California Water Service Group Annual Report 2006

Plain-text annual report

2 0 0 6 A n n u a l R e p o r t p u o r G e c i v r e S r e t a W a i n r o f i l a C 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 S H I NG T O N A W H A WAII behind the scenes. 2006 Annual Report California Water Service Group 1720 North First Street San Jose, California 95112-4598 (408) 367-8200 www.calwatergroup.com NYSE: CWT N E W M EX I C O financial highlights Year ended December 31 2006 2005 2004 2003 2002 Market price at year-end $ 40.40 $ 38.23 $ 37.65 $ 27.40 $ 23.65 Book value 18.31 15.98 15.66 14.44 13.12 Earnings per share (diluted) 1.34 1.47 1.46 1.21 1.25 Dividends per share 1.150 1.140 1.130 1.125 1.120 Revenue 334,717 320,728 315,567 277,128 263,151 Net income 25,580 27,223 26,026 19,417 19,073 company over view California Water Service Group (NYSE: CWT) is the second largest investor-owned water utility in the United States, providing high-quality water utility services to more than 2 million people in 100 communities through five subsidiaries: California Water Service Company (Cal Water), Hawaii Water Service Company, Inc. (Hawaii Water), New Mexico Water Service Company (New Mexico Water), Washington Water Service Company (Washington Water), and CWS Utility Services (Utility Services). Cal Water, Hawaii Water, New Mexico Water, and Washington Water provide regulated water utility services, while Utility Services conducts the Company’s non-regulated business, which includes providing billing, water quality testing, and water system operations and management services to cities and other companies. Table of Contents Behind the Scenes Editorial 1 20 -Year Return on Investment 2 Letter to Stockholders 24 Ten-Year Financial Review 32 Customer Service Areas 34 Service Area Map 35 Board of Directors 36 Corporate Officers 38 corporate information corporate information Stock Transfer, Dividend Disbursing, and Reinvestment Agent Stock Transfer, Dividend Disbursing, and Reinvestment Agent American Stock Transfer and Trust Company American Stock Transfer and Trust Company 57 Maiden Lane 57 Maiden Lane New York, NY 10038 New York, NY 10038 (800) 937-5449 (800) 937-5449 To Transfer Stock To Transfer Stock A change of ownership of shares (such as when stock is sold or gifted or when owners are deleted from or 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 assign- added to stock certificates) requires a transfer of stock. To transfer stock, the owner must complete the assign- ment on the back of the certificate and sign it exactly as his or her name appears on the front. This signature ment on the back of the certificate and sign it exactly as his or her name appears on the front. This signature must be guaranteed by an eligible guarantor institution (banks, stock brokers, savings and loan associations must be guaranteed by an eligible guarantor institution (banks, stock brokers, savings and loan associations and credit unions with membership in approved signature medallion programs) pursuant to SEC Rule 17Ad-15. 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 American Stock Transfer A notary’s acknowledgement is not acceptable. This certificate should then be sent to American Stock Transfer and Trust Company, by registered or certified mail with complete transfer instructions. and Trust Company, by registered or certified mail with complete transfer instructions. Bond Registrar Bond Registrar US Bank Trust, N.A. US Bank Trust, N.A. One California Street One California Street San Francisco, CA 94111-5402 San Francisco, CA 94111-5402 (415) 273-4580 (415) 273-4580 Executive Office Executive Office California Water Service Group California Water Service Group 1720 North First Street 1720 North First Street San Jose, CA 95112-4598 San Jose, CA 95112-4598 (408) 367-8200 (408) 367-8200 Annual Meeting Annual Meeting The Annual Meeting of Stockholders will be held on Wednesday, April 25, 2007 at 9:30 a.m. at the Company’s The Annual Meeting of Stockholders will be held on Wednesday, April 25, 2007 at 9:30 a.m. at the Company’s Executive Office, located at 1720 North First Street in San Jose, California. Details of the business to be 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 transacted during the meeting will be contained in the proxy material, which will be mailed to stockholders on or about March 23, 2007. or about March 23, 2007. Dividend Dates For 2007 Dividend Dates For 2007 Quarter Declaration Record Date Payment Date Quarter Declaration Record Date Payment Date First January 24 February 5 February 16 First January 24 February 5 February 16 Second April 25 May 7 May 18 Second April 25 May 7 May 18 Third July 25 August 6 August 17 Third July 25 August 6 August 17 Fourth October 24 November 5 November 16 Fourth October 24 November 5 November 16 Annual Report For 2006 On Form 10-K Annual Report For 2006 On Form 10-K A copy of the Company’s report for 2006 filed with the Securities and Exchange Commission (SEC) on Form 10-K A copy of the Company’s report for 2006 filed with the Securities and Exchange Commission (SEC) on Form 10-K will be available in March 2007 and can be obtained by any stockholder at no charge upon written request to will be available in March 2007 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 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. on the Company’s web site. Stockholder Information Stockholder Information California Water Service Group California Water Service Group Attn: Stockholder Relations Attn: Stockholder Relations 1720 North First Street 1720 North First Street San Jose, CA 95112-4598 San Jose, CA 95112-4598 (408) 367-8200 or (800) 750-8200 (408) 367-8200 or (800) 750-8200 http://www.calwatergroup.com http://www.calwatergroup.com Water – it’s life’s key ingredient, but often, we take it for granted. This year, we take you behind the scenes to see what it takes to ensure that customers have a reliable supply of high-quality water, 24 hours per day, 7 days per week. Behind the Scenes / 1 CWT 20-year total return on investment (On Stock Purchased December 31, 1986, with Dividends Reinvested) $1000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 You’ll see that water does not magically appear at the turn of a faucet; it is delivered through a carefully planned and well- maintained system, after being collected, treated, tested, and delivered by our team of dedicated, industry- leading professionals. Behind the Scenes / 2 & 3 6:14a.m. You are awakened from a deep Behind the Scenes / 4 & 5 sleep by your radio alarm clock. After tap- ping the “snooze” button a few times, you shufﬂ e into the bathroom and turn on the shower. There, under the spray of hot water, you begin to feel ready to face the day – just as soon as you’ve had your morning coffee. Meanwhile, at 6:14 a.m., Cal Water employee Dave Kirsling turns a valve at the outlet structure of the Bear Gulch reservoir, the collection point for water that accumulates in the Company’s 1,300-acre watershed and ﬂ ows to the reservoir through the Bear Gulch Creek. After being released from the reservoir, the water is sent to the treatment plant, where it goes through a multi-barrier treatment process that culminates with exposure to ultraviolet light. It is one of the ﬁ rst and largest drinking water treatment plants using this technology in California, and because it’s there, you can savor that morning shower – and cup of coffee – with the assurance that your water meets stringent state and federal water quality standards. Behind the Scenes / 6 & 7 9:08a.m.You volunteered Behind the Scenes / 8 & 9 to take a vacation to look after the kids during their spring break from school, but you realize that after the week is over, you’re going to need another week off to recover. As you make your way through bedrooms pick- ing clothes up off the ﬂ oor, you remember that your daughter has a soccer game this afternoon. You load the basket with her uniform, among other things, and prepare to wash a load of laundry... At 9:08 a.m., Matt Menezes descends a ladder to inspect a new storage tank before it is ﬁ lled with water. Company-wide, we have 520 tanks that can store a total of 267 million gallons of water, enough water to ﬁ ll the Rose Bowl to the rim more than three times. At a capacity of 165,000 gallons, this one is relatively small, but it is equipped with a new check-valve system that promotes circulation of the water, which in turn enhances water quality. Investing in new tanks, and maintaining existing ones, enables us to store water for delivery during times of day when customer usage peaks. It also provides an emergency supply that can be used to ﬁ ght ﬁ res or continue providing water if a power outage affects the operation of our wells and pumps. That means when you hit the “start” button on your washing machine, you know that you’ll have a clean soccer uniform ready in time for the game, no matter what time of day it is. Behind the Scenes / 10 & 11 11:47a.m. This morning Behind the Scenes / 12 & 13 your grandson called to remind you of the date –as if you needed a reminder. It is his eighth birthday, and he wants to be sure you are making your “special cake.” Of course you are, you tell him. After you hang up, you laugh, tickled that he is so enamored with your “special cake”-- a simple cake mix (just add water and eggs) topped with plenty of frosting and colored sprinkles... At 11:47 a.m., Darlene Hudler analyzes a water sample at the Company’s state-certiﬁ ed water quality laboratory. She is part of the team of chemists and microbiologists responsible for testing more than 70,000 water samples each year for 310,000 compounds. Here, in the “inorganic section” of the laboratory, chemists use various methods, and a quarter-of-a-million-dollar Inductive Coupled Plasma Mass Spectrophotometer, to test the water for elements such as iron. Of course, you don’t want to think about elements like iron. But because we do, you can feel comfortable giving your grandson, and his friends, seconds of your “special cake.” Behind the Scenes / 14 & 15 5:12p.m. You sip a Behind the Scenes / 16 & 17 glass of iced tea as you sit on the patio and watch the kids play tag in the soft, green grass. You think about the fact that so many of your family’s best memories–of summer picnics, Easter egg hunts, and even a small wedding–were made in this backyard. It’s your little refuge from the world, and you can’t imagine your family living without it... At 5:12 p.m., Lenny Carrasco checks the calibration of the Supervisory Control and Data Acquisition program, which is used to monitor and control the water system remotely via laptop computers. Moving water from the source to the customer requires large, power- ful pumps. The ones that Lenny is checking are equipped with a unique variable-frequency drive, which causes them to speed up or slow down automatically based on customer demand. This ensures that customers receive steady, consistent water pressure. Why should this matter? Because it helps ensure that the farthest corners of your lawn will get water, even if you turn the sprinklers on at the same time as everybody else in your neighborhood. Behind the Scenes / 18 & 19 10:52p.m. You are tucked in and ready for Behind the Scenes / 20 & 21 a good night’s sleep. You take a drink of water from the glass on your nightstand and turn off your reading lamp. Unfortunately, you can’t turn off your mind. So your thoughts drift to the work project you’ve put off, your kid’s chemistry grade, and your inability to remember the name of a particular song that played at your high school prom. One thing that doesn’t keep you awake is concern about your water... At 10:52 p.m., Sean Cabuag checks water quality after making an emergency repair to the water system. Throughout the company, we have professionals standing by, ready to respond to after-hours emergency calls. So if a customer needs us to investigate a leak, a water quality concern, a change in water pressure, or any other urgent matter in the middle of the night, we are ready. And now, we also offer an optional, non-regulated service called Extended Service Protection, through which we make repairs to the customer’s water line from the meter to the house. It’s just one more way that we provide customers peace of mind, ensuring that they don’t lose sleep worrying about their water. Behind the Scenes / 22 & 23 to our stockholders For decades, the water utility industry referred to itself as the “silent service.” We went about our business ---securing water supplies, planning and build- ing infrastructure, treating and testing the water for quality, and delivering it to our customers --- without much fanfare. The result of this low-proﬁ le ap- proach is that many of our customers have little idea how valuable our ser- vices are. Water costs a fraction of a penny per gallon, a unit price that is con- siderably lower than those of other necessities, such as food, gasoline, and other utilities, and about one thousand times lower than the cost of bottled water. In fact, water rates in the United States are among the lowest in the world. And yet, what could be more important, more valuable, than water? As reporter Michael Specter wrote in the October 2006 issue of the New Yorker magazine, “It is a fact of the human condition that we can achieve none of our goals without water.” Although water may continue to be a bargain, it need not be under- valued. That is why we have invited you behind the scenes, to see for yourself what it takes to provide high-quality, reliable water service to our customers. As a stockholder, you play an important role by investing in the infrastructure that is essential to providing life’s key ingredient, 24 hours per day, seven days per week. 11:00 a.m. A stockholder retrieves her mail and ﬁ nds a dividend check from California Water Service Group. At the same time, our team is making strategic decisions to increase the value of that stockholder’s investment. Financial Results The total return on your investment in California Water Ser vice Group increased nearly 9% in 2006, as annual dividends increased for the 39th consecutive year to $1.15 per share (at a yield of approximately 3%) 6.28% Five-year compound annual growth rate Left to right: Peter C. Nelson, President and Chief Executive Ofﬁ cer Robert W. Foy, Chairman of the Board and stock price rose 6% to $40.40 per share as of December 31, 2006. Earnings per share were $1.34 and net income was $25.6 million, compared to earnings per share of $1.47 and net income of $27.2 million for 2005. Revenues were up 4% to $334.7 million, with rate increases adding $10.1 million to 2006 revenues, sales to new customers adding $3.1 million, and sales to existing customers adding $0.8 million. Decreases in earn- ings and net income were due in part to the impacts of wet weather in the ﬁ rst six months of the year and the issuance of 2.25 million shares of stock in 2006. Additionally, we experienced expense increases in several categories. Stockholder Letter / 24 & 25 1.120 1.125 1.130 1.140 1.150 2:00 p.m. A new homeowner turns on a faucet and ﬁ nds that his water service has been started, just as Cal Water’s professional customer service representative said it would. Meanwhile, employees throughout the Company are executing a four-pronged strategy that will positively affect that homeowner for years to come. Our Four-pronged Strategy For 2007 And Beyond 2002 2003 2004 2005 2006 1. Intense Focus on Regulatory Matters Five-Year Dividend Growth The Water Action Plan is truly a milestone for our industry, because it sets the course for future water regulation and formally establishes the California Public Utilities Commission’s commitment to fair and balanced policy- making. Supporting four key principles—safe, high- quality water; highly reliable water supplies; efﬁ cient The California Public Utilities Commission sets customer use of water; and reasonable rates and viable water rates in each of our 24 service areas on a staggered utilities—the Plan reﬂ ects the best practices of utilities basis once every three years. As a result, under current commissions across the country. More importantly, in regulatory rules, prudently incurred and reasonable in- 2006, the Commission made several decisions that creases in certain expenses, such as those associated clearly demonstrated its commitment to implementing with employee health and welfare plans and mandatory the Plan: compliance with Sarbanes-Oxley (SOX) requirements, take several years to be fully reﬂ ected in rates. This • The Commission repealed W-1, the decision that pre- delay, known in the utility industry as “regulatory lag,” cluded California water utilities from recovering certain affected 2006 results. The good news is that we believe prudently incurred expenses in rates. that this type of expense increase will be recovered in future years in a timelier manner, thanks to the California • It issued the “Order Instituting Rulemaking on Public Utilities Commission’s adoption of the Water the General Rate Case Plan,” the goal of which is Action Plan. to streamline the process and reduce regulatory plan to ﬁ le General Rate Cases for all 24 California districts as well as the Company headquarters in 2007, which, if approved, will allow company-wide expense increases to be recovered in all service areas more quickly than they would if they were phased-in in three-year rate case cycles. • It accepted our application for a Revenue Adjustment Mechanism. If approved, it will enable us to promote water conservation more effectively and lessen the short- term impacts of conservation and weather on our revenue. • It approved a Rate Support Fund and a Low-Income Ratepayer Assistance pro- gram to soften the impact of necessary water system improvement costs on certain vulnerable customers. Considering these positive developments, and the timely conclusion of the eight General Rate Cases ﬁ led in 2005 and approved in 2006, we are optimistic that regulation in California will continue to improve. Going forward, we will continue to work diligently to seek innovative solutions in support of the Commission’s stated purpose of protecting customers’ best interests while ensuring the ﬁ nan- cial viability of the water utilities that serve them. Our strategy has been, and will continue to be, predicated on the notion that the two goals are not mutually exclusive; that is, we believe that we can and should achieve excellence in customer service and provide value to our stockholders. 2. Continuing Emphasis on Customer Service and Water Quality It is our focus on the customer that sets us apart. In 2006, we upgraded our Customer Information System to enable our Customer Service Representatives to serve customers better when they need assistance, and we implemented a company-wide, advanced training program for Customer Service Representatives to ensure that each has the skills and knowledge necessary to meet customers’ 8.7% total return in 2006 Stockholder Letter / 26 & 27 needs the ﬁ rst time they call. Results of customer surveys completed in 2006 indicate that we are on the right track, as 91.6% of respondents ranked our overall service as “excellent or very good.” In 2007, we will upgrade our electronic billing site and make it easier to navi- gate. More customers than ever opted to pay their bills electronically in 2006, and with the upgrade, we expect even greater participation. Other customer service-related plans for 2007 include implementation of a new cash-handling technology; provision of a new, no-fee credit card online payment option; and introduction of a new customer service management training and develop- ment program. These initiatives, combined with our ongoing commitment to the Continuous Improvement approach to the business, will keep us at the forefront in providing excellent customer service. Providing high-quality water is an integral part of our service, and we con- tinue to make customer health and safety our highest priority. In 2006, our lab earned its annual accreditation from the Environmental Laboratory Accreditation Program of the state of California, one of the toughest cer- tiﬁ cations to attain in the United States. Our Water Quality Department also leads the industry in compliance planning, and it made great strides in 2006 in preparing to meet future standards, including the Groundwater Rule, the Stage 2 Disinfectants/Disinfection By-Product Rule, the Long-Term 2 Enhanced Surface Water Treatment Rule, and the Unregulated Contaminant Monitoring Rule 2. It is our employees’ expertise and dedication that make us leaders in the in- dustry, and they play a key role in protecting our service areas. We are happy to report that in 2006, the City of Visalia decided after studying the issue that it would not start its own water system to serve new developments, due largely to its recognition of Cal Water’s expertise, resources, and performance record. 91.6% ranked service “excellent or very good” 3. Disciplined Approach to Growth Like all of our Central Valley service areas, our Visalia District is experiencing high growth rates. In 2006, it added 2,000 new customers. In total, we added 5,000 customers in existing service areas in 2006. As for acquisitions, only one met our strict criteria in 2006. In August, we completed the acquisition of the assets of the Independent Utility Company, which has added 400 metered connections 15 miles east of Albuquerque, New Mexico. In 2007 and beyond, we will continue to pursue quality systems that comple- ment our core business and increase value for our stockholders. 13.12 14.44 15.66 15.98 18.31 2002 2003 2004 2005 2006 Five-Year Book Value On the non-regulated side of the business, our new water line. I know if I had to pay for the repairs out of Extended Service Protection (ESP) program was very pocket, it would have been very expensive.” well received. More customers than anticipated signed up for this voluntary program, introduced throughout Perhaps the most signiﬁ cant source of growth in a reg- California in 2006. For a monthly fee of $4.95, we ulated utility such as ours is our investment in water repair or replace the portion of the water line that is system infrastructure. Because we earn a return on in- the customer’s responsibility if it is damaged by tree vested capital, our return grows when we invest more in roots, age, earthquakes, or freezing temperatures. Not improvements that beneﬁ t our customers. In 2006, we only does ESP add to non-regulated revenues, it also spent $86 million on capital projects, including a new provides a valuable service that customers truly appre- treatment plant in Bakersﬁ eld, an arsenic standard com- ciate. As one customer said of signing up, “I decided pliance project in Stockton, and 10 new wells. Our capital to err on the side of caution, because I was very re- budget for 2007 is expected to exceed $80 million, and cently widowed and there was also a very large tree in an upward trend for 2008 and beyond is likely, as we my front yard. I’m so glad I signed up for ESP; it helped continue to replace aging infrastructure and enhance our tremendously when that tree’s roots destroyed my systems to meet new water quality standards. Stockholder Letter / 28 & 29 696,988 759,498 800,305 862,731 941,475 2002 2003 2004 2005 2006 Five-Year Net Utility Plant 4. Prudent Fiscal Management fund capital programs that are approved by our utilities commissions provides a means by which our stockhold- ers can earn a fair rate of return and helps improve ﬁ - nancial performance in future periods. As of December 31, we had $941 million in net utility plant assets, up 9% from 2005, and our market capitalization was $835 million, up from $703 million for the previous year. Another key development in 2006 was the even greater interest that we generated on Wall Street. During 2006, three additional ﬁ nancial ﬁ rms initiated research cover- age of our company, bringing our total to seven. Increas- ing coverage of our company opens up new channels through which we can communicate with retail and insti- tutional investors; this ultimately assists us in improving liquidity and ensuring that we have the means to raise capital to fund our operations and provide the excellent As is the case with each element of our strategy, pru- service for which we are known. dent ﬁ scal management is a performance measure that affects both customers and stockholders. Operating At this minute, you are nearing the end of our letter. efﬁ ciently and using resources wisely ensures that we And we are preparing to overcome any challenges that continue to provide excellent service and high-quality lay ahead. water at reasonable rates while building long-term stock- holder value. Outlook For 2007 And Beyond In 2006, we raised gross proceeds of $104.7 million by The coming years will no doubt present challenges, in- issuing 2.25 million shares of common stock and $20 cluding the time that it will take to fully implement the million in long-term debt, a move that strengthened our California Public Utilities Commission’s Water Action balance sheet and enabled us to fund our capital invest- Plan and recover higher expenses associated with health ment programs. Prudently issuing equity to help care, pensions, and Sarbanes-Oxley compliance. We are conﬁ dent that we are capable of overcoming challenges that arise. Next year, we will seize the opportunity to ﬁ le rate cases for every California operation, and if we are successful, we will signiﬁ cantly reduce the time it takes to fully recover reasonable expense increases. We will pursue growth opportunities that beneﬁ t customers and add value to stockholders. We will continue to evaluate and improve the way we do business to increase efﬁ ciency. And we will remain focused on our strategy, which has proven successful in both favorable and unfa- vorable business climates. Most importantly, we can take pride in the value of the services we provide, services that you make possible as a stockholder in the company. As the largest investor-owned water utility in the state, we stand to gain much from anticipated improvements in California utility regulation. This, combined with our reputation for providing excellent customer service, positions us well for future success. We wish you the best in 2007 and thank you for your continued investment in California Water Service Group. Robert W. Foy Chairman of the Board Peter C. Nelson President and Chief Executive Ofﬁ cer Stockholder Letter / 30 & 31 ten-year fi nancial review Dollars in thousands, except common share data 2006 2005 2004 Summary of Operations Operating revenue Residential Business Industrial Public authorities Other Total operating revenue Operating expenses Interest expense, other income and expenses, net Net income Common Share Data Earnings per share - diluted Dividend declared Dividend payout ratio Book value Market price at year-end Common shares outstanding at year-end (in thousands) Return on average common stockholders’ equity Long-term debt interest coverage Balance Sheet Data Net utility plant Utility plant expenditures (company- & developer-funded) Total assets Long-term debt including current portion Capitalization ratios: Common stockholders’ equity Preferred stock Long-term debt Other Data Water production (million gallons) Wells and surface supply Purchased Total water production Metered customers Flat-rate customers Customers at year-end, including Hawthorne New customers added Revenue per customer Utility plant per customer Employees at year-end $ 232,811 60,366 16,286 15,728 9,526 334,717 294,411 14,726 25,580 $ $ $ 1.34 1.150 86% 18.31 40.40 20,657 8.2% 3.17 $ 222,634 56,962 14,241 14,965 11,926 320,728 278,903 14,602 $ 27,223 $ $ 1.47 1.140 78% 15.98 38.23 18,390 9.3% 3.61 $ 221,323 55,803 13,592 15,118 9,731 315,567 271,701 17,840 $ 26,026 $ $ 1.46 1.130 77% 15.66 37.65 18,367 9.8% 3.38 $ 941,475 112,279 1,165,019 293,592 $ 862,731 94,517 996,945 275,275 $ 800,305 68,573 942,853 275,921 56.0% 0.5% 43.5% 51.4% 0.6% 48.0% 50.8% 0.6% 48.6% 70,677 62,790 133,467 407,762 76,131 483,893 4,892 692 2,778 869 $ 68,162 64,028 132,190 402,191 76,810 479,001 5,846 670 2,578 840 $ 72,279 66,760 139,039 395,286 77,869 473,155 6,733 667 2,418 837 $ 2003 2002 2001 2000 1999 1998 1997 $ 194,903 49,666 11,255 12,789 8,515 277,128 233,996 23,716 $ 19,417 $ $ 1.21 1.125 93% 14.44 27.40 16,932 9.1% 2.78 $ 184,894 46,404 11,043 12,706 8,104 263,151 232,404 11,674 $ 19,073 $ $ 1.25 1.120 90% 13.12 23.65 15,182 9.7% 2.73 $ 173,823 44,944 9,907 11,860 6,286 246,820 221,116 10,739 $ 14,965 $ $ 0.97 1.115 115% 12.95 25.75 15,182 7.6% 2.64 $ 171,234 44,211 11,014 11,609 6,738 244,806 211,610 13,233 $ 19,963 $ $ 1.31 1.100 84% 13.13 27.00 15,146 10.1% 3.31 $ 163,681 41,246 12,695 10,898 6,417 234,937 201,890 11,076 $ 21,971 $ $ 1.44 1.085 75% 12.89 30.31 15,094 11.5% 3.79 $ 150,491 38,854 10,150 9,654 5,777 214,926 183,245 11,821 $ 19,860 $ $ 1.31 1.070 82% 12.49 31.31 15,015 10.8% 3.64 $ 158,210 40,520 10,376 11,173 4,886 225,165 188,020 11,388 25,757 $ $ $ 1.71 1.055 62% 12.15 29.53 15,015 14.5% 4.37 $ 759,498 74,253 873,035 273,130 $ 696,988 88,361 798,478 251,365 $ 624,342 62,049 710,214 207,981 $ 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 47.0% 0.7% 52.3% 44.0% 0.7% 55.3% 48.8% 0.9% 50.3% 51.1% 0.9% 48.0% 53.0% 0.9% 46.1% 54.6% 1.0% 44.4% 53.8% 1.0% 45.2% 68,416 63,264 131,680 387,579 78,843 466,422 7,434 594 2,313 813 $ 69,414 62,811 132,223 380,087 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 $ 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 $ 63,736 59,646 123,382 350,139 77,878 428,017 4,719 529 1,694 752 $ 10-Year Financial Review / 32 & 33 customer service areas* District Name Including 2006 2005 California Antelope Valley Fremont Valley, Lake Hughes, Lancaster & Leona Valley 1,400 1,400 Bakersﬁ eld 64,900 63,600 Bear Gulch Atherton, Woodside, Portola Valley & portions of Menlo Park 18,000 18,000 Chico Hamilton City 26,900 26,400 Dixon 2,900 2,900 Dominguez Carson & portions of Compton, Harbor City, Long Beach, Los Angeles & Torrance 33,700 33,600 East Los Angeles City of Commerce 27,800 27,800 Hawthorne 6,200 6,100 Hermosa-Redondo Hermosa Beach, Redondo Beach & a portion of Torrance 26,200 26,100 Kern River Valley Bodﬁ sh, Kernville, Lakeland, Mountain Shadows, Onyx, Squirrel Valley, South Lake & Wofford Heights 4,300 4,300 King City 2,400 2,400 Livermore 18,200 18,200 Los Altos Portions of Cupertino, Los Altos Hills, Mountain View 18,600 18,500 & Sunnyvale Marysville 3,800 3,800 Mid-Peninsula San Mateo & San Carlos 36,100 36,100 Oroville 3,600 3,600 Palos Verdes Palos Verdes Estates, Rancho Palos Verdes, Rolling Hills & Rolling Hills Estates 24,000 24,000 Redwood Valley Lucerne & portions of Duncans Mills, Guerneville, Dillon Beach, Noel Heights & Santa Rosa 2,000 2,000 Salinas Selma 27,800 27,800 6,100 6,000 South San Francisco Colma & Broadmoor 16,800 16,800 Stockton Visalia 42,100 42,300 37,800 35,800 Westlake Westlake Village & a portion of Thousand Oaks 7,000 7,000 Willows Hawaii New Mexico Washington Subtotal 460,900 456,700 2,300 2,300 500 500 7,100 6,500 15,400 15,300 Total 483,900 479,000 * Includes customers from regulated operations and full-system, non-regulated operations in Commerce and Hawthorne. Numbers are rounded to the nearest hundred. california Chico Chico Willows Willows Oroville Oroville Mar ysville Mar ysville Redwood Valley Redwood Valley Dixon Dixon Stockton Stockton Salinas Salinas King City King City Selma Selma Visalia Visalia South San Francisco South San Francisco Mid-Peninsula Mid-Peninsula Bear Gulch Bear Gulch Los Altos Los Altos Livermore Livermore San Jose/Headquar ters San Jose/Headquar ters Kern River Valley Kern River Valley Bakersfield Bakersfield Antelope Valley Antelope Valley Hawthorne Hawthorne East Los Angeles East Los Angeles Westlake Westlake Hermosa-Redondo Hermosa-Redondo Palos Verdes Palos Verdes Dominguez Dominguez new mexico Los Lunas Los Lunas Belen Belen Elephant Butte Elephant Butte hawaii Kauai Kauai OahuOahu Molokai Molokai Kaanapali Kaanapali MauiMaui Hawaii Hawaii washington Gig Harbor Gig Harbor South Sound South Sound Service Area / 34 & 35 board of directors President of B. Hill Enterprises, L.L.C. 4 years served as a Board Member. Co-Founder of Icon Blue; on the boards of a number of corporations and non-proﬁ t organizations. Member of the following Committees: Organization/Compensation and Nominat- ing/Corporate Governance. Vice President and Chief Financial Ofﬁ cer, the David & Lucile Packard Foundation 9 years served as a Board Member. Member of the Audit Committee and Finance Committee. Bonnie G. Hill George A. Vera Richard P. Magnuson David N. Kennedy Private Venture Capital Investor 11 years served as a Board Member. Member of the following Committees: Audit, Organization/Compensation, Executive, Finance, and Nominating/Corporate Governance. Former Director of the California Department of Water Resources 4 years served as a Board Member. Member of the Organization/Compensation Committee and Finance Committee. Chairman of the Board 30 years served as a Board Member. Member of the Executive Committee. Robert W. Foy Member of the National Board of the Institute of International Education 13 years served as a Board Member. Director of Greater Bay Bancorp, Trustee of World Affairs Council, and Co-Chair of the Stanford Challenge. Member of the following Committees: Audit, Organization/Com- pensation, and Nominating/Corporate Governance. Linda R. Meier Edward D. Harris, Jr., M.D. Peter C. Nelson Douglas M. Brown Professor of Medicine, Emeritus, Stanford University Medical Center 14 years served as a Board Member. Member of the following Committees: Organization/Compensation, Executive, and Nominating/Corporate Governance. President and Chief Executive Ofﬁ cer Former Treasurer, State of New Mexico 11 years served as a Board Member. Member of the Executive Committee. 6 years served as a Board Member. Member of the following Committees: Audit, Finance, and Nominating/Corporate Governance. Board of Directors / 36 & 37 corporate offi cers California Water Service Company Robert W. Foy 1,2,3 Chairman of the Board Peter C. Nelson 1,2,3 President and Chief Executive Ofﬁ cer Paul G. Ekstrom Vice President, Customer Service and Information Systems Francis S. Ferraro 2, 4 Vice President, Regulatory Matters and Corporate Relations Robert R. Guzzetta 2 Vice President, Operations Martin A. Kropelnicki 1, 2, 3 Vice President, Chief Financial Ofﬁ cer and Treasurer Christine L. McFarlane Vice President, Human Resources Michael J. Rossi Vice President, Engineering and Water Quality Calvin L. Breed 1 Controller, Assistant Secretary and Assistant Treasurer Lynne P. McGhee 1, 2, 3 Acting Corporate Secretary Washington Water Service Company Michael P. Ireland President 1 Holds the same position with California Water Service Group. 2 Also an ofﬁ cer of CWS Utility Services. 3 Also an ofﬁ cer 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 and Hawaii Water Service Company, Inc. Ofﬁ cers / 38 financial highlights Year ended December 31 2006 2005 2004 2003 2002 Market price at year-end $ 40.40 $ 38.23 $ 37.65 $ 27.40 $ 23.65 Book value 18.31 15.98 15.66 14.44 13.12 Earnings per share (diluted) 1.34 1.47 1.46 1.21 1.25 Dividends per share 1.150 1.140 1.130 1.125 1.120 Revenue 334,717 320,728 315,567 277,128 263,151 Net income 25,580 27,223 26,026 19,417 19,073 company over view California Water Service Group (NYSE: CWT) is the second largest investor-owned water utility in the United States, providing high-quality water utility services to more than 2 million people in 100 communities through five subsidiaries: California Water Service Company (Cal Water), Hawaii Water Service Company, Inc. (Hawaii Water), New Mexico Water Service Company (New Mexico Water), Washington Water Service Company (Washington Water), and CWS Utility Services (Utility Services). Cal Water, Hawaii Water, New Mexico Water, and Washington Water provide regulated water utility services, while Utility Services conducts the Company’s non-regulated business, which includes providing billing, water quality testing, and water system operations and management services to cities and other companies. Table of Contents Behind the Scenes Editorial 1 20 -Year Return on Investment 2 Letter to Stockholders 24 Ten-Year Financial Review 32 Customer Service Areas 34 Service Area Map 35 Board of Directors 36 Corporate Officers 38 corporate information corporate information Stock Transfer, Dividend Disbursing, and Reinvestment Agent Stock Transfer, Dividend Disbursing, and Reinvestment Agent American Stock Transfer and Trust Company American Stock Transfer and Trust Company 57 Maiden Lane 57 Maiden Lane New York, NY 10038 New York, NY 10038 (800) 937-5449 (800) 937-5449 To Transfer Stock To Transfer Stock A change of ownership of shares (such as when stock is sold or gifted or when owners are deleted from or 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 assign- added to stock certificates) requires a transfer of stock. To transfer stock, the owner must complete the assign- ment on the back of the certificate and sign it exactly as his or her name appears on the front. This signature ment on the back of the certificate and sign it exactly as his or her name appears on the front. This signature must be guaranteed by an eligible guarantor institution (banks, stock brokers, savings and loan associations must be guaranteed by an eligible guarantor institution (banks, stock brokers, savings and loan associations and credit unions with membership in approved signature medallion programs) pursuant to SEC Rule 17Ad-15. 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 American Stock Transfer A notary’s acknowledgement is not acceptable. This certificate should then be sent to American Stock Transfer and Trust Company, by registered or certified mail with complete transfer instructions. and Trust Company, by registered or certified mail with complete transfer instructions. Bond Registrar Bond Registrar US Bank Trust, N.A. US Bank Trust, N.A. One California Street One California Street San Francisco, CA 94111-5402 San Francisco, CA 94111-5402 (415) 273-4580 (415) 273-4580 Executive Office Executive Office California Water Service Group California Water Service Group 1720 North First Street 1720 North First Street San Jose, CA 95112-4598 San Jose, CA 95112-4598 (408) 367-8200 (408) 367-8200 Annual Meeting Annual Meeting The Annual Meeting of Stockholders will be held on Wednesday, April 25, 2007 at 9:30 a.m. at the Company’s The Annual Meeting of Stockholders will be held on Wednesday, April 25, 2007 at 9:30 a.m. at the Company’s Executive Office, located at 1720 North First Street in San Jose, California. Details of the business to be 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 transacted during the meeting will be contained in the proxy material, which will be mailed to stockholders on or about March 23, 2007. or about March 23, 2007. Dividend Dates For 2007 Dividend Dates For 2007 Quarter Declaration Record Date Payment Date Quarter Declaration Record Date Payment Date First January 24 February 5 February 16 First January 24 February 5 February 16 Second April 25 May 7 May 18 Second April 25 May 7 May 18 Third July 25 August 6 August 17 Third July 25 August 6 August 17 Fourth October 24 November 5 November 16 Fourth October 24 November 5 November 16 Annual Report For 2006 On Form 10-K Annual Report For 2006 On Form 10-K A copy of the Company’s report for 2006 filed with the Securities and Exchange Commission (SEC) on Form 10-K A copy of the Company’s report for 2006 filed with the Securities and Exchange Commission (SEC) on Form 10-K will be available in March 2007 and can be obtained by any stockholder at no charge upon written request to will be available in March 2007 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 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. on the Company’s web site. Stockholder Information Stockholder Information California Water Service Group California Water Service Group Attn: Stockholder Relations Attn: Stockholder Relations 1720 North First Street 1720 North First Street San Jose, CA 95112-4598 San Jose, CA 95112-4598 (408) 367-8200 or (800) 750-8200 (408) 367-8200 or (800) 750-8200 http://www.calwatergroup.com http://www.calwatergroup.com 2 0 0 6 A n n u a l R e p o r t p u o r G e c i v r e S r e t a W a i n r o f i l a C 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 S H I NG T O N A W H A WAII behind the scenes. 2006 Annual Report California Water Service Group 1720 North First Street San Jose, California 95112-4598 (408) 367-8200 www.calwatergroup.com NYSE: CWT N E W M EX I C O

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