California Water Service Group Annual Report 2012

Plain-text annual report

How do we measure Success? California Water Service Group 2012 Annual Report California Water Ser vice Group 1720 North First Street San Jose, California 95112-4598 (408) 367-8200 www.calwatergroup.com NYSE: CWT Table of Contents 2 By the Numbers 19 Letter to Stockholders 32 Ser vice Area Maps 36 Eight-Year Financial Review 38 Board of Directors 40 Corporate Officers Stock Transfer, Dividend Disbursing, and Reinvestment Agent American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, NY 11219 (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, stockbrokers, 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 American Stock Transfer & Trust Company, by registered or certified mail with complete transfer instructions. Alternatively, the Direct Registration System can be utilized, which allows electronic share transactions between your 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 21, 2013, 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 transacted during the meeting will be contained in the proxy material, which will be mailed to stockholders on or about April 12, 2013. Anticipated Dividend Dates For 2013 Quarter Declaration Record Date Payment Date First January 30 February 11 February 22 Second April 24 May 6 May 17 Third July 31 August 12 August 23 Fourth October 30 November 12 November 25 Annual Report For 2012 On Form 10-K A copy of the Company’s report for 2012 filed with the Securities and Exchange Commission (SEC) on Form 10-K will be available in April 2013 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. California Water Ser vice Group (NYSE: CWT) is the third largest investor-owned water utility in the United States, providing high- quality utility ser vices to approximately two million people in more than 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 Ser vice Company (Washington Water), CWS Utility Ser vices (CWSUS), and HWS Utility Ser vices (HWSUS). Cal Water, Hawaii Water, New Mexico Water, and Washington Water provide regulated water and wastewater utility ser vices, while CWSUS and HWSUS conduct the Company’s non-regulated business, which includes providing billing, water quality testing, and water and wastewater system operations and management services to cities and other companies. 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 http://www.calwatergroup.com 3 1 2 5 4 6 By the Numbers. CWT 2012 AR 1 8 9 7 + 20 .6 87% 31420-Year 66,90094 7$2,453 2012 % 10 1.18 math teacher may have told you, numbers are signiﬁcant. They speak volumes, really. Think about it… we could publish a 94 As your sixth grade The way we see it, if a picture paints employee turnover rate is just 5%. can too. efﬁcient operations, or we could tell you that our 20-year total return is 412%. We could ﬁll hundreds of pages describing our encounters with customers, or we could tell you that 95% of them rate us as “excellent,” “very good,” or “good.” We could go on at length about our commitment to being the employer of choice and our pride in having the best people in the industr y, or we could tell you that our 20-pound report about our strong balance sheet, disciplined approach to growth, and a thousand words, then the right number CWT 2012 AR 3 3 8 0 , 0 0 0 + The number of tests we conduct annually to ensure that our water meets increasingly stringent state and federal quality standards. Most of these tests are conducted in our state-certiﬁed water quality laboratory by a team of scientists and chemists with a combined 192 years of analytical experience and 52 years of advanced education. Our customers rely on us to provide excellent service and high-quality water, 24 hours per day, 7 days per week. And boy, do we deliver. The number of gallons of water that will be saved annually by our 2012 conservation programs. That’s enough water to meet the annual water needs of 8,800 people. 362 million % 98 Percentage of time we responded to after -hours emergencies within one hour in 2012. After-hours response times are just one of the key performance measures we track to ensure that we are providing excellent service. We also achieved a ﬁrst-call satisfaction rate of 92%, which means that 92 out of 100 times, customers were satisﬁed by the ﬁrst employee they contacted for ser vice. CWT 2012 AR 5 When it comes to our customers, the numbers tell the story. The bottom line: We provide a life-sustaining, life-enhancing service to our customers, and we continually seek their feedback to ensure that we are surpassing their expectations. If you are new to our Company, you may be wondering why stockholders would care about such things as first- call customer satisfaction. Here’s why: Well-satisfied, well-in- formed customers understand the value of the service we provide. They welcome us and appreciate all we do in their communities. They support our efforts to maintain and upgrade our infrastructure. And that’s good for customers and stockholders alike. Above all, our stockholders value consistency. They want to know that they can count on us to deliver steady results. Did we succeed in 2012? Let us count the ways… The total return earned by stockholders over the last 20 - year period, assuming reinvestment of dividends. This beats the S & P 100’s 20-year total return of 385%. 412 % In 2013, it was raised for the 46th consecutive year.4 5 Through 2012, the number of consecutive years that the dividend has increased. $ 1 2 8 M The amount of capital invested in water system infrastructure in 2012. Infrastructure investment beneﬁts customers, because it enables us to meet their needs for an uninterrupted supply of good, clean water. It also bene- ﬁts shareholders, who earn a return on capital invested in infrastructure. CWT 2012 AR 9 Let’s face it, we’re not that exciting; we certainly don’t offer investors a roller coaster ride. What we do offer them is the opportunity to be a part of providing an essential resource to our communities. And the opportunity to earn steady, predictable returns. The final and most important part of the equation is employees. If we didn’t have the best people in the industry, we couldn’t provide excellent service to customers or reliable returns to stockholders. That’s why we are committed to providing a healthy, rewarding work environment for all 1,131 of our employees. 5% Our employee turnover rate. A low turnover rate is a reﬂec- tion of our efforts to recruit and retain talented professionals who want to spend their careers with us. Our average employee tenure in 2012 was 12.4 years, and our longest- tenured employee currently has 43 years of service. What does it take to be the employer of choice – competitive salaries, good beneﬁts, and advancement opportunities? Sure. But it also takes an environment that fosters team- work and individual achievement while enabling every single employee to contribute to the Company’s success. 1 7 2 The number of Continuous Improvement teams we have throughout the Company, all of which are focused on improving customer ser vice and increasing efﬁciency. And they deliver results. Recent examples include a team that developed a standardized process for testing ﬂow rates at ﬁre hydrants that will provide more accurate results; another that discovered and tested a new type of chlorination equipment that will reduce main- tenance costs at water treatment facilities; and another that invented a tool that increases the safety of employees who investigate the condition of water tank interiors. The Continuous Improvement approach to the business also hones our employees’ analytical, public speaking, and collaboration skills. Where the Bay Area News Group ranked us in its “2012 Top Workplaces” program (among the 4,000 companies considered). The selection of winning companies was based upon sur veys about the workplace completed by employees. The sur veys were designed to assess “the fundamentals of the company: values, executive leadership, and culture.” 75Top CWT 2012 AR 13 Customers, stockholders, and employees all want things that can’t be quantified. A kind word along with a receipt. A feeling of calm in the midst of Wall Street chaos. A sense of being a valued member of the team. Granted, certain things can’t be counted, tallied, or totaled up. But there are numbers that tell us if we’re on the right track. It is these numbers we use to measure our success. Financial Highlights Year ended December 31 2012 2011 2010 2009 2008 Market price at year-end $ 18.35 $ 18.26 $ 18.64 $ 18.41 $ 23.22 Book value per share 11.30 10.76 10.45 10.13 9.72 Earnings per share (diluted) 1.17 0.90 0.90 0.98 0.95 Dividend per share 0.630 0.615 0.595 0.590 0.585 Revenue* 559,966 501,814 460,399 449,372 410,312 Net income* 48,828 37,712 37,656 40,554 39,805 *Dollars in thousands 559,966 • 2012 501,814 • 2011 460,399 • 2010 449,372 • 2009 410,312 • 2008 Five-Year Operating Revenue (Dollars in thousands) Five-Year Dividend Growth 1,457 • 2012 1,381 • 2011 1,294 • 2010 1,198 • 2009 1,112 • 2008 Five-Year Net Utility Plant (Dollars in millions) Five-Year Book Value 0.630 • 2012 0.615 • 2011 0.595 • 2010 0.590 • 2009 0.585 • 2008 11.30 • 2012 10.76 • 2011 10.45 • 2010 10.13 • 2009 9.72 • 2008 CWT 2012 AR 17 To Our Stockholders The Numbers By all measures, 2012 was a success for our stockholders. • Net income increased 29.5% to $48.8 million. • Diluted earnings per share increased 29.1% to $1.17. • Revenues increased 11.6% to $560.0 million. • Net utility plant increased 5.5% to $1.46 billion. • The annual dividend increased 2.4% to $0.63 per share in 2012. This was the 45th consecutive annual increase. These results were better than we expected, given the fact that 2012 was the second year in our largest subsidiary’s three-year rate case cycle. They were positively impacted by our prudent ﬁnan- cial management, as increases in wages, health care costs, and post-retirement beneﬁts (other than pensions) were partially offset by decreases in maintenance costs, interest expense, and costs Peter C. Nelson Chairman of the Board and Chief Executive Ofﬁcer Martin A. Kropelnicki President and Chief Operating Ofﬁcer (right) CWT 2012 AR 19 for outside services. We also beneﬁtted from a nonrecurring income tax beneﬁt resulting from a change in federal tax rules. (The change required us to deduct for tax purposes signiﬁcant costs that had previously been capitalized.) And other income was boosted by a mark-to-market accounting adjustment to reﬂect an increase in the value of long-term assets held by the Company’s non- qualiﬁed retirement plans. The California Public Utilities Commission issued two key decisions in 2012. First, in April, the Commission revised its policy that required Water Revenue Adjustment Mechanism (WRAM) balances to be recovered in rates over an extended period of time. This delay in recovery impacted our results in 2011. Going forward, in most cases, we will be able to recover the balances within 18 months. Second, in July, in its “cost of capital” decision, the Commission authorized a return on equity of 9.99%, a cost of debt of 6.24%, and a capital structure of 46.60% long-term debt and 53.40% common equity. The decision also adopted a two-way index mechanism that will further reduce the authorized return on equity to 9.43% for 2013, due to the decline in interest rates. Also in 2012, Washington Water Service Company (Washington Water) received authorization for a rate increase that adds $1.6 million to annual revenue, and Hawaii Water Service Company (Hawaii Water) received approval for a rate increase in its Ka’anapali service area that adds a total of $1.2 million to annual revenue. And California Water Service Company (Cal Water) received second- year, inﬂation-type increases in 2012, which added $8.7 million to annual revenue. Looking ahead, a rate increase in the Pukalani service area that will add nearly $600,000 to revenue over the next three years is expected to become effective in mid-2013, and three separate rate case ﬁlings requesting $6.3 million in annual revenue increases in the Waikoloa ser vice areas are pending, with decisions expected by the end of 2013. Even more signiﬁcantly, Cal Water ﬁled a General Rate Case in July 2012, requesting additional revenue of $92.7 million in 2014, $17.2 million in 2015, and $16.9 million in 2016. After a thorough review, the Commission will determine how much of a revenue increase it deems necessary in order for Cal Water to continue to deliver a reliable supply of high-quality water. New rates are scheduled to become effective in January 2014. In the General Rate Case ﬁling, Cal Water included projects to mitigate high-priority engineering and operational risks to the business as identiﬁed in an in-depth risk-assessment study completed in mid-2012 as part of the Company’s Enterprise Risk Management Program. To complete the CWT 2012 AR 21 assessment, our cross-functional team conducted extensive research; catalogued and categorized all major identiﬁed risks; rated risks based upon likelihood, scope, and intensity; and developed plans to mitigate top-rated risks. We expect to make signiﬁcant progress on this effort in 2013. Also included in the General Rate Case ﬁling was a total of $480 million for capital improvement projects, including 20 new storage tanks, 33 tank upgrades, 14 wells, 8 new treatment plants, 5 treatment plant upgrades, and 348,000 feet of new water main. What the Numbers Mean for Customers As we developed the 2012 General Rate Case, we were extremely cognizant of the importance of affordability. In addition to proposing only those capital projects we believed to be absolutely necessar y, we requested approval to increase discounts provided to qualiﬁed customers through our Low-Income Rate Assistance (LIRA) program. We also requested approval to increase discounts to customers in high-cost areas through our Rate Support Fund (RSF) and add Oroville, Lake Hughes, Lancaster, and Leona Valley customers to the RSF program. In 2012, we provided $5.2 million in water bill discounts through LIRA, and we worked with electric and gas utilities to share customer data to ensure that qualiﬁed customers are participating LIRA. We provided $1.1 million in discounts through the RSF. Many factors affect the costs of providing water service, including the source of the water, the number of customers who share the costs of operating the system, the natural quality of the water and treat- ment that is required, and the age of the water system infrastructure. Most of Cal Water’s customers pay less than one penny per gallon; in our lowest- cost district, customers pay just $1 for every 3 tons of high-quality water delivered to their taps. (A large truck weighs more than 3 tons.) In the areas where water costs are high, we continue to seek ways to mitigate the impact of water costs on our communities. In the end, concerns about affordability must always be weighed against concerns about supply reliability and water quality. Water is essential for health and safety, and our customers expect an uninterrupted supply. Our water system upgrade and maintenance initiatives are critical to ensuring that they get it. In 2012, we added 5 storage tanks with a combined capacity of 5 million gallons, 7 emergency power generators, and 52,000 feet of water main, all of which increase reliability. Two examples of our local efforts to increase water supplies in our communities: We reached an agreement with the City of Stockton and San Joaquin County to increase our surface water supply by 14%, and we acquired additional property in our Rancho Dominguez District for groundwater wells that will lessen our dependence on expensive, imported surface water supplies. CWT 2012 AR 23 Our Rancho Dominguez District, Engineering, and Water Quality teams also worked together to add additional water quality treatment processes at the City of Hawthorne treatment plant. The more robust treatment plant increases both reliability and afford- ability by enabling us to use lower-cost, local groundwater supplies. CWT 20-Year Total Return on Investment (On a $100 stock purchase on December 31, 1992, with dividends reinvested through 2012) $800 $700 $600 $500 $400 $300 $200 $100 $0 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Our industr y-leading conser vation program also increases water supply reliability. In 2012, we offered customers a range of programs, rebates, and services to help them reduce their water usage and increase sustainability of this ﬁnite natural resource. 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 CWT 2012 AR 25 A few highlights: • We provided 10,300 high-efﬁciency toilets through our direct installation program, which are expected to save 93,000,000 gallons per year. This innovative program is particularly valuable to customers who cannot afford to purchase the toilet and wait for a rebate. • We distributed 7,800 conser vation kits, which include high-efﬁciency showerheads and shut-off hose nozzles, for an annual savings of 34,000,000 gallons. • We gave out 98,500 sprinkler nozzles, which will save approximately 103,000,000 gallons per year. • And we provided $400,000 in rebates for high-efﬁciency clothes washers, which will conserve 14,000,000 gallons per year. Water quality is equally important to customers, and we have a rigorous monitoring, testing, and treatment program in place to ensure that we meet every standard, every day, in every system. Our water quality team conducts more than 300,000 tests per year for more than 140 contaminants, using equipment sensitive enough to detect levels as low as one part per trillion. To put that into per- spective, one part per trillion is equivalent to three seconds in 100,000 years or one square inch in 250 square miles. Our approach to water treatment is yet another example of our focus on affordability. For every source that requires treatment, we work diligently to identify the best, most cost-effective treatment methodology. And, to efﬁciently track water quality trends in our 61 permitted water systems and 1,700 water quality sample points, we enter all data into a software system that enables us to react quickly to water quality changes and plan effectively to meet future requirements. As outlined in our 2012 Corporate Citizenship Report (www.calwatergroup.com/corporatecitizenship), we are one of two water organizations chosen to collaborate with the American Water Works Asso- ciation’s Water Research Foundation on a study to identify the best approaches and associated costs for removing Chromium 6 from water supplies. This research is helping us get ahead of the curve in meeting an anticipated new standard for the constituent, which the State of California is expected to establish in mid-2013. Another efﬁciency-related project we described in our Corporate Citizenship Report is the 100-kilo- watt wind-turbine project on the Big Island of Hawaii that we began in 2012. The environmentally friendly plant will provide energy for a wastewater treatment plant in Waikoloa Village, which is particularly important given the fact that Hawaii has the highest energy costs in the nation. CWT 2012 AR 27 Along with reliability and quality, our customers expect excellent service. We have several key customer service performance measures that we track on an ongoing basis to ensure that we are surpassing customer expectations. It was our assessment of some of these key per formance measures that prompted us to undertake an ambi- tious service enhancement project, which we began piloting in our Bakersﬁeld District in 2012. The goal of the project is to provide “a new customer experience” through a more transactional web site that posts payments in real time and allows the customer to start and stop service, request due date extensions, make payment arrangements, set notiﬁcation preferences, and sign up for automatic payment service, 24/7, 365 days per year. We also added automated phone services, allowing customers to call anytime, day or night, to make real-time payments and retrieve their current bal- ance and last payment. And ﬁnally, we added 71 new pay stations in Bakersﬁeld to make in-person bill paying more convenient. Are customers taking advantage of this “new experience”? The numbers speak for themselves: In the ﬁrst two months that the services were offered, 5,395 Bakersﬁeld customers made a one-time payment on the web site, 8,496 made payments through the automated phone system, and 4,159 used the web site or the automated phone system to make payment arrangements. These numbers are signiﬁcant because they make us more efﬁcient and reduce wait times on the phone and in the Customer Center. More impor- tantly, they tell us that customers are getting the service they need when they need it, as evidenced by the growing number of customers who are accessing the web site and the phone system after regular business hours. We will roll these new services out to more California districts in 2013. Speaking of automated phone services, the Emergency Notiﬁcation application we implemented in 2011 won ﬁrst place in the Management Innovation Awards of the National Association of Water Companies (NAWC) in 2012. According to NAWC, the award recognizes “groundbreaking advances in customer education programs, management plans, technological advancements, and community support efforts.” In 2013, we plan to expand the capabilities of the system to allow us to send email and text messages as well as automated phone messages to customers, based upon the communications preferences they have set on our new web site. Making it Add Up for Employees We would not have our well-earned reputation for service without the dedication of our employees, and we are committed to being the recognized employer of choice in our industr y. In addition to providing competitive pay and beneﬁts, including CWT 2012 AR 29 insurance, pension, and 401(k) savings matching, we have a positive, cooperative relationship with our unions, and in fact have partnered with them on a joint healthy workforce initiative. We also en- courage our employees to stay at the top of their profession, and we provide tuition reimbursement and professional development programs to help them do it. We are pleased to report that many of our employees have earned state-certiﬁcation; 623 are certiﬁed in water distribution, 413 are certiﬁed in water treatment, and 38 are certiﬁed in wastewater treatment. In 2012, of 4,000 companies considered, Cal Water was named one of the top 75 places to work in the Bay Area. One of the business attributes assessed in the Top Workplace program is “executive leadership,” and we have a uniquely qualiﬁed, diverse team of ofﬁcers at the helm. In September, Pete assumed the role of Chairman and Chief Executive Ofﬁcer, and Marty was named President and Chief Operating Ofﬁcer. Thomas F. Smegal III, our Vice President of Regulatory Matters and Corporate Relations, became Vice President, Chief Financial Ofﬁcer and Treasurer. Earlier in 2012, Helen R. Del Grosso, David R. Karraker, and David B. Healey joined the ofﬁcer team as Vice President of Human Resources, Vice President of Customer Service and Information Technology, and Corporate Controller, Assistant Secretary and Assistant Treasurer, respectively. And most recently, in February 2013, Paul G. Townsley was named Vice President, Regulatory Matters and Corporate Relations. Together, our ofﬁcers have almost 400 years of experience in their respective professions. On a ﬁnal note, Lead Director Douglas M. Brown will be retiring after 12 years of distinguished service on our Board. The Dean of the University of New Mexico’s Anderson School of Business and former Treasurer for the State of New Mexico brought an abundance of exper tise and experience to the Company, and we will miss him. We wish Doug and his family all the best as he embarks on a well- deser ved retirement from California Water Ser vice Group. We thank you for your continued investment in the Company, and wish you the best in the coming year. Peter C. Nelson Chairman of the Board and Chief Executive Ofﬁcer Martin A. Kropelnicki President and Chief Operating Ofﬁcer CWT 2012 AR 31 In 2012, we delivered more than 116 billion gallons of water weighing nearly 1 trillion pounds to 2 million people through 500,700 service connec- tions in more than 100 communities in 4 states. But these numbers don’t tell the whole story. They don’t tell the story of the three employees who provided professional and helpful service to the self-described “old lady” who had difficulties having drip irrigation installed at her home. Or the employee who went out of his way to help a customer whose dog was hit by a car. Or the employees who showed compassion to a cust- omer who struggled to pay water bills because her husband was out of work. Or the employees who worked hard to keep an entire community’s water flowing after a lengthy storm that caused a six-day power outage. And these are just a few of the many stories we heard from customers in 2012. Numbers matter, because they enable us to measure how we’re doing. But the people we serve will always be more than just a number to us… all 2 million of them. Hawaii Operations/ Customer Centers (Maui) Ka’anapali • (Hawaii) Waikoloa Ser ving the communities of Ka’anapali, Pukalani, Waikoloa, Nor th Kona Coast, and Kohala Coast on the islands of Maui and Hawaii. Regulated Customer Connections 4,200* • 2011 4,200* • 2012 * Includes several large resor ts and condominium complexes Washington Operations/ Customer Centers Olympia (S.W. Regional Ofﬁce) • Gig Harbor (N.W. Regional Ofﬁce and Customer Center) • Sequim • Issaquah • Orcas Island (Field Ofﬁces) Ser ving more than 425 neighborhoods in the counties of Clallam, Jefferson, Kitsap, Mason, Pierce, King, San Juan, and Thurston. Regulated Customer Connections 15,700 • 2011 15,800 • 2012 CWT 2012 AR 33 California Districts Antelope Valley • Bakersﬁeld • Bayshore • Bear Gulch • Chico • Commerce • Dixon • Dominguez • East Los Angeles • Hawthorne • Hermosa-Redondo • Kern River Valley • King City • Livermore • Los Altos • Mar ysville • Oroville • Palos Verdes • Redwood Valley • Salinas • Selma • Stockton • Visalia • Westlake • Willows Customer Connections* 471,900 • 2011 473,100 • 2012 * Numbers include Hawthorne and Commerce lease agreements New Mexico Operations / Customer Centers Elephant Butte • Belen • Cedar Crest Ser ving the communitites of Meadow Lake, Cypress Gardens, Rio Communities, Rio Del Oro, Elephant Butte, and Sandia Knolls in the counties of Valencia, Sierra, and Bernalillo. Regulated Customer Connections 7,700 • 2011 7,600 • 2012 California Districts & Communities 2012 2011 Antelope Valley • Fremont Valley, Lake Hughes, Lancaster & Leona Valley 1,400 1,400 Bakersﬁeld 69,100 68,500 Bayshore • South San Francisco, Colma, Broadmoor, San Mateo & San Carlos 53,200 53,300 Bear Gulch • Ather ton, Woodside, Por tola Valley & a por tion of Menlo Park 18,800 18,800 Chico • Hamilton City 28,100 28,000 Commerce (lease agreement) 1,200 1,200 Dixon 2,900 2,900 Dominguez • Carson & por tions of Compton, Harbor City, Long Beach, Los Angeles County & Torrance 33,900 33,800 East Los Angeles • Por tions of Montebello, Commerce, Monterey Park & Vernon 26,700 26,700 Hawthorne (lease agreement) 6,200 6,200 Hermosa-Redondo • Hermosa Beach, Redondo Beach & a por tion of Torrance 26,700 26,600 Kern River Valley • Bodﬁsh, Kernville, Lakeland, Mountain Shadows, Onyx, Squirrel Valley, South Lake & Wofford Heights 4,200 4,200 King City 2,500 2,600 Livermore 18,800 18,300 Los Altos • Por tions of Cuper tino, Los Altos Hills, Mountain View & Sunnyvale 18,400 18,800 Mar ysville 3,700 3,700 Oroville 3,500 3,600 Palos Verdes • Palos Verdes Estates, Rancho Palos Verdes, Rolling Hills & Rolling Hills Estates 24,100 24,100 Redwood Valley • Lucerne & por tions of Duncans Mills, Guerneville, Dillon Beach, Noel Heights & Santa Rosa 1,900 1,900 Salinas 28,300 28,200 Selma 6,200 6,100 Stockton 42,700 42,800 Visalia 41,200 40,700 Westlake • Westlake Village & a por tion of Thousand Oaks 7,000 7,100 Willows 2,400 2,400 CWT 2012 AR 35 Eight-Year Financial Review (Dollars in thousands, except common share and other data) 2012 2011 2010 2009 2008 2007 2006 2005 Summar y of Operations Operating revenue $559,966 $501,814 $460,399 $449,372 $410,312 $367,082 $334,717 $320,728 Operating expenses 486,123 434,647 398,586 391,253 352,843 322,912 294,411 278,903 Interest expense, other income and expenses, net 25,015 29,455 24,157 17,565 17,664 13,011 14,726 14,602 Net income $48,828 $37,712 $37,656 $40,554 $39,805 $31,159 $25,580 $27,223 Common Share Data Earnings per share - diluted $1.17 $0.90 $0.90 $0.98 $0.95 $0.75 $0.67 $0.74 Dividend declared 0.630 0.615 0.595 0.590 0.585 0.580 0.575 0.570 Dividend payout ratio 54% 68% 66% 61% 62% 77% 86% 78% Book value $11.30 $10.76 $10.45 $ 10.13 $ 9.72 $ 9.33 $ 9.16 $ 7.99 Market price at year-end 18.35 18.26 18.64 18.41 23.22 18.51 20.20 19.11 Common shares outstanding at year-end (in thousands) 41,908 41,817 41,667 41,531 41,446 41,332 41,314 36,780 Return on average common stockholders’ equity 10.6% 8.5% 9.0% 9.8% 10.2% 8.1% 8.2% 9.3% Long-term debt interest coverage 3.45 3.11 3.59 4.04 4.72 3.70 3.17 3.61 Balance Sheet Data Net utility plant $1,457,056 $1,381,119 $1,294,297 $1,198,077 $1,112,367 $1,010,196 $941,475 $862,731 Total assets 1,995,924 1,854,587 1,692,066 1,525,581 1,418,107 1,184,499 1,165,019 996,945 Long-term debt, including current portion 481,250 488,165 481,561 387,222 290,316 291,921 293,592 275,275 Capitalization ratios: Common stockholders’ equity 49.6% 48.0% 47.5% 52.1% 58.1% 56.9% 56.0% 51.4% Preferred stock 0 .0% 0.0 % 0.0% 0.0% 0.0% 0.5% 0.5% 0.6% Long-term debt 50.4% 52.0% 52.5% 47.9% 41.9% 42.6% 43.5% 48.0% Other Data Water production (million gallons) 125,892 120,353 121,942 131,558 137,757 141,238 132,414 129,453 Customers at year-end, including Hawthorne and Commerce 500,700 499,500 497,900 494,700 490,493 487,555 483,893 479,001 New customers added 1,200 1,600 3,200 4,207 2,938 3,662 4,892 5,846 Revenue per customer $1,118 $1,005 $925 $908 $837 $753 $692 $670 Utility plant per customer 4,187 3,925 3,706 3,455 3,228 2,968 2,778 2,578 Employees at year-end 1,131 1,132 1,127 1,013 929 891 869 840 (Dollars in thousands, except common share and other data) 2012 2011 2010 2009 2008 2007 2006 2005 Operating revenue $559,966 $501,814 $460,399 $449,372 $410,312 $367,082 $334,717 $320,728 Operating expenses 486,123 434,647 398,586 391,253 352,843 322,912 294,411 278,903 Interest expense, other income and expenses, net 25,015 29,455 24,157 17,565 17,664 13,011 14,726 14,602 Net income $48,828 $37,712 $37,656 $40,554 $39,805 $31,159 $25,580 $27,223 Earnings per share - diluted $1.17 $0.90 $0.90 $0.98 $0.95 $0.75 $0.67 $0.74 Dividend declared 0.630 0.615 0.595 0.590 0.585 0.580 0.575 0.570 Dividend payout ratio 54% 68% 66% 61% 62% 77% 86% 78% Book value $11.30 $10.76 $10.45 $ 10.13 $ 9.72 $ 9.33 $ 9.16 $ 7.99 Market price at year-end 18.35 18.26 18.64 18.41 23.22 18.51 20.20 19.11 Common shares outstanding at year-end (in thousands) 41,908 41,817 41,667 41,531 41,446 41,332 41,314 36,780 Return on average common stockholders’ equity 10.6% 8.5% 9.0% 9.8% 10.2% 8.1% 8.2% 9.3% Long-term debt interest coverage 3.45 3.11 3.59 4.04 4.72 3.70 3.17 3.61 Net utility plant $1,457,056 $1,381,119 $1,294,297 $1,198,077 $1,112,367 $1,010,196 $941,475 $862,731 Total assets 1,995,924 1,854,587 1,692,066 1,525,581 1,418,107 1,184,499 1,165,019 996,945 Long-term debt, including current portion 481,250 488,165 481,561 387,222 290,316 291,921 293,592 275,275 Common stockholders’ equity 49.6% 48.0% 47.5% 52.1% 58.1% 56.9% 56.0% 51.4% Preferred stock 0 .0% 0.0 % 0.0% 0.0% 0.0% 0.5% 0.5% 0.6% Long-term debt 50.4% 52.0% 52.5% 47.9% 41.9% 42.6% 43.5% 48.0% Summar y of Operations Common Share Data Balance Sheet Data Capitalization ratios: Other Data Water production (million gallons) 125,892 120,353 121,942 131,558 137,757 141,238 132,414 129,453 Customers at year-end, including Hawthorne and Commerce 500,700 499,500 497,900 494,700 490,493 487,555 483,893 479,001 New customers added 1,200 1,600 3,200 4,207 2,938 3,662 4,892 5,846 Revenue per customer $1,118 $1,005 $925 $908 $837 $753 $692 $670 Utility plant per customer 4,187 3,925 3,706 3,455 3,228 2,968 2,778 2,578 Employees at year-end 1,131 1,132 1,127 1,013 929 891 869 840 CWT 2012 AR 37 Board of Directors Peter C. Nelson Chairman of the Board and Chief Executive Ofﬁcer Douglas M. Brown Dean, Anderson School of Management, University of New Mexico Linda R. Meier Member of the National Board of the Institute of International Education 17 years served as a Board Member. Member of the Executive Committee. 12 years served as a Board Member. Member of the following Committees: Organization/Compensation, Audit, Executive, Finance/Risk Management. 19 years served as a Board Member. Member of the following Committees: Audit, Executive, Organization/Compensation, and Nominating/Corporate Governance. Bonnie G. Hill President of B. Hill Enterprises, L.L.C. Richard P. Magnuson Private Venture Capital Investor Lester A. Snow Former Director of the California Depar tment of Water Resources 10 years served as a Board Member. Member of the following Committees: Organization/ Compensation and Nominating/ Corporate Governance. 17 years served as a Board Member. Member of the following Committees: Audit, Organization/ Compensation, Executive, Finance/Risk Management, and Nominating/Corporate Governance. 2 years served as a Board Member. Member of the following Committees: Finance/Risk Management and Nominating/ Corporate Governance. George A. Vera Former Vice President and Chief Financial Ofﬁcer, the David and Lucile Packard Foundation Thomas M. Krummel, M.D. Professor and Chair, Surger y Depar tment, Stanford University School of Medicine Edwin A. Guiles Former Executive Vice President of Corporate Development, Sempra Energy 15 years served as a Board Member. Member of the following Committees: Audit, Finance/Risk Management, and Nominating/ Corporate Governance. 3 years served as a Board Member. Member of the following Committees: Nominating/Corporate Governance and Organization/ Compensation. 5 years served as a Board Member. Member of the following Committees: Organization/ Compensation, Finance/Risk Management, and Audit. CWT 2012 AR 39 Ofﬁcers California Water Service Company Peter C. Nelson 1, 2, 3 Chairman of the Board and Chief Executive Ofﬁcer Helen R. Del Grosso Vice President, Human Resources Martin A. Kropelnicki 1, 2, 3 President and Chief Operating Ofﬁcer Christine L. McFarlane 3 Vice President, Chief Administrative Ofﬁcer Francis S. Ferraro 2, 4 Vice President, Corporate Development Lynne P. McGhee 1, 2, 3 Corporate Secretary Robert R. Guzzetta 2 Vice President, Operations David B. Healey 1, 2, 3 Controller, Assistant Secretary and Assistant Treasurer David R. Karraker Vice President, Customer Service and Information Technology Michael J. Rossi 2, 3 Vice President, Engineering and Water Quality Thomas F. Smegal III 1, 2, 3 Vice President, Chief Financial Ofﬁcer and Treasurer Paul G. Townsley 4 Vice President, Regulatory Matters and Corporate Relations 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. Table of Contents 2 By the Numbers 19 Letter to Stockholders 32 Ser vice Area Maps 36 Eight-Year Financial Review 38 Board of Directors 40 Corporate Officers Stock Transfer, Dividend Disbursing, and Reinvestment Agent American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, NY 11219 (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, stockbrokers, 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 American Stock Transfer & Trust Company, by registered or certified mail with complete transfer instructions. Alternatively, the Direct Registration System can be utilized, which allows electronic share transactions between your 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 21, 2013, 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 transacted during the meeting will be contained in the proxy material, which will be mailed to stockholders on or about April 12, 2013. Anticipated Dividend Dates For 2013 Quarter Declaration Record Date Payment Date First January 30 February 11 February 22 Second April 24 May 6 May 17 Third July 31 August 12 August 23 Fourth October 30 November 12 November 25 Annual Report For 2012 On Form 10-K A copy of the Company’s report for 2012 filed with the Securities and Exchange Commission (SEC) on Form 10-K will be available in April 2013 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. California Water Ser vice Group (NYSE: CWT) is the third largest investor-owned water utility in the United States, providing high- quality utility ser vices to approximately two million people in more than 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 Ser vice Company (Washington Water), CWS Utility Ser vices (CWSUS), and HWS Utility Ser vices (HWSUS). Cal Water, Hawaii Water, New Mexico Water, and Washington Water provide regulated water and wastewater utility ser vices, while CWSUS and HWSUS conduct the Company’s non-regulated business, which includes providing billing, water quality testing, and water and wastewater system operations and management services to cities and other companies. 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 http://www.calwatergroup.com How do we measure Success? California Water Service Group 2012 Annual Report California Water Ser vice Group 1720 North First Street San Jose, California 95112-4598 (408) 367-8200 www.calwatergroup.com NYSE: CWT

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