2.4% in 2002 and 2001. For income tax purposes, as applicable, the Company computes depreci-
ation 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.

Cash Equivalents. Cash equivalents include highly liquid investments, primarily money market funds.
Restricted Cash. Restricted cash primarily represents proceeds collected through a surcharge on certain

customers’ bills plus interest earned on the proceeds and is used to service California Safe Drinking Water Bond
obligations. In addition, there are compensating balances at a bank in support of borrowings. All restricted cash is
classified in other prepaid expenses. At December 31, 2003 and 2002, the amounts of restricted cash were $1,154
and $1,131, respectively.

Regulatory Assets and Liabilities. The Company records regulatory assets for future revenues expected to

be realized in customers’ rates when certain items are recognized as expenses for rate making purposes. The income
tax temporary differences relate primarily to the difference between book and income tax depreciation on utility plant
that was placed in service before the Commissions adopted normalization for rate making purposes. Previously the tax
effect was passed onto customers. In the future, when such timing differences reverse, the Company will be able to
include the impact in customer rates. The regulatory assets are net of adjustments related to deferred income taxes
that were provided at prior tax rates and the amount that would be provided at current tax rates. The differences will
reverse over the remaining book lives of the related assets.

purposes, which will be recovered in future customer rates. The liabilities relate to postretirement benefits, vacation,
self-insured workers’ compensation and asset retirement obligations.

Regulatory liabilities represent future benefit to rate payers for tax deductions that will be allowed in the

future for funds received as Advances for Construction and Contributions in Aid of Construction. Regulatory liabilities
also reflect timing differences provided at higher than the current tax rate, which will flow through to future rate payers.

Regulatory assets and liabilities are comprised of the following as of December 31:

R E G U L A T O R Y A S S E T S

Income tax temporary differences
Asset retirement obligations
Postretirement benefits other than pensions
Accrued vacation and workers’ compensation

Total regulatory assets

R E G U L A T O R Y L I A B I L I T I E S

Future tax benefits to ratepayers

2003

2002

$ 30,157
4,985
6,846
11,338

$ 31,341
—
5,165
9,583

$ 53,326

$ 46,089

$ 16,676

$ 17,201

Long-Lived Assets. The Company regularly reviews its long-lived assets for impairment annually or when

events or changes in business circumstances have occurred, which indicate the carrying amount of such assets may
not be fully realizable. Potential impairment of assets held for use is determined by comparing the carrying amount of
an asset to the future undiscounted cash flows expected to be generated by that asset. If assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets
exceeds the fair value of the assets. There have been no such impairments as of December 31, 2003 or 2002.

Long-Term Debt Premium, Discount and Expense. The discount and issuance expense on long-term

debt is amortized over the original lives of the related debt issues. Premiums paid on the early redemption of certain
debt issues and unamortized original issue discount and expense of such issues are amortized over the life of new debt
issued in conjunction with the early redemption. These amounts were $3,154, $2,449 and $0 in 2003, 2002 and
2001, respectively. Amortization expense included in interest expense was $415, $183 and $188 for 2003, 2002
and 2001, respectively.

Accumulated Other Comprehensive Loss. The Company has an unfunded Supplemental Executive

Retirement Plan. The unfunded accumulated benefit obligation of the plan, less the accrued benefit, exceeds the
unrecognized prior service cost resulting in an accumulated other comprehensive loss which has been recorded as a
separate component of Stockholders’ Equity.

Advances for Construction. Advances for Construction consist of payments received from developers for
installation of water production and distribution facilities to serve new developments. Advances are excluded from rate
base for rate-setting purposes. Annual refunds are made to developers without interest over a 20-year or 40-year period.
Refund amounts under the 20-year contracts are based on annual revenues from the extensions. Unrefunded balances
at the end of the contract period are credited to Contributions in Aid of Construction when they are no longer refund-
able in accordance with the contracts. Reclassifications were $1,813 in 2003 and $214 in 2002. Refunds on con-
tracts entered into since 1982 are made in equal annual amounts over 40 years. At December 31, 2003 and 2002,
the amounts refundable under the 20-year contracts were $1,350 and $3,248, respectively, and under 40-year con-
tracts were $119,699 and $111,136, respectively. In addition, other Advances for Construction totaling $903 and
$1,075 at December 31, 2003 and 2002, respectively, are refundable based upon customer connections. Estimated
refunds of advances for each succeeding year (2004–2008) are $4,728, $4,492, $4,221, $4,221 and $4,058, and
$100,231 thereafter.

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 contribu-
tions are included in utility plant, but excluded from rate base. Depreciation related to assets acquired from contribu-
tions is charged to Contributions in Aid of Construction.

Income Taxes. The Company accounts for income taxes using the asset and liability method. Deferred tax

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

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

effects of temporary differences recognized, which have previously been flowed through to customers. The Commissions
have granted the Company 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 tax-
able. In late 2000, federal regulations were further modified to exclude fire services from tax.

Workers’ Compensation, General Liability and Other Claims. For workers’ compensation, the Company
utilizes an actuary firm to estimate the discounted liability associated with claims submitted and claims not yet sub-
mitted based on historical data. For general liability claims and other claims, the Company estimates the costs incurred
but not yet paid using historical information.

Earnings Per Share. Basic earnings per share (EPS) is calculated by dividing income available to common

stockholders (net income less preferred stock dividends of $153) 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 including potentially dilutive shares as determined by application of the treasury stock method. The
difference between basic and diluted weighted average number of common stock outstanding is the effect of dilutive
common stock options outstanding.

Stock-Based Compensation. The Company has a stockholder-approved Long-Term Incentive Plan that

allows granting of nonqualified stock options. The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS
No.148, “Accounting for Stock-Based Compensation – Transition Disclosure – An Amendment to SFAS No. 123,” and
as permitted by the statement, applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees,” for its plan. All of the Company’s outstanding options have an exercise price equal to the market price
on the date they were granted. No compensation expense was recorded for the years ended December 31, 2003,
2002 or 2001.

The table below illustrates the effect on net income and earnings per share as if the Company had

applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-
based employee compensation:

Net income, as reported
Deduct: Total stock-based employee compensation expense determined under

2003

2002

2001

$ 19,417

$ 19,073

$ 14,965

fair value based method for all awards, net of related tax effects

Pro forma net income

Earnings per share:

Basic – as reported
Basic – pro forma

Diluted – as reported
Diluted – pro forma

$ 19,349

$ 19,003

$ 14,908

$
$

1.21
1.21

$
$

1.25
1.24

$
$

0.98
0.98

0.97
0.97

Recent Accounting Pronouncements. In June 2001, the Financial Accounting Standards Board (FASB)

issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which applies to legal obligations associated
with the retirement of long-lived assets and the associated asset retirement costs. The Statement was effective for the

Company in the first quarter of 2003. The Company recorded a long-term liability associated with its obligation to retire
wells in accordance with the Department of Health Services’ regulations when wells are abandoned and are no longer
useful for utility operations. The balance of the obligation was $7,707 as of December 31, 2003. A portion of the cost
($2,722) has been previously recognized as a component of depreciation expense. The remaining future obligation has
been recorded as a regulatory asset, as it will be recovered in the customers’ future rates. As the Company incurs the
expense of asset retirements, the cost is offset against accumulated depreciation. The accretion element recognized
each period is recorded as an increase in the regulatory asset.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal

Activities.” This Statement addresses financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This
Statement requires that a liability for costs associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not impact the
Company’s financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45, “Guarantors’ Accounting and Disclosure

Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Interpretation No. 45 requires
that a liability be recognized at the time a company issues a guarantee for the fair value of the obligations assumed
under certain guarantee agreements. Interpretation No. 45 is effective for guarantees issued or modified after
December 31, 2002. The disclosure requirements of the Interpretation expand existing disclosures required by a guar-
antor about its obligations under a guarantee. The adoption of Interpretation No. 45 did not impact the Company’s
financial position, results of operations or cash flows.

In December 2003, the FASB issued Interpretation No. 46R, “Consolidation of Variable Interest Entities,”

which amends Interpretation No. 46, “Consolidation of Variable Interest Entities.” The revision exempted
certain entities and modified the effective dates. The original guidance issued under Interpretation No. 46 in January
2003 is still applicable. Interpretation No. 46 and Interpretation No. 46R provide guidance for determining when a
primary beneficiary should consolidate a variable interest entity or equivalent structure that functions to support the
activities of the primary beneficiary. Interpretation No. 46R is effective for public entities for periods ending after
March 15, 2004. The adoption of Interpretation No. 46R will not impact the Company’s financial position, results of
operations or cash flows.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement No. 133 on Derivative

Instruments and Hedging Activities.” The Statement impacts the accounting for certain derivative contracts entered into
after June 30, 2003. This Statement is effective for quarters beginning after June 15, 2003. The Company currently
does not enter into derivative or hedging contracts. The adoption of SFAS No. 149 did not have an impact on the
Company’s financial position, results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with

Characteristics of both Liabilities and Equity.” The Statement establishes standards for the classification and measure-
ment of certain financial instruments with characteristics of both liabilities and equity. The Statement is effective for
financial instruments entered into after May 31, 2003, and is otherwise effective for quarters beginning after June 15,
2003. In November 2003, the FASB issued a staff position, which deferred the application of several provisions of
SFAS No. 150. The Company has not issued financial instruments that have characteristics of both liabilities and
equity. The adoption of SFAS No. 150 did not have nor is expected to have an impact on the Company’s financial
position, results of operations or cash flows.

In December 2003, federal legislation was passed reforming Medicare and introducing the Medicare

Part D prescription drug program. The Company has not yet determined the effects, if any, the new legislation will have
on its postretirement benefit plan or calculations that are required under SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other than Pensions,” which are disclosed in Note 12. The legislation may provide a special
subsidy to the Company that may affect the actuarial assumptions used in determining the utilization rates and medical
cost trends. In addition, the FASB may take future action in response to the legislation.

O T H E R I N C O M E A N D E X P E N S E S
The Company conducts various non-regulated activities as reflected in the table below. Income reflects

I N T A N G I B L E A S S E T S
As of December 31, 2003 and 2002, intangible assets that will continue to be amortized and those not

revenue less direct and allocated costs. Income taxes are not included.

amortized were:

2003

2002

2001

Revenue

Income

Revenue

Income

Revenue

Income

Operating and maintenance
Meter reading and billing
Leases
Water rights brokering
Design and construction
Other and non-regulated expenses

$ 4,137
1,337
1,190
196
1,305
320

$ 939
473
781
112
204
(412)

$ 4,007
1,179
1,050
1,382
6,267
262

$ 800
464
661
515
206
(459)

$ 3,724
1,130
818
483
7,185
411

619
204
469
309
400
(575)

Total

$ 8,485

$ 2,097

$ 14,147

$ 2,187

$ 13,751

$ 1,426

Operating and maintenance services and meter reading and billing services are provided for water and

wastewater systems owned by private companies and municipalities. The agreements call for a fee per service or a flat-
rate amount per month due from companies and municipalities. Leases have been entered into with telecommunica-
tions companies for cellular phone antennas placed on the Company’s property. Water right brokering activity involves
purchasing water rights from third parties and reselling those rights to other third parties. Design and construction ser-
vices are for the design and installation of water mains and other water infrastructure for others outside our regulated
service areas.

A C Q U I S I T I O N S
In 2003, after receiving regulatory approval, the Company acquired the Kaanapali Water Corporation and
renamed the corporation Hawaii Water Service Company, Inc. The purchase was for $6,094 in cash for the approximate
amount of rate base. If the rate base is adjusted by the Commission in the next rate proceeding, the purchase price will
be adjusted accordingly.

During 2002, after receiving regulatory approval, the Company acquired the assets of Rio Grande Utility
Corporation (Rio Grande) through its wholly-owned subsidiary, New Mexico Water. The purchase includes the water and
wastewater assets of Rio Grande, which serves water and wastewater customers in unincorporated areas of Valencia
County, New Mexico. The purchase price was $2,300 in cash, plus assumption of $3,100 in outstanding debt. Rate
base for the system is $5,400, including intangible water rights valued at $732.

In 2001, the Company acquired four companies operating in Cal Water’s Visalia District. The acquisitions
were completed in February 2001, in exchange for 36,180 shares of Company common stock worth $899 and assumed
debt of $218. The acquisitions were accounted for under the pooling of interests method of accounting; however, due
to the results from operations not being material to the Company’s consolidated results from operations, prior periods
were not restated. The net equity acquired was recorded as an increase to retained earnings at the beginning of the
year. In addition, Washington Water purchased the assets of eight water companies for cash of $701.

Condensed balance sheets and pro forma results of operations for these acquisitions have not been
presented since the effect of these purchases are not material. Acquisitions that involved purchase of assets were
accounted for under the purchase method of accounting.

2003

2002

Weighted
Average
Amortization
Period (yrs.)

Gross
Carrying
Value

Accumulated
Amortization

Net
Carrying
Value

Gross
Carrying
Value

Accumulated
Amortization

Net
Carrying
Value

Amortized intangible assets:

Hawthorne lease
Water pumping rights
Water planning studies
Leasehold improvements

and other

Total

Unamortized intangible assets:

Perpetual water rights

15
usage
14

$ 6,515
1,046
2,234

$ 3,402
8
386

$ 3,113
1,038
1,848

$ 6,515
1,046
1,783

$ 2,968
2
238

$ 3,547
1,044
1,545

2,338

952

1,386

2,160

1,027

1,133

$ 12,133

$ 4,748

$ 7,385

$ 11,504

$ 4,235

$ 7,269

$ 2,696

—

$ 2,696

$ 2,425

—

$ 2,425

For the years ending December 31, 2003, 2002 and 2001, amortization of intangible assets was $713,

$670 and $630, respectively. Estimated future amortization expense related to intangible assets for the succeeding five
years is $788, $786, $770, $641 and $612 for 2004 to 2008, and $3,788 thereafter.

P R E F E R R E D S T O C K
As of December 31, 2003 and 2002, 380,000 shares of preferred stock were authorized. Dividends on

outstanding shares are payable quarterly at a fixed rate before any dividends can be paid on common stock.

The outstanding 139,000 shares of $25 par value cumulative, 4.4% Series C preferred shares are not

convertible to common stock. A premium of $243 would be due to preferred stock shareholders upon voluntary liquida-
tion of Series C. There is no premium in the event of an involuntary liquidation. Each Series C preferred share is enti-
tled to sixteen votes, with the right to cumulative votes at any election of directors.

C O M M O N S T O C K H O L D E R S ’ E Q U I T Y
The Company is authorized to issue 25 million shares of $0.01 par value common stock. As of December

31, 2003 and 2002, 16,932,046 shares and 15,182,046 shares, respectively, of common stock were issued
and outstanding.

Dividend Reinvestment and Stock Repurchase Plan. Under the Plan, stockholders may reinvest dividends

to purchase additional common stock without commission fees. The Plan also allows existing stockholders and other
interested investors to purchase common stock through the transfer agent up to certain limits. The Company’s transfer
agent operates the Plan and purchases shares on the open market to provide shares for the Plan.

Stockholder Rights Plan. The Company’s Stockholder Rights Plan (SRP) is designed to provide stock-

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

holders protection and to maximize stockholder value by encouraging a prospective acquirer to negotiate with the Board.
The SRP 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 (Purchase Price). Each share of Series D Preferred Stock is entitled to receive a dividend
equal to 100 times any dividend paid on common stock and 100 votes per share in any stockholder election. The
Rights become exercisable upon occurrence of a Distribution Date. A Distribution Date event occurs if (a) any person
accumulates 15% of the then outstanding Common Stock, (b) any person presents a tender offer that would cause 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 sepa-
rately transferable. When a Distribution Date occurs: (a) the Company would distribute separate Rights Certificates to
Common Stockholders and the Rights would subsequently trade separate from the Common Stock; and (b) each holder
of a Right, other than the acquiring person (whose Rights would thereafter be void), would have the right to receive
upon exercise at its then current Purchase Price that number of shares of Common Stock having a market value of two
times the Purchase Price of the Right. If the Company merges into the acquiring person or enters into any transaction
that unfairly favors the acquiring person or disfavors the Company’s other stockholders, the Right becomes a right to
purchase Common Stock of the acquiring person having a market value of two times the Purchase Price.

The Board may determine that in certain circumstances a proposal that would cause a Distribution Date is

in the Company stockholders’ best interest. Therefore, the Board may, at its option, redeem the Rights at a redemption
price of $0.001 per Right.

S H O R T - T E R M B O R R O W I N G S
At December 31, 2003, the Company maintained a bank line of credit providing unsecured borrowings
of up to $10 million at the prime lending rate or lower rates as quoted by the bank. Cal Water maintained a separate
bank line of credit for an additional $45 million on the same terms as the Company’s line of credit. Both agreements
required a 30-day out-of-debt period for 2003, which was met. For 2004, the $10 million line has a requirement where
the outstanding balance must be below $5 million for a 30-day consecutive period. The $45 million Cal Water line has
a requirement that the outstanding balance must be below $10 million for a 30-day consecutive period. Both agree-
ments include a provision that allows the bank to call the loan and cancel the facility if Cal Water’s debt ratings fall
below investment grade (Moody’s Baa3 or S&P’s BBB-). The Company and Cal Water were in compliance with all
covenants as of December 31, 2003. At December 31, 2003, $4 million was outstanding on the Cal Water line and
there were no borrowings on the Company line.

Washington Water has a loan commitment for $0.1 million from a bank to meet its operating and capital
equipment purchase requirements at interest rates negotiated with the bank. At December 31, 2003, nothing was out-
standing under the short-term commitment.

New Mexico Water has a $2.6 million credit agreement with a New Mexico bank that expires in May

2004. The interest rate for the agreement is based on prime rate plus 75 basis points. At December 31, 2003, the
amount borrowed was $2.5 million.

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

2003

2002

2001

$ 58,633
$ 30,388

$ 52,285
$ 25,495

$ 36,800
$ 24,453

2.96%
4.08%

3.44%
3.61%

5.29%
3.16%

L O N G - T E R M D E B T
As of December 31, 2003 and 2002, long-term debt outstanding was:

First Mortgage Bonds:

Senior Notes:

Series

J
K
CC
EE
FF
GG

A
B
C
D
E
F
G
H
I
J
K
L
M
N

Interest
Rate

8.86%
6.94%
9.86%
7.90%
6.95%
6.98%

7.28%
6.77%
8.15%
7.13%
7.11%
5.90%
5.29%
5.29%
5.54%
5.44%
4.58%
5.48%
5.52%
5.55%

Maturity
Date

2003

2002

2023
2012
2020
2023
2023
2023

2025
2028
2030
2031
2032
2017
2022
2022
2023
2018
2010
2018
2013
2013

3,800
5,000
18,300
—
—
—

27,100

20,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
10,000
10,000
10,000
10,000
20,000
20,000

4,000
5,000
18,400
19,100
19,100
19,100

84,700

20,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
—
—
—
—
—
—

240,000

160,000

California Department of Water Resources loans

3.0% to 7.4%

2003-33

2,747

2,797

Other long-term debt

Total long-term debt
Less current maturities

3,283

3,868

273,130
904

251,365
1,000

Long-term debt, less current maturities

$ 272,226

$ 250,365

The first mortgage bonds and unsecured senior notes are obligations of Cal Water. All bonds are held by

institutional investors and are secured by substantially all of Cal Water’s utility plant. The senior notes are held by insti-
tutional investors and require interest-only payments until maturity, except Series G and H Senior Notes, which have an

annual sinking fund requirement of $1.8 million starting in 2012. The Department of Water Resources (DWR) loans
were financed under the California Safe Drinking Water Bond Act. Repayment of principal and interest on the DWR
loans is through a surcharge on customer bills. Other long-term debt is primarily equipment and system acquisition
financing arrangements with financial institutions. Compensating balances of $228 as of December 31, 2003, are
required by these institutions. Aggregate maturities and sinking fund requirements for each of the succeeding five years
(2004 through 2008) are $904, $880, $808, $819 and $804, and $268,915 thereafter.

O T H E R A C C R U E D L I A B I L I T I E S
As of December 31, 2003 and 2002, other accrued liabilities were:

Accrued pension and postretirement benefits
Accrued and deferred compensation
Accrued insurance
Other

I N C O M E T A X E S
Income tax expense (benefit) consists of the following:

2003

2002

2001

Federal

State

Total

Current
Deferred

$ 8,506
1,697

$ 2,604
91

$ 11,110
1,788

Total

$ 10,203

$ 2,695

$ 12,898

Current
Deferred

$ 8,797
1,039

$ 2,406
326

$ 11,203
1,365

Total

$ 9,836

$ 2,732

$ 12,568

Current
Deferred

$ 6,472
1,456

$ 2,136
(336)

$ 8,608
1,120

Total

$ 7,928

$ 1,800

$ 9,728

2003

2002

$ 11,828
7,192
2,894
5,546

$ 9,635
6,041
2,914
5,524

$ 27,460

$ 24,114

Depreciation
Developer advances and contributions
Bond redemption premiums
Investment tax credits
Other

Total deferred income tax expense

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

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

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 expense

The components of deferred income tax expense were:

2003

2002

2001

$ 11,310

$ 11,074

$ 8,643

1,846
(91)
(167)

1,818
(191)
(133)

1,170
(156)
71

$ 12,898

$ 12,568

$ 9,728

2003

2002

2001

$ 3,110
(1,136)
911
(110)
(987)

$ 2,405
(789)
806
(95)
(962)

$ 2,337
(783)
(42)
(94)
(298)

$ 1,788

$ 1,365

$ 1,120

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

tax liabilities at December 31, 2003 and 2002 are presented in the following table:

Deferred tax assets:

Developer deposits for extension agreements and contributions in aid of construction
Federal benefit of state tax deductions
Book plant cost reduction for future deferred ITC amortization
Insurance loss provisions
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

2003

2002

$ 42,517
6,439
1,728
1,179
1,359
945

$ 41,776
6,325
1,639
876
1,136
850

54,167

52,602

89,464
2,708

92,172

82,130
1,843

83,973

$ 38,005

$ 31,371

A valuation allowance was not required at December 31, 2003 and 2002. Based on historical 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.

E M P L O Y E E B E N E F I T P L A N S
Pension Plan. The Company provides a qualified defined benefit, non-contributory pension plan for sub-

stantially all employees. The Company also maintains an unfunded, non-qualified, supplemental executive retirement
plan. The costs of the plans are charged to expense and utility plant. The Company makes annual contributions to fund
the amounts accrued for pension cost. The Company estimates that the annual contribution to the pension plan will be
$8,235 in 2004. Plan assets in the pension plan as of December 31, 2003 and 2002 (the measurement dates for the
plan) were as follows:

Asset Category

Bond Funds
Equity Accounts

Target

2003

2002

40.0%
60.0%

42.9%
57.1%

52.6%
47.4%

The investment objective of the fund is to maximize the return on assets, commensurate with the risk the
Company Trustees deem appropriate to meet the obligations of the Plan, minimize the volatility of the pension expense
and account for contingencies. The Trustees utilize the services of an outside investment advisor and periodically mea-
sure fund performance against specific indexes, in an effort to generate a rate of return for the total portfolio that
equals or exceeds the actuarial investment rate assumptions.

Pension benefit payments are generally done in the form of purchasing an annuity from a life insurance
company. Benefit payments under the supplemental executive retirement plan are paid currently. Benefits expected to
be paid in each year 2004 to 2008 are $3,711, $4,078, $4,817, $5,028 and $6,746, respectively. The aggregate
benefit expected to be paid in the five years 2009 to 2013 is $44,861. The expected benefit payments are based upon
the same assumption used to measure the Company’s benefit obligation at December 31, 2003, and include estimated
future employee service.

The accumulated benefit obligations of the pension plan are $62,368 and $58,318 as of December 31,

2003 and 2002, respectively. The fair value of pension plan assets was $63,216 and $56,303 as of December 31,
2003 and 2002, respectively. The unfunded supplemental executive retirement plan accumulated benefit obligations
were $6,480 and $5,972 as of December 31, 2003 and 2002, respectively.

The data in the tables below includes the unfunded, non-qualified, supplemental executive retirement

plan. In addition, the tables reflect a plan amendment effective January 1, 2003, which increased the annual minimum
benefit, which is recognized over the estimated working lives of the employees.

Savings Plan. The Company sponsors a 401(k) qualified, defined contribution savings plan that allows
participants to contribute up to 20% of pretax compensation. The Company matches fifty cents for each dollar con-
tributed by the employee up to a maximum Company match of 4.0%. Company contributions were $1,433, $1,422 and
$1,425, for the years 2003, 2002 and 2001, respectively.

Other Postretirement Plans. The Company provides substantially all active, permanent employees with

medical, dental and vision benefits through a self-insured plan. Employees retiring at or after age 58 are offered, along
with their spouses and dependents, continued participation in the plan by payment of a premium. Plan assets are invested
in mutual funds and short-term money market funds. Retired employees are also provided with a life insurance benefit.

The Company records the costs of postretirement benefits during the employees’ years of active service.

The Commissions have issued decisions that authorize rate recovery of tax deductible funding of postretirement benefits
and permit recording of a regulatory asset for the portion of costs that will be recoverable in future rates.

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

net postretirement benefit liability as of December 31, 2003 and 2002:

Change in projected benefit obligation:
Beginning of year
Service cost
Interest cost
Assumption change
Plan amendment
Experience loss
Benefits paid

Pension Benefits

Other Benefits

2003

2002

2003

2002

$ 79,569
3,879
5,374
6,662
—
2,058
(9,186)

$ 60,359
2,968
4,404
30
15,424
660
(4,276)

$ 17,503
1,033
1,224
1,462
—
1,106
(109)

$ 14,708
815
1,037
699
40
845
(641)

End of year

$ 88,356

$ 79,569

$ 22,219

$ 17,503

Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Retiree contributions
Benefits paid

$ 56,303
10,667
5,432
—
(9,186)

$ 57,340
(2,377)
5,616
—
(4,276)

$ 2,465
364
977
580
(689)

2,300
(79)
885
470
(1,111)

Fair value of plan assets at end of year

$ 63,216

$ 56,303

$ 3,697

$ 2,465

Funded status
Unrecognized actuarial loss
Unrecognized prior service cost
Unrecognized transition obligation
Unrecognized net initial asset

Net amount recognized

$ (25,140)
4,031
17,074
—
—

$ (23,266)
1,281
18,875
—
—

$ (18,522)
7,175
712
2,769
(276)

$ (15,038)
5,025
786
3,045
(276)

(4,035)

(3,110)

(8,142)

(6,458)

Amounts recognized on the balance sheets consist of:

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

Pension Benefits

Other Benefits

2003

2002

2003

2002

$ (4,035)
(2,992)
2,691
301

$ (3,110)
(4,784)
4,650
134

$ (8,142)
—
—
—

$ (6,458)
—
—
—

Net amount recognized

$ (4,035)

$ (3,110)

$ (8,142)

$ (6,458)

Below are the actuarial assumptions used for the benefit plans:

Pension Benefits

Other Benefits

2003

2002

2003

2002

Weighted average assumptions as of December 31:

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

6.25%
8.00%

6.70%
8.00%
1.50 to 4.25% 1.00 to 4.25%

6.25%
8.00%
—

6.70%
8.00%
—

The long-term rate of return assumption is the expected rate of return on a balanced portfolio invested
roughly 60% in equities and 40% in fixed income securities. The average return for the plan for the last five and ten
years was 6.2% and 8.6%, respectively.

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

31, 2003, 2002 and 2001 included the following components:

Pension Plan

Other Benefits

2003

2002

2001

2003

2002

2001

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

$ 3,879
5,374
(4,757)
1,861

$ 2,968
4,404
(4,497)
1,166

$ 2,786
4,333
(4,946)
855

$ 1,033
1,224
(233)
637

$ 815
1,037
(216)
500

$ 625
858
(212)
363

Net periodic benefit cost

$ 6,357

$ 4,041

$ 3,028

$ 2,661

$ 2,136

$ 1,634

Postretirement benefit expense recorded in 2003, 2002 and 2001 was $1,160, $1,157 and $885,
respectively. A regulatory asset of $6,846 was recorded and is expected to be recoverable through future customer
rates. The Company intends to make annual contributions to the plan up to the amount deductible for tax purposes.

For 2003 measurement purposes, the Company assumed a 6% annual rate of increase in the per capita

cost of covered benefits for 2004. Thereafter, the Company assumed a 5% annual rate. 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:

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

1-percentage
Point Increase

1-percentage
Point Decrease

$ 487
$ 3,926

$
(378)
$ (3,119)

S T O C K - B A S E D C O M P E N S A T I O N P L A N
The Company has a stockholder-approved Long-Term Incentive Plan that allows granting of non-qualified

stock options, performance shares and dividend units. Under the plan, a total of 1,500,000 common shares are author-
ized 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. At December 31, 2003, 74,625 options were exercisable at a weighted average
price of $24.45. No options were granted in 2003.

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:

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

2003

2002

2001

n/a
n/a
n/a
n/a

4.5%
14.4%
3.25%
5.0

4.3%
30.4%
4.6%
5.0

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

Outstanding at December 31, 2000
Granted
Cancelled

Outstanding at December 31, 2001
Granted

Outstanding at December 31, 2002
Cancelled

Weighted
Average
Exercise
Price

$ 23.06
25.94
24.50

24.57
25.15

24.77
24.78

53,500
58,000
(12,000)

99,500
55,000

154,500
(5,250)

Outstanding at December 31, 2003

149,250

$ 24.77

Weighted
Average
Remaining
Contractual Life

9.5

8.8

8.2

7.2

Options
Exercisable

—

11,875

36,750

74,625

Weighted
Average
Fair
Value

—
$ 5.65

—
2.05

—

F A I R V A L U E O F F I N A N C I A L I N S T R U M E N T S
For those financial instruments for which it is practicable to estimate a fair value, the following

methods and assumptions were used. For cash equivalents, accounts receivables, accounts payables and short-term
borrowings, 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 $272 million as of December 31, 2003, and $306 million as
of December 31, 2002, using a discounted cash flow analysis, based on the current rates available to the Company
for debt of similar maturities. The fair value of advances for construction contracts is estimated at $48 million as of
December 31, 2003, and $34 million as of December 31, 2002, based on data provided by brokers who purchase and
sell these contracts.

C O M M I T M E N T S A N D C O N T I N G E N C I E S
Commitments. The Company leases office facilities in many of its operating districts. The total paid and

charged to operations for such leases was $577 in 2003, $700 in 2002 and $620 in 2001.

The Company has long-term contracts with two wholesale water suppliers that require the Company to

purchase minimum annual water quantities. Purchases are priced at the suppliers’ then current wholesale water rate.
The Company operates to purchase sufficient water to equal or exceed the minimum quantities under both contracts.
The total paid under the contracts was $8,557 in 2003, $6,816 in 2002 and $6,208 in 2001.

The Company leases the City of Hawthorne water system, which in addition to the upfront lease payment,
includes an annual payment. The 15-year lease expires in 2011. The annual payments in 2003, 2002 and 2001 were
$111, $100 and $100, respectively. In July 2003 the Company entered into a 15-year lease of the City of Commerce
water system. The lease includes an annual lease payment of $845 per year plus a cost savings sharing arrangement.

Payments for these contracts are summarized below:

2004
2005
2006
2007
2008
thereafter

Office Leases

Water Contracts

System Leases

456
379
355
285
257
441

$ 8,138
8,463
8,802
9,154
9,520
9,901

961
961
961
961
961
8,346

The water supply contract with Stockton East Water District (SEWD) requires a fixed, annual payment and

In February 2003, the California Public Utilities Commission (CPUC) Office of Ratepayer Advocates

recommended that Cal Water be fined up to $9.6 million and refund $0.5 million in revenue for failing to report two
acquisitions as required by the CPUC. One acquisition was completed prior to adoption of the reporting requirement by
the CPUC; the other was inadvertently not reported. Cal Water acquired the two water systems, which serve 283 cus-
tomers, for approximately $0.1 million. The staff’s recommendation does not challenge the level of service provided or
amounts charged for water service to the customers; it is based solely on the fact that Cal Water failed to report the
acquisitions to the CPUC. On July 10, 2003, the CPUC issued Resolution W-4390. In this resolution, the CPUC’s staff
challenged whether Cal Water was properly authorized to make these two acquisitions, as a result of the failure to
report. The resolution grants Cal Water’s request to consult and work with the CPUC’s Water Division to resolve the
matters. Since the CPUC’s policy is to encourage large water utilities to acquire small water systems, Cal Water believes
that a reasonable resolution will be reached. At this time, Cal Water cannot estimate the costs or the timing of the reso-
lution of these issues. Cal Water does not believe that the staff’s recommendation will be upheld when this matter is
considered by the CPUC. Accordingly, no liability was accrued in the financial statements.

In September 2003, the CPUC issued decision D. 03-09-021. In this decision, the CPUC ordered Cal

Water to maintain and track sales records for each property that was at any time included in rate base and subse-
quently sold and to share these records with the CPUC. The CPUC’s staff is reviewing Cal Water’s recording of proceeds
and recognition of gain on sales of these non-utility, surplus properties. Cal Water believes the sales of surplus proper-
ties were properly recorded in accordance with the Water Utility Infrastructure Act of 1995 and the CPUC’s decision
authorizing the holding company structure for California Water Service Group. Gains have been recognized outside of
regulated operations, as the properties sold were not being used in the regulated operations and were excluded from
rate base for rate setting purposes. Also, proceeds from these sales have been reinvested in the regulated business of
Cal Water. The CPUC has requested documentation to determine whether Cal Water appropriately removed these non-
utility, surplus properties from rate base in a timely manner, and has requested documentation on the determination
that these properties were no longer used and useful. If the CPUC finds any surplus property sale or transfer was
recorded inappropriately, then this could result in a reduction to rate base used to determine future rates charged
to regulated customers. This could reduce future revenues, net income and cash flows. The Company is not able to
provide estimates of the timing or what the ultimate resolution may be.

The Company is involved in other proceedings or litigation arising in the ordinary course of operations.

The Company believes the ultimate resolution of such matters will not materially affect its financial position, results of
operations or cash flows.

does not vary during the year with the quantity of water delivered by the district. Because of the fixed price arrange-
ment, the Company operates to receive as much water as possible from SEWD in order to minimize the cost of operat-
ing Company-owned wells used to supplement SEWD deliveries. The total paid under the contract was $3,779 in 2003,
$2,967 in 2002 and $3,496 in 2001. Pricing under the contract varies annually.

In 2002, New Mexico Water signed an agreement to purchase National Utilities Corporation and land for

approximately $1.1 million in cash. The purchase of National Utilities is subject to the approval of the New Mexico
Public Regulation Commission, which is expected in the first half of 2004.

Contingencies. In 1995, the State of California’s Department of Toxic Substances Control (DTSC) named
the Company as a potential responsible party for cleanup of a toxic contamination plume in the Chico groundwater. The
toxic spill occurred when cleaning solvents, which were discharged into the city’s sewer system by local dry cleaners,
leaked into the underground water supply. The DTSC contends that the Company’s responsibility stems from its opera-
tion of wells in the surrounding vicinity that caused the contamination plume to spread. While the Company is cooper-
ating with the cleanup effort, it denies any responsibility for the contamination or the resulting cleanup and intends to
vigorously resist any action that may be brought against it. The Company has negotiated with DTSC regarding dismissal
of the Company from the claim in exchange for the Company’s cooperation in the cleanup effort. However, no agree-
ment has been reached with DTSC regarding dismissal of the Company from the DTSC action. In December 2002, the
Company was named along with eight other defendants in a lawsuit filed by DTSC for the cleanup of the plume. The
suit asserts that the defendants are jointly and severally liable for the estimated cleanup of $8.7 million. The Company
believes that it has insurance coverage for this claim and that if it were ultimately held responsible for a portion of the
cleanup costs, there would not be a material adverse effect on the Company’s financial position or results of operations.
The Company’s insurance carrier is currently paying the cost of legal representation in this matter.

In 2003, the Company was served with a lawsuit in state court naming it as one of several defendants for

damages alleged to have resulted from waste oil contamination in the groundwater in the Marysville District. The suit
did not specify a dollar amount. The Company does not believe that the complaint alleges any facts under which it may
be held liable. The Court has twice dismissed the complaint on various grounds raised by the Company, but the Court
has continued to grant the plaintiff leave to amend the complaint. If necessary, the Company intends to vigorously
defend the suit. In 2002, the plaintiff in this action brought a suit against the Company in federal court with similar
allegations concerning groundwater contamination. The suit was dismissed; however, the Court did not bar the plaintiff
from filing a state claim. If an assessment is determined by a court, the Company believes that its insurance policy will
cover costs related to this matter under the terms of the policy.

In December 2001, the Company and several other defendants were served with a lawsuit by the

estate and immediate family members of a deceased employee of a pipeline construction contractor. The contractor’s
employee had worked on various Company projects over a number of years. The plaintiffs allege that the Company and
other defendants are responsible for an asbestos-related disease that is claimed to have caused the death of the con-
tractor’s employee. The complaint seeks damages in excess of $0.1 million, in addition to unspecified punitive dam-
ages. The Company denies responsibility in the case and intends to vigorously defend itself against the claim. Pursuant
to an indemnity provision in the contracts between the contractor and the Company, the contractor has accepted liabil-
ity for the claim against the Company and is reimbursing the Company for its defense costs.

The Company and City of Stockton (City) purchase water from Stockton East Water District (SEWD). The

City believes that SEWD’s meter, which recorded water deliveries to the City’s system, malfunctioned for some period of
time, and as a result the City overpaid for water deliveries from SEWD. If the City’s assertion is correct, SEWD would
owe the City a credit which may be recovered from its other customers, which is primarily the Company. SEWD has ini-
tially agreed with the City’s assertion and has recommended a reimbursement to the City and a billing adjustment to
the Company of $1.9 million over a 24-month period. At this time, the Company has not agreed with the assertion or
the method in which the overcharging to the City was determined. The Company has not been formally notified by
SEWD of a liability to the Company. The Company has been billed $0.7 million, and has paid in 2003 higher costs
associated with this claim. These amounts were recorded as an expense in 2003. The Company has ceased further
payments of this adjustment and has hired a consultant to perform a study on the situation. After completion of the
study, the Company will negotiate with SEWD and the City. Given the assertion of the City, the estimated settlement is
between $0.7 and $1.9 million. The Company believes that any additional expense associated with settlement would be
recoverable in customers’ rates.

Q U A R T E R L Y F I N A N C I A L D A T A ( U N A U D I T E D )
The Company’s common stock is traded on the New York Stock Exchange under the symbol “CWT.”

Through 2003, dividends have been paid on common stock for 59 consecutive years and the rate has been increased
each year since 1968.

2003 – in thousands except per share amounts

First

Second

Third

Fourth

Operating revenue
Net operating income
Net income (loss)
Diluted earnings (loss) per share
Common stock market price range:

High
Low

Dividends paid

2002 – in thousands except per share amounts

Operating revenue
Net operating income
Net income
Diluted earnings per share
Common stock market price range:

High
Low

Dividends paid

$ 51,311
2,625
(768)
(0.05)

26.27
23.92
.28125

$ 51,611
5,353
1,928
0.12

26.25
23.20
.2800

$ 67,994
7,548
4,585
0.30

30.97
25.79
.28125

$ 69,183
8,405
6,619
0.43

26.69
23.40
.2800

$ 88,197
12,519
8,587
0.53

29.98
25.20
.28125

$ 81,440
11,597
7,675
0.50

26.45
21.60
.2800

$ 69,626
7,542
7,013
0.41

27.99
25.51
.28125

$ 60,917
5,392
2,851
0.19

25.95
23.65
.2800

Independent Auditors’ Report

T H E B O A R D O F D I R E C T O R S A N D S T O C K H O L D E R S
C A L I F O R N I A W A T E R S E R V I C E G R O U P :

We have audited the accompanying consolidated balance sheets of California Water Service Group

and subsidiaries as of December 31, 2003 and 2002, 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, 2003. These consolidated financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with 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 provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material

respects, the financial position of California Water Service Group and subsidiaries as of December 31, 2003 and 2002,
and the results of their operations and their cash flows for each of the years in the three-year period ended December
31, 2003, in conformity with accounting principles generally accepted in the United States of America.

Mountain View, California
January 27, 2004

Certifications

As provided in the rules of the New York Stock Exchange (NYSE), the Company’s Chief Executive Officer has certified
to the NYSE in writing that, as of March 4, 2004, he was not aware of any violation by the Company of the NYSE’s
Corporate Governance listing standards. The Company has included as Exhibits 31.1 and 31.2 to its Annual Report on
Form 10-K for the year ended December 31, 2003, certifications from its Chief Executive Officer and Chief Financial
Officer regarding the quality of the Company’s public disclosure.

Corporate Information

S T O C K T R A N S F E R , D I V I D E N D D I S B U R S I N G A N D R E I N V E S T M E N T A G E N T
EquiServe
P.O. Box 43010
Providence, RI 02940-3010
(800) 736-3001

T O T R A N S F E R S T O C K
A change of ownership of shares (such as when stock is sold or gifted or when owners are deleted from or
added to stock certificates) requires a transfer of stock. To transfer stock, the owner must complete the assignment on
the back of the certificate and sign it exactly as his or her name appears on the front. This signature must be guaran-
teed by an eligible guarantor institution (banks, stock brokers, savings and loan associations and credit unions with
membership in approved signature medallion programs) pursuant to SEC Rule 17Ad-15. A notary’s acknowledgement is
not acceptable. This certificate should then be sent to EquiServe, Stockholder Services, by registered or certified mail
with complete transfer instructions.

B O N D R E G I S T R A R
US Bank Trust, N.A.
One California Street
San Francisco, CA 94111-5402
(415) 273-4580

E X E C U T I V E O F F I C E
California Water Service Group
1720 North First Street
San Jose, CA 95112-4598
(408) 367-8200

A N N U A L M E E T I N G
The Annual Meeting of Stockholders will be held on Wednesday, April 28, 2004, at 10 a.m. at the

Company’s Executive Office, located at 1720 North First Street in San Jose, California. Details of the business to be
transacted during the meeting will be contained in the proxy material, which will be mailed to stockholders on or about
March 26, 2004.

D I V I D E N D D A T E S F O R 2 0 0 4

Quarter

First
Second
Third
Fourth

Declaration Date

Record Date

Payment Date

January 28
April 28
July 28
October 27

February 7
May 10
August 9
November 8

February 20
May 21
August 20
November 19

A N N U A L R E P O R T F O R 2 0 0 3 O N F O R M 1 0 - K
A copy of the Company’s report for 2003 filed with the Securities and Exchange Commission (SEC) on

Form 10-K will be available in March 2004 and can be obtained by any stockholder at no charge upon written request
to the address below. The Company’s filings with the SEC can be viewed via the link to the SEC’s EDGAR system on the
Company’s web site.

S T O C K H O L D E R I N F O R M A T I O N
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.calwatergroup.com