California Water Service Group
Annual Report 2007

Plain-text annual report

California Water Service Group 1720 North First Street San Jose, California 95112-4598 (408) 367-8200 www.calwatergroup.com NYSE: CWT California Water Service Group Investing for Life The Stockholder 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 approximately 2 million people in 100 communities through six 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), CWS Utility Services (CWSUS), and HWS Utility Services, L.L.C. (HWSUS). Cal Water, Hawaii Water, New Mexico Water, and Washington Water provide regulated water utility services, while CWSUS and HWSUS conduct 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. Stock Transfer, Dividend Disbursing, and Reinvestment Agent American Stock Transfer & Trust Company 57 Maiden Lane New York, NY 10038 (800) 937-5449 To Transfer Stock A change of ownership of shares (such as when stock is sold or gifted or when owners are deleted from or added to stock certificates) requires a transfer of stock. To transfer stock, the owner must complete the assignment on the back of the certificate and sign it exactly as his or her name appears on the front. This signature must be guaranteed by an eligible guarantor institution (banks, stock brokers, savings and loan associations, and credit unions with member- ship 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 & Trust Company by registered or certified mail with complete transfer instructions. Alternatively, effective January 1, 2008, California Water Service Group is participating in the Direct Registration System, which allows electronic share transactions between the stockholder’s broker or dealer and American Stock Transfer & Trust Company. Bond Registrar US Bank Trust, N.A. One California Street San Francisco, CA 94111-5402 (415) 273-4580 Annual Meeting The Annual Meeting of Stockholders will be held on Tuesday, May 27, 2008 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 trans- acted during the meeting will be contained in the proxy material, which will be mailed to stockholders on or about April 11, 2008. Dividend Dates For 2008 Quarter Declaration Record Date Payment Date First January 23 February 4 February 15 Second April 23 May 5 May 16 Third July 23 August 4 August 16 Fourth October 22 November 3 November 14 Annual Report For 2007 On Form 10-K A copy of the company’s report for 2007 filed with the Securities and Exchange Commission (SEC) on Form 10-K will be available in April 2008 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. Executive Office and Stockholder Information California Water Service Group Attn: Stockholder Relations 1720 North First Street San Jose, CA 95112-4598 (408) 367-8200 or (800) 750-8200 www.calwatergroup.com It was a good year. 1 investing for life Financial Highlights Year ended December 31 2007 2006 2005 2004 2003 Market price at year-end $ 37.02 $ 40.40 $ 38.23 $ 37.65 $ 27.40 Book value 18.66 18.31 15.98 15.66 14.44 Earnings per share (diluted) 1.50 1.34 1.47 1.46 1.21 Dividends per share 1.160 1.150 1.140 1.130 1.125 Revenue* 367,082 334,717 320,728 315,567 277,128 Net income* 31,159 25,580 27,223 26,026 19,417 *Dollars in thousands Contents Letter to Stockholders 4 20-Year Return on Investment 10 Service Area Maps 17 Eight -Year Financial Review 26 Board of Directors 28 Corporate Officers 30 Company Information 31 3 investing for life To Our Stockholders k Investing for life. It’s what we do when we invest in our water systems. It’s what you do when you invest in California Water Service Group (NYSE: CWT). The pipelines that connect us to the 2 million people we serve are tangible, but the intangible connection that links our customers, our employees, and our stockholders is no less real. In a fire, a homeowner relies on the firefighter who connects the hose to our hydrant. That firefighter relies on our employees, who ensure that the hydrant operates as it should. Our employees, in turn, rely on our stockholders, who make the investments that enable us to maintain and upgrade the water system that supplies that hydrant. So what rewards do we reap by investing for life? 4 investing for life Peter C. Nelson President and Chief Executive Officer Robert W. Foy Chairman of the Board Five -Year Dividend Growth 1.125 1.130 1.140 1.150 1.160 03 04 05 06 07 CWT 20 -Year Total Return on Investment (On stock purchased December 31, 1987, with dividends reinvested) $$$800 $700 $600 $500 $400 $300 $200 $100 $0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 10 investing for life 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 11 investing for life Five -Year Book Value 14.44 15.66 15.98 18.31 18.66 03 04 05 06 07 Five -Year Net Utility Plant (Dollars in thousands) 759,498 800,305 862,731 941,475 1,010,196 03 04 05 06 07 Hawaii Operations & Customer Centers Kaanapali • Pukalani • Waimea • Waikoloa 2006 500* 2007 700* Regulated Customer Connections Locations of pending regulated & non-regulated acquisitions. Service area includes Kaanapali on Maui. * Includes several large resorts and condominium complexes. Does not include pending acquisitions. 17 investing for life Washington Operations & Customer Centers Olympia (S.W. Regional Office) • Gig Harbor (N.W. Regional Office) Sequim • Issaquah • Orcas Island 2006 15,400 2007 15,800 Regulated Customer Connections Service areas located in the counties of Clallam, Jefferson, Kitsap, Mason, Pierce, King, San Juan, and Thurston. 18 investing for life Additionally, in December, we formed a non-regulated subsidiary, HWS Utility Services, L.L.C., in order to acquire the non-regulated operations and maintenance contracts from Waimea-based Island Utility Services on the island of Hawaii, which we expect to close in April 2008. We selected Terry S. Tamble, formerly manager of one of our largest districts in California, to assume leadership of Hawaii Water Service Company as General Manager, effective February 2008. Service and Quality Our work with regulatory agencies and efforts to grow would be fruitless without our reputation for providing excellent customer service and high-quality water. In 2007, we continued our Continuous Improvement approach to the business, which involves every single employee in developing and implementing projects that improve service or increase efficiency. We also began offering a no-fee credit card payment option to customers and arranged for Home Service USA to provide an expanded and enhanced Extended Service 19 investing for life California Districts Antelope Valley • Bakersfield • Bear Gulch • Chico • Dixon • Dominguez • East Los Angeles • Hawthorne • Hermosa-Redondo • Kern River Valley • King City • Livermore • Los Altos • Marysville • Mid-Peninsula • Oroville • Palos Verdes • Redwood Valley • Salinas • Selma • South San Francisco • Stockton • Visalia • Westlake • Willows 2006 460,900 2007 463,600 Regulated Customer Connections 20 investing for life California Districts & Communities 2007 2006 Antelope Valley • Fremont Valley, Lake Hughes, Lancaster & Leona Valley 1,400 1,400 Bakersfield 65,400 64,900 Bear Gulch • Atherton, Woodside, Portola Valley & portions of Menlo Park 18,000 18,000 Chico • Hamilton City 27,300 26,900 Dixon 2,900 2,900 Dominguez • Carson and portions of Compton, Harbor City, Long Beach, Los Angeles County & Torrance 33,700 33,700 East Los Angeles • City of Commerce 27,800 27,800 Hawthorne 6,200 6,200 Hermosa-Redondo • Hermosa Beach, Redondo Beach & part of Torrance 26,300 26,200 Kern River Valley • Bodfish, Kernville, Lakeland, Mountain Shadows, Onyx, Squirrel Valley, South Lake & Wofford Heights 4,300 4,300 King City 2,500 2,400 Livermore 18,200 18,200 Los Altos • Portions of Cupertino, Los Altos Hills, Mountain View & Sunnyvale 18,600 18,600 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 28,000 27,800 Selma 6,100 6,100 South San Francisco • Colma & Broadmoor 16,800 16,800 Stockton 42,200 42,100 Visalia 38,900 37,800 Westlake • Westlake Village & a portion of Thousand Oaks 7,100 7,000 Willows 2,400 2,300 21 investing for life Protection program, an optional program that protects residential customers if the water service line between the meter and the home breaks. Behind the scenes, we provided intensive training to all of our customer service representatives, upgraded our data center, and completed an evaluation of the security of customer data. With the California Public Utilities Commission’s support, we now have the opportunity to be even more proactive about support- ing customer efforts to use water efficiently. In the coming year and beyond, we intend to help our customers manage their water bills and support them in their efforts to ensure enough water for future generations. Prudent Fiscal Management Clearly, each of these four strategic areas is interrelated, and all contribute to our financial strength. In 2007, we were effective at controlling expenses and managing operating costs. We also streamlined and improved our internal controls to ensure compliance with all accounting and corporate 22 investing for life New Mexico Operations & Customer Centers Elephant Butte • Belen • Cedar Crest 2006 7,100 2007 7,500 Regulated Customer Connections Service areas located in the counties of Sierra, Valencia, and Bernalillo. 23 investing for life governance rules and regulations. Most importantly, we con- tinued to invest diligently in our infrastructure. In 2007, company-funded capital expenditures were $77 million; in 2008, we expect capital expenditures to exceed $85 million. By building our financial strength, we provide value to stock- holders; by providing value to stockholders, we attract the capital needed to maintain and upgrade our infrastructure; and by maintaining and upgrading our infrastructure, we reliably provide life’s key ingredient to our customers and communities. For California Water Service Group and our stockholders, investing for life has its rewards. Director Update At the March 2008 meeting, the Board elected Edwin A. Guiles as Director. Ed brings a wealth of utility business leadership experience to the table, having begun his distinguished career in the energy industry 36 years ago. He currently serves as Executive Vice President of Corporate Development for San Diego-based Sempra Energy, and he previously served as 24 investing for life Chairman and CEO of Sempra Energy Utilities, San Diego Gas & Electric, and Southern California Gas Company. We know he will be an asset to our team and we welcome him to California Water Service Group. In closing, it is with great sadness that we report the passing of recently retired Director David N. Kennedy, former director of the California Department of Water Resources. He was a great man, an outstanding board member, and an expert in his field, and we will miss him greatly. We dedicate this report to his memory. On behalf of the entire Board, we thank you for your continued investment in California Water Service Group and wish you the very best in 2008. Peter C. Nelson President and Chief Executive Officer Robert W. Foy Chairman of the Board 25 investing for life Eight -Year Financial Review (Dollars in thousands, except common share data) 2007 2006 2005 2004 2003 2002 2001 2000 Summary of Operations Operating revenue Operating expenses Interest expense, other income and expenses, net Net income $ 367,082 $334,717 322,912 294,411 14,726 $ 31,159 $ 25,580 13,011 $ 1.50 $ 1.34 1.150 86% 1.160 77% Common Share Data Earnings per share - diluted Dividend declared Dividend payout ratio Book value Market price at year-end 37.02 20,666 Common shares outstanding at year-end (in thousands) 8.1% Return on average common stockholders’ equity 3.70 Long-term debt interest coverage $ 18.66 $ 18.31 40.40 20,657 8.2% 3.17 Balance Sheet Data Net utility plant $1,010,196 $941,475 Utility plant expenditures 101,343 112,279 1,184,499 1,165,019 Total assets 291,921 293,592 Long-term debt including current portion Capitalization ratios: 56.9% Common stockholders’ equity Preferred stock 0.5% Long-term debt 42.6% 56.0% 0.5% 43.5% Other Data Water production (million gallons) 141,238 132,414 487,600 483,893 Customers at year-end, including Hawthorne 4,892 3,662 New customers added $692 $753 Revenue per customer 2,778 Utility plant per customer 2,968 869 891 Employees at year-end 26 investing for life $320,728 $315,567 $ 277,128 $263,151 $246,820 $244,806 278,903 273,488 244,167 230,301 218,963 211,035 14,602 $ 27,223 $ 26,026 $ 19,417 $ 19,073 $ 14,965 $ 19,963 16,053 13,544 13,777 12,892 13,808 77% 1.130 1.125 1.120 $ 1.47 $ 1.46 $ 1.21 $ 1.25 1.140 78% $ 15.98 $ 15.66 $ 14.44 $ 13.12 38.23 18,390 9.3% 3.61 18,367 16,932 15,182 37.65 27.40 23.65 2.78 2.73 93% 90% 9.1% 9.7% 3.38 9.8% $ 0.97 $ 1.31 1.115 1.100 115% 84% $ 12.95 $ 13.13 25.75 27.00 15,182 15,146 7.6% 10.1% 2.64 3.31 $862,731 $800,305 $759,498 $696,988 $624,342 $582,782 94,517 996,945 942,853 873,035 798,478 710,214 666,605 275,275 275,921 273,130 251,365 207,981 189,979 68,573 74,253 88,361 62,049 37,161 51.4% 0.6% 48.0% 50.8% 0.6% 48.6% 47.0% 44.0% 48.8% 0.7% 0.7% 0.9% 52.3% 55.3% 50.3% 51.1% 0.9% 48.0% 129,453 139,039 131,680 132,225 126,626 127,645 479,001 473,155 466,422 458,988 450,427 444,346 5,846 $670 2,578 840 6,733 7,434 8,561 2,418 2,313 2,182 $667 $594 $579 2,020 1,916 $552 $554 6,081 5,219 813 802 783 797 837 (Dollars in thousands, except common share data) Summary of Operations 2007 2006 2005 2004 2003 2002 2001 2000 Operating revenue $ 367,082 $334,717 Operating expenses 322,912 294,411 Interest expense, other income and expenses, net 13,011 14,726 Net income $ 31,159 $ 25,580 $320,728 $315,567 $ 277,128 $263,151 $246,820 $244,806 278,903 273,488 244,167 230,301 218,963 211,035 14,602 12,892 13,808 $ 27,223 $ 26,026 $ 19,417 $ 19,073 $ 14,965 $ 19,963 16,053 13,544 13,777 Common Share Data Earnings per share - diluted $ 1.50 $ 1.34 Dividend declared 1.160 Dividend payout ratio 77% Book value $ 18.66 $ 18.31 Market price at year-end 37.02 Common shares outstanding at year-end (in thousands) 20,666 Return on average common stockholders’ equity 8.1% Long-term debt interest coverage 3.70 1.150 86% 40.40 20,657 8.2% 3.17 $ 1.47 $ 1.46 $ 1.21 $ 1.25 1.130 1.125 1.120 1.140 93% 90% 77% 78% $ 15.98 $ 15.66 $ 14.44 $ 13.12 37.65 27.40 23.65 38.23 18,367 16,932 15,182 18,390 9.1% 9.7% 9.8% 9.3% 2.78 2.73 3.38 3.61 $ 0.97 $ 1.31 1.100 1.115 84% 115% $ 12.95 $ 13.13 25.75 27.00 15,182 15,146 10.1% 7.6% 3.31 2.64 Net utility plant $1,010,196 $941,475 Utility plant expenditures 101,343 112,279 Total assets 1,184,499 1,165,019 Long-term debt including current portion 291,921 293,592 $862,731 $800,305 $759,498 $696,988 $624,342 $582,782 94,517 62,049 37,161 996,945 942,853 873,035 798,478 710,214 666,605 275,275 275,921 273,130 251,365 207,981 189,979 68,573 74,253 88,361 Common stockholders’ equity 56.9% Preferred stock 0.5% Long-term debt 42.6% 56.0% 0.5% 43.5% 51.4% 0.6% 48.0% 50.8% 0.6% 48.6% 47.0% 44.0% 0.7% 0.7% 52.3% 55.3% 48.8% 0.9% 50.3% 51.1% 0.9% 48.0% Balance Sheet Data Capitalization ratios: Other Data Water production (million gallons) 141,238 132,414 Customers at year-end, including Hawthorne 487,600 483,893 New customers added 3,662 Revenue per customer $753 Utility plant per customer 2,968 Employees at year-end 891 4,892 $692 2,778 869 129,453 139,039 131,680 132,225 126,626 127,645 479,001 473,155 466,422 458,988 450,427 444,346 6,081 5,219 5,846 $552 $554 $670 2,020 1,916 2,578 797 783 840 6,733 7,434 8,561 $667 $594 $579 2,418 2,313 2,182 813 802 837 27 investing for life Board of Directors Peter C. Nelson President and Chief Executive Officer Linda R. Meier Member of the National Board of the Institute of International Education Douglas M. Brown Former Treasurer, State of New Mexico Richard P. Magnuson Private Venture Capital Investor 28 investing for life Robert W. Foy Chairman of the Board George A. Vera Vice President and Chief Financial Officer, The David and Lucile Packard Foundation Bonnie G. Hill President of B. Hill Enterprises, L.L.C. Edward D. Harris, Jr., M.D. Professor of Medicine, Emeritus, Stanford University Medical Center 29 investing for life Officers California Water Service Company Robert W. Foy 1,2,3 Chairman of the Board Peter C. Nelson 1,2,3 Michael J. Rossi Vice President, Engineering and Water Quality President and Chief Executive Officer Thomas F. Smegal 4 Paul G. Ekstrom Vice President, Customer Service and Information Technology Francis S. Ferraro 2, 4 Vice President, Corporate Development* Robert R. Guzzetta 2 Vice President, Operations Vice President, Regulatory Matters and Corporate Relations* Calvin L. Breed 1, 3 Controller, Assistant Secretary and Assistant Treasurer Lynne P. McGhee 1, 2, 3 Corporate Secretary and Associate Corporate Counsel Martin A. Kropelnicki 1, 2, 3 Washington Water Service Company Vice President, Chief Financial Officer and Treasurer Christine L. McFarlane 3 Vice President, Human Resources Michael P. Ireland President *Effective March 1, 2008 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 and Hawaii Water Service Company, Inc. 30 investing for life 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 approximately 2 million people in 100 communities through six 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), CWS Utility Services (CWSUS), and HWS Utility Services, L.L.C. (HWSUS). Cal Water, Hawaii Water, New Mexico Water, and Washington Water provide regulated water utility services, while CWSUS and HWSUS conduct 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. Stock Transfer, Dividend Disbursing, and Reinvestment Agent American Stock Transfer & Trust Company 57 Maiden Lane New York, NY 10038 (800) 937-5449 To Transfer Stock A change of ownership of shares (such as when stock is sold or gifted or when owners are deleted from or added to stock certificates) requires a transfer of stock. To transfer stock, the owner must complete the assignment on the back of the certificate and sign it exactly as his or her name appears on the front. This signature must be guaranteed by an eligible guarantor institution (banks, stock brokers, savings and loan associations, and credit unions with member- ship 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 & Trust Company by registered or certified mail with complete transfer instructions. Alternatively, effective January 1, 2008, California Water Service Group is participating in the Direct Registration System, which allows electronic share transactions between the stockholder’s broker or dealer and American Stock Transfer & Trust Company. Bond Registrar US Bank Trust, N.A. One California Street San Francisco, CA 94111-5402 (415) 273-4580 Annual Meeting The Annual Meeting of Stockholders will be held on Tuesday, May 27, 2008 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 trans- acted during the meeting will be contained in the proxy material, which will be mailed to stockholders on or about April 11, 2008. Dividend Dates For 2008 Quarter Declaration Record Date Payment Date First January 23 February 4 February 15 Second April 23 May 5 May 16 Third July 23 August 4 August 16 Fourth October 22 November 3 November 14 Annual Report For 2007 On Form 10-K A copy of the company’s report for 2007 filed with the Securities and Exchange Commission (SEC) on Form 10-K will be available in April 2008 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. Executive Office and Stockholder Information California Water Service Group Attn: Stockholder Relations 1720 North First Street San Jose, CA 95112-4598 (408) 367-8200 or (800) 750-8200 www.calwatergroup.com California Water Service Group 1720 North First Street San Jose, California 95112-4598 (408) 367-8200 www.calwatergroup.com NYSE: CWT California Water Service Group Investing for Life The Stockholder 

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