California Water Service Group
Annual Report 2011

Plain-text annual report

1 val·ue [val-yoo] noun, verb, -ued, -u·ing. noun 1. relative worth, merit, or importance; 2. monetary or material worth; 3. the worth of something in terms of the amount of other things for which it can be exchanged; 4. equivalent worth or return in money, material, services; 5. estimated or assigned worth; valuation verb 1. to calculate or reckon the monetary value of; give a specified material or financial value to; assess; appraise; 2. to consider with respect to worth, excellence, usefulness, or importance; 3. to regard or esteem highly Have you heard of “buzzword bingo” ? It’s a game that pokes fun of the common business practice of using technical, important-sounding words primarily to impress laypeople. Words like empowerment and leverage and bandwidth and mindshare. Most people don’t know what they mean, but they sound good. Think about it; everybody knows somebody who says things like, “At the end of the day, we need to break through the clutter and think outside the box in order to shift paradigms.” If your eyes just glazed over, you get the point. So we at California Water Service Group wanted to check ourselves. We say that we are committed to providing value to our stockholders, our customers, and our employees, but what the heck does that mean? It turns out, the answer to that question depends upon whom you ask… Financial Highlights Year ended December 31 2011 2010 2009 2008 2007 Market price at year-end $ 18.26 $ 18.64 $ 18.41 $ 23.22 $ 18.51 Book value per share 10.76 10.45 10.13 9.72 9.33 Earnings per share (diluted) 0.90 0.90 0.98 0.95 0.75 Dividend per share 0.615 0.595 0.590 0.585 0.580 Revenue* 501,814 460,399 449,372 410,312 367,082 Net income* 37,712 37,656 40,554 39,805 31,159 *Dollars in thousands but regardless of how the Commission determines that WRAM and MCBA balances will be amortized, we are confident that the amounts tracked in these mechanisms will continue to be recoverable in customer rates. As for 2012, our performance will be tied to our efforts at cost control. We expect to receive inflation-type rate increases at best in California in 2012 and 2013 due to the Commission’s three-year rate case cycle, which provides the majority of the rate relief in year one, and interim, Commission- determined, inflation-type increases in years two and three. That means we must aggressively tighten our budgets in order to produce good finan- cial results, and employees throughout the Company are focused on achieving this goal. Effective Management of Regulatory Matters Looking ahead, it’s clear that we need to overcome three challenges in order to continue to meet our stockholders’ need for consis- tent financial performance. First, we need the Commission to address the issue of timely WRAM and MCBA balance collection. We are hopeful that this issue will be resolved favor- ably in the first half of 2012. Second, we need the Commission to set rates based on realistic, updated sales fore- casts. This would not only minimize future WRAM and MCBA balances, but also minimize the need for surcharges on customers’ bills. Sales in California in 2010 and 2011 were well below those of prior years, but the Commission’s rules do not allow us to adjust to this new reality until 2014. We must ensure that water rates reflect lower water use throughout the state, because many of the costs associated with providing water service are fixed and do not decrease when water usage decreases. We will seek realistic sales forecasts in our 2012 GRC and work with other water utilities to propose new mechanisms to address challenges in forecasting sales. Third, we have an opportunity to submit our expenses and capital improvement proposals to the Commission in our 2012 GRC. We have three new Commissioners on the five-member California Public Utilities Commission, and the entire Commission is taking a hard look at safety in all utility operations in the wake of a major accident in the gas utility industry. For us, that’s not the challenge; we have always put safety first, and we continually assess and address risks through an Enterprise Risk Management Program that involves professionals from finance, operations, and engineering working together in risk analysis and mitigation. Our challenge is continuing to make necessary investments in our infra- structure while keeping water rates affordable. It’s a balancing act, and one that we take very seriously as we prepare to file our 2012 GRC in July. Part of the issue is a continuing need to educate the public on the value and relative low cost of having a clean, reliable water supply available at all times. Many people labor under the misconception that water should be free because it falls from the sky. We have worked to demonstrate that we do not provide water in its natural state; rather, we capture it, test it, treat it, and deliver it right to the customer’s tap. We hope to get help from other water utilities in 2012 as we undertake a coordinated industry effort to publicize on a broader scale the value of water and the range of services we provide that are largely unseen by the general public. Stockholder Letter / 2011 AR We will also complete our second state-of-the-art Membrane Bio-Reactor wastewater treatment plant in Hawaii in 2012. Located on the Big Island at the Waikoloa Beach Resort, the new plant will produce up to one million gallons of high-quality effluent per day that will be used for irrigation. This plant, together with our Pukalani plant on the island of Maui, earns us the distinction of producing the highest-quality effluent on the Islands. On the water quality front, we continued our vigilant water quality assurance efforts. In addition to our ongoing treatment and testing programs and compliance with new and evolving regulations, we made significant improvements to our cross-connection control program, which essentially ensures that protective devices are installed where neces- sary to prevent anything on the customer’s side of the meter from contaminating our water systems. Data analysis and planning are critical to ensuring that we are prepared to meet new water quality standards. In 2011, Cal Water was honored to be selected by the Water Research Foundation as one of two water providers to participate in a national pilot study to assess the best treatment technology for chromium - 6. We expect this major data col- lection and analysis project to be a key consideration for regulators as they contemplate setting a maximum contaminant level for the constituent. We are proud to have a part in such an important undertaking, and believe that it will put us ahead of the curve in meet- ing whatever standard is ultimately established to protect public health. Another key to ensuring that we are prepared to meet new water quality standards is investing in necessary equipment for our state-certified water quality laboratory. In 2011, we added a new gas chromatograph-mass spectrophotometer-mass spectrophotometer (you read that right – two mass spectrophotometers!), which uses a dual-detection system in order to detect and identify constituents in the water at levels as low as two parts per trillion. In 2012, we will continue to evaluate existing treatment plant performance and investi- gate new treatment technologies. We also have a task force that will be looking for ways to optimize water quality in the distribution system, including identifying opportunities to remove “dead -ends” in the system to improve circulation, repair system leaks that could affect water quality, modify pump operations to maintain steady system pressures, and make other improvements to ensure high quality from the water source to the customer’s faucet. Responsive Customer Service For us, quality isn’t limited to our water and our infrastruc- ture; it extends to our service as well. In order to provide quality service, we have to be responsive to customers and give them what they want. How do we know what they want? We ask. In 2011, we completed two survey projects that will be critical to ensuring that we are being responsive to changing customer expectations. The first project took place in our Bakersfield District, where we have a lot of walk- in and phone traffic at our Customer Center. Our objective was to learn why customers were Stockholder Letter / 2011 AR Value to our Employees Contributions through Continuous Improvement Clearly, our employees are integral in providing value to stockholders and customers. One clear way that they contribute to our success is through our continuous improvement approach to the business. Through con- tinuous improvement, employees take a leadership role in improving processes in order to increase efficiency or enhance customer service. And while employees are improving the way we do business, they are learning how to analyze data, make a solid business case, and present their findings and recommendations to their peers and Officer review teams. Opportunities for Professional Development In addition to developing their skills by continuously improving service and efficiency, our employees are encouraged to take advantage of a variety of professional development opportunities, including a tuition reimbursement program, Company- sponsored classes to prepare for state certification examinations, and other job -specific seminars and classes. The goal is to help every employee reach his or her full potential. One prime example of an employee who made the most of the opportunities he was offered is Paul Ekstrom, who, during the course of his 40 - year career, worked his way from an entry - level utility worker position to Vice President of Customer Service, Human Resources, and Information Technology. Paul is retiring in 2012, and we thank him for his many contributions to our success. Effective May 1, 2012, David R. Karraker will assume the role of Vice President of Cus- tomer Service and Information Technology. Like Paul, Dave has a strong operational back- ground, having joined the Company as a Maintenance Operator in 1974. Dave currently serves as Manager of our East Los Angeles District. Helen Del Grosso will succeed Paul as Vice President of Human Resources. Prior to joining Cal Water as Director of Human Resources in 2008, Helen held human resource management positions at the City of Palo Alto and Santa Clara County. We are confident that Dave and Helen will bring considerable value to our leadership team. A Change in Board Leadership – A Personal Note from Pete After 35 years of distinguished service, Bob Foy will retire from his role as Chairman of the Board of Directors. His re- markable tenure will certainly be remembered not only for his tremendous leadership, but also for his well-deserved reputation as being the consummate gentleman. Bob has made an indelible mark on the water profession, the Company, and all the people who work here. He will be dearly missed. Yet, I am confident we will keep him engaged in the water business for years to come – he is simply too valuable for us to let him get away completely. The Board has indicated that it plans to have me succeed Bob as Chairman. His shoes will be difficult to fill, yet working so closely with him in partnership through the years will be an asset to me going forward. On behalf of both of us, I thank you for your continued confidence and investment in the Company and wish you the very best in the coming year. Stockholder Letter / 2011 AR Our Service Areas We serve nearly two million people in 100 communities in California, Washington, New Mexico, and Hawaii, and each of them is unique. We serve moms whose highest priority is having confidence in the safety of the water. We serve factory managers whose highest priority is having enough water to manufacture their product and provide local jobs. We serve firefighters whose highest priority is having an uninterrupted water supply when needed to protect the public. Sure, every customer is different. But no matter who they are, no matter what they do, no matter where they live, our customers value one thing above all else: quality. Quality water. Quality infrastructure. Quality service. And that’s what we deliver. California Districts & Communities 33 2011 2010 Antelope Valley • Fremont Valley, Lake Hughes, Lancaster & Leona Valley 1,400 1,400 Bakersfield 68,500 67,600 Bayshore • South San Francisco, Colma, Broadmoor, San Mateo & San Carlos 53,300 53,300 Bear Gulch • Atherton, Woodside, Portola Valley & a portion of Menlo Park 18,800 18,800 Chico • Hamilton City 28,000 27,900 Commerce (lease agreement) 1,200 1,200 Dixon 2,900 2,900 Dominguez • Carson & portions of Compton, Harbor City, Long Beach, Los Angeles County & Torrance 33,800 33,800 East Los Angeles • Portions of Montebello, Commerce, Monterey Park & Vernon 26,700 26,700 Hawthorne (lease agreement) 6,200 6,200 Hermosa-Redondo • Hermosa Beach, Redondo Beach & a portion of Torrance 26,600 26,600 Kern River Valley • Bodfish, Kernville, Lakeland, Mountain Shadows, Onyx, Squirrel Valley, South Lake & Wofford Heights 4,200 4,300 King City 2,600 2,500 Livermore 18,300 18,300 Los Altos • Portions of Cupertino, Los Altos Hills, Mountain View & Sunnyvale 18,800 18,700 Marysville 3,700 3,700 Oroville 3,600 3,600 Palos Verdes • Palos Verdes Estates, Rancho Palos Verdes, Rolling Hills & Rolling Hills Estates 24,100 24,100 Redwood Valley • Lucerne & portions of Duncans Mills, Guerneville, Dillon Beach, Noel Heights & Santa Rosa 1,900 2,000 Salinas 28,200 28,000 Selma 6,100 6,100 Stockton 42,800 42,800 Visalia 40,700 40,300 Westlake • Westlake Village & a portion of Thousand Oaks 7,100 7,000 Willows 2,400 2,400 Eight-Year Financial Review (Dollars in thousands, except common share and other data) 2011 2010 2009 2008 2007 2006 2005 2004 Summary of Operations Operating revenue $501,814 $460,399 $449,372 $410,312 $367,082 $334,717 $320,728 $315,567 Operating expenses 434,647 398,586 391,253 352,843 322,912 294,411 278,903 273,488 Interest expense, other income and expenses, net 29,455 24,157 17,565 17,664 13,011 14,726 14,602 16,053 Net income $37,712 $37,656 $40,554 $39,805 $31,159 $25,580 $27,223 $26,026 Common Share Data Earnings per share - diluted $0.90 $0.90 $0.98 $0.95 $0.75 $0.67 $0.74 $0.73 Dividend declared 0.615 0.595 0.590 0.585 0.580 0.575 0.570 0.565 Dividend payout ratio 68% 66% 61% 62% 77% 86% 78% 77% Book value $10.76 $10.45 $10.13 $ 9.72 $ 9.33 $ 9.16 $ 7.99 $ 7.83 Market price at year-end 18.26 18.64 18.41 23.22 18.51 20.20 19.11 18.83 Common shares outstanding at year-end (in thousands) 41,817 41,667 41,531 41,446 41,332 41,314 36,780 36,734 Return on average common stockholders’ equity 8.5% 9.0% 9.8% 10.2% 8.1% 8.2% 9.3% 9.8% Long-term debt interest coverage 3.11 3.59 4.04 4.72 3.70 3.17 3.61 3.38 Balance Sheet Data Net utility plant $1,381,119 $1,294,297 $1,198,077 $1,112,367 $1,010,196 $941,475 $862,731 $800,305 Total assets 1,854,587 1,692,066 1,525,581 1,418,107 1,184,499 1,165,019 996,945 942,853 Long-term debt, including current portion 488,165 481,561 387,222 290,316 291,921 293,592 275,275 275,921 Capitalization ratios: Common stockholders’ equity 48.0% 47.5% 52.1% 58.1% 56.9% 56.0% 51.4% 50.8% Preferred stock 0 .0% 0.0 % 0.0% 0.0% 0.5% 0.5% 0.6% 0.6% Long-term debt 52.0% 52.5% 47.9% 41.9% 42.6% 43.5% 48.0% 48.6% Other Data Water production (million gallons) 120,353 121,942 131,558 137,757 141,238 132,414 129,453 139,039 Customers at year-end, including Hawthorne and Commerce 499,500 497,900 494,700 490,493 487,555 483,893 479,001 473,155 New customers added 1,600 3,200 4,207 2,938 3,662 4,892 5,846 6,733 Revenue per customer $1,005 $925 $908 $837 $753 $692 $670 $667 Utility plant per customer 3,925 3,706 3,455 3,228 2,968 2,778 2,578 2,418 Employees at year-end 1,132 1,127 1,013 929 891 869 840 837 35 Summary of Operations Common Share Data Balance Sheet Data Capitalization ratios: Other Data (Dollars in thousands, except common share and other data) 2011 2010 2009 2008 2007 2006 2005 2004 Operating revenue $501,814 $460,399 $449,372 $410,312 $367,082 $334,717 $320,728 $315,567 Operating expenses 434,647 398,586 391,253 352,843 322,912 294,411 278,903 273,488 Interest expense, other income and expenses, net 29,455 24,157 17,565 17,664 13,011 14,726 14,602 16,053 Net income $37,712 $37,656 $40,554 $39,805 $31,159 $25,580 $27,223 $26,026 Earnings per share - diluted $0.90 $0.90 $0.98 $0.95 $0.75 $0.67 $0.74 $0.73 Dividend declared 0.615 0.595 0.590 0.585 0.580 0.575 0.570 0.565 Dividend payout ratio 68% 66% 61% 62% 77% 86% 78% 77% Book value $10.76 $10.45 $10.13 $ 9.72 $ 9.33 $ 9.16 $ 7.99 $ 7.83 Market price at year-end 18.26 18.64 18.41 23.22 18.51 20.20 19.11 18.83 Common shares outstanding at year-end (in thousands) 41,817 41,667 41,531 41,446 41,332 41,314 36,780 36,734 Return on average common stockholders’ equity 8.5% 9.0% 9.8% 10.2% 8.1% 8.2% 9.3% 9.8% Long-term debt interest coverage 3.11 3.59 4.04 4.72 3.70 3.17 3.61 3.38 Net utility plant $1,381,119 $1,294,297 $1,198,077 $1,112,367 $1,010,196 $941,475 $862,731 $800,305 Total assets 1,854,587 1,692,066 1,525,581 1,418,107 1,184,499 1,165,019 996,945 942,853 Long-term debt, including current portion 488,165 481,561 387,222 290,316 291,921 293,592 275,275 275,921 Common stockholders’ equity 48.0% 47.5% 52.1% 58.1% 56.9% 56.0% 51.4% 50.8% Preferred stock 0 .0% 0.0 % 0.0% 0.0% 0.5% 0.5% 0.6% 0.6% Long-term debt 52.0% 52.5% 47.9% 41.9% 42.6% 43.5% 48.0% 48.6% Water production (million gallons) 120,353 121,942 131,558 137,757 141,238 132,414 129,453 139,039 Customers at year-end, including Hawthorne and Commerce 499,500 497,900 494,700 490,493 487,555 483,893 479,001 473,155 New customers added 1,600 3,200 4,207 2,938 3,662 4,892 5,846 6,733 Revenue per customer $1,005 $925 $908 $837 $753 $692 $670 $667 Utility plant per customer 3,925 3,706 3,455 3,228 2,968 2,778 2,578 2,418 Employees at year-end 1,132 1,127 1,013 929 891 869 840 837 Board of Directors Officers California Water Service Company Peter C. Nelson 1, 2, 3 President and Chief Executive Officer Paul G. Ekstrom Vice President, Customer Service, Human Resources, and Information Technology Francis S. Ferraro 2, 4 Vice President, Corporate Development Robert R. Guzzetta 2 Vice President, Operations Martin A. Kropelnicki 1, 2, 3 Vice President, Chief Financial Officer and Treasurer Christine L. McFarlane 3 Vice President, Chief Administrative Officer Michael J. Rossi 2, 3 Vice President, Engineering and Water Quality Thomas F. Smegal III 4 Vice President, Regulatory Matters and Corporate Relations Calvin L. Breed 1, 2, 3 Controller, Assistant Secretary and Assistant Treasurer Lynne P. McGhee 1, 2, 3 Corporate Secretary Washington Water Service Company 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 and Hawaii Water Service Company, Inc. 

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