CALIFORNIA WATER SERVICE GROUP
10-Ks and 10-Qs
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Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-K
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2009 | ||
|
OR
|
||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission file
No. 1-13883
CALIFORNIA WATER SERVICE
GROUP
(Exact name of registrant as
specified in its charter)
|
Delaware
|
77-0448994 | |
|
(State or Other Jurisdiction
of
Incorporation or Organization) |
(I.R.S. Employer
Identification No.) |
|
|
1720 North First Street,
San Jose, California |
95112 |
|
|
(Address of Principal Executive
Offices)
|
(Zip Code) |
(408)
367-8200
(Registrant’s Telephone Number, including Area Code)
(Registrant’s Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
|
Title of Each Class:
|
Name of Each Exchange on which Registered:
|
|
| Common Stock, $0.01 par value per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
þ
No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 of Section 15(d) of the
Act. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232,405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
|
þ
Large
accelerated filer
|
o Accelerated filer | o Non-accelerated filer | o Smaller reporting company | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
o
No
þ
The aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant was
$754 million on June 30, 2009, the last business day
of the registrant’s most recently completed second fiscal
quarter. The valuation is based on the closing price of the
registrant’s common stock as traded on the New York Stock
Exchange.
Common stock outstanding at February 24, 2010, —
20,765,452 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the California
Water Service Group 2010 Annual Meeting are incorporated by
reference into Part III hereof.
Table of Contents
TABLE OF
CONTENTS
2
Table of Contents
3
Table of Contents
| Item 1. | Business. |
Forward-Looking
Statements
This annual report, including all documents incorporated by
reference, contains forward-looking statements within the
meaning established by the Private Securities Litigation Reform
Act of 1995. Forward-looking statements in this annual report
are based on currently available information, expectations,
estimates, assumptions and projections, and our
management’s beliefs, assumptions, judgments and
expectations about us, the water utility industry and general
economic conditions. These statements are not statements of
historical fact. When used in our documents, statements that are
not historical in nature, including words like
“expects,” “intends,” “plans,”
“believes,” “may,” “estimates,”
“assumes,” “anticipates,”
“projects,” “predicts,”
“forecasts,” “should,” “seeks,” or
variations of these words or similar expressions are intended to
identify forward-looking statements. The forward-looking
statements are not guarantees of future performance. They are
based on numerous assumptions that we believe are reasonable,
but they are open to a wide range of uncertainties and business
risks. Consequently, actual results may vary materially from
what is contained in a forward-looking statement.
Factors which may cause actual results to be different than
those expected or anticipated include, but are not limited to:
| • | governmental and regulatory commissions’ decisions, including decisions on proper disposition of property; | |
| • | changes in regulatory commissions’ policies and procedures; | |
| • | the timeliness of regulatory commissions’ actions concerning rate relief; | |
| • | changes in the capital markets and access to sufficient capital on satisfactory terms; | |
| • | new legislation; | |
| • | changes in accounting valuations and estimates; | |
| • | changes in accounting treatment for regulated companies, including adoption of International Financial Reporting Standards, if required; | |
| • | electric power interruptions; | |
| • | increases in suppliers’ prices and the availability of supplies including water and power; | |
| • | fluctuations in interest rates; | |
| • | changes in environmental compliance and water quality requirements; | |
| • | acquisitions and the ability to successfully integrate acquired companies; | |
| • | the ability to successfully implement business plans; | |
| • | civil disturbances or terrorist threats or acts, or apprehension about the possible future occurrences of acts of this type; | |
| • | the involvement of the United States in war or other hostilities; | |
| • | our ability to attract and retain qualified employees; | |
| • | labor relations matters as we negotiate with the unions; | |
| • | implementation of new information technology systems; | |
| • | changes in operations that result in an impairment to acquisition goodwill; | |
| • | restrictive covenants in or changes to the credit ratings on current or future debt that could increase financing costs or affect the ability to borrow, make payments on debt, or pay dividends; |
4
Table of Contents
| • | general economic conditions, including changes in customer growth patterns and our ability to collect billed revenue from customers; | |
| • | changes in customer water use patterns and the effects of conservation; | |
| • | the impact of weather on water sales and operating results; | |
| • | the ability to satisfy requirements related to the Sarbanes-Oxley Act and other regulations on internal controls; and | |
| • | the risks set forth in “Risk Factors” included elsewhere in this annual report. |
In light of these risks, uncertainties and assumptions,
investors are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date of
this annual report or as of the date of any document
incorporated by reference in this report, as applicable. When
considering forward-looking statements, investors should keep in
mind the cautionary statements in this annual report and the
documents incorporated by reference. We are not under any
obligation, and we expressly disclaim any obligation, to update
or alter any forward-looking statements, whether as a result of
new information, future events or otherwise.
Overview
California Water Service Group is a holding company incorporated
in Delaware with six operating subsidiaries: California Water
Service Company (Cal Water), New Mexico Water Service Company
(New Mexico Water), Washington Water Service Company (Washington
Water), Hawaii Water Service Company, Inc. (Hawaii Water), and
CWS Utility Services and HWS Utility Services LLC (CWS Utility
Services and HWS Utility Services LLC being referred to
collectively in this annual report as Utility Services). Cal
Water, New Mexico Water, Washington Water, and Hawaii Water are
regulated public utilities. The regulated utility entities also
provide some non-regulated services. Utility Services provides
non-regulated services to private companies and municipalities.
Cal Water was the original operating company and began
operations in 1926.
Our business is conducted through our operating subsidiaries.
The bulk of the business consists of the production, purchase,
storage, treatment, testing, distribution and sale of water for
domestic, industrial, public and irrigation uses, and for fire
protection. We also provide non-regulated water-related services
under agreements with municipalities and other private
companies. The non-regulated services include full water system
operation, billing and meter reading services. Non-regulated
operations also include the lease of communication antenna
sites, lab services, and promotion of other non-regulated
services. Earnings may be significantly affected by the sale of
surplus real properties if and when they occur.
During the year ended December 31, 2009, there were no
significant changes in the kind of products produced or services
rendered or those provided by our operating subsidiaries, or in
the markets or methods of distribution.
Our mailing address and contact information is:
California Water Service Group
1720 North First Street
San Jose, California 95112-4598
telephone number: 408-367-8200
www.calwatergroup.com
1720 North First Street
San Jose, California 95112-4598
telephone number: 408-367-8200
www.calwatergroup.com
Annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to these reports are available free of charge
through our website. The reports are available on our website as
soon as reasonably practicable after such reports are filed with
the SEC.
Regulated
Business
California water operations are conducted by the Cal Water and
CWS Utility Services entities, which provide service to
approximately 467,100 customers in 83 California communities
through 26 separate districts. Of these 26 districts, 24
districts are regulated water systems, which are subject to
regulation by the California Public Utilities Commission (CPUC).
The other 2 districts, the City of Hawthorne and the City of
Commerce, are governed
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Table of Contents
through their respective city councils and are outside of the
CPUC’s jurisdiction. California water operations account
for approximately 94% of our total customers and approximately
94% of our total consolidated operating revenue.
Hawaii Water provides service to approximately 4,200 water and
wastewater customers on the islands of Maui and Hawaii,
including several large resorts and condominium complexes.
Hawaii’s regulated operations are subject to the
jurisdiction of the Hawaii Public Utilities Commission. Hawaii
Water accounts for less than 1% of our total customers and
approximately 3% of our total operating revenue. HWS Utility
Services LLC was organized in 2007 and began non-regulated
operations in January 2008.
Washington Water provides domestic water service to
approximately 15,600 customers in the Tacoma and Olympia areas.
Washington Water’s utility operations are regulated by the
Washington Utilities and Transportation Commission. Washington
Water accounts for approximately 3% of our total customers and
approximately 2% of our total consolidated operating revenue.
New Mexico Water provides service to approximately 7,800 water
and wastewater customers in the Belen, Los Lunas and Elephant
Butte areas in New Mexico. New Mexico’s regulated
operations are subject to the jurisdiction of the New Mexico
Public Regulation Commission. New Mexico Water accounts for
approximately 2% of our total customers and approximately 1% of
our total consolidated operating revenue.
The state regulatory bodies governing our regulated operations
are referred to as the Commissions in this report. Rates and
operations for regulated customers are subject to the
jurisdiction of the respective state’s regulatory
commission. The Commissions require that water and wastewater
rates for each regulated district be independently determined.
The Commissions are expected to authorize rates sufficient to
recover normal operating expenses and allow the utility to earn
a fair and reasonable return on invested capital.
We distribute water in accordance with accepted water utility
methods. Where applicable, we hold franchises and permits in the
cities and communities where we operate. The franchises and
permits allow us to operate and maintain facilities in public
streets and right- of-ways as necessary.
We operate the City of Hawthorne and the City of Commerce water
systems under lease agreements. In accordance with the lease
agreements, we receive all revenues from operating the systems
and are responsible for paying the operating costs. Rates for
the City of Hawthorne and City of Commerce water systems are
established in accordance with operating agreements and are
subject to ratification by the respective city councils. The
City of Hawthorne lease is a
15-year
lease and expires in 2011. The City of Commerce lease is a
15-year
lease and expires in 2018. The terms of other operating
agreements range from one-year to three-year periods with
provisions for renewals.
In February 1996, we entered into an agreement to operate the
City of Hawthorne water system. The system, which is located
near the Hermosa-Redondo district, serves about half of
Hawthorne’s population. The agreement required us to make
an up-front $6.5 million lease payment to the city that is
being amortized over the lease term. Additionally, annual lease
payments of $0.1 million are made to the city and indexed
to changes in water rates. Under the lease we are responsible
for all aspects of system operation and capital improvements,
although title to the system and system improvements reside with
the city. In exchange, we receive all revenue from the water
system, which was $6.1 million, $5.2 million and
$5.4 million in 2009, 2008, and 2007, respectively. At the
end of the lease, the city is required to reimburse us for the
unamortized value of capital improvements made during the term
of the lease. The City of Hawthorne is in the process of
determining how they will handle their water system subsequent
to the end of the lease.
In July 2003, an agreement was negotiated with the City of
Commerce to lease and operate its water system. The lease
requires us to pay $0.8 million per year in monthly
installments and pay $200 per acre-foot for water usage
exceeding
2,000 acre-feet
per year plus a percentage of certain operational savings that
may be realized. Under the lease agreement, we are responsible
for all aspects of the system’s operations. The city is
responsible for capital expenditures, and title to the system
and system improvements resides with the city. We bear the risks
of operation and collection of amounts billed to customers. The
agreement includes a procedure to request rate changes for costs
changes outside of our control and other cost changes. In
exchange, we receive all revenue from the system, which totaled
$1.7 million 2009, $2.0 million in 2008 and
$1.7 million in 2007.
6
Table of Contents
The City of Hawthorne and the City of Commerce are governed
through their respective city councils and are considered
non-regulated because they are outside of the CPUC’s
jurisdiction. We report revenue and expenses for the City of
Hawthorne and City of Commerce leases in operating revenue and
operating expenses because we are entitled to retain all
customer billings and are generally responsible for all
operating expenses.
Non-Regulated
Businesses
Fees for non-regulated activities are based on contracts
negotiated between the parties. Under other contract
arrangements, we operate municipally owned water systems,
privately owned water systems, and recycled water distribution
systems, but are not responsible for all operating costs.
Non-regulated revenue received from water system operations is
generally determined on a
fee-per-customer
basis.
Non-regulated activities consist primarily of:
| • | operating water and waste water systems, which are owned by other entities; | |
| • | providing meter reading and billing services; | |
| • | leasing communication antenna sites on our properties; | |
| • | operating recycled water systems; | |
| • | providing lab services for water quality testing; | |
| • | marketing and billing of optional third party insurance program to our residential customers; | |
| • | selling surplus property; and | |
| • | other services as requested by the client. |
The revenue from these activities is not included in operations
revenue, and therefore is reported below operating profit on the
income statement. Due to the variety of services provided and
activities being outside of our core business, the number of
customers is not tracked for these non-regulated activities,
except customers for the City of Hawthorne and the City of
Commerce.
In the first quarter of 2008, the Company’s wholly-owned
subsidiary HWS Utility Services, LLC, acquired contracts to
operate and maintain water and wastewater systems in Hawaii. The
purchase price of $1.3 million was paid with the issuance
of the Company’s common stock. The purchase price is being
amortized over the remaining life of the contracts.
We provide meter reading and customer billing services for
several municipalities in California. We also provide sewer and
refuse billing services to several municipalities.
We lease antenna sites to telecommunication companies, which
place equipment at various Company-owned sites. Lease revenues
totaled $2.0 million in 2009, 2008 and 2007. The antennas
are used in cellular phone and personal communication
applications. We continue to negotiate new leases for similar
uses.
We provide laboratory services to San Jose Water Company, a
5% stockholder of Cal Water, and Great Oaks Water Company and
for the systems under operation and maintenance agreements.
Effective January 21, 2010, San Jose Water terminated
the contract for laboratory services. The loss of the contract
will not have a material impact to our financial results.
In 2006, we started an Extended Service Protection program (ESP)
in California covering certain repairs to residential
customer’s water line between the meter and the home. The
non-regulated program was operated by CWS Utility Services.
Typically the utility is responsible for servicing and
maintaining the water line up to and including the meter. The
home owner is responsible for the water line from the meter to
the house. In late 2007, we contracted with Home Service USA to
replace the ESP program with an insurance product. Home Service
USA now provides water line protection insurance, sewer line
protection insurance, and internal plumbing protection insurance
to Cal Water’s customers. Cal Water includes charges for
these optional non-tariffed services on its bills and CWS
Utility Services facilitates marketing these products to its
customers.
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Table of Contents
Operating
Segment
We operate in one reportable segment, the supply and
distribution of water and providing water-related utility
services.
Growth
We intend to continue exploring opportunities to expand our
regulated and non-regulated water and wastewater businesses in
the western United States. The opportunities could include
system acquisitions, lease arrangements similar to the City of
Hawthorne and City of Commerce contracts, full service system
operation and maintenance agreements, meter reading, billing
contracts and other utility-related services. Management
believes that a holding company structure facilitates providing
non-regulated utility services, which are not subject to any
Commission’s jurisdiction.
Geographical
Service Areas and Number of Customers at Year-end
Our principal markets are users of water within our service
areas. Most of the geographical service areas are regulated;
however, the City of Hawthorne and City of Commerce are included
due to similarities in structure and risk of operations. The
approximate number of customers served in each district is as
follows:
Regulated Customers, City of Hawthorne and City of Commerce
Customers at December 31, (rounded to the nearest hundred)
| 2009 | 2008 | |||||||
|
SAN FRANCISCO BAY AREA
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||||||||
|
Mid-Peninsula (serving San Mateo and San Carlos)
|
36,200 | 36,200 | ||||||
|
South San Francisco (including Colma and Broadmoor)
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16,800 | 16,800 | ||||||
|
Bear Gulch (serving portions of Menlo Park, Atherton, Woodside
and Portola Valley)
|
18,600 | 18,100 | ||||||
|
Los Altos (including portions of Cupertino, Los Altos Hills,
Mountain View and Sunnyvale)
|
18,700 | 18,600 | ||||||
|
Livermore
|
18,200 | 18,200 | ||||||
| 108,500 | 107,900 | |||||||
|
SACRAMENTO VALLEY
|
||||||||
|
Chico (including Hamilton City)
|
27,700 | 27,400 | ||||||
|
Oroville
|
3,600 | 3,600 | ||||||
|
Marysville
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3,700 | 3,700 | ||||||
|
Dixon
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2,800 | 2,800 | ||||||
|
Willows
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2,400 | 2,400 | ||||||
|
Redwood Valley (Lucerne, Duncans Mills, Guerneville, Dillon
Beach, Noel Heights & portions of Santa Rosa)
|
2,000 | 1,900 | ||||||
| 42,200 | 41,800 | |||||||
|
SALINAS VALLEY
|
||||||||
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Salinas
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27,900 | 27,800 | ||||||
|
King City
|
2,500 | 2,500 | ||||||
| 30,400 | 30,300 | |||||||
|
SAN JOAQUIN VALLEY
|
||||||||
|
Bakersfield
|
66,900 | 65,500 | ||||||
|
Stockton
|
42,400 | 41,500 | ||||||
|
Visalia
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39,800 | 39,200 | ||||||
|
Selma
|
6,000 | 6,100 | ||||||
|
Kern River Valley
|
4,300 | 4,300 | ||||||
|
Antelope Valley (Fremont Valley, Lake Hughes,
Lancaster & Leona Valley)
|
1,400 | 1,400 | ||||||
| 160,800 | 158,000 | |||||||
8
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| 2009 | 2008 | |||||||
|
LOS ANGELES AREA
|
||||||||
|
East Los Angeles (including portions of the City of Commerce
service area)
|
26,600 | 26,700 | ||||||
|
Hermosa-Redondo (serving Hermosa Beach, Redondo Beach and a
portion of Torrance)
|
26,500 | 26,500 | ||||||
|
Dominguez (Carson and portions of Compton, Harbor City, Long
Beach, Los Angeles and Torrance)
|
33,700 | 33,700 | ||||||
|
Palos Verdes (including Palos Verdes Estates, Rancho Palos
Verdes, Rolling Hills Estates and Rolling Hills)
|
24,000 | 24,000 | ||||||
|
Westlake (a portion of Thousand Oaks)
|
7,000 | 7,100 | ||||||
|
Hawthorne and Commerce (leased municipal systems)
|
7,400 | 7,400 | ||||||
| 125,200 | 125,400 | |||||||
|
CALIFORNIA TOTAL
|
467,100 | 463,400 | ||||||
|
HAWAII
|
4,200 | 3,700 | ||||||
|
NEW MEXICO
|
7,800 | 7,600 | ||||||
|
WASHINGTON
|
15,600 | 15,800 | ||||||
|
COMPANY TOTAL
|
494,700 | 490,500 | ||||||
Rates and
Regulation
Our water utility rates and service for the regulated business
are subject to the jurisdiction of the Commissions. The
Commissions’ decisions and the timing of those decisions
can have a significant impact on our operations and earnings.
Since our 24 California-regulated operating districts are not
physically integrated, rates are set independently for each
district as required by the California Public Utilities
Commission (CPUC). General office (headquarters) expenses and
capital expenditures are considered separately and allocated
ratably to the operating districts.
General
and Escalation Rate Increases
General rate case (GRC) applications in California address
district and general office operating costs and capital
requirements for a forward-looking three-year period. GRC
decisions typically authorize an immediate rate increase and
annual step rate increases for the three-year cycle. Under the
CPUC’s 2004 rate case processing plan, step rate increases
will generally be effective on July 1 of each calendar year
through 2010, and are designed to maintain the return on equity
(ROE) authorized in the initial decision in succeeding years.
Cal Water is required to file a GRC for each operating district
every three years. The CPUC adopted a new rate case plan (RCP)
in May 2007. Under this plan, Cal Water was able to recover
general office expenses, including employee benefit costs, as
well as insurance and other corporate items, for its 24
regulated operating districts in 2008 as determined by the CPUC
in the 2007 GRC. The next California GRC was filed in July 2009
covering all 24 California districts and general office
expenses. Rate changes resulting from the 2009 GRC are scheduled
to be effective January 1, 2011.
The CPUC’s processing schedule sets an expected effective
date of July 1 for Cal Water filings including the 2007 GRC
(12 month processing schedule) and a January 1, 2011
effective date for the 2009 GRC (18 month schedule). While
Cal Water expects future filings to receive decisions on the
CPUC’s published processing time line, if decisions are
delayed, legislation enacted in 2003 gives Cal Water protection
by establishing an effective date when the decision should have
been made. This allows interim rates to be charged typically
based upon inflation and surcharge or surcredit, if necessary,
once the CPUC renders a decision.
In December 2005, the CPUC approved the California Water Action
Plan (the Plan). The Plan identifies and lays out 28 best
practices associated with water infrastructure management and
rate making that California would like to adopt over time. Among
other things, the Plan calls for streamlining the GRC process,
development and adoption of a Water Rate Adjustment Mechanism
(WRAM), and creating incentives for large water systems to
acquire smaller systems. As part of the streamlining process,
the CPUC issued its new RCP in May 2007. Cal
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Water’s request for a WRAM and a Modified Cost Balancing
Account (MCBA) was approved and implemented in 2008. See Rates
and Regulations Section in Item 7 of this report.
Water rates for Washington Water and New Mexico Water regulated
operations are set based on historic
12-month
data. Applications are filed on an “as needed” basis
and can be submitted annually. Water rates for the regulated
operations of Hawaii Water are set based on a combination of
historical base and forward-looking methodology and are allowed
to be filed annually. In these states, regulatory procedures do
not provide for step rate increases or offset increases (see
“Expense-Balancing and Memorandum Accounts” below),
except for Hawaii, which allows immediate rate adjustments to
reflect changes in purchased power rates.
Expense-Balancing
and Memorandum Accounts
Prior to July 2008, Cal Water used expense-balancing accounts
(also referred to as Incremental Cost Balancing Accounts (ICBA))
and memorandum accounts to track suppliers’ rate changes
for purchased water, purchased power, and pump taxes, and other
costs that are not included in customer water rates. The cost
changes are referred to as “offsetable expenses,”
because under certain circumstances, they are collectible from
customers (or refunded to customers) in future rates designed to
offset cost changes from suppliers. We do not record the ICBA
and memorandum accounts until the CPUC has authorized a change
in customer rates and the customer has been billed. The
cumulative net amount in the expense balancing accounts and
memorandum accounts as of December 31, 2009, was
approximately $1.5 million. Cal Water is in the process of
filing for recovery through customer billings. Effective
July 1, 2008, the ICBA was replaced with the MCBA. With the
MCBA, the suppliers’ rate changes for purchased water,
purchased power, and pump taxes are immediately reflected in the
financial statements. (See “Rates and Regulation”
section in Item 7 of this report).
Washington Water, New Mexico Water, and Hawaii Water did not
have material amounts in expense balancing or memorandum
accounts.
See Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Rates and Regulation” for more information on rates and
regulation.
Seasonal
Fluctuations
Our water business is seasonal in nature and weather conditions
can have a material effect on customer usage. Customer demand
for water generally is lower during the cooler and rainy, winter
months. Demand increases in the spring when warmer weather
returns and the rains end, and customers use more water for
outdoor purposes, such as landscape irrigation. Warm
temperatures during the generally dry summer months result in
increased demand. Water usage declines during the fall as
temperatures decrease and the rainy season begins.
During years in which precipitation is especially heavy or
extends beyond the spring into the early summer, customer demand
can decrease from historic normal levels, generally due to
reduced outdoor water usage. Likewise, an early start to the
rainy season during the fall can cause a decline in customer
usage. When summer temperatures are cooler than normal, water
usage is generally lower. A warmer than normal summer can result
in higher customer usage. In the past, the seasonality of water
usage had a significant impact on operating revenues and net
income. In addition, the promotion of water conservation could
also affect our operating revenues and net income. During 2008,
Cal Water, after receiving California Public Utilities
Commission approval, changed its method of recognizing revenue
and production costs with the adoption of the WRAM and MCBA. As
a result, customer water usage does not have the same impact as
in prior years. This is discussed further in Management’s
Discussion and Analysis.
Drought can have an impact on the business. When rainfall is
below average for consecutive years, drought conditions can
develop and certain customers may be required to reduce
consumption to preserve available supply. As an example, from
1987 to 1993, California experienced a six-year period when
rainfall was below historic average. During that period, some
districts issued water-rationing requirements to their
customers. In certain districts, penalties were assessed on
customers who exceeded monthly allotments, which was approved by
the CPUC after local governments enacted ordinances for drought.
During 2008, the governor of California declared a drought
emergency in the state and Cal Water’s water wholesalers
requested voluntary reduction in water usage. On
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January 31, 2010, the California Department of Water
Resources indicated the snow content was 113 percent of
normal to date, statewide. The financial impact of a drought, or
of water rationing, has been minimized with the adoption of the
WRAM and MCBA. Water rationing will present us with challenges
including changing our billing system to accommodate any penalty
program, responding to customer requirements, and certain
operational issues. We are in the process of increasing our
water conservation programs to promote water savings.
Water
Supply
Our source of supply varies among our operating districts.
Certain districts obtain all of their supply from wells; some
districts purchase all of their supply from wholesale suppliers;
and other districts obtain supply from a combination of wells
and wholesale suppliers. A small portion of supply comes from
surface sources and is processed through Company-owned water
treatment plants. During 2009, an estimated 132 billion
gallons of water was produced to meet customer demand, down 4.5%
from the estimated 138 billion gallons produced in 2008.
The 2009 average daily water production was approximately
360 million gallons. Historically, approximately half of
Cal Water’s water supply is purchased from wholesale
suppliers with the balance pumped from wells. In 2009
approximately 49 percent of the Cal Water supply was
obtained from wells, 46 percent was purchased from
wholesale suppliers and 5 percent was obtained from surface
supplies. By comparison, in 2008, the average daily water
production was approximately 377 million gallons. Well
water is generally less expensive and Cal Water strives to
maximize the use of its well sources in districts where there is
an option between well or purchased supply sources.
In California, we obtain our water supply from wells, surface
runoff or diversion, and by purchase from public agencies and
other wholesale suppliers. Our water supply has been adequate to
meet customer demand; however, during periods of drought, some
districts have experienced mandatory water rationing.
California’s rainy season usually begins in November and
continues through March with the most rain typically falling in
December, January and February. During winter months, reservoirs
and underground aquifers are replenished by rainfall. Snow
accumulated in the mountains provides an additional water source
when spring and summer temperatures melt the snowpack, producing
runoff into streams and reservoirs, and also replenishing
underground aquifers. There are six California water treatment
plants located in the Bakersfield, Bear Gulch, Kernville,
Oroville and Redwood Valley districts. Water for operation of
the Bakersfield plants, with a combined capacity of
28 million gallons per day, is drawn from the Kern River
under a long-term contract with the City of Bakersfield. The
other four plants have a combined capacity of 15.5 million
gallons per day.
Washington and Hawaii receive rain in all seasons with the
majority falling during winter months. Washington Water and
Hawaii Water draw all their water supply by pumping from wells.
New Mexico Water’s rainfall normally occurs in all seasons,
but is heaviest in the summer monsoon season. New Mexico Water
pumps all of its water supply from wells based on its water
rights.
In several of Cal Water’s operating districts, we have
service contracts with and lease equipment from Basin Water,
Inc. for the treatment of water from company-owned wells. The
continued treatment of water from these wells is critical to Cal
Water’s ability to meet customers’ demand in those
districts. On July 17, 2009, Basin Water, Inc. filed for
Chapter 11 bankruptcy and was seeking to sell some of its
assets and assignment of certain of their contracts to a third
party. The sale of the assets and assignments occurred during
third quarter 2009 and did not impact our operations. We believe
there are additional suppliers that can supply the needed
equipment and treatment process required in order for us to meet
our water supply needs.
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The following table shows the estimated quantity of water
purchased and the percentage of purchased water to total water
production in each California operating district that purchased
water in 2009. Other than noted below, all other districts
receive 100% of their water supply from wells.
|
(MG)
|
||||||||||
|
Water
|
||||||||||
|
Production
|
Percentage
|
|||||||||
|
District
|
Purchased | Purchased | Source of Purchased Supply | |||||||
|
SAN FRANCISCO BAY AREA
|
||||||||||
|
Mid-Peninsula
|
5,562 | 100 | % | San Francisco Water Public Utilities Commission | ||||||
|
South San Francisco
|
2,736 | 96 | % | San Francisco Water Public Utilities Commission | ||||||
|
Bear Gulch
|
4,418 | 95 | % | San Francisco Water Public Utilities Commission | ||||||
|
Los Altos
|
2,898 | 63 | % | Santa Clara Valley Water District | ||||||
|
Livermore
|
2,590 | 72 | % | Alameda County Flood Control and Water | ||||||
| Conservation District | ||||||||||
|
SACRAMENTO VALLEY
|
||||||||||
|
Oroville
|
798 | 77 | % | Pacific Gas and Electric Co. and County of Butte | ||||||
|
Redwood Valley
|
107 | 76 | % | County of Lake | ||||||
|
SAN JOAQUIN VALLEY
|
||||||||||
|
Antelope/Kern
|
65 | 20 | % | Antelope Valley-East Kern Water Agency and City of Bakersfield | ||||||
|
Bakersfield
|
4,634 | 18 | % | Kern County Water Agency and City of Bakersfield | ||||||
|
Stockton
|
6,508 | 88 | % | Stockton East Water District | ||||||
|
LOS ANGELES AREA
|
||||||||||
|
East Los Angeles
|
4,475 | 78 | % | Central Basin Municipal Water District | ||||||
|
Dominguez
|
9,940 | 77 | % | West Basin Municipal Water District and City of Torrance | ||||||
|
City of Commerce
|
14 | 2 | % | Central Basin Municipal Water District | ||||||
|
Hawthorne
|
1,429 | 100 | % | West Basin Municipal Water District | ||||||
|
Hermosa-Redondo
|
3,974 | 93 | % | West Basin Municipal Water District | ||||||
|
Palos Verdes
|
7,133 | 100 | % | West Basin Municipal Water District | ||||||
|
Westlake
|
3,013 | 100 | % | Calleguas Municipal Water District | ||||||
MG = million gallons
The Bear Gulch district obtains a portion of its water supply
from surface runoff from the local watershed. The Oroville and
Redwood Valley districts in the Sacramento Valley and the
Bakersfield and Kern River Valley districts in the
San Joaquin Valley purchase water from a surface supply.
Surface sources are processed through our water treatment plants
before being delivered to the distribution system. The
Bakersfield district also purchases treated water as a component
of its water supply.
The Chico, Marysville, Dixon, and Willows districts in the
Sacramento Valley, the Salinas and King City districts in the
Salinas Valley, and the Selma and Visalia districts in the
San Joaquin Valley obtain their entire supply from wells.
In the Salinas district, which solely depends upon ground water,
several wells were taken out of service in the last four years,
primarily due to poor water quality. Treatment systems have been
installed on some of these wells to meet customer demand.
Management believes water supply issues in the Salinas district
will be adequately resolved in the future by seeking additional
sources or additional treatment.
Purchases for the Los Altos, Livermore, Oroville, Redwood
Valley, Stockton, and Bakersfield districts are pursuant to
long-term contracts expiring on various dates after 2011. The
water supplies purchased for the Dominguez, East Los Angeles,
Hermosa-Redondo, Palos Verdes, and Westlake districts as well as
the Hawthorne and Commerce systems are provided by public
agencies pursuant to a statutory obligation of continued non-
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preferential service to purveyors within the agencies’
boundaries. Purchases for the South San Francisco,
Mid-Peninsula, and Bear Gulch districts are in accordance with
long-term contracts with the San Francisco Public Utilities
Commission (SFPUC) which were renewed effective July 1,
2009 and will remain in effect until June 30, 2034.
Management anticipates water supply contracts will be renewed as
they expire though the price of wholesale water purchases is
subject to pricing changes imposed by the various wholesalers.
Shown below are wholesaler price rates and increases that became
effective in 2009 and estimated wholesaler price rates and
percent changes for 2010. In 2009, several districts experienced
significant purchased water cost increases resulting in a
significant impact in the 2009 MCBA balance and the filing of
several purchased water offsets.
|
Effective
|
2009 |
Percent
|
Effective
|
2010 |
Percent
|
|||||||||||||||
|
District
|
Month | Unit Cost | Change | Month | Unit Cost | Change | ||||||||||||||
|
Antelope
|
January | $ | 290.00 /af | 0.00 | % | January | $ | 296.00 /af | 2.07 | % | ||||||||||
|
Bakersfield*
|
July | $ | 154.00 /af | 10.00 | % | July | $ | 150.00 /af | (2.60 | )% | ||||||||||
|
Bear Gulch
|
July | $ | 1.65 /ccf | 15.38 | % | July | $ | 1.90 /ccf | 15.15 | % | ||||||||||
|
Commerce
|
July | $ | 653.00 /af | 2.83 | % | July | $ | 781.00 /af | 19.60 | % | ||||||||||
|
Dominguez
|
January | $ | 689.00 /af | 13.70 | % | January | $ | 846.00 /af | 22.79 | % | ||||||||||
|
East Los Angeles
|
July | $ | 653.00 /af | 2.83 | % | July | $ | 781.00 /af | 19.60 | % | ||||||||||
|
Hawthorne
|
January | $ | 689.00 /af | 13.70 | % | January | $ | 846.00 /af | 22.79 | % | ||||||||||
|
Hermosa-Redondo
|
January | $ | 689.00 /af | 13.70 | % | January | $ | 846.00 /af | 22.79 | % | ||||||||||
|
Livermore
|
January | $ | 1.85 /ccf | 17.21 | % | January | $ | 2.02 /ccf | 9.21 | % | ||||||||||
|
Los Altos
|
July | $ | 620.00 /af | 8.06 | % | July | $ | 620.00 /af | 0.00 | % | ||||||||||
|
Oroville
|
January | $ | 152,400.00 /yr | 103.20 | % | January | $ | 152,400.00 /yr | 2.60 | % | ||||||||||
|
Palos Verdes
|
January | $ | 689.00 /af | 13.70 | % | January | $ | 846.00 /af | 22.79 | % | ||||||||||
|
Mid-Peninsula
|
July | $ | 1.65 /ccf | 15.38 | % | July | $ | 1.90 /ccf | 15.15 | % | ||||||||||
|
Redwood Valley
|
May | $ | 50.00 /af | 0.00 | % | May | $ | 52.00 /af | 4.00 | % | ||||||||||
|
So. San Francisco
|
July | $ | 1.65 /ccf | 15.38 | % | July | $ | 1.90 /ccf | 15.15 | % | ||||||||||
|
Stockton**
|
April | $ | 441,705.00 /mo | (7.27 | )% | April | $ | XXX /mo | TBD | % | ||||||||||
|
Westlake
|
January | $ | 632.00 /af | (3.81 | )% | January | $ | 769.00 /af | 21.68 | % | ||||||||||
af = acre foot;
ccf = hundred cubic feet;
yr = fixed annual cost;
mo = fixed monthly cost
ccf = hundred cubic feet;
yr = fixed annual cost;
mo = fixed monthly cost
| * | untreated water | |
| ** | as of February 26, 2010 Stockton purchased water rates for 2010 are not known. |
We work with all local suppliers and agencies responsible for
water supply to insure adequate, long-term supply for each
system.
See Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Water Supply” concerning more information on adequacy of
supplies.
Utility
Plant Construction
We have continually extended, enlarged, and replaced our
facilities as required to meet increasing demands and to
maintain the water systems. We obtain construction financing
using funds from operations, short-term bank borrowings,
long-term financing, advances for construction and contributions
in aid of construction that are funded by developers. Advances
for construction are cash deposits from developers for
construction of water facilities or water facilities deeded from
developers. These advances are generally refundable without
interest over a period of 40 years by equal annual
payments. Contributions in aid of construction consist of
nonrefundable cash deposits or facilities transferred from
developers, primarily for fire protection and relocation
projects. We cannot control the
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amount received from developers. This amount fluctuates from
year-to-year as the level of construction activity carried on by
developers varies. This activity is impacted by the demand for
housing, commercial development, and general business
conditions, including interest rates.
See Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Liquidity and Capital Resources” for additional information.
Sale of
Surplus Real Properties
When properties are no longer used and useful for public utility
purposes, we are no longer allowed to earn a return on our
investment in the property in the regulated business. The
surplus property is transferred out of the regulated operations.
From time to time, some properties have been sold or offered for
sale. As these sales are subject to local real estate market
conditions and can take several months or years to close, income
from the sale of surplus properties may or may not be consistent
from year-to-year.
California
Energy Situation
The California energy crisis in prior years was well publicized.
There is still uncertainty about the state’s ability to
avoid future rolling electric blackouts, although we did not
experience any major electric blackouts during 2009 or 2008. We
continue to use power efficiently to minimize the power expenses
passed on to our customers, and maintain backup power systems to
continue water service to our customers if the power
companies’ supplies are interrupted. Many of our well sites
are equipped with emergency electric generators designed to
produce electricity to keep the wells operating during power
outages. Storage tanks also provide customers with water during
blackout periods.
Impact of
Climate Change Legislation
Our operations depend on power provided by other public
utilities and, in emergencies, power generated by our portable
and fixed generators. If future legislation limits emissions
from the power generation process, our cost of power may
increase. Any increase in the cost of power will be passed along
to our California rate payers through the MCBA or included in
our cost of service paid by our rate payers as requested in our
general rate case filings
Approved in April 2009, the Low Carbon Fuel Standard Program,
which will go in to effect January 1, 2011, will require
diesel engines to use low carbon fuel such as biodiesel or other
alternatives. This may increase the operating cost of our
generators and vehicles.
We maintain a fleet of vehicles to provide service to our
customers, including a number of heavy duty diesel vehicles that
will be required to be retrofitted by the end of 2010 to meet
California emission standards. If future legislation further
impacts the cost to operate the fleet or the fleet acquisition
cost in order to meet certain emission standards, it will
increase our cost of service and our rate base. Any increase in
fleet operating costs associated with meeting emission standards
will be included in our cost of service paid by our rate payers
as requested in our general rate case filings. While recovery of
these costs are not guaranteed, we would expect recovery in the
regulatory process.
Starting January 1, 2010, under the California
Environmental Quality Act (CEQA), all capital projects of a
certain type (primarily wells, tanks, major pipelines and
treatment facilities) will require mitigation of green house gas
emissions. The cost to prepare the CEQA documentation and permit
will add an estimated ten thousand dollars to such capital
projects. This cost will be included in our capital cost and
added to our rate base, which will be requested to be paid for
by our rate payers. Any increase in the operating cost of the
facilities will also be included in our cost of service paid by
our rate payers as requested in our general rate case filings.
While recovery of these costs are not guaranteed, we would
expect recovery in the regulatory process.
Proposed cap and trade regulations are scheduled to be approved
in late 2010 and implemented in 2012 with the goal of reducing
emissions to 1990 levels by the year 2020. Under such
regulations, if approved, we will be required to determine our
carbon footprint and evaluate our electricity and fuel usage
(both diesel and gasoline). We will also be required to evaluate
methane emissions from our primary processes in our wastewater
plants. At this time we are unable to determine the cost impact
of such regulations but any increase in operating costs
associated
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with the cap and trade regulations will be included in our cost
of service requested to be paid by our rate payers as requested
in our general rate case filings. While recovery of these costs
are not guaranteed, we would expect recovery in the regulatory
process.
Security
at Company Facilities
Due to terrorist and other risks, we have heightened security at
our facilities and have taken added precautions to protect our
employees and the water delivered to customers. In 2002, federal
legislation was enacted that resulted in new regulations
concerning security of water facilities, including submitting
vulnerability assessment studies to the federal government. We
have complied with regulations issued by the Environmental
Protection Agency (EPA) pursuant to our federal legislation
concerning vulnerability assessments and have made filings to
the EPA as required. In addition, communication plans have been
developed as a component of our procedures. While we do not make
public comments on our security programs, we have been in
contact with federal, state, and local law enforcement agencies
to coordinate and improve our water delivery systems’
security.
Quality
of Water Supplies
Our operating practices are designed to produce potable water in
accordance with accepted water utility practices. Water entering
the distribution systems from surface sources is treated in
compliance with federal and state Safe Drinking Water Acts
(SDWA) standards. Most well supplies are chlorinated or
chloraminated for disinfection. Water samples from each water
system are analyzed on a regular, scheduled basis in compliance
with regulatory requirements. We operate a state-certified water
quality laboratory at the San Jose General Office that
provides testing for most of our California operations. Certain
tests in California are contracted with independent certified
labs qualified under the Environmental Laboratory Accreditation
Program. Local independent state certified labs provide water
sample testing for the Washington, New Mexico and Hawaii
operations.
In recent years, federal and state water quality regulations
have continued to increase water testing requirements. The SDWA
continues to be amended to reflect new public health concerns.
We monitor water quality standard changes and upgrade our
treatment capabilities to maintain compliance with the various
regulations.
Competition
and Condemnation
Our principal operations are regulated by the Commission of each
state. Under state laws, no privately owned public utility may
compete within any service territory that we already serve
without first obtaining a certificate of public convenience and
necessity from the applicable Commission. Issuance of such a
certificate would only be made upon finding that our service is
deficient. To management’s knowledge, no application to
provide service to an area served by us has been made.
State law provides that whenever a public agency constructs
facilities to extend a utility system into the service area of a
privately owned public utility, such an act constitutes the
taking of property and requires reimbursement to the utility for
its loss. State statutes allow municipalities, water districts
and other public agencies to own and operate water systems.
These agencies are empowered to condemn properties already
operated by privately owned public utilities. The agencies are
also authorized to issue bonds, including revenue bonds, for the
purpose of acquiring or constructing water systems. However, if
a public agency were to acquire utility property by eminent
domain action, the utility would be entitled to just
compensation for its loss. In Washington, annexation was
approved in February 2008 for property served by us on Orcas
Island; however, we continue to serve the customers in the
annexed area and do not expect the annexation to impact our
operations. To management’s knowledge, other than the Orcas
Island property, no municipality, water district, or other
public agency is contemplating or has any action pending to
acquire or condemn any of our systems.
In recent years, consolidation within the water industry has
accelerated. A number of publicly traded water companies have
been acquired or merged into larger domestic companies. Several
acquisitions of publicly traded companies have also been
completed by much larger foreign companies. We intend to
continue the pursuit of opportunities to expand our business in
the western United States, which may include expansion through
acquisitions or mergers with other companies.
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Environmental
Matters
Our operations are subject to environmental regulation by
various governmental authorities. Environmental affairs programs
have been designed to provide compliance with water discharge
regulations, underground and aboveground fuel storage tank
regulations, hazardous materials management plans, hazardous
waste regulations, air quality permitting requirements,
wastewater discharge limitations and employee safety issues
related to hazardous materials. Also, we actively investigate
alternative technologies for meeting environmental regulations
and continue the traditional practices of meeting environment
regulations.
For a description of the material effects that compliance with
environmental regulations may have on us, see Item 1A.
“Risk Factors — Risks Related to Our Regulatory
Environment.” We expect environmental regulation to
increase, resulting in higher operating costs in the future,
which may have a material adverse effect on earnings.
Employees
At year-end 2009, we had 1,013 employees, including 56 at
Washington Water, 16 at New Mexico Water and 47 at Hawaii Water.
In California, most non-supervisory employees are represented by
the Utility Workers Union of America, AFL-CIO, except certain
engineering and laboratory employees who are represented by the
International Federation of Professional and Technical
Engineers, AFL-CIO.
At December 31, 2009, there were 660 union employees. In
November 2009, we negotiated 2010 wage increases with both of
our unions of 1.0% and other employee benefit increases, and
wage increases of 3% in 2011. The current agreement with the
unions is effective through 2011. Management believes that it
maintains good relationships with the unions.
Employees at Washington Water, New Mexico Water, and Hawaii
Water are not represented by unions.
Executive
Officers of the Registrant
|
Name
|
Positions and Offices with California Water Service Group | Age | ||||
|
Peter C. Nelson(1)
|
President and Chief Executive Officer since February 1, 1996. Formerly Vice President, Division Operations (1994-1995) and Region Vice President (1989-1994), Pacific Gas & Electric Company, a gas and electric public utility | 62 | ||||
|
Martin A. Kropelnicki(2)
|
Chief Financial Officer and Treasurer since March 13, 2006. Previously Chief Financial Officer of Power Light Corporation (2005-2006), Chief Financial Officer and Executive Vice President of Corporate Services of Hall Kinion and Associates (1997-2004), Deloitte & Touche Consulting (1996-1997), various positions with Pacific Gas & Electric (1989-1996) | 43 | ||||
|
Lynne P. McGhee(2)
|
Corporate Secretary since July 25, 2007; Associate Corporate Counsel since May 2003; previously served as a Commissioner legal advisor and staff counsel at the California Public Utilities Commission | 45 | ||||
|
Calvin L. Breed(3)
|
Controller, Assistant Secretary and Assistant Treasurer since November 1, 1994; previously Treasurer of TCI International, Inc. (1984-1994); a certified public accountant with Arthur Andersen & Co. (1980-1983) | 54 | ||||
| (1) | Holds the same position with California Water Service Company, CWS Utility Services, and Hawaii Water Service Co.; Chief Executive Officer of New Mexico Water Service Company and Washington Water Service Company; | |
| (2) | Holds the same position with California Water Service Company New Mexico Water Service Company, Washington Water Service Company, Hawaii Water Service Company, Inc., and CWS Utility Services; |
16
Table of Contents
| (3) | Holds the same position with California Water Service Company, Washington Water Service Company, and Hawaii Water Service Company; Assistant Secretary and Assistant Treasurer of New Mexico Water Service Company |
| Item 1A. | Risk Factors. |
The risks and uncertainties described below are not the only
ones facing us. Additional risks and uncertainties that
management is not aware of or focused on or that management
currently deems immaterial may also impair our business
operations. If any of the following risks actually occur, our
financial condition and results of operations could be
materially and adversely affected.
Risks
Related to Our Regulatory Environment
Our
business is heavily regulated by state and federal regulatory
agencies and our financial viability depends upon our ability to
recover costs from our customers through rates that must be
approved by state public utility commissions.
California Water Service Company, New Mexico Water Service
Company, Washington Water Service Company and Hawaii Water
Service Company, Inc., are regulated public utilities which
provide water service to our customers. The rates that we charge
our water customers are subject to the jurisdiction of the
regulatory commissions in the states in which we operate. These
commissions set water rates for each operating district
independently because the systems are not interconnected. The
commissions authorize us to charge rates which they consider to
be sufficient to recover normal operating expenses, to provide
funds for adding new or replacing water infrastructure, and to
allow us to earn what the commissions consider to be a fair and
reasonable return on invested capital.
Our revenues and consequently our ability to meet our financial
objectives are dependent upon the rates we are authorized to
charge our customers by the commissions and our ability to
recover our costs in these rates. Our management uses forecasts,
models and estimates in order to set rates that will provide a
fair and reasonable return on our invested capital. While our
rates must be approved by the commissions, no assurance can be
given that our forecasts, models and estimates will be correct
or that the commissions will agree with our forecasts, models
and estimates. If our rates are set too low, our revenues may be
insufficient to cover our operating expenses, capital
expenditure requirements and desired dividend levels.
We periodically file rate increase applications with the
commissions. The ensuing administrative and hearing process may
be lengthy and costly. The decisions of the commissions are
beyond our control and we can provide no assurances that our
rate increase requests will be granted by the commissions. Even
if approved, there is no guarantee that approval will be given
in a timely manner or at a sufficient level to cover our
expenses and provide a reasonable return on our investment. If
the rate increase decisions are delayed, our earnings may be
adversely affected.
Our
evaluation of the probability of recovery of regulatory assets
is subject to adjustment by regulatory agencies and any such
adjustment could adversely affect our results of
operations.
Regulatory decisions may also impact prospective revenues and
earnings, affect the timing of the recognition of revenues and
expenses and may overturn past decisions used in determining our
revenues and expenses. Our management continually evaluates the
anticipated recovery of regulatory assets, liabilities, and
revenues subject to refund and provides for allowances
and/or
reserves as deemed necessary. Current accounting procedures
allow us to defer certain costs if we believe it is probable
that we will be allowed to recover those costs by future rate
increases. If a commission determined that a portion of our
assets were not recoverable in customer rates, we may suffer an
asset impairment which would require a write down in such
asset’s valuation which would be recorded through
operations.
If our assessment as to the probability of recovery through the
ratemaking process is incorrect, the associated regulatory asset
or liability would be adjusted to reflect the change in our
assessment or any regulatory
17
Table of Contents
disallowances. A change in our evaluation of the probability of
recovery of regulatory assets or a regulatory disallowance of
all or a portion of our cost could have a material adverse
effect on our financial results.
Regulatory
agencies may disagree with our valuation and characterization of
certain of our assets.
If we determine that assets are no longer used or useful for
utility operations, we may remove them from our rate base and
subsequently sell those assets. If the commission disagrees with
our characterization, we could be subjected to penalties.
Furthermore, there is a risk that the commission could determine
that appreciation in property value should be awarded to the
ratepayers rather than our stockholders.
Changes
in laws, rules and policies of regulatory agencies can
significantly affect our business.
Regulatory agencies may change their rules and policies for
various reasons, including changes in the local political
environment. In some states, regulators are elected by popular
vote or are appointed by elected officials, and the results of
elections may change the long-established rules and policies of
an agency dramatically. For example, in 2001 regulation
regarding recovery of increases in electrical rates changed in
California. For over 20 years prior to 2001, the California
Public Utilities Commission allowed recovery of electric rate
increases under its operating rules. However, in 2003, the
commission reinstated its policy to allow utilities to adjust
their rates for rate changes by the power companies. The
original decision by the commission to change its policy, as
well as its subsequent decision to reinstate that policy,
affected our business.
We rely on policies and regulations promulgated by the various
state commissions in order to recover capital expenditures,
maintain favorable treatment on gains from the sale of real
property, offset certain production and operating costs, recover
the cost of debt, maintain an optimal equity structure without
over-leveraging, and have financial and operational flexibility
to engage in non-regulated operations. If any of the commissions
with jurisdiction over us implement policies and regulations
that do not allow us to accomplish some or all of the items
listed above, our future operating results may be adversely
affected.
In addition, legislatures may repeal, relax or tighten existing
laws, or enact new laws that impact the regulatory agencies with
jurisdiction over our business or affect our business directly.
If changes in existing laws or the implementation of new laws
limit our ability to accomplish some or all of our business
objectives, our future operating results may be adversely
affected.
We
expect environmental regulation to increase, resulting in higher
operating costs in the future.
Our water and wastewater services are governed by various
federal and state environmental protection, health and safety
laws, and regulations. These provisions establish criteria for
drinking water and for discharges of water, wastewater and
airborne substances. The Environmental Protection Agency
promulgates numerous nationally applicable standards, including
maximum contaminant levels (MCLs) for drinking water. We believe
we are currently in compliance with all of the MCLs promulgated
to date but we can give no assurance that we will continue to
comply with all water quality requirements. If we violate any
federal or state regulations or laws governing health and
safety, we could be subject to substantial fines or otherwise
sanctioned.
Environmental laws are complex and change frequently. They tend
to become more stringent over time. As new or stricter standards
are introduced, they could increase our operating costs.
Although we would likely seek permission to recover these costs
through rate increases, we can give no assurance that the
commissions would approve rate increases to enable us to recover
these additional compliance costs.
We are required to test our water quality for certain chemicals
and potential contaminants on a regular basis. If the test
results indicate that we exceed allowable limits, we may be
required either to commence treatment to remove the contaminant
or to develop an alternate water source. Either of these results
may be costly, and there can be no assurance that the
commissions would approve rate increases to enable us to recover
these additional compliance costs.
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Legislation
regarding climate change may impact our operations
Future legislation regarding climate change may restrict our
operations or impose new costs on our business. Our operations
depend on power provided by other public utilities and, in
emergencies, power generated by our portable and fixed
generators. If future legislation limits emissions from the
power generation process, our cost of power may increase. Any
increase in the cost of power will be passed along to our
California rate payers through the MCBA or included in our cost
of service paid by our rate payers as requested in our general
rate case filings. While recovery of these costs are not
guaranteed, we would expect recovery in the regulatory process.
Approved in April 2009, the Low Carbon Fuel Standard Program,
which will go in to effect January 1, 2011, will require
diesel engines to use low carbon fuel such as biodiesel or other
alternatives. This may increase the operating cost of our
generators and vehicles.
We maintain a fleet of vehicles to provide service to our
customers, including a number of heavy duty diesel vehicles that
will be required to be retrofitted by the end of 2010 to meet
California emission standards. If future legislation further
impacts the cost to operate the fleet or the fleet acquisition
cost in order to meet certain emission standards, it will
increase our cost of service and our rate base. Any increase in
fleet operating costs associated with meeting emission standards
will be included in our cost of service paid by our rate payers
as requested in our general rate case filings. While recovery of
these costs are not guaranteed, we would expect recovery in the
regulatory process.
Starting January 1, 2010, under the California
Environmental Quality Act (CEQA), all capital projects of a
certain type (primarily wells, tanks, major pipelines and
treatment facilities) will require mitigation of green house gas
emissions. The cost to prepare the CEQA documentation and permit
will add an estimated ten thousand dollars to such capital
projects. This cost will be included in our capital cost and
added to our rate base, which will be requested to be paid for
by our rate payers. Any increase in the operating cost of the
facilities will also be included in our cost of service paid by
our rate payers as requested in our general rate case filings.
While recovery of these costs are not guaranteed, we would
expect recovery in the regulatory process.
Proposed cap and trade regulations are scheduled to be approved
in late 2010 and implemented in 2012 with the goal of reducing
emissions to 1990 levels by the year 2020. Under such
regulations, if approved, we will be required to determine our
carbon footprint and evaluate our electricity and fuel usage
(both diesel and gasoline). We will also be required to evaluate
methane emissions from our primary processes in our wastewater
plants. At this time we are unable to determine the cost impact
of such regulations but any increase in operating costs
associated with the cap and trade regulations will be included
in our cost of service requested to be paid by our rate payers
as requested in our general rate case filings. While recovery of
these costs are not guaranteed, we would expect recovery in the
regulatory process.
We are
party to a toxic contamination lawsuit which could result in our
paying damages not covered by insurance.
In 1995, the State of California’s Department of Toxic
Substances Control (DTSC) named us as a potential responsible
party for cleanup of a toxic contamination plume in the Chico
groundwater. In December 2002, we were named along with other
defendants in two lawsuits filed by DTSC for the cleanup of the
plumes. The toxic spill occurred when cleaning solvents, which
were discharged into the city’s sewer system by local dry
cleaners, leaked into the underground water supply. The DTSC
contends that our responsibility stems from our operation of
wells in the surrounding vicinity that caused the contamination
plumes to spread. While we are cooperating with the clean up, we
deny any responsibility for the contamination or the resulting
cleanup.
In 2007, the Company entered into Court approved consent decrees
(Consent Decrees). The Consent Decrees conditioned the
Company’s performance upon many factors, including, but not
limited to, water pumped and treated by the Company must meet
regulatory standards so the Company may distribute to its
customers. Pursuant to the terms of the Consent Decrees, the
Company will incur capital costs of $1.5 million and future
operating costs with a present value of approximately
$2.6 million. In its 2007 general rate case (GRC)
settlement negotiations, Division of Ratepayer Advocates agreed
to track all costs associated with the Consent Decrees including
legal costs to pursue insurance coverage for potential future
recovery in rates.
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In connection with these suits, our insurance carrier, Employers
Insurance of Wausau (Wausau) filed a separate lawsuit against us
for reimbursement of past defense costs, which approximate
$1.5 million, and a declaratory determination of coverage.
On January 23, 2008, the Court heard various parties’
motions and on September 25, 2008 issued its rulings that
Wausau had a duty to defend; therefore, the Company will not
have to reimburse Wausau for previously incurred defense costs.
The Court did not find Wausau’s actions were intended to
harm the Company so the Company will not be able to recover
punitive damages. However, the Court also found that the issue
of policy coverage would be determined at trial. Trial commenced
on June 1, 2009. During trial, the parties entered into a
confidential settlement agreement. which did not have a
significant impact on the Company’s results of operations.
The confidential settlement was fully executed on June 23,
2009 and the lawsuit was dismissed with prejudice by the court
during the month of October 2009.
The number of environmental and product-related lawsuits against
other water utilities have increased in frequency in recent
years. If we are subject to additional environmental or
product-related lawsuits, we might incur significant legal costs
and it is uncertain whether we would be able to recover the
legal costs from ratepayers or other third parties. In addition,
if current California law regarding California Public Utilities
Commission’s preemptive jurisdiction over regulated public
utilities for claims about compliance with California Department
of Health Services and United States Environmental Protection
Agency water quality standards changes, our legal exposure may
be significantly increased.
Risks
Related to Our Business Operations
Wastewater
operations entail significant risks.
While wastewater collection and treatment is not presently a
major component of our revenues, wastewater collection and
treatment involve many risks associated with damage to the
surrounding environment. If collection or treatment systems fail
or do not operate properly, untreated or partially treated
wastewater could discharge onto property or into nearby streams
and rivers, causing property damage or injury to aquatic life,
or even human life. Liabilities resulting from such damage could
materially and adversely affect our results of operations and
financial condition.
Demand
for our water is subject to various factors and is affected by
seasonal fluctuations.
Demand for our water during the warmer, dry months is generally
greater than during cooler or rainy months due primarily to
additional requirements for water in connection with irrigation
systems, swimming pools, cooling systems and other outside water
use. Throughout the year, and particularly during typically
warmer months, demand will vary with temperature and rainfall
levels. If temperatures during the typically warmer months are
cooler than normal, or if there is more rainfall than normal,
the demand for our water may decrease.
In addition, governmental restrictions on water usage during
drought conditions may result in a decreased demand for our
water, even if our water reserves are sufficient to serve our
customers during these drought conditions. However, during the
drought of the late 1980’s and early 1990’s the
California Public Utilities Commission beginning in 1992 allowed
us to surcharge our customers to collect lost revenues caused by
customers’ conservation during the drought. Regardless of
whether we may surcharge our customers during a conservation
period, they may use less water even after a drought has passed
because of conservation patterns developed during the drought.
Furthermore, our customers may wish to use recycled water as a
substitute for potable water. If rights are granted to others to
serve our customers recycled water, there will likely be a
decrease in demand for our water.
The
adequacy of our water supplies depends upon a variety of factors
beyond our control. Interruption in the water supply may
adversely affect our earnings.
We depend on an adequate water supply to meet the present and
future needs of our customers. Whether we have an adequate
supply varies depending upon a variety of factors, many of which
are partially or completely beyond our control, including:
| • | the amount of rainfall; | |
| • | the amount of water stored in reservoirs; |
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| • | underground water supply from which well water is pumped; | |
| • | changes in the amount of water used by our customers; | |
| • | water quality; | |
| • | legal limitations on water use such as rationing restrictions during a drought; and | |
| • | population growth. |
We purchase our water supply from various governmental agencies
and others. Water supply availability may be affected by weather
conditions, funding and other political and environmental
considerations. In addition, our ability to use surface water is
subject to regulations regarding water quality and volume
limitations. If new regulations are imposed or existing
regulations are changed or given new interpretations, the
availability of surface water may be materially reduced. A
reduction in surface water could result in the need to procure
more costly water from other sources, thereby increasing our
water production costs and adversely affecting our operating
results.
We have entered into long-term agreements, which commit us to
payments whether or not we purchase any water. Therefore, if
demand is insufficient to use our required purchases we would
have to pay for water we did not receive.
From time to time, we enter into water supply contracts with
third parties and our business is dependent upon such agreements
in order to meet regional demand. For example, we have entered
into a water supply contract with the San Francisco Public
Utilities Commission which we rely upon. We can give no
assurance that the San Francisco Public Utilities
Commission, or any of the other parties from whom we purchase
water, will renew our contracts upon expiration, or that we will
not be subject to significant price increases under any such
renewed contracts.
The parties from whom we purchase water maintain significant
infrastructure and systems to deliver water to us. Maintenance
of these facilities is beyond our control. If these facilities
are not adequately maintained or if these parties otherwise
default on their obligations to supply water to us, we may not
have adequate water supplies to meet our customers’ needs.
If we are unable to access adequate water supplies we may be
unable to satisfy all customer demand which could result in
rationing. Rationing may have an adverse effect on cash flow
from operations. We can make no guarantee that we will always
have access to an adequate supply of water that will meet all
required quality standards. Water shortages may affect us in a
variety of ways. For example, shortages could:
| • | adversely affect our supply mix by causing us to rely on more expensive purchased water; | |
| • | adversely affect operating costs; | |
| • | increase the risk of contamination to our systems due to our inability to maintain sufficient pressure; and | |
| • | increase capital expenditures for building pipelines to connect to alternative sources of supply, new wells to replace those that are no longer in service or are otherwise inadequate to meet the needs of our customers and reservoirs and other facilities to conserve or reclaim water. |
We may or may not be able to recover increased operating and
construction costs on a timely basis, or at all, for our
regulated systems through the ratemaking process. Although we
can give no assurance, we may also be able to recover certain of
these costs from third parties that may be responsible, or
potentially responsible, for groundwater contamination.
Changes
in water supply costs impact our operations.
The cost to obtain water for delivery to our customers varies
depending on the sources of supply, wholesale suppliers’
prices and the quantity of water produced to fulfill customer
water demand. Our source of supply varies among our operating
districts. Certain districts obtain all of their supply from
wells; some districts purchase all of the supply from wholesale
suppliers; and other districts obtain the supply from a
combination of wells and wholesale suppliers. A small portion of
supply comes from surface sources and is processed through
Company-owned water treatment plants. On average, slightly more
than half of the water we deliver to our customers is
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pumped from wells or received from a surface supply with the
remainder purchased from wholesale suppliers. Water purchased
from suppliers usually costs us more than surface supplied or
well pumped water. During 2009, the cost of purchased water for
delivery to customers represented 31.2% of our total operating
costs and in 2008 it represented 31.7% of our total operating
costs.
Wholesale water suppliers may increase their prices for water
delivered to us based on factors that affect their operating
costs. Purchased water rate increases are beyond our control. In
California, effective July 1, 2008, our ability to recover
increases in the cost of purchased water changed with the
adoption of the MCBA. With this change actual purchased water
costs are compared to authorized purchased water costs with
variances, netted against variance in purchased power, pump tax,
and metered revenue, recorded to revenue. The balance in the
MCBA will be collected in the future. Though there may be a
short-term impact to cash flow from operations; the impact to
earnings have been minimized.
Dependency
upon adequate supply of electricity and certain chemicals could
adversely affect our results of operations.
Purchased electrical power is required to operate the wells and
pumps needed to supply water to our customers. Although there
are
back-up
power generators to operate a number of wells and pumps in
emergencies, an extended interruption in power could impact the
ability to supply water. In the past, California has been
subject to rolling power blackouts due to insufficient power
supplies. There is no assurance we will not be subject to power
blackouts in the future. Additionally, we require sufficient
amounts of certain chemicals in order to treat the water we
supply. There are multiple sources for these chemicals but an
extended interruption of supply could adversely affect our
ability to adequately treat our water.
Purchased power is a significant operating expense. During 2009
and 2008, purchased power expense represented 7.2% and 7.4% of
our total operating costs. These costs are beyond our control
and can change unpredictably and substantially as occurred in
California during 2001 when rates paid for electricity increased
48%. As with purchased water, purchased power costs are included
in the MCBA. Cash flows between rate filings may be adversely
affected until the commission authorizes a rate change but
earnings will be minimally impacted. Cost of chemicals used in
the delivery of water is not an element of the MCBA and
therefore variances in quantity or cost could impact the results
of operations.
Our
ability to generate new operating contracts is affected by local
politics.
Our revenue growth depends upon our ability to generate new as
well as renew operating contracts with cities, other agencies
and municipal utility districts. As our services are sold in a
political environment, there is exposure to changing trends and
municipal preferences. Recent terrorist acts have affected some
political viewpoints relative to outsourcing of water or
wastewater utility services. Municipalities own and municipal
employees operate the majority of water and wastewater systems.
Significant marketing and sales efforts are spent demonstrating
the benefits of contract operations to elected officials and
municipal authorities. The existing political environment means
decisions are based on many factors, not just economic factors.
Our
business requires significant capital expenditures that are
dependent on our ability to secure appropriate funding. If we
are unable to obtain sufficient capital or if the rates at which
we borrow increase, there would be a negative impact on our
results of operations.
The water utility business is capital-intensive. We invest
significant funds to add or replace property, plant and
equipment. In addition, water shortages may adversely affect us
by causing us to rely on more purchased water. This could cause
increases in capital expenditures needed to build pipelines to
secure alternative water sources. In addition, we require
capital to grow our business through acquisitions. We fund our
short-term capital requirements from cash received from
operations and funds received from developers. We also borrow
funds from banks under short-term bank lending arrangements. We
seek to meet our long-term capital needs by raising equity
through common or preferred stock issues or issuing debt
obligations. We cannot give any assurance that these sources
will continue to be adequate or that the cost of funds will
remain at levels permitting us to earn a reasonable rate of
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return. In the event we are unable to obtain sufficient capital,
our expansion efforts could be curtailed, which may affect our
growth and may affect our future results of operations.
Our ability to access the capital markets is affected by the
ratings of certain of our debt securities. Standard &
Poor’s Rating Agency issues a rating on California Water
Service Company’s ability to repay certain debt
obligations. The credit rating agency could downgrade our credit
rating based on reviews of our financial performance and
projections or upon the occurrence of other events that could
impact our business outlook. Standard & Poor’s
rating is A+ with a stable outlook. On April 8, 2009,
Standard & Poor’s issued a rating of AA- on the
5.875% $100 million First Mortgage bonds issued in April.
Lower ratings by the agency could restrict our ability to access
equity and debt capital. We can give no assurance that the
rating agency will maintain ratings which allow us to borrow
under advantageous conditions and at reasonable interest rates.
A future downgrade by the agency could also increase our cost of
capital by causing potential investors to require a higher
interest rate due to a perceived risk related to our ability to
repay outstanding debt obligations.
While the majority of our debt is long term at fixed rates, we
do have interest rate exposure in our short-term borrowings
which have variable interest rates. We are also subject to
interest rate risks on new financings. However, if interest
rates were to increase on a long-term basis, our management
believes that customer rates would increase accordingly, subject
to approval by the appropriate commission. We can give no
assurance that the commission would approve such an increase in
customer rates.
We are obligated to comply with specified debt covenants under
certain of our loan and debt agreements. Failure to maintain
compliance with these covenants could limit future borrowing,
and we could face increased borrowing costs, litigation,
acceleration of maturity schedules, and cross default issues.
Such actions by our creditors could have a material adverse
effect on our financial condition and results of operations.
Adverse
changes to the national and world-wide financial system could
result in disruptions in the financial and real estate markets
availability and cost of short-term funds for our liquidity
requirements, our ability to meet long-term commitments, and our
customers’ ability to pay for water services. This could
adversely affect our results of operations, cash flows and
financial condition.
We rely on our current credit facilities to fund short-term
liquidity needs if internal funds are not available from
operations. Specifically, given the seasonal fluctuations in
demand for our water we commonly draw on our credit facilities
to meet our cash requirements at times in the year when demand
is relatively low. We also may occasionally use letters of
credit issued under our revolving credit facilities. Disruptions
in the capital and credit markets or further deterioration in
the strength of financial institutions could adversely affect
our ability to draw on our credit facilities. Our access to
funds under our credit facilities is dependent on the ability of
our banks to meet its funding commitments.
Longer-term disruptions in the financial markets as a result of
uncertainty, changing or increased regulation, reduced
capital-raising alternatives, or failures of significant
financial institutions or other factors could adversely affect
our access to liquidity. Any disruption could require us to take
measures to conserve cash until the markets stabilize or until
alternative credit arrangements or other funding for business
needs can be arranged. Such measures could include deferring
capital expenditures, dividend payments or other discretionary
uses of cash.
Many of our customers and suppliers also have exposure to risks
that their ability to meet their payment and supply commitments
are adversely affected by the worldwide financial crisis and
recession in the United States and resulting potential
disruptions in the financial and real estate markets. We operate
in geographic areas that may be particularly susceptible to
declines in the price of real property and other consequences of
the financial crisis, which could result in significant declines
in demand for our products and services in certain of our
districts. In the event that any of our significant customers or
suppliers, or a significant number of smaller customers and
suppliers, are adversely affected by these risks, we may face
disruptions in supply, significant reductions in demand for our
products and services, inability of customers to pay invoices
when due, and other adverse effects that could negatively affect
our financial condition, results of operations
and/or
cash
flows.
Our operations and certain contracts for water distribution and
treatment depend on the financial capability of state and local
governments, and other municipal entities such as water
districts. Major disruptions in the financial
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strength or operations of such entities, such as liquidity
limitations, bankruptcy or insolvency, could have an adverse
effect on our ability to conduct our business
and/or
enforce our rights under contracts to which such entities are a
party.
We are
a holding company that depends on cash flow from our
subsidiaries to meet our obligations and to pay dividends on our
common stock.
As a holding company, we conduct substantially all of our
operations through our subsidiaries and our only significant
assets are investments in those subsidiaries. 94% of our
revenues are derived from the operations of California Water
Service Company. As a result, we are dependent on cash flow from
our subsidiaries, and California Water Service Company in
particular, to meet our obligations and to pay dividends on our
common stock.
We can make dividend payments only from our surplus (the excess,
if any, of our net assets over total paid-in capital) or if
there is no surplus, the net profits for the current fiscal year
or the fiscal year before which the dividend is declared. In
addition, we can pay cash dividends only if after paying those
dividends we would be able to pay our liabilities as they become
due. Owners of our capital stock cannot force us to pay
dividends and dividends will only be paid if and when declared
by our board of directors. Our board of directors can elect at
any time, and for an indefinite duration, not to declare
dividends on our capital stock.
Our subsidiaries are separate and distinct legal entities and
generally have no obligation to pay any amounts due on
California Water Service Group’s debt or to provide
California Water Service Group with funds for dividends.
Although there are no contractual or regulatory restrictions on
the ability of our subsidiaries to transfer funds to us, the
reasonableness of our capital structure is one of the factors
considered by state and local regulatory agencies in their
ratemaking determinations. Therefore, transfer of funds from our
subsidiaries to us for the payment of our obligations or
dividends may have an adverse effect on ratemaking
determinations. Furthermore, our right to receive cash or other
assets upon the liquidation or reorganization of a subsidiary is
generally subject to the prior claims of creditors of that
subsidiary. If we are unable to obtain funds from our
subsidiaries in a timely manner we may be unable to meet our
obligations or pay dividends.
An
important element of our growth strategy is the acquisition of
water and wastewater system, including operating agreements.
Risks associated with potential acquisitions, divestitures or
restructurings may adversely affect us.
We may seek to acquire or invest in other companies,
technologies, services or products that complement our business.
The execution of our growth strategy may expose us to different
risks than those associated with our utility operations. We can
give no assurance that we will succeed in finding attractive
acquisition candidates or investments, or that we would be able
to reach mutually agreeable terms with such parties. In
addition, as consolidation becomes more prevalent in the water
and wastewater industries, the prices for suitable acquisition
candidates may increase to unacceptable levels and limit our
ability to grow through acquisitions. If we are unable to find
acquisition candidates or investments, our ability to grow may
be limited.
Acquisition and investment transactions may result in the
issuance of our equity securities that could be dilutive if the
acquisition or business opportunity does not develop in
accordance with our business plan. They may also result in
significant write-offs and an increase in our debt. The
occurrence of any of these events could have a material adverse
effect on our business, financial condition and results of
operations.
Any of these transactions could involve numerous additional
risks. For example, we may incur one or more of the following:
| • | problems integrating the acquired operations, personnel, technologies or products with our existing businesses and products; | |
| • | liabilities inherited from the acquired companies’ prior business operations; | |
| • | diversion of management time and attention from our core business to the acquired business; | |
| • | failure to retain key technical, management, sales and other personnel of the acquired business; |
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| • | difficulty in retaining relationships with suppliers and customers of the acquired business; and | |
| • | difficulty in getting required regulatory approvals. |
In addition, the businesses and other assets we acquire may not
achieve the sales and profitability expected. The occurrence of
one or more of these events may have a material adverse effect
on our business. There can be no assurance that we will be
successful in overcoming these or any other significant risks
encountered.
We may
not be able to increase or sustain our recent growth rate, and
we may not be able to manage our future growth
effectively.
We may be unable to continue to expand our business or manage
future growth. To successfully manage our growth and handle the
responsibilities of being a public company, we believe we must
effectively:
| • | hire, train, integrate and manage additional qualified engineers for research and development activities, sales and marketing personnel, and financial and information technology personnel; | |
| • | retain key management and augment our management team; | |
| • | implement and improve additional and existing administrative, financial and operations systems, procedures and controls; | |
| • | expand and upgrade our technological capabilities; and | |
| • | manage multiple relationships with our customers, regulators, suppliers and other third parties. |
If we are unable to manage our growth effectively, we may not be
able to take advantage of market opportunities, satisfy customer
requirements, execute our business plan or respond to
competitive pressures.
We
have a number of large-volume commercial and industrial
customers and a significant decrease in consumption by one or
more of these customers could have an adverse effect on our
operating results and cash flows.
Our revenues will decrease, and such decrease may be material,
if a significant business or industrial customer terminates or
materially reduces its use of our water. Approximately
$105.7 million, or 24% of our 2009 water utility revenues
was derived from business and industrial customers. If any of
our large business or industrial customers reduces or ceases its
consumption of our water, we may seek commission approval to
increase the rates of our remaining customers to offset
decreased revenues. There can be no assurance, however, that the
commission would approve such a rate relief request, and even if
it did approve such a request, it would not apply retroactively
to the date of the reduction in consumption. The delay between
such date and the effective date of the rate relief may be
significant and could adversely affect our operating results and
cash flows.
Our
operating cost and costs of providing services may rise faster
than our revenues.
Our ability to increase rates over time is dependent upon
approval of such rate increases by state commissions, or in the
case of the City of Hawthorne and the City of Commerce, the City
Council, which may be inclined, for political or other reasons,
to limit rate increases. However, our costs are subject to
market conditions and other factors, which may increase
significantly. The second largest component of our operating
costs after water production is made up of salaries and wages.
These costs are affected by the local supply and demand for
qualified labor. Other large components of our costs are general
insurance, workers compensation insurance, employee benefits and
health insurance costs. These costs may increase
disproportionately to rate increases authorized by state
commissions and may have a material adverse effect on our future
results of operations.
Our
non-regulated business operates in a competitive
market.
While a majority of our business is regulated, our non-regulated
business participates in a competitive market. We compete with
several larger companies whose size, financial resources,
customer base and technical expertise may restrict our ability
to compete successfully for certain operations and maintenance
contracts. Due to the nature of our contract operations
business, and to the very competitive nature of the market, we
must accurately estimate
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the cost and profitability of each project while, at the same
time, maintaining prices at a level low enough to compete with
other companies. Our inability to achieve this balance could
adversely impact our results of operations.
Demand
for our stock may fluctuate due to circumstances beyond our
control.
We believe that stockholders invest in public utility stocks, in
part, because they seek reliable dividend payments. If there is
an over-supply of stock of public utilities in the market
relative to demand by such investors, the trading price of our
securities could decrease. Additionally, if interest rates rise
above the dividend yield offered by our equity securities,
demand for our stock, and consequently its market price, may
also decrease.
The
price of our common stock may be volatile and may be affected by
market conditions beyond our control.
The trading price of our common stock may fluctuate in the
future because of the volatility of the stock market and a
variety of other factors, many of which are beyond our control.
Factors that could cause fluctuations in the trading price of
our common stock include: regulatory developments; general
economic conditions and trends; price and volume fluctuations in
the overall stock market from time to time; actual or
anticipated changes or fluctuations in our results of
operations; actual or anticipated changes in the expectations of
investors or securities analysts; actual or anticipated
developments in our competitors’ businesses or the
competitive landscape generally; litigation involving us or our
industry; major catastrophic events or sales of large blocks of
our stock.
Equity markets in general have recently experienced extreme
price and volume fluctuations. Such price and volume
fluctuations may continue to adversely affect the market price
of our common stock for reasons unrelated to our business or
operating results.
Adverse
investment returns and other factors may increase our pension
liability and pension funding requirements.
A substantial number of our employees are covered by a defined
benefit pension plan. At present, the pension plan is
underfunded because our projected pension benefit obligation
exceeds the aggregate fair value of plan assets. Under
applicable law, we are required to make cash contributions to
the extent necessary to comply with minimum funding levels
imposed by regulatory requirements. The amount of such required
cash contribution is based on an actuarial valuation of the
plan. The funded status of the plan can be affected by
investment returns on plan assets, discount rates, mortality
rates of plan participants, pension reform legislation and a
number of other factors. There can be no assurance that the
value of our pension plan assets will be sufficient to cover
future liabilities. Although we have made contributions to our
pension plan in recent years, it is possible that we could incur
a pension liability adjustment, or could be required to make
additional cash contributions to our pension plan, which would
reduce the cash available for business and other needs.
Work
stoppages and other labor relations matters could adversely
affect our operating results.
At December 31, 2009, 660 of our 1,013 total employees were
union employees. Most of our unionized employees are represented
by the Utility Workers Union of America, AFL-CIO, except certain
engineering and laboratory employees who are represented by the
International Federation of Professional and Technical
Engineers, AFL-CIO. In November 2009 we negotiated 2010 wage
increases with both unions of 1.0% and other changes to our
employee benefit plans, and wage increases of 3.0% in 2011.
We believe our labor relations are good, but in light of rising
costs for healthcare and pensions, contract negotiations in the
future may be difficult. Furthermore, changes in applicable law
or regulations could have an adverse effect on management’s
negotiating position with respect to our currently unionized
employees
and/or
employees that decide to unionize in the future. We are subject
to a risk of work stoppages and other labor relations matters as
we negotiate with the unions to address these issues, which
could affect our results of operations and financial condition.
We can give no assurance that issues with our labor forces will
be resolved favorably to us in the future or that we will not
experience work stoppages.
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We
depend significantly on the services of the members of our
management team, and the departure of any of those persons could
cause our operating results to suffer.
Our success depends significantly on the continued individual
and collective contributions of our management team. The loss of
the services of any member of our management team could have a
material adverse effect on our business as our management team
has knowledge of our industry and customers and would be
difficult to replace.
Our
operations are geographically concentrated in California and
this lack of diversification may negatively impact our
operations.
Although we own facilities in a number of states, over 94% of
our operations are located in California. As a result, we are
largely subject to weather, political, water supply, labor,
utility cost, regulatory and economic risks affecting California.
We are also affected by the real property market in California.
In order to grow our business, we may need to acquire additional
real estate or rights to use real property owned by third
parties, the cost of which tends to be higher and more volatile
in California relative to other states. The value of our assets
in California may decline if there is a decline in the
California real estate market which results in a significant
decrease in real property values.
In 2007, 2008, and 2009 we experienced an increase in
uncollectible accounts which, we believe, were attributable in
part to the significant declines in real estate values and
rising unemployment due to the economic recession, experienced
by our customers in a number of our districts in California. In
2010 we may experience continued high levels of uncollectible
accounts until real estate values rise and unemployment rates
decline.
The
effects of natural disasters, terrorist activity, pandemics, or
poor water quality or contamination to our water supply may
result in disruption in our services and litigation which could
adversely affect our business, operating results and financial
condition.
We operate in areas that are prone to earthquakes, fires,
mudslides and other natural disasters. A significant seismic
event in California, where our operations are concentrated, or
other natural disaster in California could adversely impact our
ability to deliver water and adversely affect our costs of
operations. A major disaster could damage or destroy substantial
capital assets. The California Public Utilities Commission has
historically allowed utilities to establish a catastrophic event
memorandum account as another possible mechanism to recover
costs. However, we can give no assurance that the CPUC or any
other commission would allow any such cost recovery mechanism in
the future.
Our water supplies are subject to contamination, including
contamination from the development of naturally-occurring
compounds, chemicals in groundwater systems, pollution resulting
from man-made sources, such as MTBE, sea water incursion and
possible terrorist attacks. If our water supply is contaminated,
we may have to interrupt the use of that water supply until we
are able to substitute the flow of water from an uncontaminated
water source. In addition, we may incur significant costs in
order to treat the contaminated source through expansion of our
current treatment facilities, or development of new treatment
methods. If we are unable to substitute water supply from an
uncontaminated water source, or to adequately treat the
contaminated water source in a cost-effective manner, there may
be an adverse effect on our revenues, operating results and
financial condition. The costs we incur to decontaminate a water
source or an underground water system could be significant and
could adversely affect our business, operating results and
financial condition and may not be recoverable in rates. We
could also be held liable for consequences arising out of human
exposure to hazardous substances in our water supplies or other
environmental damage. For example, private plaintiffs have the
right to bring personal injury or other toxic tort claims
arising from the presence of hazardous substances in our
drinking water supplies. Our insurance policies may not be
sufficient to cover the costs of these claims.
We operate a dam. If the dam were to fail for any reason, we
would lose a water supply and flooding likely would occur.
Whether or not we were responsible for the dam’s failure,
we could be sued. We can give no assurance that we would be able
to successfully defend such a suit.
In light of the threats to the nation’s health and security
ensuing in the wake of the September 11, 2001 terrorist
attacks, we have taken steps to increase security measures at
our facilities and heighten employee awareness of
27
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threats to our water supply. We have also tightened our security
measures regarding the delivery and handling of certain
chemicals used in our business. We have and will continue to
bear increased costs for security precautions to protect our
facilities, operations and supplies. These costs may be
significant. Despite these tightened security measures, we may
not be in a position to control the outcome of terrorist events
should they occur.
We depend upon our skilled and trained workforce to ensure water
delivery. Were a pandemic to occur, we can give no assurance
that we would be able to maintain sufficient manpower to ensure
uninterrupted service in all of the districts that we serve.
We
retain certain risks not covered by our insurance
policies.
We evaluate our risks and insurance coverage annually. Our
evaluation considers the costs, risks and benefits of retaining
versus insuring various risks as well as the availability of
certain types of insurance coverage. In addition, portions of
our business are difficult or impracticable to insure.
Furthermore, we are also affected by increases in prices for
insurance coverage; in particular, we have been, and will
continue to be, affected by rising health insurance costs.
Retained risks are associated with deductible limits, partial
self-insurance programs and insurance policy coverage ceilings.
If we suffer an uninsured loss, we may be unable to pass all, or
any portion, of the loss on to customers because our rates are
regulated by regulatory commissions. Consequently, uninsured
losses may negatively affect our financial condition, liquidity
and results of operations. There can be no assurance that we
will not face uninsured losses pertaining to the risks we have
retained.
We
rely on our information technology and a number of complex
business systems that could malfunction and result in negative
impacts on our profitability and cash flow.
Our business is dependent on several complex business systems,
certain of which are owned by third parties. The business
systems must function reliably in order for us to operate
effectively. Among other things, system malfunctions and
security breaches could prevent us from operating or monitoring
our facilities, billing accurately and timely analysis of
financial results. Our profitability and cash flow could be
affected negatively in the event these systems do not operate
effectively or are circumvented.
The
accuracy of our judgments and estimates about financial and
accounting matters will impact our operating results and
financial condition.
We make certain estimates and judgments in preparing our
financial statements regarding, among others:
| • | the useful life of intangible rights; | |
| • | the number of years to depreciate certain assets; | |
| • | amounts to set aside for uncollectible accounts receivable, inventory obsolesces and uninsured losses; | |
| • | our legal exposure and the appropriate accrual for claims, including medical claims and workers’ compensation claims; | |
| • | future costs for pensions and other post-retirement benefits; and | |
| • | possible tax allowances. |
The quality and accuracy of those estimates and judgments will
have an impact on our operating results and financial condition.
In addition, we must estimate unbilled revenues and costs as of
the end of each accounting period. If our estimates are not
accurate, we will be required to make an adjustment in a future
period. Accounting rules permit us to use expense balancing
accounts and memorandum accounts that include input cost changes
to us that are different from amounts incorporated into the
rates approved by the commissions. These accounts result in
expenses and revenues being recognized in periods other than in
which they occurred.
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Our
controls and procedures may fail or be
circumvented.
Management regularly reviews and updates our internal control
over financial reporting, disclosure controls and procedures,
and corporate governance policies and procedures. Any system of
controls and procedures, however well designed and operated, is
based in part on certain assumptions and can provide only
reasonable, not absolute, assurances that the objectives of the
system are met. Any failure or circumvention of our controls and
procedures or failure to comply with regulations related to
controls and procedures could result in lack of compliance with
contractual agreements, misstatements in our financial
statements in amounts that could be material or could cause
investors to lose confidence in our reported financial
information, either of which could have a negative effect on the
trading price of our stock and may negatively affect our ability
to raise future capital.
Further, if we or our independent registered public accounting
firm discover a material weakness in our internal control over
financial reporting, the disclosure of that fact, even if
quickly remedied, could reduce the market’s confidence in
our financial statements and harm our stock price. In addition,
non-compliance with Section 404 of the Sarbanes-Oxley Act
of 2002 could subject us to a variety of administrative
sanctions, including the suspension or delisting of our common
stock from the New York Stock Exchange and the inability of
registered broker-dealers to make a market in our common stock,
which would further reduce our stock price.
We may
be required to adopt International Financial Reporting Standards
(IFRS), or other accounting or financial reporting standards,
the ultimate adoption of which could negatively impact our
business, financial condition or results of
operations.
We could be required to adopt IFRS or other accounting or
financial reporting standards different from Generally Accepted
Accounting Principles (GAAP) in the United States of America,
which is currently applicable to our accounting and financial
reporting. In 2008 the SEC released a timetable for the adoption
of IFRS according to which we could be required to adopt IFRS by
2016. Under GAAP we are subject to the accounting procedures for
accounting for the effects of certain types of regulation,
which, among other things, allows us to defer certain costs if
we believe it is probable that we will be allowed to recover
those costs by future rate increases. Currently, IFRS does not
contain provisions equivalent to the current GAAP accounting
procedures. The implementation and adoption of new accounting or
financial reporting standards could affect our reported
performance, which in turn could favorably or unfavorably impact
our business, financial condition or results of operations.
Furthermore, the transition to and application of new accounting
or financial reporting standards could result in increased
administrative costs.
Municipalities,
water districts and other public agencies may condemn our
property by eminent domain action.
State statutes allow municipalities, water districts and other
public agencies to own and operate water systems. These agencies
are empowered to condemn properties already operated by
privately owned public utilities. However, whenever a public
agency constructs facilities to extend a utility system into the
service area of a privately owned public utility, such an act
constitutes the taking of property and requires reimbursement to
the utility for its loss. If a public agency were to acquire our
utility property by eminent domain action, we would be entitled
to just compensation for our loss, but we would no longer have
access to the condemned property nor would we be entitled to any
portion of revenue generated from the use of such asset going
forward.
| Item 1B. | Unresolved Staff Comments. |
None
| Item 2. | Properties. |
Our physical properties consist of offices and water facilities
to accomplish the production, storage, treatment, and
distribution of water. These properties are located in or near
the geographic service areas listed above in Item 1
“Business — Geographical Service Areas and Number
of Customers at Year-end.” Our headquarters, which houses
accounting, engineering, information systems, human resources,
purchasing, regulatory, water quality, and executive staff, is
located in San Jose, California.
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The real properties owned are held in fee simple title.
Properties owned by Cal Water are subject to the lien of an
Indenture of Mortgage and Deed of Trust dated April 17,
2009 (the California Indenture), securing Cal Water’s first
mortgage bonds, of which $378.1 million was outstanding at
December 31, 2009. The California Indenture contains
certain restrictions common to such types of instruments
regarding the disposition of property and includes various
covenants and restrictions. At December 31, 2009, our
California utility was in compliance with the covenants of the
California Indenture.
Washington Water has long-term bank loans that are secured
primarily by utility plant owned by Washington Water. New Mexico
Water has a long-term loan that is secured by utility plant
owned by New Mexico Water.
Cal Water owns 634 wells and operates 9 leased wells. There
are 426 owned storage tanks with a capacity of 489 million
gallons, 36 managed storage tanks with a capacity of
30 million gallons, and 3 reservoirs with a capacity of
220 million gallons. Cal Water owns and operates 6 surface
water treatment plants with a combined capacity of
42 million gallons per day. There are 5,601 miles of
supply and distribution mains in the various systems.
Washington Water owns 348 wells and manages 113 wells.
There are 127 owned storage tanks and 42 managed storage tanks
with a storage capacity of 9 million gallons. There are
326 miles of supply and distribution lines.
New Mexico Water owns 17 wells. There are 12 storage tanks
with a storage capacity of 4 million gallons. There are
134 miles of supply and distribution lines. New Mexico
operates two waste water treatment facilities with a combined
capacity to process 0.5 million gallons per day. There are
34 miles of sewer collection mains.
Hawaii Water owns 18 wells. There are 24 storage tanks with
a storage capacity of 20 million gallons. There are
70 miles of supply and distribution lines. Hawaii Water
operates five wastewater treatment facilities with a combined
capacity to process approximately 1.7 million gallons per
day. There are 24 miles of sewer collection mains.
In the leased City of Hawthorne and City of Commerce systems or
in systems that are operated under contract for municipalities
or private companies, title to the various properties is held
exclusively by the municipality or private company.
| Item 3. | Legal Proceedings. |
Groundwater
Contamination Matters
As previously reported, in 1995, the State of California’s
Department of Toxic Substances Control (DTSC) named us as a
potential responsible party for cleanup of toxic contamination
plumes, which contain perchloroethylene, also know as
tetrachloroethylene (PCE) in the Chico groundwater. In December
2002, we were named along with other defendants in two lawsuits
filed by DTSC for the cleanup of the plumes. In 2007, we entered
into Court approved consent decrees (Consent Decrees). In
connection with these suits, our insurance carrier, Employers
Insurance of Wausau (Wausau) filed a separate lawsuit against us
for reimbursement of past defense costs which approximate
$1.5 million and a declaratory determination of coverage.
On June 23, 2009, we executed a confidential settlement
with Wausau that did not significantly impact our financial
statements.
Other
Groundwater Contamination
The Company has been and is involved in litigation against third
parties to recover past and future costs related to ground water
contamination in our service areas. The cost of litigation is
expensed as incurred and any settlement is first offset against
such costs. Any settlement in excess of the cost to litigate is
accounted for on a case by case basis, dependent upon the nature
of the settlement.
The Company is involved in a lawsuit against major oil
refineries regarding the contamination of the ground water as a
result of the gas additive MTBE. The Company entered into a
partial settlement with the defendants in April of 2008 that
represent approximately 70% of the responsible parties (as
determined by the Superior Court). On October 22, 2008, the
Company received $34.2 million after deducting
attorneys’ fees and litigation expenses. The Company is
aggressively pursuing legal action against the remaining
responsible parties. The Company has filed with the Commission
to determine the appropriate regulatory treatment of the
proceeds. It anticipates that the proceeds will have been used
by the Company on MTBE capital investments. The Company has also
filed with the Internal Revenue Service a request for a private
letter ruling, regarding the taxability of the re-investment of
proceeds.
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As previously reported, the Company has filed with the City of
Bakersfield, in the Superior Court of California, a lawsuit that
names potentially responsible parties, who manufactured and
distributed products containing 1,2,3 trichloropropane (TCP) in
California. TCP has been detected in the ground water. The
lawsuit seeks to recover treatment costs necessary to remove
TCP. The Court has now coordinated our action with other water
purveyor cases (TCP Cases JCCP 4435) in San Bernardino
County. No trial date has yet been set. Company has entered into
a settlement with one of the distributor defendants, FMC
Corporation. Company will record the proceeds in a memorandum
account until the Commission approves an allocation between
ratepayers and shareholders.
The Company has filed in San Mateo County Superior Court a
complaint (
California Water Service Company v. The Dow
Chemical Company, et al.
CIV 473093) against
potentially responsible parties that manufactured and
distributed products, which contained perchloroethylene, also
know as tetrachloroethylene (PCE) in California, to recover the
past, present, and future treatment costs. The case has not been
consolidated with other PCE cases. Discovery is underway. No
trial date has yet been set.
Other
Legal Matters
From time to time, the Company has been named as a co-defendant
in several asbestos related lawsuits. The Company has been
dismissed without prejudice in several of these cases. In other
cases our contractors and our insurance policy carriers have
settled the cases with no effect on the Company’s financial
statements. As such the Company does not currently believe that
there is any potential loss which is probable of occurring
related to these matters and therefore no accrual or contingency
has been recorded.
From time to time, the Company is involved in various disputes
and litigation matters that arise in the ordinary course of
business. We review the status of each significant matter and
assess its potential financial exposure. If the potential loss
from any claim or legal proceeding is considered probable and
the amount of the range of loss can be estimated, we accrue a
liability for the estimated loss in accordance with the
accounting standards for contingencies. Legal proceedings are
subject to uncertainties, and the outcomes are difficult to
predict. Because of such uncertainties, accruals are based on
the best information available at the time. While the outcome of
these disputes and litigation matters cannot be predicted with
any certainty, management does not believe that when taking into
account existing reserves that the ultimate resolution of these
matters will materially affect our financial position, results
of operations, or cash flows.
| Item 4. | Submission of Matters to a Vote of Security Holders. |
Reserved.
| Item 5. | Market for Registrant’s Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is traded on the New York Stock exchange under
the symbol “CWT.” At December 31, 2009, there
were 20,765,452 common shares outstanding. There were 2,597
common stockholders of record as of February 8, 2010.
During 2009, we paid a cash dividend of $1.18 per common share,
or $0.2950 per quarter. During 2008, we paid a cash dividend of
$1.17 per common share, or $0.2925 per quarter. In January 2010,
our Board of Directors declared a cash dividend of $0.2975 per
common share payable on February 19, 2010, to stockholders
of record on February 8, 2010. This represents our
43rd consecutive year of increasing the annual dividend and
marks the 260th consecutive quarterly dividend.
We presently intend to pay quarterly cash dividends in the
future consistent with past practices, subject to our earnings
and financial condition, restrictions set forth in our debt
instruments, regulatory requirements and such other factors as
our Board of Directors may deem relevant.
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During 2009 and 2008, the common stock market price range and
dividends per share were as follows for each quarter
|
2009
|
First | Second | Third | Fourth | ||||||||||||
|
Common stock market price range:
|
||||||||||||||||
|
High
|
$ | 46.43 | $ | 40.87 | $ | 39.27 | $ | 40.11 | ||||||||
|
Low
|
37.83 | 33.54 | 35.52 | 35.18 | ||||||||||||
|
Dividends paid per common share
|
0.2950 | 0.2950 | 0.2950 | 0.2950 | ||||||||||||
|
2008
|
First | Second | Third | Fourth | ||||||||||||
|
Common stock market price range:
|
||||||||||||||||
|
High
|
$ | 40.68 | $ | 41.04 | $ | 40.22 | $ | 46.43 | ||||||||
|
Low
|
33.58 | 31.69 | 31.16 | 29.73 | ||||||||||||
|
Dividends paid per common share
|
0.2925 | 0.2925 | 0.2925 | 0.2925 | ||||||||||||
Five
Years Performance Graph
The following performance graph compares the changes in the
cumulative shareholder return on California Water Services
Group’s common stock with the cumulative total return on
the Water Utility Index and the Standard & Poor’s
500 Index during the last five years ended December 31,
2009. The comparison assumes $100 was invested on
December 31, 2004, in California Water Service Group’s
common stock and in each of the forgoing indicies and assumes
reinvestment of dividends.
Performance
Graph Data
The following descriptive data is supplied in accordance with
rule 304(d) of Regulations S-T:
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||||||||
|
California Water Services Group
|
100 | 105 | 114 | 108 | 140 | 114 | ||||||||||||||||||||||||
|
S&P 500
|
100 | 103 | 117 | 121 | 75 | 92 | ||||||||||||||||||||||||
|
Baird Water Utility Index
|
100 | 137 | 137 | 132 | 119 | 122 | ||||||||||||||||||||||||
32
Table of Contents
| Item 6. | Selected Financial Data. |
The following selected consolidated financial data should be
read in conjunction with our Consolidated Financial Statements
and the Notes thereto and the information contained in
Item 7, “Managements Discussion and Analysis of
Financial Condition and Results of Operations.”
Historical results are not necessarily indicative of future
results.
FIVE YEAR
FINANCIAL REVIEW
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (Dollars in thousands, except common share and other data) | ||||||||||||||||||||
|
Summary of Operations
|
||||||||||||||||||||
|
Operating revenue
|
||||||||||||||||||||
|
Residential
|
$ | 315,617 | $ | 284,913 | $ | 253,745 | $ | 232,811 | $ | 222,634 | ||||||||||
|
Business
|
86,766 | 75,620 | 65,457 | 60,366 | 56,962 | |||||||||||||||
|
Industrial
|
18,963 | 18,932 | 17,403 | 16,286 | 14,241 | |||||||||||||||
|
Public authorities
|
22,408 | 21,042 | 17,952 | 15,728 | 14,965 | |||||||||||||||
|
Other
|
5,618 | 9,805 | 12,525 | 9,526 | 11,926 | |||||||||||||||
|
Total operating revenue
|
449,372 | 410,312 | 367,082 | 334,717 | 320,728 | |||||||||||||||
|
Operating expenses
|
391,253 | 352,843 | 322,912 | 294,411 | 278,903 | |||||||||||||||
|
Interest expense, other income and expenses, net
|
17,565 | 17,664 | 13,011 | 14,726 | 14,602 | |||||||||||||||
|
Net income
|
$ | 40,554 | $ | 39,805 | $ | 31,159 | $ | 25,580 | $ | 27,223 | ||||||||||
|
Common Share Data
|
||||||||||||||||||||
|
Earnings per share — diluted
|
$ | 1.95 | $ | 1.90 | $ | 1.50 | $ | 1.34 | $ | 1.47 | ||||||||||
|
Dividend paid
|
1.18 | 1.17 | 1.16 | 1.15 | 1.14 | |||||||||||||||
|
Dividend payout ratio
|
61 | % | 62 | % | 77 | % | 86 | % | 78 | % | ||||||||||
|
Book value per share
|
$ | 20.26 | $ | 19.44 | $ | 18.66 | $ | 18.31 | $ | 15.98 | ||||||||||
|
Market price at year-end
|
36.82 | 46.43 | 37.02 | 40.40 | 38.23 | |||||||||||||||
|
Common shares outstanding at year-end (in thousands)
|
20,765 | 20,723 | 20,666 | 20,657 | 18,390 | |||||||||||||||
|
Return on average common stockholders’ equity
|
9.8 | % | 10.2 | % | 8.1 | % | 8.2 | % | 9.3 | % | ||||||||||
|
Long-term debt interest coverage
|
4.04 | 4.72 | 3.70 | 3.17 | 3.61 | |||||||||||||||
|
Balance Sheet Data
|
||||||||||||||||||||
|
Net utility plant
|
$ | 1,198,077 | $ | 1,112,367 | $ | 1,010,196 | $ | 941,475 | $ | 862,731 | ||||||||||
|
Total assets
|
1,525,581 | 1,418,107 | 1,184,499 | 1,165,019 | 996,945 | |||||||||||||||
|
Long-term debt including current portion
|
387,222 | 290,316 | 291,921 | 293,592 | 275,275 | |||||||||||||||
|
Capitalization ratios:
|
||||||||||||||||||||
|
Common stockholders’ equity
|
52.1 | % | 58.1 | % | 56.9 | % | 56.0 | % | 51.4 | % | ||||||||||
|
Preferred stock
|
— | — | 0.5 | % | 0.5 | % | 0.6 | % | ||||||||||||
|
Long-term debt
|
47.9 | % | 41.9 | % | 42.6 | % | 43.5 | % | 48.0 | % | ||||||||||
|
Other Data
|
||||||||||||||||||||
|
Estimated water production (million gallons)
|
||||||||||||||||||||
|
Wells and surface supply
|
71,266 | 72,228 | 70,708 | 70,094 | 67,841 | |||||||||||||||
|
Purchased
|
60,292 | 65,529 | 70,530 | 62,320 | 61,612 | |||||||||||||||
|
Total estimated water production
|
131,558 | 137,757 | 141,238 | 132,414 | 129,453 | |||||||||||||||
|
Metered customers
|
426,600 | 417,208 | 412,432 | 407,762 | 402,191 | |||||||||||||||
|
Flat-rate customers
|
68,100 | 73,285 | 75,123 | 76,131 | 76,810 | |||||||||||||||
|
Customers at year-end **
|
494,700 | 490,493 | 487,555 | 483,893 | 479,001 | |||||||||||||||
|
New customers added
|
4,207 | 2,938 | 3,662 | 4,892 | 5,846 | |||||||||||||||
|
Revenue per customer
|
$ | 908 | $ | 837 | $ | 753 | $ | 692 | $ | 670 | ||||||||||
|
Utility plant per customer
|
3,455 | 3,228 | 2,968 | 2,778 | 2,578 | |||||||||||||||
|
Employees at year-end
|
1,013 | 929 | 891 | 869 | 840 | |||||||||||||||
| ** | Includes customers of the City of Hawthorne and City of Commerce |
33
Table of Contents
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
For 2009, net income was $40.6 million compared to
$39.8 million in 2008, or an increase of 1.9%. The increase
in net income was primarily caused by an increase in revenues to
$449.4 million, or a 9.5% increase from 2008. Net operating
income increased $0.7 million to $58.1 million, or a
1.1% increase over 2008 levels. Net other income reflected a net
increase of $4.2 million due primarily to gain on the cash
surrender value of life insurance held for certain benefit plans
in 2009, while 2008 reflected a decline in value of such
investments. Diluted earnings per share for 2009 were $1.95
compared to $1.90 in 2008, or an increase of 2.6%.
As a result of the 2007 General Rate Case (2007 GRC) and
corresponding approved rates which were effective the first of
July 2008, we recognized a significant increase in net income.
The rate increases authorized additional annual revenues of
$47.1 million (see discussion in the Regulatory Matters
section of this report).
The 2007 GRC included recovery of certain conservation expenses.
Company conservation program expenses were approximately three
million dollars in 2009 and are expected to increase in future
years.
We plan to continue to seek rate relief to recover our operating
cost increases and receive reasonable returns on invested
capital. We expect to fund our long-term capital needs through a
combination of debt, common stock offerings, and cash flow from
operations.
Critical
Accounting Policies and Estimates
We maintain our accounting records in accordance with accounting
principles generally accepted in the United States of America
and as directed by the Commissions to which our operations are
subject. The process of preparing financial statements requires
the use of estimates on the part of management. The estimates
used by management are based on historic experience and an
understanding of current facts and circumstances. A summary of
our significant accounting policies is listed in Note 2 of
the Notes to Consolidated Financial Statements. The following
sections describe those policies where the level of
subjectivity, judgment, and variability of estimates could have
a material impact on the financial condition, operating
performance, and cash flows of the business.
Revenue
Recognition
Revenue includes monthly cycle customer billings for regulated
water and wastewater services at rates authorized by regulatory
commissions and billings to certain non-regulated customers at
rates authorized by contract with government agencies.
Revenue from metered customers includes billings to customers
based on monthly meter readings plus an estimate for water used
between the customer’s last meter reading and the end of
the accounting period. As of December 31, 2009 and 2008,
our unbilled revenue amount was $13.4 million and
$13.1 million, respectively. The unbilled revenue amount is
generally higher during the summer months when water sales are
higher. Flat rate customers are billed in advance at the
beginning of the service period. The revenue is prorated so that
the portion of revenue applicable to the current period is
included in that period’s revenue, with the balance is
recorded as unearned revenue on the balance sheet and recognized
as revenue when earned in the subsequent accounting period. Our
unearned revenue liability was $2.6 million and
$2.7 million as of December 31, 2009 and 2008,
respectively. This liability is included in “other accrued
liabilities” on our consolidated balance sheets.
Effective July 1, 2008, Cal Water is operating under a
Water Rate Adjustment Mechanism (WRAM) approved in February 2008
by the California Public Utilities Commission (CPUC). Under the
WRAM, Cal Water records the adopted level of volumetric revenues
as established by the CPUC for metered accounts (adopted
volumetric revenues). In addition to volumetric-based revenues,
the revenue requirements approved by the CPUC include service
charges, flat rate charges, and other items not subject to the
WRAM. The adopted volumetric revenue considers the seasonality
of consumption of water based upon historical averages. The
variance between adopted volumetric revenues and actual billed
volumetric revenues for metered accounts is recorded as a
component of
34
Table of Contents
revenue with an offsetting entry to a current asset or liability
balancing account (tracked individually for each Cal Water
district). The variance amount may be positive or negative and
represents amounts that will be billed or refunded to customers
in the future.
Also effective July 1, 2008, Cal Water is operating under a
Modified Cost Balancing Account (MCBA). We track authorized
expense levels for purchased water, purchased power and pump
taxes, as established by the CPUC. Variances (which include the
effects of changes in both rate and volume) between adopted and
actual purchased water, purchased power, and pump taxes expenses
will be recorded as a component of revenue, as the amount of
such variances will be recovered from or refunded to our
customers at a later date. Any recovery or refund of the MCBA
would be netted against the WRAM revenue over- or under-recovery
for the corresponding district. The monthly balances accrue
interest (payable or receivable) based upon the 90 day
commercial paper rate.
The balances in the WRAM and MCBA assets and liabilities
accounts will fluctuate on a monthly basis depending upon the
variance between adopted and actual results. The recovery or
refund of the WRAM is netted against the MCBA over- or
under-recovery for the corresponding district and is interest
bearing at the current 90 day commercial paper rate. When
the net amount for any district achieves a pre-determined level
at the end of any calendar year (i.e., at least 2.5 percent
over- or under-recovery of the approved revenue requirement),
Cal Water will file with the CPUC to refund or collect the
balance in the accounts. Account balances less than those levels
may be refunded or collected in Cal Water’s general rate
case proceedings or aggregated with future calendar year
balances for comparison with the recovery level. As of
December 31, 2009, included in the net regulatory balancing
accounts, current and long-term assets were $10.5 million
and $5.1 million, respectively, and the net regulatory
balancing accounts current and long-term liabilities were
$2.4 million and $0.9 million, respectively. As of
December 31, 2008, the current net regulatory balancing
accounts asset was $4.6 million and the current net
regulatory balancing account liability was $2.6 million.
Expense-Balancing
and Memorandum Accounts
Prior to the implementation of the Modified Cost Balancing
Accounts (MCBA) the Company has historically used
expense-balancing accounts (also referred as Incremental Cost
Balancing Accounts (ICBA)) and memorandum accounts to track only
suppliers’ rate changes for purchased water, purchased
power, and pump taxes that are not included in customer water
rates. The cost changes were referred to as “off-settable
expenses” as under certain circumstances they were
refundable either from or to customers in future rates designed
to offset cost changes from suppliers. The balancing and
memorandum accounts are not recorded until the CPUC has
authorized a change in customer rates and the customer has been
billed. The cumulative net amount in the expense balancing
accounts and memorandum accounts as of December 31, 2009,
was approximately $1.5 million. Cal Water is in the process
of filing for recovery through customer billings. See
“Rates and Regulations” below for descriptions of
amounts included in this total that have been authorized for
recovery. The existing ICBA and the memorandum accounts will not
be transferred to the WRAM/MCBA balances. Additions and other
adjustments to these balances ended on July 1, 2008.
However, interest will continue to accumulate on these balances
until they are fully amortized through customer billings.
Washington Water, New Mexico Water, and Hawaii Water do not have
any material amounts in expense balancing or memorandum accounts.
Regulated
Utility Accounting
Because we operate extensively in a regulated business, we are
subject to the accounting standards for regulated utilities.
Regulators establish rates that are designed to permit the
recovery of the cost of service and a return on investment.
Based upon past practices and decisions by the Commissions, we
assess the probability of future recovery from rate payers of
certain items, including the probability of return of amounts
collected to rate payers. If it is probable that rates will
recover an item in the future, a regulatory asset will be
reported. If it is probable that rates will reflect a reduction
in future rates for an item, a regulatory liability will be
reported. We assess the probability of recovery of the
regulatory assets and regulatory liabilities in each reporting
period. In addition, if a regulatory commission determined that
a portion of our assets used in utility operations were not
recoverable in customer rates, we would be required to determine
if we had suffered an asset impairment that would
35
Table of Contents
require a write-down in the assets’ valuation. There have
been no such asset impairments as of December 31, 2009 or
December 31, 2008.
Goodwill
Accounting and Evaluation for Impairment
During 2008, we acquired three privately held companies on the
island of Hawaii (Waikoloa Resort Utilities, Inc; Waikoloa Water
Company, Inc.; Waikoloa Sewer Company, Inc.; jointly referred to
as the Waikoloa Companies). Total assets were $26,885 (including
cash of $6,268), with liabilities assumed of $10,209 (net of
$12,608 which was paid at close of escrow) and initial goodwill
of $3,906. During 2009 and after the completion of the
evaluation of tax benefits of the Waikoloa Companies’ net
tax operating loss carryovers, goodwill was reduced by $1,291.
In November of 2009, we performed an annual impairment test of
the remaining goodwill balance of $2,615 by comparing the fair
value of Hawaii Water Service Company, the reporting unit, with
its carrying amount, including goodwill. Our analysis considered
the approval of future rate case proceedings for the various
operations of Hawaii Water Service Company based on historical
rate of return filings allowed by the Hawaii Public Utilities
Commission. To the extent the approved rate of return filings
allowed by the Hawaii Public Utilities Commission are less than
expected, an impairment of the recorded goodwill may occur.
Income
Taxes
We account for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. We measure deferred
tax assets and liabilities at enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. We
recognize the effect on the deferred tax assets and liabilities
of a change in tax rate in the period that includes the
enactment date. We must also assess the likelihood that deferred
tax assets will be recovered in future taxable income and, to
the extent recovery is not probable, a valuation allowance would
be recorded. If a valuation allowance were required, it could
significantly increase income tax expense. In management’s
view, a valuation allowance was not required at
December 31, 2009 or December 31, 2008.
We anticipate that future rate action by the regulatory
commissions will reflect revenue requirements for the tax
effects of temporary differences recognized, which have
previously been passed through to customers. The regulatory
commissions have granted us rate increases to reflect the
normalization of the tax benefits of the federal accelerated
methods and available Investment Tax Credits (ITCs) for all
assets placed in service after 1980. ITCs are deferred and
amortized over the lives of the related properties for book
purposes.
Pension
Benefits
We incur costs associated with our pension and postretirement
health care benefits plans. To measure the expense of these
benefits, our management must estimate compensation increases,
mortality rates, future health cost increases and discount rates
used to value related liabilities and to determine appropriate
funding. Different estimates used by our management could result
in significant variances in the cost recognized for pension
benefit plans. The estimates used are based on historical
experience, current facts, future expectations, and
recommendations from independent advisors and actuaries. We use
an investment advisor to provide advice in managing the
plan’s investments. We anticipate any increase in funding
for the pension and postretirement health care benefits plans
will be recovered in future rate filings, thereby mitigating the
financial impact.
In September 2006, the Company adopted the FASB accounting
standards which required the full recognition of the projected
benefit obligation over the fair value of plan assets,
reflecting the funded status of the benefit plans, on the
balance sheet. We believe it is probable that future costs will
be recovered in future rates and therefore have recorded a
regulatory asset in accordance with FASB accounting standards.
36
Table of Contents
Workers’
Compensation and Other Claims
We are self-insured for a portion of workers’ compensation
and other claims. Excess amounts are covered by insurance
policies. For workers’ compensation, we work with an
independent actuary firm to estimate the discounted liability
associated with claims submitted and claims not yet submitted
based on historical data. These estimates could vary
significantly from actual claims paid, which could impact
earnings and cash flows. For other claims, management estimates
the cost incurred but not yet paid using historical information.
Actual costs could vary from these estimates. Management
believes actual costs incurred would be allowed in future rates,
mitigating the financial impact.
Contingencies
For 2009, 2008, and 2007, the Company did not record any
provisions relating to the contingencies reported in
Note 15 of the Notes to Consolidated Financial Statements,
as these did not qualify as financial statement liabilities
under current accounting standards.
Results
of Operations
Earnings
Net income in 2009 was $40.6 million compared to
$39.8 million in 2008 and $31.2 million in 2007.
Diluted earnings per common share were $1.95 in 2009, $1.90 in
2008, and $1.50 in 2007. The weighted average number of common
shares outstanding used in the diluted earnings per share
calculation was 20,766,000 in 2009, 20,734,000 in 2008, and
20,689,000 in 2007. The increase in 2009 earnings per share
resulted from increased operating income, largely driven by rate
increases.
Dividends
At the January 2010 meeting, the Board of Directors declared the
quarterly dividend, increasing it for the
43
rd
consecutive year. The quarterly dividend was raised from $0.2950
to $0.2975 per common share, or an annual rate of $1.19 per
common share. Dividends have been paid for 65 consecutive years.
The annual dividends paid per common share in 2009, 2008, and
2007 were $1.18, $1.17, and $1.16, respectively. Earnings not
paid as dividends are reinvested in the business for the benefit
of stockholders. The dividend payout ratio was 61% in 2009, 62%
in 2008, and 77% in 2007, for an average of 66% over the
three-year period. Our long-term targeted dividend payout ratio
is 60%
Operating
Revenue
Operating revenue in 2009 was $449.4 million, an increase
of $39.1 million, or 9.5%, over 2008. Operating revenue in
2008 was $410.3 million, an increase of $43.2 million,
or 11.8%, above 2007. The estimated sources of changes in
operating revenue were:
| 2009 | 2008 | |||||||
| Dollars in millions | ||||||||
|
Rate increases
|
$ | 50.6 | $ | 42.1 | ||||
|
Usage by new customers
|
10.7 | 4.0 | ||||||
|
Net change due to actual versus adopted results, usage, and other
|
(22.2 | ) | (2.9 | ) | ||||
|
Net change
|
$ | 39.1 | $ | 43.2 | ||||
The usage by existing customers can materially change based upon
current weather patterns, influenced both by temperature and
rainfall. However, with the adoption of the WRAM and MCBA for
California customers on July 1, 2008, the impact of weather
on revenue has been minimized.
In 2009, rate relief increased revenues by $50.6 million
with a significant portion due to purchased water offsets. See
the “Rates and Regulation” section of this report for
more information on regulatory activity occurring in 2007, 2008,
and through February 9, 2010.
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Table of Contents
Water
Production Expenses
Water production expenses, which consist of purchased water,
purchased power, and pump taxes, comprise the largest segment of
total operating expenses. Water production costs accounted for
40.8%, 41.5%, and 43.0% of total operating costs in 2009, 2008,
and 2007, respectively. The rates charged for wholesale water
supplies, electricity, and pump taxes are established by various
public agencies. As such, these rates are beyond our control.
The table below provides the amount of increases and percent
changes in water production costs during the past two years:
| 2009 | 2008 | |||||||||||||||||||||||
| Amount | Change | % Change | Amount | Change | % Change | |||||||||||||||||||
| Dollars in millions | ||||||||||||||||||||||||
|
Purchased water
|
$ | 121.7 | $ | 10.0 | 9 | % | $ | 111.7 | $ | 5.0 | 5 | % | ||||||||||||
|
Purchased power
|
28.3 | 2.4 | 9 | % | 25.9 | 1.9 | 8 | % | ||||||||||||||||
|
Pump taxes
|
9.5 | 0.6 | 7 | % | 8.9 | 0.7 | 9 | % | ||||||||||||||||
|
Total water production expenses
|
$ | 159.5 | $ | 13.0 | 9 | % | $ | 146.5 | $ | 7.6 | 5 | % | ||||||||||||
Two of the principal factors affecting water production expenses
are the amount of water produced and the source of the water.
Generally, water from wells costs less than water purchased from
wholesale suppliers.
The table below provides the amounts, percentage change, and
source mix for the respective years:
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| MG | % of total | MG | % of total | MG | % of total | |||||||||||||||||||
| Millions of gallons (MG) | ||||||||||||||||||||||||
|
Source:
|
||||||||||||||||||||||||
|
Wells
|
64,685 | 49.2 | % | 67,041 | 48.7 | % | 65,562 | 46.4 | % | |||||||||||||||
|
% change from prior year
|
(4 | )% | 2 | % | 2 | % | ||||||||||||||||||
|
Purchased
|
60,292 | 45.8 | % | 65,529 | 47.5 | % | 70,530 | 49.9 | % | |||||||||||||||
|
% change from prior year
|
(8 | )% | (7 | )% | 13 | % | ||||||||||||||||||
|
Surface
|
6,581 | 5.0 | % | 5,187 | 3.8 | % | 5,146 | 3.7 | % | |||||||||||||||
|
% change from prior year
|
27 | % | 1 | % | (8 | )% | ||||||||||||||||||
|
Total
|
131,558 | 100.0 | % | 137,757 | 100.0 | % | 141,238 | 100.0 | % | |||||||||||||||
|
% change from prior year
|
(4.5 | )% | (2 | )% | 7 | % | ||||||||||||||||||
Purchased water expenses are affected by changes in quantities
purchased, supplier prices, and cost differences between
wholesale suppliers. For 2009, the $10.0 million increase
in purchased water is due to an 8% decrease in quantities offset
by wholesaler water rate increases of between 4% and 38%.
Purchased water was offset by lease of water rights of
$1.8 million in 2009 versus $1.6 million in 2008. The
impact of variation of actual water production expense from the
adopted expense, effective July 1, 2008, is recorded as a
component of revenue under the MCBA. (See “Water
Supply” in Item 1 of this report). For 2008 the
$5.0 million increase in purchased water is due to a 7%
decrease in quantities purchased and wholesale water rate
increases of between 2.8% and 20.5%, For 2007, the
$13.3 million increase in purchased water costs is due to a
13% increase in quantities purchased, magnified by overall
higher wholesale water rates of 4.0% to 8.6%. On an overall
blended basis, wholesale water rates increased 10.3% on a
cost-per-million-gallon
basis in 2009.
Purchased power expenses are affected by the quantity of water
pumped from wells and moved through the distribution system,
rates charged by electric utility companies, and rate structures
applied to usage during peak and non-peak times of the day or
season. The purchased power expense increase of
$2.4 million was primarily due to the acquisition of
systems in Hawaii. Pump taxes increased $0.6 million in
2009 over 2008.
The cost of purchased power in the future may be impacted by
climate change legislation that would impact the rates our power
suppliers charge us. Any change in pricing of our purchase power
in California would be recovered from our rate payers by the
MCBA. Any change in power costs in other states would be
requested to be recovered by
38
Table of Contents
the rate payers in those states. The impact of such legislation,
is dependent upon the enacted date, the factors that impact our
suppliers cost structure, and their ability to pass the costs to
us in their approved tariffs. These items are not known at this
time.
Administrative
and General Expenses
Administrative and general expenses include payroll related to
administrative and general functions, all employee benefits
charged to expense accounts, insurance expenses, legal fees,
regulatory utility commissions’ expenses, expenses
associated with being a public company, and general corporate
expenses.
During 2009, administrative and general expenses increased
$15.8 million, or 26.6%, compared to 2008. Pension expense
increased $8.6 million over the prior year and legal
expense increased $1.0 million. Increase in labor expense
and other administrative costs were offset by a reduction in
recording of expense of fees paid to the Commission of
$2.3 million. (Fees paid to the Commission by our customers
were previously recorded as a component of revenue and expense.
Effective July 1, 2008, the revenues are recorded net of
fees with the adoption of the WRAM). Other expense elements
contributed to the balance of the change, but none were
individually significant.
During 2008, administrative and general expenses increased
$5.2 million, or 9.5%, compared to 2007. Pension expense
increased $5.0 million over the prior year and legal
expense increased $0.8 million. Increase in labor expense
and other administrative costs were offset by a reduction in
recording of expense of fees paid to the Commission of
$2.7 million. (Fees paid to the Commission by our customers
were previously recorded as a component of revenue and expense.
Effective July 1, 2008, the revenues are recorded net of
fees with the adoption of the WRAM). Other expense elements
contributed to the balance of the change, but none were
individually significant.
Other
Operations Expenses
The components of other operations expenses include payroll,
material and supplies, and contract service costs of operating
the regulated water systems, including the costs associated with
water transmission and distribution, pumping, water quality,
meter reading, billing, and operations of district offices.
For 2009, other operations expenses increased $5.4 million,
or 10.5%, from 2008. The cost of operating the production and
distribution systems increased $1.1 million, or 9.3% over
the prior year. the cost for water treatment and water quality
testing and chemicals increased by $1.4 million, or 13.8%.
The largest increase in this category is the cost of labor. The
other major single increase was in conservation expense of
$1.7 million, or an increase of 110% from 2008. Other
expense elements contributed to the balance of the change, but
none were individually significant.
For 2008, other operations expenses increased $4.9 million,
or 10.6%, from 2007. The cost of operating the production and
distribution systems increased $4.0 million, or 14.7% over
the prior year. The largest increase in this category is the
cost of labor. Outside services for water treatment and water
quality testing and chemicals increased by $1.0 million, or
32%. The other major single increase was in conservation expense
of $0.6 million, or an increase of 66% from 2007.
Uncollectible accounts, which increased $0.2 million over
the prior year. Other expense elements contributed to the
balance of the change, but none were individually significant.
Maintenance
Maintenance expenses decreased $0.4 million, or 2.3%, in
2009, compared to 2008 due to decreased costs for maintenance of
mains and services. Repairs of wells, pumping equipment, and
water treatment equipment declined from the prior year. For
2008, maintenance expenses increased $0.6 million, or 3.5%,
compared to 2007, due to increased costs for maintenance of
meters, services and pumping equipment.
Depreciation
and Amortization
Depreciation and amortization increased due to the increased
level of our capital expenditures and our use of a higher
depreciation rate as authorized by the CPUC.
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Table of Contents
Our capital expenditures in California will be impacted by
certain California environmental legislation passed in prior
years. The CEQA permitting process involved in certain capital
projects has increased the administrative cost of certain
projects. California emission controls are expected to increase
the cost of vehicle acquisitions. Certain existing vehicles will
also have to be retrofitted to comply with the current
legislation. The costs are not believed to be material at this
time and will be recovered via depreciation expense by our rate
payers upon the filing of future general rate cases.
Income
Taxes
For 2009, income taxes increased $3.2 million as compared
to 2008. For 2008, income taxes increased $3.4 million as
compared to 2007. The increase in income tax for 2009, as
compared to 2008, was due to higher pretax income and a higher
effective tax rate. The effective tax rate was 40.4%, 37.7%, and
39.9% in 2009, 2008, and 2007, respectively. The effective tax
rate is impacted by the allowable tax benefit from an additional
tax deduction for the qualified production activity deduction
for income attributed to the production of water. The tax rate
is also affected by the flow through method of accounting for
income taxes which resulted from differences between tax
depreciation and book depreciation on both pre-1982 assets, as
well as all California assets. The flow through method of
accounting is described in the Summary of Significant Accounting
Policies in the Notes to Consolidated Financial Statements. We
anticipate the reversal of federal tax depreciation on pre-1982
assets to continue in future years; however, its effect on our
tax provision is uncertain due to the offsetting flow-through of
state tax depreciation, which continues to increase with capital
additions and the impact of cost to remove of pre-1982 assets.
Property
and Other Taxes
For 2009, expenses increased $2.0 million, or 13.4% from
2008. The increase is primary due to increased public service
company tax due to the acquisitions in Hawaii in September 2008,
increased payroll tax due to increased gross pay, increased
local franchise tax, which is based upon revenue, and increased
property tax, which is primary based upon our utility plant in
service. For 2008, expense increased $1.2 million, or 8.5%
compared to 2007. The increased is mainly due to increased local
franchise tax and property tax.
Non-Regulated
Revenue and Expense, Net
The major components of non-regulated income are revenue and
operating expenses related to the following activities:
| • | operating and maintenance services (O&M) and meter reading and billing services; | |
| • | antenna site leases; | |
| • | Extended Service Protection (ESP); | |
| • | design and construction services; | |
| • | interest income; | |
| • | change in cash surrender value of life insurance; and | |
| • | non-regulated expenses. |
For 2009, we experienced an increase of $4.1 million in the
cash surrender value (CSV) of life insurance contracts
associated with our benefit plans. In 2008, the decline in CSV
was $3.8 million, while in 2007 we experienced an increase
of $0.5 million. The CSV is determined in part by the
market of certain underlining funds, the value of which reflects
the changes in the stock market. Due to the continued decline in
the stock market during 2008, there was a corresponding impact
on the CSV of the life insurance contracts. In addition, we
expensed certain acquisition costs associated with some
non-regulated operations and maintenance contracts, which are
recorded as intangible assets. For 2007, non-regulated income
net of expenses increased $1.0 million, or 29%, compared to
2006. The increase was primarily due to increased non-regulated
revenues from our ESP program, interest income, and antenna site
leases. See Note 3 of the Notes to Consolidated Financial
Statements for additional information.
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Table of Contents
Gain
on Sale of Non-Utility Property
For 2009 and 2008, there were no significant non-utility
property sales compared to pretax gains of $2.5 million in
2007. Earnings and cash flow from these transactions are
sporadic and may or may not continue in future periods,
depending upon market conditions. The Company has other
non-utility properties that may be marketed in the future based
on real estate market conditions.
Interest
Expenses
In 2009, interest expense increased $4.1 million compared
to 2008. This increase was attributable to the additional
interest on the $100 million First Mortgage Bonds issued in
April 2009. In 2008, interest increased $0.9 million due to
borrowing on our line of credit. Capitalized interest in 2009,
2008, and 2007 was $3.1 million, $3.4 million, and
$2.6 million, respectively. See the “Liquidity and
Capital Resources” section for more information.
Rates
and Regulation
The state regulatory commissions have plenary powers setting
rates and operating standards. As such, state commission
decisions significantly impact our revenues, earnings, and cash
flows. The amounts discussed herein are generally annual
amounts, unless specifically stated, and the financial impact to
recorded revenue is expected to occur over a
12-month
period from the effective date of the decision. In California,
water utilities are required to make several different types of
filings. Most filings result in rate changes that remain in
place until the next General Rate Case (GRC). As explained
below, surcharges and surcredits to recover balancing and
memorandum accounts as well as general rate case interim rate
catch-up
surcharges are temporary rate changes, which have specific time
frames for recovery.
GRCs, escalation rate increase filings, and offset filings
change rates to amounts that will remain in effect until the
next GRC. The CPUC follows a rate case plan, which requires Cal
Water to file a GRC for each of its 24 regulated operating
districts every three years. In a GRC proceeding, the CPUC not
only considers the utility’s rate setting requests, but may
also consider other issues that affect the utility’s rates
and operations. Effective in 2004, Cal Water’s GRC schedule
was shifted from a calendar year to a fiscal year with test
years commencing on July 1st of each year. Effective
with the 2009 GRC, the schedule will be shifted back to a
calendar year. The CPUC is generally required to issue its GRC
decision prior to the first day of the test year or authorize
interim rates. As such, Cal Water’s GRC decisions, prior to
2005, were generally issued in the fourth quarter, and from 2005
through 2009 were generally issued in the third quarter. In
accordance with the rate case plan, the Commission would issue a
decision on Cal Water’s 2009 general rate case filing in
the fourth quarter of 2010 with rates effective on
January 1, 2011
Between GRC filings utilities may file escalation rate
increases, which allow the utility to recover cost increases,
primarily from inflation and incremental investment, during the
second and third years of the rate case cycle. However,
escalation rate increases are subject to a weather-normalized
earnings test. Under the earnings test, the CPUC may reduce the
escalation rate increase if, in the most recent twelve month
period, this earnings test reflects earnings in excess of
authorized for that district.
In addition, utilities are entitled to file offset filings.
Offset filings may be filed to adjust revenues for construction
projects authorized in GRCs when the plant is placed in service
or for rate changes charged to the Company for purchased water,
purchased power, and pump taxes (referred to as
“offsettable expenses”). Such rate changes approved in
offset filings remain in effect until a GRC is approved.
Surcharges and surcredits to amortize balances in the WRAM and
MCBA accounts, which are interest bearing, will be filed in
April of each year based on the district balances for the last
calendar year. Surcharges are expected to be amortized over
twelve months. In the event the combined WRAM and MCBA balance
for a district is less than 2.5% of revenue, the amount will not
be amortized at that time. The WRAM and MCBA amounts are
cumulative, so if they are not amortized in a given calendar
year, the balance will be rolled forward and reviewed with the
following year balance.
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Table of Contents
The following is a summary of 2009 rate filings and the
anticipated annual impact on revenues. California decisions and
resolutions may be found on the CPUC website at www.cpuc.ca.gov.
|
Increase
|
CA District/
|
|||||||||||
|
Type of Filing
|
Decision/Resolution | Approval Date | Annual Revenue | Subsidiary | ||||||||
|
GRC, Step Rate and Offset Filings
|
||||||||||||
|
Offset
|
Various (1) | Jan 2009 | $ | 3.0 million | 3 districts | |||||||
|
Offset
|
Various (2) | Feb 2009 | $ | 8.7 million | 5 districts | |||||||
|
Rate Base Offset
|
Various (3) | Apr 2009 | $ | 1.0 million | 7 districts | |||||||
|
Offset
|
Various (4) | Jul 2009 | $ | 3.3 million | 4 districts | |||||||
|
Escalation rate increase
|
Various (5) | Jul 2009 | $ | 9.2 million | 11 districts | |||||||
|
Interim rate increase
|
Various (6) | Jul 2009 | $ | 2.4 million | 8 districts | |||||||
|
City of Hawthorne
|
Res 1233 | Jul 2009 | $ | 1.0 million | City of Hawthorne | |||||||
|
Washington Water GRC
|
Order 02-UW090733 | Jul 2009 | $ | 1.2 million | Washington Water | |||||||
|
Surcharges and Surcredits
|
||||||||||||
|
Cost of Capital Change
|
d.09.05.019 | Jun 2009 | $ | (1.8 million | ) | 24 districts | ||||||
| (1) | Increase result from advice letters 1893, 1895, and 1899. | |
| (2) | Increases result from advice letters 1901, 1902, 1903, 1905, and 1906.. | |
| (3) | Increases result from advice letters 1904, 1939, 1940, 1941, 1942, 1943, and 1944. | |
| (4) | Increases result from advice letters 1924, 1927, 1928, and 1929. | |
| (5) | Increases were authorized in d.09-05-055 and d.08-07-008. | |
| (6) | Increases result from advice letters 1930-1937 |
The estimated impact of current and prior year rate changes
compared to prior years is listed in the following table:
| 2009 | 2008 | 2007 | ||||||||||
| Dollars in millions | ||||||||||||
|
General Rate Case (GRC)
|
$ | 26.3 | $ | 31.0 | $ | 3.3 | ||||||
|
Step rate increases
|
5.9 | 3.3 | 6.6 | |||||||||
|
Offset (purchased water/pump taxes)
|
16.2 | 4.9 | 4.6 | |||||||||
|
Balancing accounts, net
|
0.9 | 2.9 | 0.1 | |||||||||
|
Other
|
1.3 | — | 0.4 | |||||||||
|
Rate increases
|
$ | 50.6 | $ | 42.1 | $ | 15.0 | ||||||
Remaining
Unrecorded Balances from Previously Authorized Balancing
Accounts Recoveries/Refunds
The total net under-collected incremental cost balancing
accounts (ICBA) memorandum and balancing accounts was
approximately $1.5 million as of December 31, 2009.
Effective July 1, 2008, the ICBA memorandum and balancing
accounts were replaced with the MCBA. Cal Water is in the
process of filing for the recovery of the net $1.5 million
through customer billings.
Rate
Case Plan
In December 2005, the CPUC issued the California Water Action
Plan. The plan focuses on four key principles, among other
things, including safe, high quality water; highly reliable
water supplies; efficient use of water; and reasonable rates and
viable utilities. In accordance with the Water Action
Plan’s objective to streamline regulatory decision-making
the CPUC issued R.06-12-016 in December 2006, to address
streamlining of its water rate case plan. The CPUC issued
D.07-05-062 on May 24, 2007 adopting a new rate case plan.
As a result, since July 2009, Cal Water will be filing a
company-wide general rate case every three years. Rates would be
effective
42
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approximately 18 months from the filing date or
January 1, 2011 in the first cycle. As an interim measure,
the CPUC allowed Cal Water to incorporate general operations
costs including company benefits in rates for all districts in
July 2008 after a decision in its 2007 general rate case. In
addition, for the sixteen districts that have a delayed
effective date, the CPUC will authorize interim rates from the
authorized effective date under the old rate case plan. These
interim rates will be subject to adjustment based on a final
determination in the 2009 general rate case filing. In addition
to general rate case processing, the RCP set a schedule for
separate cost of capital applications. Under the RCP, Cal Water
must file its cost of capital application every three years. The
first application under this procedure was made on May 1,
2008. Cal Water’s 2008 cost of capital application was
consolidated with applications of two other multi-district
Class A water utilities into a combined proceeding.
Conservation
Application
Decision
06-08-011
directed Cal Water to file an application to implement
conservation rates and a sales decoupling mechanism. On
October 23, 2006, Cal Water filed Application
06-10-026
requesting a water revenue balancing account, a conservation
memorandum account, and conservation rates. This request was
consolidated with applications filed by other water companies in
the CPUC’s Order Instituting Investigation
07-01-022.
On June 15, 2007, Cal Water and two consumer groups (the
Commission’s Division of Ratepayer Advocates (DRA) and The
Utility Reform Network (TURN)) filed a settlement jointly
proposing a program of tiered residential rates, a water revenue
adjustment mechanism (WRAM), and a modified balancing account
(MCBA) that includes changes in source mix. Tiered rates have
varying charges depending on the overall monthly usage. They are
intended to provide a conservation incentive, particularly in
high-usage periods. Non-residential rate design under the
settlement emphasizes variable charges over service charges. The
WRAM and MCBA are intended to negate any impact from customer
conservation on Cal Water’s earnings.
On February 29, 2008, the Commission adopted the
settlement. On July 1, 2008, Cal Water made its tiered
rates, WRAM, and MCBA effective in compliance with the
Commission’s administrative processing rules. The submitted
tariffs were administratively approved in the third quarter,
effective July 1, 2008.
In the conservation proceeding, the Commission also sought to
examine the effect of sales decoupling on appropriate return on
equity. On August 21, 2008, the Commission issued its
decision
08-08-030
declining to make a specific return on equity adjustment and
ordering that the issue be considered in connection with the
cost of capital applications filed on May 1, 2008.
The conservation proceeding is still open to examine the
Commission’s non-rate-related conservation policies. We are
unable to predict the outcome of the proceeding with respect to
these matters at this time.
2009
Regulatory Activity
Cost
of Capital Proceeding
On May 1, 2008, as required under the Rate Case Plan, Cal
Water filed Application
08-05-002
requesting a review of its authorized rate of return. Cal Water
requested a rate of return on rate base of 9.90% reflecting a
12.57% return on common equity versus the 10.2% return on common
equity previously approved by the CPUC. In September of 2008,
the Commission held three days of evidentiary hearings on the
applications of Cal Water, Golden State Water Company, and
California-American
Water Company. The Commission’s Division of Ratepayer
Advocates was the only other participating party in the
proceeding. All parties filed opening and reply briefs in
October, 2008. An Administrative Law Judge issued a decision
which was considered by the Commission in the first quarter of
2009. The final decision was adopted on May 7, 2009 in
Decision
09-05-019.
The CPUC declined to change the adopted return on equity,
reauthorizing 10.2%. However, the Commission slightly changed
Cal Water’s adopted capital structure (the relative amounts
of debt and equity) which changed the authorized overall rate of
return on rate base to 8.58% for all districts. This represented
an increased authorized return for eight districts and a reduced
return for sixteen districts. The overall revenue decrease for
the company was calculated to be $1.8 million.
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2007
GRC Escalation Rate Increase
On July 3, 2007, Cal Water filed its 2007 GRC application
covering eight districts and general office costs. On
July 10, 2008, the CPUC approved a settlement between Cal
Water and the Division of Ratepayer Advocates, and authorized
annual rate increases for eight districts of $33.4 million.
In its order, the CPUC allowed Cal Water to file immediately to
recover its increased general costs in all other districts. The
CPUC order also allows for additional rate increases, including
escalation increases, which Cal Water requested in 2009 and will
also request in 2010, and offset increases after construction of
certain large capital projects. In June 2009, Cal Water filed
escalation rate increase in 11 districts to increase rates by
$9.2 million. These filings were approved effective in July
as requested.
2009
California GRC Filing
On July 2, 2009, Cal Water filed its 2009 GRC application
covering all twenty-four districts and general office costs. The
GRC application requested an increase of $70.6 million or
16.75% in rates for 2011, $24.8 million or 5.04% in rates
for 2012 and $24.8 million or 4.79% in rates for 2013. Cal
Water anticipates a decision on this application by
January 1, 2011. At this time, we cannot predict the timing
or outcome of the filing.
2009
Washington GRC Filing
On May 12, 2009, Washington Water filed its 2009 GRC
application. The Washington Utilities and Transportation
Commission (WUTC) allows Washington Water to file a consolidated
rate application for all service areas. Most areas are served on
the same rate schedule. On July 30, 2009, the WUTC approved
a rate increase of $1.2 million on an annual basis or
approximately 16.5% over current rates.
Other
2009 Regulatory Proceedings
In January 2009, Cal Water filed offset advice letters to
increase rates by $3.0 million to offset increased
purchased water and pump tax rates in three of its regulated
districts. These advice letters were approved effective in
January 2009 as requested.
In February 2009, Cal Water filed offset advice letters to
increase rates by $8.7 million to offset increased
purchased water and pump tax rates in five of its regulated
districts. These advice letters were approved effective in
February 2009 as requested.
In April 2009, Cal Water filed offset advice letters to increase
rates by $1.0 million in seven districts to recover the
capital requirements for various water treatment and
distribution projects. The Commission had authorized recovery
for these projects in D.06-08-011 in August 2006 and in
D08-07-008 in July of 2008.
In June 2009, Cal Water filed, effective in July 2009, interim
rate increases for eight districts totaling $2.4 million.
These filings were approved effective in July as requested.
2010
Regulatory Activity to Date
In February 2010, Cal Water filed advice letters to offset
increased purchased water and pump tax rates in six of its
regulated districts totaling $15.8 million in annual
revenue. Under CPUC advice letter processing rules, Cal Water
must wait for a required customer notice period for some of
these districts. Therefore, Cal Water anticipates these
increases will be approved in March or April. While these
offsets have not been approved as of February 10, 2010, Cal
Water expects that they will be approved and effective as filed.
However, expense offsets are
dollar-for-dollar
increases in revenue to match increased expenses and interact
with the WRAM and MCBA mechanisms so that net operating revenue
is not affected by an offset increase.
On January 7, 2010, Cal Water filed an application for
additional financing authority with the CPUC. If adopted as
proposed, Cal Water would be allowed authority to issue
$350 million of debt and common stock. Cal Water cannot
predict the timing or outcome of the application at this time.
Throughout the calendar year, Cal Water plans to file advice
letters to offset expected increases in purchased water and pump
tax charges in some districts. Cal Water cannot predict the
exact timing or dollar amount of the
44
Table of Contents
changes. However, expense offsets are
dollar-for-dollar
increases in revenue to match increased expenses and interact
with the WRAM and MCBA mechanisms so that net operating revenue
is not affected by an offset increase.
In April 2010, as allowed in the Commission’s 2007 Rate
Case Plan, Cal Water intends to file advice letters for interim
rate increases for sixteen districts effective in July 2010.
Under the Commission’s prior rate case plan, these
districts would have had rates effective in July 2010. The
interim rate changes will be adjusted once the Commission has
issued a determination in Cal Water’s 2009 GRC, expected in
the fourth quarter of 2010.
In May 2010, Cal Water intends to file for escalation rate
increases effective in July for eight districts. The CPUC’s
current practice on approving escalation rate increases is based
partly on inflation through March 2010. Inputs to the
weather-adjusted earnings test include recorded information
through March 2010. Therefore, Cal Water does not know the
amount of its request at this time.
In November 2009, Hawaii Water notified the Hawaii Public
Utilities Commission of its intent to file a general rate
increase application for the Ka’anapali service area. Such
notification is required at least 60 days before filing a
rate application. At this time, we cannot predict the timing or
outcome of the proposed filing.
Water
Supply
Our source of supply varies among our operating districts.
Certain districts obtain all of their supply from wells; some
districts purchase all of their supply from wholesale suppliers;
and other districts obtain supply from a combination of wells
and wholesale suppliers. A small portion of supply comes from
surface sources and is processed through Company-owned water
treatment plants. To the best of management’s knowledge, we
are meeting water quality, environmental, and other regulatory
standards for all company-owned systems.
California’s normal weather pattern yields little
precipitation between mid-spring and mid-fall. The Washington
Water service areas receive precipitation in all seasons, with
the heaviest amounts during the winter. New Mexico Water’s
rainfall is heaviest in the summer monsoon season. Hawaii Water
receives precipitation throughout the year, with the largest
amounts in the winter months. Water usage in all service areas
is highest during the warm and dry summers and declines in the
cool winter months. Rain and snow during the winter months
replenish underground water aquifers and fill reservoirs,
providing the water supply for subsequent delivery to customers.
To date, snowpack water content and rainfall accumulation during
the 2009 — 2010 water year is 113% of normal (as of
January 31, 2010 per the California Department of Water
Resources). Precipitation in the prior year was below average.
Management believes that supply pumped from underground aquifers
and purchased from wholesale suppliers will be adequate to meet
customer demand during 2010 and beyond. However, water rationing
may be required in 2010, if declared by the state or local
jurisdictions. Long-term water supply plans are developed for
each of our districts to help assure an adequate water supply
under various operating and supply conditions. Some districts
have unique challenges in meeting water quality standards, but
management believes that supplies will meet current standards
using current treatment processes.
Liquidity
and Capital Resources
Cash
flow from Operations
During 2009 we generated cash flow from operations of
approximately $72 million, compared to $96 million
during 2008, and $50 million in 2007. Cash flow from
operations is primarily generated by net income, non-cash
expenses for depreciation and amortization, and deferred income
taxes. Cash generated by operations varies during the year.
The water business is seasonal. Billed revenue is lower in the
cool, wet winter months when less water is used compared to the
warm, dry summer months when water use is highest. This
seasonality results in the possible need for short-term
borrowings under the bank lines of credit in the event cash is
not sufficient to cover operating and capital costs during the
winter period. The increase in cash flow during the summer
allows short-term borrowings to be paid down. Customer water
usage can be lower than normal in years when more than normal
precipitation falls in our service areas or temperatures are
lower than normal, especially in the summer months. The
reduction in water usage reduces cash flow from operations and
increases the need for short-term bank borrowings. In addition,
short-term borrowings are used to finance capital expenditures
until long-term financing is arranged.
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Table of Contents
Investing
Activities
During 2009 we used $111 million of cash for both
company-funded and developer-funded capital expenditures.
Capital expenditures were budgeted at approximately
$120 million.
Included in investing activities in 2008 was the receipt of
$34.2 million from our MTBE litigations. We are currently
reviewing the regulatory treatment with the CPUC and have
requested a private letter ruling from the Internal Revenue
Service regarding the tax treatment. While we have not yet
determined the final accounting treatment of the proceeds, we
anticipate using the proceeds on infrastructure improvements.
Financing
Activities
During 2009, Cal Water issued $100 million aggregate
principal amount of its 5.875% First Mortgage Bonds due in 2019,
which are fully and unconditionally guaranteed by the Company.
Pursuant to the note purchase agreements and supplements thereto
under which Cal Water’s outstanding unsecured senior notes
had been issued, Cal Water was required to issue a new series of
First Mortgage Bonds in exchange for each outstanding series of
unsecured senior notes with a like aggregate principal amount.
The offering triggered this exchange provision. Accordingly,
upon the closing of the offering, Cal Water was required to
issue an additional series of First Mortgage Bonds under the
mortgage indenture with a like aggregate principal amount to the
holders of each series of its outstanding unsecured senior notes
in exchange for each such series of notes.
In connection with the offering, Cal Water exercised its option
to redeem the remaining $3.0 million of 8.86% Series J
First Mortgage Bonds due 2023, which Cal Water assumed in
connection with its acquisition of Dominguez Water Corporation
in 2000. The redemption was effected pursuant to the terms of
the indenture and supplemental indentures governing the
Series J bonds. The Series J bonds were redeemed at a
redemption price equal to 100% of the outstanding principal
amount of the Series J bonds plus a make-whole premium of
$1.0 million, and accrued and unpaid interest to the date
of redemption.
Short-Term
Financing
Short-term liquidity is provided by credit facilities extended
to us and to certain of our subsidiaries and by internally
generated funds. Long-term financing is accomplished through use
of both debt and equity. Short-term bank borrowings were
$12 million at December 31, 2009 and $40 million
at December 31, 2008. Cash and cash equivalents were
$9.9 million at December 31, 2009, and
$13.9 million at December 31, 2008. Given our ability
to access our lines of credit on a daily basis, cash balances
are managed to levels required for daily cash needs and excess
cash is invested in short-term or cash equivalent instruments.
Minimal operating levels of cash are maintained for Washington
Water, New Mexico Water, and Hawaii Water.
On October 27, 2009, the Company and Cal Water entered into
three-year syndicated unsecured revolving line of credit
agreements with sixteen banks to provide an unsecured revolving
line of credit of $50 million and $250 million,
respectively. The base loan rate can vary from prime plus
50 basis points to prime plus 125 basis points
depending on the Company’s total capitalization ration.
Likewise, the unused commitment fee can vary from 25 basis
points to 35 basis points based on the same ratio. Based on
the Company’s planned capitalization during 2010 and future
years, the Company expects its pricing to be prime plus
75 basis points with a 25 basis point unused
commitment fee. California Water Service Group and subsidiaries
which it designates may borrow under the facilities. Borrowings
by California Water Service Company will be repaid within
12 months unless otherwise authorized by the CPUC. Bank of
America was selected as lead bank and administrative agent, with
CoBank and Bank of China as co-syndication agents.
These unsecured credit agreements contain affirmative and
negative covenants and events of default customary for credit
facilities of this type including, among other things,
limitations and prohibitions relating to additional
indebtedness, liens, mergers, and asset sales. Also, these
unsecured credit agreements contain financial covenants
governing the Company and its subsidiaries’ consolidated
total capitalization ratio and interest coverage ratio. As of
December 31, 2009, we have met all of the covenant
requirements and are eligible to use the full amount of the
commitment.
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Table of Contents
Credit
Ratings
Cal Water’s first mortgage bonds are rated by
Standard & Poor’s (S&P). Since 2004, the
credit rating agency has maintained their rating of A+ and
characterized us as stable. On April 8, 2009,
Standard & Poor’s issued a rating of AA- on the
5.875% $100 million First Mortgage bonds issued in April.
Management believes we would be able to meet financing needs
even if ratings were downgraded, but a rating change could
result in a higher interest rate on new debt.
Long-Term
Financing
Long-term financing, which includes senior notes, other debt
securities, and common stock, has been used to replace
short-term borrowings and fund capital expenditures. Internally
generated funds, after making dividend payments, provide
positive cash flow, but have not been at a level to meet the
needs of our capital expenditure requirements. Management
expects this trend to continue given our capital expenditures
plan for the next five years. Some capital expenditures are
funded by payments received from developers for contributions in
aid of construction or advances for construction. Funds received
for contributions in aid of construction are non-refundable,
whereas funds classified as advances in construction are
refundable. Management believes long-term financing is available
to meet our cash flow needs through issuances in both debt and
equity markets.
In September 2004, the CPUC issued a decision granting Cal Water
authority to complete up to $250 million of equity and debt
financing through 2010, subject to certain restrictions. In
2006, our issuance of $79.5 million of common stock,
$73.4 million was contributed to Cal Water. In 2009, under
this authorization, Cal Water issued First Mortgage Bonds for
$100 million. We are currently in the process of filing
with the CPUC authorization of $350 million for additional
equity and debt financing.
In 2009, we utilized cash generated from operations and the
First Mortgage Bond financing. We did not issue any significant
common stock in 2009. In future periods, management anticipates
funding our capital needs through a relatively balanced approach
between long term debt and equity.
Additional information regarding the bank borrowings and
long-term debt is presented in Notes 8 and 9 in the Notes
to Consolidated Financial Statements.
Off-Balance
Sheet Transactions
We do not utilize off-balance-sheet financing or utilize special
purpose entity arrangements for financing. We do not have equity
ownership through joint ventures or partnership arrangements.
Contractual
Obligations
|
Less than
|
After
|
|||||||||||||||||||
| Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Long-term debt
|
$ | 387,222 | $ | 12,953 | $ | 6,455 | $ | 51,109 | $ | 316,705 | ||||||||||
|
Interest payments
|
294,746 | 23,418 | 46,052 | 42,867 | 182,409 | |||||||||||||||
|
Advances for construction
|
185,027 | 6,478 | 12,788 | 12,745 | 153,016 | |||||||||||||||
|
Office leases
|
4,684 | 826 | 1,017 | 525 | 2,316 | |||||||||||||||
|
System leases
|
7,389 | 961 | 1,709 | 1,691 | 3,028 | |||||||||||||||
|
Water supply contracts
|
431,464 | 16,330 | 32,663 | 32,667 | 349,804 | |||||||||||||||
|
TOTAL
|
$ | 1,310,532 | $ | 60,966 | $ | 100,684 | $ | 141,604 | $ | 1,007,278 | ||||||||||
Our contractual obligations are summarized in the table above.
For pension and post retirement benefits other than pension
obligations see Note 12 to the Notes to the consolidated
Financial Statements. Long-term debt payments include annual
sinking fund payments on first mortgage bonds, maturities of
long-term debt, and annual payments on other long-term
obligations. Advances for construction represent annual contract
refunds to developers for the cost of water systems paid for by
the developers. The contracts are non-interest bearing, and
refunds
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Table of Contents
are generally on a straight-line basis over a
40-year
period. System and office leases include obligations associated
with leasing water systems and rents for office space.
Cal Water has water supply contracts with wholesale suppliers in
14 of its operating districts and for the two leased systems in
Hawthorne and Commerce. For each contract, the cost of water is
established by the wholesale supplier and is generally beyond
our control. The amount paid annually to the wholesale suppliers
is charged to purchased water expense on our statement of
income. Most contracts do not require minimum annual payments
and vary with the volume of water purchased.
We have a contract with the Santa Clara Water District,
which contains minimal purchase provisions. The contract payment
varies with the volume of water purchased above the minimal
levels. Management plans to continue to purchase and use at
least the minimum water requirement under this contract in the
future. Total paid under this contract was $5.4 million in
2009, $6.7 million in 2008, and $6.2 million in 2007.
The water supply contract with Stockton East Water District
(SEWD) requires a fixed, annual payment and does not vary during
the year with the quantity of water delivered by the district.
Due to the fixed price arrangement, we utilize as much water as
possible from SEWD in order to minimize the cost of operating
Company-owned wells used to supplement SEWD deliveries. The
total paid under the contract was $5.5 million in 2009,
$5.7 million in 2008, and $5.5 million in 2007.
Pricing under the contract varies annually. Estimated annual
contractual obligations in the above table are based on the same
payment level as 2009. Future cost increases by SEWD are
expected to be offset by a decline in the allocation of costs to
us as more of these costs are expected to be allocated to other
SEWD customers due to growth within their service areas.
On September 21, 2005, we entered into an agreement with
Kern County Water Agency (Agency) to obtain treated water for
our operations. The term of the agreement is to January 1,
2035, or until the Agency’s bonds are repaid. The
Agency’s bonds are described below. Under the terms of the
agreement, we were obligated to purchase approximately
11,500 acre feet of treated water in 2009 and an
incrementally higher volume of water for each subsequent year
until 2017, when we are obligated to purchase 20,500 acre
feet of treated water per year. We are obligated to pay a
capital facilities charge and a treated water charge, both of
which will be expensed as invoiced, regardless of whether we can
use the water in our operation, and we are obligated for these
charges even if the Agency cannot produce an adequate amount to
supply the 20,500 acre feet in the year. This agreement
supersedes a prior agreement with Kern County Water Agency for
the supply of 11,500 acre feet of water per year. Total
paid, under the prior agreement, was $5.5 million,
$4.4 million, and $2.9 million in 2009, 2008 and 2007,
respectively.
Three other parties, including the City of Bakersfield, are also
obligated to purchase a total of 32,500 acre feet per year
under separate agreements with the Agency. Further, the Agency
has the right to proportionally reduce the water supply provided
to all of the participants if it cannot produce adequate
supplies. The participation of all parties in the transaction
for expansion of the Agency’s facilities, including its
water purification plant, purchase of the water, and payment of
interest and principal on the bonds being issued by the Agency
to finance the transaction, is required as a condition to the
obligation of the Agency to proceed with expansion of the
Agency’s facilities. If any of the other parties does not
use its allocation in a given year, that party is still
obligated to pay its contracted amount.
The Agency has issued bonds to fund the project and will use the
payments of the capital facilities charges by us and the other
contracted parties to meet the Agency’s obligations to pay
interest and repay principal on the bonds. If any of the parties
were to default on making payments of the capital facilities
charge, then the other parties are obligated to pay for the
defaulting party’s share on a pro-rata basis. If there is a
payment default by a party and the remaining parties have to
make payments, they are also entitled to a pro-rata share of the
defaulting party’s water allocation.
We expect to use all of its entitled water in our operations
every year. If additional treated water is available, all
parties have an option to purchase this additional treated
water, subject to the Agency’s right to allocate the water
among the parties. If we were to pay for and receive additional
amounts of water due to a default of another participating
party, we believe we could use this additional water in our
operations without incurring substantial increases in
incremental costs.
The total obligation of all parties, excluding us, is
approximately $82.4 million to the Agency. Based on the
credit worthiness of the other participants, which are
government entities, our management believes it to be highly
48
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unlikely that we would be required to assume any other
parties’ obligations under the contract due to their
default. If a party defaults, we would receive entitlement to
the additional water for assuming the additional obligation.
Once the project is complete, we are obligated to pay a capital
facilities charge and a treated water charge that together total
$6.7 million annually, which equates to $0.32 per acre
foot. Annual payments of $3.6 million for the capital
facilities charge began when the Agency issued bonds to fund the
project. Some of the treated water charge of $2.8 million
began July 1, 2007, when a portion of the planned capacity
became available. Once the entire expansion project is
completed, the full annual payments will be $6.7 million
which will continue through the term of the agreement. As
treated water is being delivered, we will also be obligated for
our portion of the operating costs; that portion is currently
estimated to be $0.01 per acre foot. The actual amount will vary
due to variations from estimates, inflation, and other changes
in the cost structure. Our overall estimated cost of $0.32 per
acre foot is less than the estimated cost of procuring untreated
water (assuming water rights could be obtained) and then
providing treatment.
Capital
Requirements
Capital requirements consist primarily of new construction
expenditures for expanding and replacing utility plant
facilities and the acquisition of water systems. They also
include refunds of advances for construction.
Company-funded and developer-funded utility plant expenditures
were $110.6 million, $107.8 million, and
$89.5 million in 2009, 2008, and 2007, respectively. A
majority of capital expenditures was associated with mains and
water treatment equipment.
For 2010, the Company is estimating its capital expenditures to
be between $100 and $160 million. We do not expect a
decline in annual capital expenditure for the next five years.
Management expects us to incur non-company funded expenditures
in 2010. These expenditures will be financed by developers
through refundable advances for construction and non-refundable
contributions in aid of construction. Developers are required to
deposit the cost of a water construction project with us prior
to our commencing construction work, or the developers may
construct the facilities themselves and deed the completed
facilities to us. Funds are generally received in advance of
incurring costs for these projects. Advances are normally
refunded over a
40-year
period without interest. Future payments for advances received
are listed under contractual obligations above. Because
non-company-funded construction activity is solely at the
discretion of developers, we cannot predict the level of future
activity. The cash flow impact is expected to be minor due to
the structure of the arrangements.
Capital
Structure
Common stockholders’ equity was $420.6 million
compared to $402.9 million at December 31, 2009 and
2008, respectively. As noted above, in 2009 additional long-term
debt was incurred. During 2008, we redeemed all of the issued
and outstanding shares of Series C Preferred Stock.
Total capitalization, including the current portion of long-term
debt, at December 31, 2009, was $807.9 million and
$693.3 million at December 31, 2008. The Company
intends to issue common stock and long-term debt to finance our
operations. The capitalization ratios will vary depending upon
the method we choose to finance our operations.
At December 31, capitalization ratios were:
| 2009 | 2008 | |||||||
|
Common equity
|
52.1 | % | 58.1 | % | ||||
|
Long-term debt
|
47.9 | % | 41.9 | % | ||||
49
Table of Contents
The return (from both regulated and non-regulated operations) on
average common equity was 9.8% in 2009 compared to 10.2% in 2008.
Acquisitions
The following acquisitions were completed in 2009, 2008, and
2007.
In 2009, after receiving regulatory approval, Cal Water acquired
two water utility systems with no increase to the allowed rate
base. In addition, as part of the acquisition Cal Water assumed
cash of $0.5 million and an obligation of equal amount to
fund future capital projects on behalf of rate payers. No other
assets or liabilities were assumed.
In 2008, the Company’s wholly-owned subsidiary HWS Utility
Services, LLC, acquired contracts to operate and maintain water
and wastewater systems in Hawaii. The purchase price of
$1.3 million was paid with the issuance of the
Company’s common stock. The purchase price is being
amortized over the remaining life of the contracts.
On September 2, 2008, after receiving regulatory approval,
the Company’s wholly-owned subsidiary, Hawaii Water Service
Company, Inc. acquired all the outstanding stock of three
related privately held companies (Waikoloa Resort Utilities,
Inc.; Waikoloa Water Company, Inc.; Waikoloa Sewer Company,
Inc.) on the Island of Hawaii with water and wastewater
operations. The combined purchase price was $20.6 million.
Assets acquired were $26.9 million, including cash of
$6.3 million. Liabilities assumed were $10.2 million
(net of $12.6 million which was paid at close of escrow).
Goodwill of $3.9 million was initially recorded. In 2009,
the goodwill was reduced by $1.3 million in recognition of
the tax benefits of the acquired net operating loss
carryforwards. On December 19, 2008, after receiving
regulatory approval, Hawaii Water acquired the water and
wastewater assets of two other privately held company (Kukio
Utility Company and WB Maninowali) for a cash price of
$10.6 million which was the assigned value of the assets.
No liabilities were assumed.
In 2007, after receiving regulatory approval, we acquired for
cash a water system with allowed rate base of approximately
$0.4 million. In addition, in Washington we acquired five
water systems for $1.1 million in cash, which was the
approximate value of rate base of the systems.
Real
Estate Program
We own real estate. From time to time, certain parcels are
deemed no longer used or useful for water utility operations.
Most surplus properties have a low cost basis. We developed a
program to realize the value of certain surplus properties
through sale or lease of those properties. The program will be
ongoing for a period of several years. Property sales produced
pretax gains of $0.6 million, none, and $2.5 million
in 2009, 2008, and 2007, respectively. As sales are dependent on
real estate market conditions, future sales, if any, may or may
not be at prior year levels.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
We do not participate in hedge arrangements, such as forward
contracts, swap agreements, options, or other contractual
agreements to mitigate the impact of market fluctuations on our
assets, liabilities, production, or contractual commitments. We
operate only in the United States and, therefore, are not
subject to foreign currency exchange rate risks.
Terrorism
Risk
Due to terrorist risks, we have heightened security at our
facilities over the past few years and have taken added
precautions to protect our employees and the water delivered to
customers. We have complied with EPA regulations concerning
vulnerability assessments and have made filings to the EPA as
required. In addition, communication plans have been developed
as a component of our procedures related to this risk. While we
do not make public comments on our security programs, we have
been in contact with federal, state, and local law enforcement
agencies to coordinate and improve our water delivery
systems’ security.
50
Table of Contents
Interest
Rate Risk
We are subject to interest rate risk, although this risk is
lessened because we operate in a regulated industry. If interest
rates were to increase, management believes customer rates would
increase accordingly, subject to Commission approval in future
GRC filings. The majority of our debt is long-term at a fixed
rate. Interest rate risk does exist on short-term borrowings
within our credit facilities, as these interest rates are
variable. We also have interest rate risk on new financing, as
higher interest cost may occur on new debt if interest rates
increase.
Stock
Price Risk
Because we operate primarily in a regulated industry, our stock
price volatility risk is somewhat lessened; however, regulated
parameters also can be recognized as limitations to operations,
earnings, and the ability to respond to certain business
condition changes. An adverse change in the stock price could
make issuance of common stock less attractive in the future.
Stock
Market Performance Risk
Our stock price could be affected by changes in the general
market. This could impact the costs of obtaining funds through
the equity markets. Stock market performance could also impact
us through the investments by our defined benefit plan and
postretirement medical benefit plan. We are responsible for
funding these plans. Plan investments are made in stock market
equities using mutual funds and in corporate bonds. Poor
performance of the equity and bond markets could result in
increased costs and additional funding requirements due to lower
investment returns. Management believes we would be able to
recover these higher costs in customer rates.
Equity
Risk
We do not have equity investments and, therefore, do not have
equity risks.
51
Table of Contents
| Item 8. | Financial Statements and Supplementary Data. |
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
California Water Service Group
San Jose, California
We have audited the accompanying consolidated balance sheets of
California Water Service Group and subsidiaries (the
“Company”) as of December 31, 2009 and 2008, and
the related consolidated statements of income, common
stockholders’ equity and cash flows for the years ended
December 31, 2009 and 2008. We also have audited the
Company’s internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control
—
Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is
responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial
Reporting
. Our responsibility is to express an opinion on
these financial statements and an opinion on the Company’s
internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
52
Table of Contents
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of California Water Service Group and subsidiaries as
of December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on
the criteria established in
Internal Control
—
Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Deloitte &
Touche LLP
San Francisco, California
February 26, 2010
53
Table of Contents
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
California Water Service Group:
We have audited the accompanying consolidated statements of
income, common stockholders’ equity, and cash flows of
California Water Service Group and subsidiaries for the year
ended December 31, 2007. These consolidated financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the results
of operations and cash flows of California Water Service Group
and subsidiaries for the year ended December 31, 2007, in
conformity with U.S. generally accepted accounting
principles.
/s/
KPMG
LLP
Mountain View, California
February 28, 2008, except for the last paragraph of
note 1,
which is as of February 27, 2009
54
Table of Contents
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| In thousands, except per share data | ||||||||
|
ASSETS
|
||||||||
|
Utility plant:
|
||||||||
|
Land
|
$ | 19,422 | $ | 19,058 | ||||
|
Depreciable plant and equipment
|
1,575,756 | 1,464,904 | ||||||
|
Construction work in progress
|
89,908 | 80,649 | ||||||
|
Intangible assets
|
23,976 | 18,468 | ||||||
|
Total utility plant
|
1,709,062 | 1,583,079 | ||||||
|
Less accumulated depreciation and amortization
|
(510,985 | ) | (470,712 | ) | ||||
|
Net utility plant
|
1,198,077 | 1,112,367 | ||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
9,866 | 13,869 | ||||||
|
Receivables, net of allowance for doubtful accounts of $847 and
$1,210, respectively:
|
||||||||
|
Customers
|
25,567 | 22,786 | ||||||
|
Regulatory balancing accounts
|
10,513 | 4,629 | ||||||
|
Other
|
9,043 | 7,442 | ||||||
|
Unbilled revenue
|
13,417 | 13,112 | ||||||
|
Materials and supplies at weighted average cost
|
5,530 | 5,070 | ||||||
|
Prepaid income taxes
|
7,192 | 4,968 | ||||||
|
Taxes, prepaid expenses, and other assets
|
11,113 | 7,922 | ||||||
|
Total current assets
|
92,241 | 79,798 | ||||||
|
Other assets:
|
||||||||
|
Regulatory assets
|
204,104 | 198,293 | ||||||
|
Unamortized debt premium and expense
|
4,756 | 6,070 | ||||||
|
Goodwill
|
2,615 | 3,906 | ||||||
|
Other
|
23,788 | 17,673 | ||||||
|
Total other assets
|
235,263 | 225,942 | ||||||
| $ | 1,525,581 | $ | 1,418,107 | |||||
|
CAPITALIZATION AND LIABILITIES
|
||||||||
|
Capitalization:
|
||||||||
|
Common stock, $0.01 par value; 25,000 shares
authorized, 20,765 and 20,723, outstanding in 2009 and 2008,
respectively
|
$ | 208 | $ | 207 | ||||
|
Additional paid-in capital
|
215,528 | 213,922 | ||||||
|
Retained earnings
|
204,898 | 188,820 | ||||||
|
Total common stockholders’ equity
|
420,634 | 402,949 | ||||||
|
Long-term debt, less current maturities
|
374,269 | 287,498 | ||||||
|
Total capitalization
|
794,903 | 690,447 | ||||||
|
Current liabilities:
|
||||||||
|
Current maturities of long-term debt
|
12,953 | 2,818 | ||||||
|
Short-term borrowings
|
12,000 | 40,000 | ||||||
|
Accounts payable
|
43,689 | 39,187 | ||||||
|
Regulatory balancing accounts
|
2,430 | 2,585 | ||||||
|
Accrued other taxes
|
4,369 | 2,776 | ||||||
|
Accrued interest
|
4,258 | 3,295 | ||||||
|
Other accrued liabilities
|
30,659 | 32,535 | ||||||
|
Total current liabilities
|
110,358 | 123,196 | ||||||
|
Unamortized investment tax credits
|
2,318 | 2,392 | ||||||
|
Deferred income taxes
|
91,851 | 72,344 | ||||||
|
Regulatory liabilities
|
19,669 | 20,728 | ||||||
|
Pension and postretirement benefits other than pension
|
137,127 | 152,685 | ||||||
|
Advances for construction
|
185,027 | 176,163 | ||||||
|
Contributions in aid of construction
|
118,217 | 117,568 | ||||||
|
MTBE settlement
|
34,375 | 34,216 | ||||||
|
Other long-term liabilities
|
31,736 | 28,368 | ||||||
|
Commitments and contingencies
|
— | — | ||||||
| $ | 1,525,581 | $ | 1,418,107 | |||||
See accompanying Notes to Consolidated Financial Statements.
55
Table of Contents
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| In thousands, except per share data | ||||||||||||
|
Operating revenue
|
$ | 449,372 | $ | 410,312 | $ | 367,082 | ||||||
|
Operating expenses:
|
||||||||||||
|
Operations:
|
||||||||||||
|
Purchased water
|
121,695 | 111,726 | 106,748 | |||||||||
|
Purchased power
|
28,252 | 25,939 | 23,974 | |||||||||
|
Pump taxes
|
9,537 | 8,899 | 8,161 | |||||||||
|
Administrative and general
|
75,243 | 59,429 | 54,262 | |||||||||
|
Other
|
56,577 | 51,196 | 46,310 | |||||||||
|
Maintenance
|
18,537 | 18,969 | 18,336 | |||||||||
|
Depreciation and amortization
|
39,778 | 37,339 | 33,563 | |||||||||
|
Income taxes
|
24,812 | 24,507 | 17,887 | |||||||||
|
Property and other taxes
|
16,822 | 14,839 | 13,671 | |||||||||
|
Total operating expenses
|
391,253 | 352,843 | 322,912 | |||||||||
|
Net operating income
|
58,119 | 57,469 | 44,170 | |||||||||
|
Other income and expenses:
|
||||||||||||
|
Non-regulated revenue
|
18,190 | 14,230 | 13,557 | |||||||||
|
Non-regulated expense
|
(12,452 | ) | (15,097 | ) | (9,114 | ) | ||||||
|
Gain on sale of non-utility property
|
560 | 7 | 2,516 | |||||||||
|
Income tax (expense) benefit on other income and expenses
|
(2,550 | ) | 376 | (2,836 | ) | |||||||
|
Net other income (expense)
|
3,748 | (484 | ) | 4,123 | ||||||||
|
Interest expense:
|
||||||||||||
|
Interest expense
|
24,394 | 20,591 | 19,719 | |||||||||
|
Less: capitalized interest
|
(3,081 | ) | (3,411 | ) | (2,585 | ) | ||||||
|
Net interest expense
|
21,313 | 17,180 | 17,134 | |||||||||
|
Net income
|
$ | 40,554 | $ | 39,805 | $ | 31,159 | ||||||
|
Earnings per share:
|
||||||||||||
|
Basic
|
$ | 1.95 | $ | 1.90 | $ | 1.50 | ||||||
|
Diluted
|
$ | 1.95 | $ | 1.90 | $ | 1.50 | ||||||
|
Weighted average number of common shares outstanding:
|
||||||||||||
|
Basic
|
20,745 | 20,710 | 20,665 | |||||||||
|
Diluted
|
20,766 | 20,734 | 20,689 | |||||||||
See accompanying Notes to Consolidated Financial Statements.
56
Table of Contents
Consolidated
Statements of Common Stockholders’ Equity
For the
years ended December 31, 2009, 2008 and 2007
|
Additional
|
Total
|
|||||||||||||||||||
| Common Stock |
Paid-in
|
Retained
|
Stockholders’
|
|||||||||||||||||
| Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||
| In thousands | ||||||||||||||||||||
|
Balance at December 31, 2006
|
20,657 | $ | 207 | $ | 211,513 | $ | 166,582 | $ | 378,302 | |||||||||||
|
Net income
|
— | — | — | 31,159 | 31,159 | |||||||||||||||
|
Issuance of common stock
|
9 | — | 372 | — | 372 | |||||||||||||||
|
Dividends paid:
|
||||||||||||||||||||
|
Preferred stock
|
— | — | — | (153 | ) | (153 | ) | |||||||||||||
|
Common stock
|
— | — | — | (23,971 | ) | (23,971 | ) | |||||||||||||
|
Total dividends paid
|
— | — | — | (24,124 | ) | (24,124 | ) | |||||||||||||
|
Balance at December 31, 2007
|
20,666 | 207 | 211,885 | 173,617 | 385,709 | |||||||||||||||
|
Net income
|
— | — | — | 39,805 | 39,805 | |||||||||||||||
|
Issuance of common stock
|
57 | — | 2,037 | — | 2,037 | |||||||||||||||
|
Premium on retirement of preferred stock
|
— | — | — | (253 | ) | (253 | ) | |||||||||||||
|
Dividends paid:
|
||||||||||||||||||||
|
Preferred stock
|
— | — | — | (115 | ) | (115 | ) | |||||||||||||
|
Common stock
|
— | — | — | (24,234 | ) | (24,234 | ) | |||||||||||||
|
Total dividends paid
|
— | — | — | (24,349 | ) | (24,349 | ) | |||||||||||||
|
Balance at December 31, 2008
|
20,723 | 207 | 213,922 | 188,820 | 402,949 | |||||||||||||||
|
Net income
|
— | — | — | 40,554 | 40,554 | |||||||||||||||
|
Issuance of common stock
|
42 | 1 | 1,606 | — | 1,607 | |||||||||||||||
|
Dividends paid on common stock
|
— | — | — | (24,476 | ) | (24,476 | ) | |||||||||||||
|
Balance at December 31, 2009
|
20,765 | $ | 208 | $ | 215,528 | $ | 204,898 | $ | 420,634 | |||||||||||
See accompanying Notes to Consolidated Financial Statements.
57
Table of Contents
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| In thousands | ||||||||||||
|
Operating activities:
|
||||||||||||
|
Net income
|
$ | 40,554 | $ | 39,805 | $ | 31,159 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Depreciation and amortization
|
41,643 | 39,485 | 33,563 | |||||||||
|
Amortization of debt premium and expenses
|
970 | 673 | 673 | |||||||||
|
Other changes in noncurrent assets and liabilities
|
3,688 | 10,659 | (262 | ) | ||||||||
|
Change in value of life insurance contracts
|
(4,107 | ) | 3,763 | — | ||||||||
|
Gain on sale of non-utility property
|
(560 | ) | (7 | ) | (2,516 | ) | ||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
Receivables
|
(9,557 | ) | (6,069 | ) | (881 | ) | ||||||
|
Unbilled revenue
|
(305 | ) | (201 | ) | (1,570 | ) | ||||||
|
Taxes, prepaid expenses, and other assets
|
(2,332 | ) | (4,421 | ) | (5,781 | ) | ||||||
|
Accounts payable
|
1,340 | 2,610 | 2,857 | |||||||||
|
Material and supplies
|
(460 | ) | (322 | ) | (228 | ) | ||||||
|
Other current liabilities
|
734 | 8,109 | (4,282 | ) | ||||||||
|
Other changes, net
|
816 | 1,646 | (2,678 | ) | ||||||||
|
Net adjustments
|
31,870 | 55,925 | 18,895 | |||||||||
|
Net cash provided by operating activities
|
72,424 | 95,730 | 50,054 | |||||||||
|
Investing activities:
|
||||||||||||
|
Utility plant expenditures
|
(110,608 | ) | (107,804 | ) | (89,463 | ) | ||||||
|
MTBE settlement received
|
— | 34,217 | — | |||||||||
|
Proceeds from sale of non-utility assets
|
810 | 7 | 2,495 | |||||||||
|
Acquisitions
|
— | (24,924 | ) | (1,479 | ) | |||||||
|
Purchase of life insurance
|
(1,813 | ) | (1,373 | ) | — | |||||||
|
Restricted cash increases
|
(3,104 | ) | — | — | ||||||||
|
Net cash used in investing activities
|
(114,715 | ) | (99,877 | ) | (88,447 | ) | ||||||
|
Financing activities:
|
||||||||||||
|
Short-term borrowings
|
20,000 | 56,000 | — | |||||||||
|
Repayment of short-term borrowings
|
(48,000 | ) | (16,000 | ) | — | |||||||
|
Issuance of common stock, net of expenses
|
614 | — | 372 | |||||||||
|
Issuance of long-term debt, net of expenses
|
97,980 | 655 | 264 | |||||||||
|
Advances and contributions in aid of construction
|
4,981 | 8,227 | 16,589 | |||||||||
|
Refunds of advances for construction
|
(6,039 | ) | (6,662 | ) | (6,306 | ) | ||||||
|
Retirement of long-term debt
|
(6,772 | ) | (2,871 | ) | (1,980 | ) | ||||||
|
Redemption of preferred stock
|
— | (3,718 | ) | — | ||||||||
|
Dividends paid
|
(24,476 | ) | (24,349 | ) | (24,124 | ) | ||||||
|
Net cash provided by (used in) financing activities
|
38,288 | 11,282 | (15,185 | ) | ||||||||
|
Change in cash and cash equivalents
|
(4,003 | ) | 7,135 | (53,578 | ) | |||||||
|
Cash and cash equivalents at beginning of year
|
13,869 | 6,734 | 60,312 | |||||||||
|
Cash and cash equivalents at end of year
|
$ | 9,866 | $ | 13,869 | $ | 6,734 | ||||||
|
Supplemental disclosures of cash flow information:
|
||||||||||||
|
Cash paid during the year for:
|
||||||||||||
|
Interest (net of amounts capitalized)
|
$ | 20,351 | $ | 16,284 | $ | 16,459 | ||||||
|
Income taxes
|
14,003 | 22,586 | 30,220 | |||||||||
|
Supplemental disclosure of non-cash activities:
|
||||||||||||
|
Accrued payables for investments in utility plant
|
9,570 | 10,967 | 11,186 | |||||||||
|
Purchase of intangible assets with Company common stock
|
— | 1,300 | — | |||||||||
|
Utility plant contributed by developers
|
24,198 | 10,222 | 11,880 | |||||||||
See accompanying Notes to Consolidated Financial Statements.
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Notes to
Consolidated Financial Statements
December 31, 2009, 2008, and 2007
Amounts in thousands, except share data
December 31, 2009, 2008, and 2007
Amounts in thousands, except share data
| 1 | ORGANIZATION AND OPERATIONS |
California Water Service Group (Company) is a holding company
that provides water utility and other related services in
California, Washington, New Mexico, and Hawaii through its
wholly-owned subsidiaries. California Water Service Company (Cal
Water), Washington Water Service Company (Washington Water), New
Mexico Water Service Company (New Mexico Water), and Hawaii
Water Service Company, Inc. (Hawaii Water) provide regulated
utility services under the rules and regulations of their
respective state’s regulatory commissions (jointly referred
to as the Commissions). CWS Utility Services and HWS Utility
Services LLC provide non-regulated water utility and
utility-related services.
The Company operates in one reportable segment, providing water
and related utility services.
Basis
of Presentation
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America (GAAP) and include the Company accounts
and those of its wholly owned subsidiaries. All intercompany
transactions have been eliminated from the consolidated
financial statements. In the opinion of management, the
consolidated financial statements reflect all adjustments that
are necessary to provide a fair presentation of the results for
the periods covered.
The preparation of the Company’s consolidated financial
statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the consolidated balance sheet dates and the
reported amounts of revenues and expenses for the periods
presented. These include, but are not limited to, estimates and
assumptions used in determining the Company’s regulatory
asset and liability balances based upon probability assessments
of regulatory recovery, revenues earned but not yet billed,
asset retirement obligations, allowance for doubtful accounts,
pension and other employee benefit plan liabilities, and income
tax-related assets and liabilities. Actual results could differ
from these estimates.
In connection with the preparation of its financial statements
for the year ended December 31, 2008, the Company
determined that it had not properly classified the non-cash
component related to developer funded construction in its
statement of cash flows for the year ended December 31,
2007. As a result, net cash used in investing activities and net
cash provided by financing activities were overstated by
$11.9 million for the year ended December 31, 2007.
Management has concluded that these errors are immaterial to its
consolidated financial statements. Pursuant to the accounting
procedures for
“Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year
Financial Statements,”
the consolidated statement of
cash flows for the year ended December 31, 2007, has been
adjusted to reflect the correction of this error.
| 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Revenue
Revenue includes monthly cycle customer billings for regulated
water and wastewater services at rates authorized by regulatory
commissions and billings to certain non-regulated customers.
Revenue from metered customers includes billings to customers
based on monthly meter readings plus an estimate for water used
between the customer’s last meter reading and the end of
the accounting period. Flat rate customers are billed in advance
at the beginning of the service period. The revenue is prorated
so that the portion of revenue applicable to the current
accounting period is included in that period’s revenue,
with the balance recorded as unearned revenue on the balance
sheet and recognized as revenue when earned in the subsequent
accounting period.
Effective July 1, 2008 with the adoption of the Water
Revenue Adjustment Mechanism (WRAM) and the Modified Cost
Balancing Account (MCBA), Cal Water records the difference
between what is billed to its regulated customers and that which
is authorized by the California Public Utilities Commission
(CPUC).
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Table of Contents
Under the WRAM, Cal Water records the adopted level of
volumetric revenues as authorized by the CPUC for metered
accounts (adopted volumetric revenues). In addition to
volumetric-based revenues, the revenue requirements approved by
the CPUC include service charges, flat rate charges, and other
items that are not subject to the WRAM. The adopted volumetric
revenue considers the seasonality of consumption of water based
upon historical averages. The variance between adopted
volumetric revenues and actual billed amounts for metered
accounts is recorded as a component of revenue with an
offsetting entry to a current and long-term asset or liability
regulatory balancing account (tracked individually for each Cal
Water district). The variance amount may be positive or negative
and represents amounts that will be billed or refunded to
customers in the future.
Under the MCBA, Cal Water will track adopted expense levels for
purchased water, purchased power and pump taxes, as established
by the CPUC. Variances (which include the effects of changes in
both rate and volume) between adopted and actual purchased
water, purchased power, and pump tax expenses are recorded as a
component of revenue, as the amount of such variances will be
recovered from or refunded to the Company’s customers in
the future. This is reflected with an offsetting entry to a
current and long-term asset or liability regulatory balancing
account (tracked individually for each Cal Water district).
The balances in the WRAM and MCBA assets and liabilities
accounts will fluctuate on a monthly basis depending upon the
variance between adopted and actual results. The recovery or
refund of the WRAM is netted against the MCBA over- or
under-recovery for the corresponding district and is interest
bearing at the current 90 day commercial paper rate. When
the net amount for any district achieves a pre-determined level
at the end of any calendar year (i.e., at least 2.5 percent
over- or under-recovery of the approved revenue requirement),
Cal Water will file with the CPUC to refund or collect the
balance in the accounts. Account balances less than those levels
may be refunded or collected in Cal Water’s general rate
case proceedings or aggregated with future calendar year
balances for comparison with the recovery level. As of
December 31, 2009, included in the net regulatory balancing
accounts, current and long-term assets were $10,513 and $5,077,
respectively, and the net regulatory balancing accounts current
and long-term liabilities were $2,430 and $864, respectively. As
of December 31, 2008, the current net regulatory balancing
accounts asset was $4,629 and the current net regulatory
balancing account liability was $2,585.
The Company provides an allowance for doubtful accounts
receivable. The allowance is based upon specific identified,
potentially troubled accounts plus an estimate of uncollectible
accounts based upon historical percentages. The balance of
customer receivables is net of the allowance for doubtful
accounts at December 31, 2009 and 2008 of $847 and $1,210,
respectively.
The activities in the allowance for doubtful accounts are as
follows:
| 2009 | 2008 | |||||||
|
Beginning Balance
|
$ | 1,210 | $ | 641 | ||||
|
Provision for uncollectible accounts
|
1,462 | 2,308 | ||||||
|
Net write off of uncollectible accounts
|
(1,825 | ) | (1,739 | ) | ||||
|
Ending Balance
|
$ | 847 | $ | 1,210 | ||||
Non-Regulated
Revenue
Revenues from non-regulated operations and maintenance
agreements are recognized when services have been rendered to
companies or municipalities under such agreements. For
construction and design services, revenue is generally
recognized on the completed contract method, as most projects
are completed in less than three months. Other non-regulated
revenue is recognized when title has transferred to the buyer,
or ratably over the term of the lease.
Expense
Balancing and Memorandum Accounts
Prior to the adoption of the MCBA, ICBA, and memorandum accounts
were used to track suppliers’ rate changes for purchased
water, purchased power, and pump taxes that were not included in
customer water rates. The cost changes are referred to as
“Offsettable Expenses” because under certain
circumstances they are recoverable
60
Table of Contents
from customers (or refunded to customers) in future rates
designed to offset the cost changes from the suppliers. The
Company does not record the ICBA and memorandum accounts until
the Commission authorizes a change in customer rates and the
customer has been billed. As of December 31, 2009, the
balance of the ICBA and memorandum accounts not yet recognized
is $1.5 million.
Utility
Plant
Utility plant is carried at original cost when first constructed
or purchased, or at fair value when acquired through
acquisition. When depreciable plant is retired, the cost is
eliminated from utility plant accounts and such costs are
charged against accumulated depreciation. Maintenance of utility
plant is charged to operating expenses as incurred. Maintenance
projects are not accrued for in advance. Interest is capitalized
on plant expenditures during the construction period and
amounted to $3,081 in 2009, $3,411 in 2008, and $2,585 in 2007.
Intangible assets acquired as part of water systems purchased
are recorded at fair value. All other intangibles have been
recorded at cost and are amortized over their useful life.
Included in intangible assets is $6,515 paid to the City of
Hawthorne in 1996 to lease the city’s water system and
associated water rights. The asset is being amortized on a
straight-line basis over the
15-year
life
of the lease.
The following table represents depreciable plant and equipment
as of December 31:
| 2009 | 2008 | |||||||
|
Equipment
|
$ | 314,351 | $ | 317,735 | ||||
|
Transmission and distribution plant
|
1,159,998 | 1,054,329 | ||||||
|
Office buildings and other structures
|
101,407 | 92,840 | ||||||
|
Total
|
$ | 1,575,756 | $ | 1,464,904 | ||||
Depreciation of utility plant for financial statement purposes
is computed on a straight-line basis over the assets’
estimated useful lives including cost of removal of certain
assets as follows:
| Useful Lives | ||||
|
Equipment
|
5 to 50 years | |||
|
Transmission and distribution plant
|
40 to 65 years | |||
|
Office Buildings and other structures
|
50 years | |||
The provision for depreciation expressed as a percentage of the
aggregate depreciable asset balances was 2.8% in 2009, 2.8% in
2008, and 2.7% 2007. For income tax purposes, as applicable, the
Company computes depreciation using the accelerated methods
allowed by the respective taxing authorities. Plant additions
since June 1996 are depreciated on a straight-line basis for tax
purposes in accordance with tax regulations.
Asset
Retirement Obligation
The Company has a legal obligation to retire wells in accordance
with Department of Public Health regulations. In addition, upon
decommission of a wastewater plant or lift station certain
wastewater infrastructure would need to be retired in accordance
with Department of Public Health regulations. The Company has
been generally allowed to collect retirement obligation costs
from ratepayers through depreciation expense. As of
December 31, 2009 and 2008 the retirement obligation is
estimated to be $9,611 and $9,365, respectively.
Cash
Equivalents
Cash equivalents include highly liquid investments with
remaining maturities of three months or less at the time of
acquisition.
Restricted
Cash
Restricted cash primarily represents cash held in escrow
accounts for pending and parcel sales and proceeds collected
through a surcharge on certain customers’ bills plus
interest earned on the proceeds and is used to service
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Table of Contents
California Safe Drinking Water Bond obligations. All restricted
cash is included in prepaid expenses. At December 31, 2009
and 2008, restricted cash was $4,352 and $1,248, respectively.
Regulatory
Assets and Liabilities
The Company operates extensively in a regulated business, and as
such is subject to the accounting standards for regulated
utilities. As such, the Company defers costs and credits on the
balance sheet as regulatory assets and liabilities when it is
probable that those costs and credits will be recognized in the
ratemaking process in a period different from the period in
which they would have been reflected in income by an unregulated
company. In determining the probability of costs being
recognized in other periods, the Company considers regulatory
rules and decisions, past practices, and other facts or
circumstances that would indicate if recovery is probable. These
deferred regulatory assets and liabilities are then reflected in
the income statement in the period in which the same amounts are
reflected in the rates charged for service. In the event that a
portion of the Company’s operations were no longer subject
to the accounting standards for regulated utilities, the Company
would be required to write off related regulatory assets and
liabilities that are not specifically recoverable and determine
if other assets might be impaired. If a commission determined
that a portion of the Company’s assets were not recoverable
in customer rates, the Company would be required to determine if
the Company had suffered an asset impairment that would require
a write-down in the assets’ valuation. There was no such
asset impairment in 2009, 2008 or 2007. The income tax temporary
differences relate primarily to the difference between book and
federal income tax depreciation on utility plant that was placed
in service before the regulatory Commissions adopted
normalization for rate making purposes. Previously, the tax
benefit of tax depreciation was passed on to customers
(flow-through). For state income tax purposes, the Commission
continues to use the flow-through method. As such timing
differences reverse, the Company will be able to include the
impact of such differences in customer rates. These federal tax
differences will continue to reverse over the remaining book
lives of the related assets.
In addition, regulatory assets include expense items that are
capitalized for financial statement purposes, because they will
be recovered in future customer rates. The capitalized expenses
relate to asset retirement obligations, pension benefits,
postretirement benefits other than pensions (Retiree Group
Health), and accrued benefits for vacation, self-insured
workers’ compensation, and directors retirement benefits.
Asset retirement obligations are recorded net of depreciation
which has been recorded and recognized through the regulatory
process.
Regulatory liabilities represent future benefits to ratepayers
for tax deductions that will be allowed in the future.
Regulatory liabilities also reflect timing differences provided
at higher than the current tax rate, which will flow-through to
future ratepayers.
Regulatory assets and liabilities are comprised of the following
as of December 31:
| 2009 | 2008 | |||||||
|
Regulatory Assets
|
||||||||
|
Pension and Retiree Group Health
|
$ | 129,879 | $ | 138,677 | ||||
|
Income tax temporary differences
|
36,017 | 35,590 | ||||||
|
Asset retirement obligations, net
|
5,819 | 6,100 | ||||||
|
Other accrued benefits
|
32,389 | 17,926 | ||||||
|
Total Regulatory Assets
|
$ | 204,104 | $ | 198,293 | ||||
|
Regulatory Liabilities
|
||||||||
|
Future tax benefits due ratepayers
|
17,523 | 20,728 | ||||||
|
Other liabilities
|
2,146 | — | ||||||
|
Total Regulatory Liabilities
|
$ | 19,669 | $ | 20,728 | ||||
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Table of Contents
Impairment
of Long-Lived Assets, Intangibles and Goodwill
The Company regularly reviews its long-lived assets, intangible
assets and goodwill for impairment annually or when events or
changes in business circumstances have occurred that indicate
the carrying amount of such assets may not be fully realizable.
Potential impairment of assets held for use is determined by
comparing the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the asset.
If assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying value
of the asset exceeds its fair value.
Goodwill is measured as the excess of the cost of an acquisition
over the sum of the amounts assigned to identifiable assets
acquired less liabilities assumed. Goodwill and other
identifiable intangible assets are accounted for in accordance
with ASC 350-20. Goodwill is not amortized but instead is
reviewed annually for impairment or more frequently if
impairment indicators arise.
Company tests for impairment at November 30th of each year and
whenever events or changes in circumstances indicate that the
carrying amount of goodwill may not be recoverable. The test is
performed at the reporting unit level using a two-step,
fair-value based approach. The first step determines the fair
value of the reporting unit and compares it to the reporting
unit’s carrying value. If the fair value of the reporting
unit is less than its carrying amount, a second step is
performed to measure the amount of impairment loss, if any. The
second step allocates the fair value of the reporting unit to
the Company’s tangible and intangible assets and
liabilities. This derives an implied fair value for the
reporting unit’s goodwill. If the carrying amount of the
reporting unit’s goodwill exceeds the implied fair value of
that goodwill, an impairment loss is recognized equal to the
excess.
The recorded goodwill balance as of December 31, 2009 and 2008,
relate to the Hawaii Water Service Company reporting unit. Based
on our annual impairment test, no impairment was recorded in
2009 or 2008.
The discount and issuance expense on long-term debt is amortized
over the original lives of the related debt on a straight-line
basis which approximates the effective interest method. Premiums
paid on the early redemption of certain debt and the unamortized
original issuance discount and expense are amortized over the
life of new debt issued in conjunction with the early
redemption. Amortization expense included in interest expense
was $970, $673, and $673 for 2009, 2008, and 2007, respectively.
Advances
for Construction
Advances for Construction consist of payments received from
developers for installation of water production and distribution
facilities to serve new developments. Advances are excluded from
rate base for rate setting purposes. Annual refunds are made to
developers without interest. Advances of $183,555, and $174,626
at December 31, 2009, and 2008, respectively, will be
refunded primarily over a
40-year
period in equal annual amounts. In addition, other Advances for
Construction totaling $1,472 and $1,537 at December 31,
2009, and 2008, respectively, are refundable based upon customer
connections. Estimated refunds of advances for each succeeding
year (2010 through 2014) are approximately $6,478, $6,407,
$6,381, $6,374, $6,372 and $153,015 thereafter.
Contributions
in Aid of Construction
Contributions in Aid of Construction represent payments received
from developers, primarily for fire protection purposes, which
are not subject to refunds. Facilities funded by contributions
are included in utility plant, but excluded from rate base.
Depreciation related to assets acquired from contributions is
charged to the Contributions in Aid of Construction account.
Income
Taxes
The Company accounts for income taxes using the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Measurement of the deferred tax assets and liabilities is at
enacted tax rates expected to apply to taxable income in the
years in which those temporary
63
Table of Contents
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in the period that includes the enactment date.
Historically the Commissions have allowed revenue requirements
for the tax effects of temporary differences recognized, which
have previously been flowed through to customers. The
Commissions have granted the Company rate increases to reflect
the normalization of the tax benefits of the federal accelerated
methods and available Investment Tax Credits (ITC) for all
assets placed in service after 1980. ITCs are deferred and
amortized over the lives of the related properties for book
purposes.
Advances for Construction and Contributions in Aid of
Construction received from developers subsequent to 1986 were
taxable for federal income tax purposes and subsequent to 1991
were subject to California income tax. In 1996, the federal tax
law, and in 1997, the California tax law, changed and only
deposits for new services were taxable. In late 2000, federal
regulations were further modified to exclude contributions of
fire services from taxable income.
Workers’
Compensation, General Liability and Other Claims
For workers’ compensation, the Company estimates the
liability associated with claims submitted and claims not yet
submitted based on historical data. For general liability claims
and other claims, the Company estimates the cost incurred but
not yet paid using historical information.
Collective
Bargaining Agreements
As of December 31, 2009, the Company had
1,013 employees, including 660 non-supervisory employees
who are represented by the Utility Workers Union of America,
AFL-CIO, except certain engineering and laboratory employees who
are represented by the International Federation of Professional
and Technical Engineers, AFL-CIO. The union agreements expire at
the end of 2011.
Earnings
Per Share
The computations of basic and diluted earnings per share are
noted below. Basic earnings per share are computed by dividing
net income available to common stockholders by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share reflect the potential dilution that
could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. Restricted
Stock Awards are included in the weighted stock outstanding as
the shares have all voting and dividend rights as issued and
unrestricted common stock.
Common stock options outstanding to purchase common shares were
62,750, 84,000, and 90,500 at December 31, 2009, 2008, and
2007, respectively. Stock Appreciation Rights (SAR) covering
180,210, 108,710 and 61,640 shares of common stock were
outstanding as of December 31, 2009, 2008, and 2007,
respectively.
All options are dilutive and the SARs are antidilutive. The
dilutive effect is shown in the table below.
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands, except per share data) | ||||||||||||
|
Net income, as reported
|
$ | 40,554 | $ | 39,805 | $ | 31,159 | ||||||
|
Less preferred dividends and premium paid upon retirement of
preferred stock
|
— | 368 | 153 | |||||||||
|
Net income available to common stockholders
|
$ | 40,554 | $ | 39,437 | $ | 31,006 | ||||||
|
Weighted average common shares, basic
|
20,745 | 20,710 | 20,665 | |||||||||
|
Dilutive common stock equivalents (treasury method)
|
21 | 24 | 24 | |||||||||
|
Shares used for dilutive calculation
|
20,766 | 20,734 | 20,689 | |||||||||
|
Earnings per share — basic
|
$ | 1.95 | $ | 1.90 | $ | 1.50 | ||||||
|
Earnings per share — diluted
|
$ | 1.95 | $ | 1.90 | $ | 1.50 | ||||||
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Table of Contents
Stock-based
Compensation
The Company follows accounting standards for stock-based
compensation. Compensation cost is measured at the grant date
based on the fair value of the award. The Company recognizes
compensation as expense on a straight-line basis over the
requisite service period, which is the vesting period.
Long-Term
Incentive Plan
The Company had a stockholder-approved Long-Term Incentive Plan
(which was replaced on April 27, 2005, by a
stockholder-approved Equity Incentive Plan) that allowed
granting of non-qualified stock options. The Company accounted
for options issued under the Long-Term Incentive Plan using the
intrinsic value method of accounting. All outstanding options
issued under the Long-Term Incentive Plan have an exercise price
equal to the market price on the date they were granted and were
fully vested at December 31, 2007. No compensation expense
was recorded in 2009, 2008 or 2007, related to stock options
issued under the Long-Term Incentive Plan.
Accumulated
Other Comprehensive Income or Loss
The Company has not had any accumulated other comprehensive
income or loss transactions since the adoption of the FASB
accounting standards for employers’ accounting for defined
benefit pension and other postretirement plans during 2006.
Recent
Accounting Pronouncements Adopted
In December 2007, the FASB issued accounting standards for
business combinations. The new standards apply prospectively to
business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period
beginning on or after December 15, 2008. Among the more
significant changes, it expands the definition of a business and
a business combination; requires the acquirer to recognize the
assets acquired, liabilities assumed and noncontrolling
interests (including goodwill), measured at fair value at the
acquisition date; requires acquisition-related expenses and
restructuring costs to be recognized separately from the
business combination and requires assets acquired and
liabilities assumed from contractual and non-contractual
contingencies to be recognized at their acquisition date fair
values with subsequent changes recognized in earnings. Also, it
requires that an entity record, generally through income tax
expense, adjustments made after the measurement period (and
adjustments during the measurement period that relate to facts
and circumstances that did not exist as of the acquisition date)
to (1) valuation allowances for acquired deferred tax
assets and (2) acquired tax uncertainties. The Company
adopted the new accounting standards for business combinations
effective January 1, 2009. See Note 4.
In May 2008, the FASB issued new standards to compute earnings
per share with the assumption that instruments granted in
shared-based payment transactions are participating securities.
It requires unvested share-based payments that entitle employees
to receive nonrefundable dividends to also be considered
participating securities. The Company currently grants certain
unvested share-based payments awards that include rights to
dividends similar to common stockholders. The Company adopted
the new standards effective January 1, 2009, and it did not
have a material impact to its computation of earnings per share.
In December 2008, the FASB issued new accounting standards for
employers’ disclosures about postretirement benefit plan
assets. An entity is required to provide qualitative disclosures
about how investment allocation decisions are made, the inputs
and valuation techniques used to measure the fair value of plan
assets, and the concentration of risk within plan assets.
Additionally, quantitative disclosures are required showing the
fair value of each major category of plan assets, the levels in
which each asset is classified within the fair value hierarchy,
and a reconciliation for the period of plan assets which are
measured using significant unobservable inputs. The Company
adopted the new disclosure on December 31, 2009. The
expanded disclosures are detailed in Note 12.
In May 2009, the FASB issued a new accounting standards for
subsequent events (revised by
ASU No. 2010-09).
It does not significantly change the prior accounting practice
for subsequent events. The Company adopted the new disclosure
requirements and have evaluated subsequent events through the
time these financial statements were issued.
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Table of Contents
In June 2009, the FASB issued new accounting standards for the
accounting standards codification and the hierarchy of generally
accepted accounting principles (codification). The Codification
is a reorganization and compilation of all existing
authoritative U.S. GAAP recognized by the FASB to be
applied to nongovernmental entities. Rules and interpretive
releases of the SEC under authority of federal securities law
are also sources of authoritative GAAP for SEC registrants. On
the effective date of this statement, the Codification
superseded all then-existing non-SEC accounting and reporting
standards. The Company adopted the codification effective
September 30, 2009.
| 3 | OTHER INCOME AND EXPENSES |
The Company conducts various non-regulated activities as
reflected in the table below.
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Revenue | Expense | Revenue | Expense | Revenue | Expense | |||||||||||||||||||
|
Operating and maintenance
|
$ | 11,210 | $ | 11,525 | $ | 7,180 | $ | 7,327 | $ | 5,705 | $ | 5,247 | ||||||||||||
|
Meter reading and billing
|
1,205 | 929 | 1,150 | 898 | 1,187 | 902 | ||||||||||||||||||
|
Leases
|
2,026 | 805 | 2,048 | 690 | 1,958 | 613 | ||||||||||||||||||
|
Design and construction
|
1,717 | 1,515 | 1,292 | 887 | 1,142 | 847 | ||||||||||||||||||
|
Interest income
|
106 | — | 423 | — | 1,435 | — | ||||||||||||||||||
|
Change in value of life insurance contracts
|
— | (4,107 | ) | — | 3,763 | 539 | — | |||||||||||||||||
|
Non-regulated expenses and other
|
1,926 | 1,785 | 2,137 | 1,532 | 1,591 | 1,505 | ||||||||||||||||||
|
Total
|
$ | 18,190 | $ | 12,452 | $ | 14,230 | $ | 15,097 | $ | 13,557 | $ | 9,114 | ||||||||||||
Operating and maintenance services and meter reading and billing
services are provided for water and wastewater systems owned by
private companies and municipalities. The agreements call for a
fee-per-service
or a flat-rate amount per month. Leases have been entered into
with telecommunications companies for cellular phone antennas
placed on the Company’s property. Design and construction
services are for the design and installation of water mains and
other water infrastructure for others outside the Company’s
regulated service areas.
| 4 | ACQUISITIONS |
In 2009, after receiving regulatory approval, Cal Water acquired
two water utility systems with no increase to the allowed rate
base. In addition, as part of the acquisition Cal Water assumed
cash of $0.5 million and an obligation of equal amount to
fund future capital projects on behalf of rate payers. No other
assets or liabilities were assumed.
In 2008, the Company’s wholly-owned subsidiary HWS Utility
Services, LLC, acquired contracts to operate and maintain water
and wastewater systems in Hawaii. The purchase price of
$1.3 million was paid with the issuance of the
Company’s common stock. The purchase price is being
amortized over the remaining life of the contracts.
In 2008, after receiving regulatory approval, the Company’s
wholly-owned subsidiary, Hawaii Water Service Company, Inc.
acquired in two separate transactions, business on the Island of
Hawaii. The first acquisition was for all the outstanding stock
of three related privately held companies (Waikoloa Resort
Utilities, Inc.; Waikoloa Water Company, Inc.; Waikoloa Sewer
Company, Inc.) with water and wastewater operations. The
combined purchase price was $20,581. Assets acquired were
$26,885, including cash of $6,268. Liabilities assumed were
$10,209 (net of $12,608 which was paid at close of escrow).
Goodwill of $3,906 was initially recorded. In 2009, the goodwill
was reduced by $1,291 in recognition of the tax benefits of the
acquired net operating loss carry forwards. The second
acquisition was for the water and wastewater assets of two other
companies, (Kukio Utility Company and WB Maninowali) for a cash
price of $10,610. No liabilities were assumed.
In 2007, after receiving regulatory approval, the Company’s
wholly owned subsidiary, Cal Water, acquired a water system with
allowed rate base of approximately $425 for $388 in cash. In
addition, the Company’s wholly-
66
Table of Contents
owned subsidiary, Washington Water, acquired five water systems
for $1,091 in cash, which was the approximate value of rate base
of the systems.
Condensed balance sheets and pro forma results of operations for
these acquisitions have not been presented since the impact of
the purchases were not material.
| 5 | INTANGIBLE ASSETS |
As of December 31, 2009 and 2008, intangible assets that
will continue to be amortized and those not amortized were:
|
Weighted
|
2009 | 2008 | ||||||||||||||||||||||||
|
Average
|
Gross
|
Net
|
Gross
|
Net
|
||||||||||||||||||||||
|
Amortization
|
Carrying
|
Accumulated
|
Carrying
|
Carrying
|
Accumulated
|
Carrying
|
||||||||||||||||||||
| Period | Value | Amortization | Value | Value | Amortization | Value | ||||||||||||||||||||
|
Amortized intangible assets:
|
||||||||||||||||||||||||||
|
Hawthorne lease
|
15 | $ | 6,515 | $ | 5,985 | $ | 530 | $ | 6,515 | $ | 5,589 | $ | 926 | |||||||||||||
|
Water pumping rights
|
usage | 1,084 | 14 | 1,070 | 1,084 | 23 | 1,061 | |||||||||||||||||||
|
Water planning studies
|
9 | 10,704 | 2,062 | 8,642 | 5,454 | 1,403 | 4,051 | |||||||||||||||||||
|
Leasehold improvements and other
|
20 | 2,441 | 1,655 | 786 | 2,484 | 1,391 | 1,093 | |||||||||||||||||||
|
Total
|
12 | $ | 20,744 | $ | 9,716 | $ | 11,028 | $ | 15,537 | $ | 8,406 | $ | 7,131 | |||||||||||||
|
Unamortized intangible assets:
|
||||||||||||||||||||||||||
|
Perpetual water rights and other
|
$ | 3,232 | — | $ | 3,232 | $ | 2,931 | — | $ | 2,931 | ||||||||||||||||
For the years ended December 31, 2009, 2008, and 2007,
amortization of intangible assets was $1,310, $1,838, and $866,
respectively. Estimated future amortization expense related to
intangible assets for the succeeding five years is approximately
$1,323, $793, $614, $526, $448, and $7,324 thereafter.
| 6 | PREFERRED STOCK |
In 2008, the Company redeemed all 139,000 outstanding shares of
its 4.4% Series C Preferred Stock, with a par value of $25
per share, at the pre-determined redemption price of $26.75 per
share and all shares of the Series C Preferred Stock were
cancelled. The resulting premium of $253 was charged to retained
earnings and subtracted from net earnings available to common
stockholders in the Company’s 2008 earnings per common
share.
The Company is authorized to issue 241,000 shares of
Preferred Stock as of December 31, 2009 and 2008. None were
issued and outstanding at December 31, 2009 and 2008.
| 7 | COMMON STOCKHOLDERS’ EQUITY |
The Company is authorized to issue 25 million shares of
$0.01 par value common stock. As of December 31, 2009
and 2008, 20,765,452 shares and 20,723,202 shares,
respectively, of common stock were issued and outstanding.
Dividend
Reinvestment and Stock Repurchase Plan
The Company has a Dividend Reinvestment and Stock Purchase Plan
(DRIP Plan). Under the DRIP Plan, stockholders may reinvest
dividends to purchase additional Company common stock without
commission fees. The Plan also allows existing stockholders and
other interested investors to purchase Company common stock
through the transfer agent up to certain limits. The
Company’s transfer agent operates the DRIP Plan and
purchases shares on the open market to provide shares for the
Plan.
67
Table of Contents
| 8 | SHORT-TERM BORROWINGS |
On October 27, 2009, the Company and Cal Water entered into
three-year syndicated unsecured revolving line of credit
agreements with sixteen banks to provide an unsecured revolving
line of credit of $50 million and $250 million,
respectively. The base loan rate can vary from prime plus
50 basis points to prime plus 125 basis points
depending on the Company’s total capitalization ratio.
Likewise, the unused commitment fee can vary from 25 basis
points to 35 basis points based on the same ratio.
California Water Service Group and subsidiaries which it
designates may borrow under the facilities. Borrowings by
California Water Service Company will be repaid within
12 months unless otherwise authorized by the CPUC.
These unsecured credit agreements contain affirmative and
negative covenants and events of default customary for credit
facilities of this type including, among other things,
limitations and prohibitions relating to additional
indebtedness, liens, mergers, and asset sales. Also, these
unsecured credit agreements contain financial covenants
governing the Company and its subsidiaries’ consolidated
total capitalization ratio and interest coverage ratio.
As of December 31, 2009, the outstanding borrowings on the
Company line of credit was $12,000.
The following table represents borrowings under the bank lines
of credit:
| 2009 | 2008 | |||||||
|
Maximum short-term borrowings
|
$ | 60,000 | $ | 44,000 | ||||
|
Average amount outstanding
|
$ | 16,751 | $ | 25,748 | ||||
|
Weighted average interest rate
|
2.77 | % | 3.24 | % | ||||
|
Interest rate at December 31
|
2.15 | % | 1.75 | % | ||||
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Table of Contents
| 9 | LONG-TERM DEBT |
As of December 31, 2009 and 2008, long-term debt
outstanding was:
|
Interest
|
||||||||||||||||
| Series | Rate | Maturity Date | 2009 | 2008 | ||||||||||||
|
First Mortgage Bonds
|
LL | 5.875% | 2019 | $ | 100,000 | $ | — | |||||||||
| AAA | 7.280% | 2025 | 20,000 | — | ||||||||||||
| BBB | 6.770% | 2028 | 20,000 | — | ||||||||||||
| CCC | 8.150% | 2030 | 20,000 | — | ||||||||||||
| DDD | 7.130% | 2031 | 20,000 | — | ||||||||||||
| EEE | 7.110% | 2032 | 20,000 | — | ||||||||||||
| FFF | 5.900% | 2017 | 20,000 | — | ||||||||||||
| GGG | 5.290% | 2022 | 20,000 | — | ||||||||||||
| HHH | 5.290% | 2022 | 20,000 | — | ||||||||||||
| III | 5.540% | 2023 | 10,000 | — | ||||||||||||
| JJJ | 5.440% | 2018 | 7,273 | — | ||||||||||||
| KKK | 4.580% | 2010 | 10,000 | — | ||||||||||||
| LLL | 5.480% | 2018 | 10,000 | — | ||||||||||||
| MMM | 5.520% | 2013 | 20,000 | — | ||||||||||||
| NNN | 5.550% | 2013 | 20,000 | — | ||||||||||||
| OOO | 6.020% | 2031 | 20,000 | — | ||||||||||||
| CC | 9.860% | 2020 | 17,700 | 17,800 | ||||||||||||
| J | 8.860% | 2023 | — | 3,000 | ||||||||||||
| K | 6.940% | 2012 | 2,200 | 2,900 | ||||||||||||
|
Total First Mortgage Bonds
|
$ | 377,173 | $ | 23,700 | ||||||||||||
|
Unsecured Senior Notes (converted to first mortgage bonds on
April 17, 2009)
|
— | 259,091 | ||||||||||||||
|
California Department of Water Resources Loans
|
2.6% to 8% | 2010-32 | 3,721 | 2,595 | ||||||||||||
|
Other Long-term debt
|
6,328 | 4,930 | ||||||||||||||
|
Total long-term debt
|
$ | 387,222 | $ | 290,316 | ||||||||||||
|
Less current maturities
|
12,953 | 2,818 | ||||||||||||||
|
Long-term debt excluding current maturities
|
$ | 374,269 | $ | 287,498 | ||||||||||||
On April 17, 2009, Cal Water completed the sale and
issuance of $100 million aggregate principal amount of its
5.875% First Mortgage Bonds due 2019, which are fully and
unconditionally guaranteed by the Company. Pursuant to the note
purchase agreements and supplements thereto under which Cal
Water’s outstanding unsecured senior notes had been issued,
Cal Water was required to issue a new series of First Mortgage
Bonds in exchange for each outstanding series of unsecured
senior notes with a like aggregate principal amount. The
offering triggered this exchange provision. Accordingly, upon
the closing of the offering, Cal Water was required to issue an
additional series of First Mortgage Bonds under the mortgage
indenture with a like aggregate principal amount to the holders
of each series of its outstanding unsecured senior notes in
exchange for each such series of notes.
In connection with the offering, Cal Water exercised its option
to redeem the remaining $3.0 million of 8.86% Series J
First Mortgage Bonds due 2023, which Cal Water assumed in
connection with its acquisition of Dominguez Water Corporation
in 2000. The redemption was effected pursuant to the terms of
the indenture and supplemental indentures governing the
Series J bond. The Series J bonds were redeemed at a
redemption price equal to 100% of the outstanding principal
amount of the Series J bond plus a make-whole premium of
$1.0 million, and accrued and unpaid interest to the date
of redemption.
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Table of Contents
| 10 | OTHER ACCRUED LIABILITIES |
As of December 31, 2009 and 2008, other accrued liabilities
were:
| 2009 | 2008 | |||||||
|
Accrued and deferred compensation
|
$ | 12,052 | $ | 11,429 | ||||
|
Accrued benefit and workers’ compensation claims
|
5,492 | 8,118 | ||||||
|
Other
|
13,115 | 12,988 | ||||||
| $ | 30,659 | $ | 32,535 | |||||
| 11 | INCOME TAXES |
Income tax expense consists of the following:
| Federal | State | Total | ||||||||||
|
2009
|
||||||||||||
|
Current
|
$ | 10,105 | $ | 4,382 | $ | 14,487 | ||||||
|
Deferred
|
12,056 | 819 | 12,875 | |||||||||
|
Total
|
$ | 22,161 | $ | 5,201 | $ | 27,362 | ||||||
|
2008
|
||||||||||||
|
Current
|
$ | 15,233 | $ | 4,679 | $ | 19,912 | ||||||
|
Deferred
|
4,486 | (267 | ) | 4,219 | ||||||||
|
Total
|
$ | 19,719 | $ | 4,412 | $ | 24,131 | ||||||
|
2007
|
||||||||||||
|
Current
|
$ | 16,028 | $ | 4,662 | $ | 20,690 | ||||||
|
Deferred
|
522 | (489 | ) | 33 | ||||||||
|
Total
|
$ | 16,550 | $ | 4,173 | $ | 20,723 | ||||||
Income tax expense computed by applying the current federal 35%
tax rate to pretax book income differs from the amount shown in
the Consolidated Statements of Income. The difference is
reconciled in the table below:
| 2009 | 2008 | 2007 | ||||||||||
|
Computed “expected” tax expense
|
$ | 23,771 | $ | 22,378 | $ | 18,159 | ||||||
|
Increase (reduction) in taxes due to:
|
||||||||||||
|
State income taxes net of federal tax benefit
|
3,903 | 3,674 | 2,981 | |||||||||
|
Investment tax credits
|
(32 | ) | (32 | ) | (32 | ) | ||||||
|
Other
|
(280 | ) | (1,889 | ) | (385 | ) | ||||||
|
Total income tax
|
$ | 27,362 | $ | 24,131 | $ | 20,723 | ||||||
Included in Other in the above table is the recognition of the
flow-through accounting for Federal depreciation expense on
assets acquired prior to 1982 and retirement costs of such
assets. For assets acquired prior to 1982, the benefit of excess
tax depreciation was previously passed through to the
ratepayers. The tax benefit is now reversing and a higher tax
expense is being recognized and is included in customer rates.
Offsetting the flow-through depreciation in 2009 and 2008 was
the impact of cost to remove pre-1982 assets. Also included is
the federal income tax deduction from qualified
U.S. production activities, which is being phased in from
2006 through 2011. Qualified production activities include
production of potable water, but exclude the transmission and
distribution of the potable water. The impact of the deduction
is being reported in the year in which the deduction is claimed
on the Company’s tax return. The impact was to lower the
income tax provision by $560, $1,276, and $490 in 2009, 2008,
and 2007, respectively.
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Table of Contents
On January 1, 2007, we adopted the accounting standards for
accounting for uncertainty in income taxes which also requires
the inclusion of interest and penalties related to uncertain tax
positions as a component of income taxes. As of
December 31, 2009, 2008, and 2007 we had no material
unrecognized tax benefits and no adjustments to assets or
liabilities were required.
During 2007, there was a federal tax examination covering 2005
which resulted in a tax liability of $87. Tax years of 2006,
2007, 2008, and 2009 are subject to examination by the federal
and state taxing authorities, respectively. There are no income
tax examinations currently in progress.
The tax effects of differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities
at December 31, 2009 and 2008 are presented in the
following table:
| 2009 | 2008 | |||||||
|
Deferred tax assets:
|
||||||||
|
Developer deposits for extension agreements and contributions in
aid of construction
|
$ | 47,553 | $ | 47,055 | ||||
|
Federal benefit of state tax deductions
|
9,257 | 8,925 | ||||||
|
Insurance loss provisions
|
2,073 | 2,431 | ||||||
|
Book plant cost reduction for future deferred ITC amortization
|
1,369 | 1,413 | ||||||
|
Net operating loss carry forward
|
1,291 | — | ||||||
|
Pension plan
|
1,071 | 2,043 | ||||||
|
Total deferred tax assets
|
62,614 | 61,867 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Utility plant, principally due to depreciation differences
|
147,712 | 131,652 | ||||||
|
WRAM/MCBA balancing accounts
|
6,651 | — | ||||||
|
Premium on early retirement of bonds
|
1,966 | 1,745 | ||||||
|
Prepaid expense
|
1,080 | 4,123 | ||||||
|
Other
|
1,179 | 814 | ||||||
|
Total deferred tax liabilities
|
158,588 | 138,334 | ||||||
|
Net deferred tax liabilities
|
$ | 95,974 | $ | 76,467 | ||||
A valuation allowance was not required at December 31, 2009
and 2008. Based on historical taxable income and future taxable
income projections over the period in which the deferred assets
are deductible, management believes it is more likely than not
that the Company will realize the benefits of the deductible
differences.
| 12 | EMPLOYEE BENEFIT PLANS |
Savings
Plan
The Company sponsors a 401(k) qualified, defined contribution
savings plan that allows participants to contribute up to 20% of
pre-tax compensation. The Company matches fifty cents for each
dollar contributed by the employee up to a maximum Company match
of 4.0% of base salary. Company contributions were $1,953,
$1,786, and $1,733, for the years 2009, 2008, and 2007,
respectively.
Pension
Plans
The Company provides a qualified, defined-benefit,
non-contributory pension plan for substantially all employees.
The accumulated benefit obligations of the pension plan are
$161,449 and $130,206 as of December 31, 2009 and 2008,
respectively. The fair value of pension plan assets was $105,639
and $66,941 as of December 31, 2009 and 2008, respectively.
Prior to 2009, pension payment obligations were generally funded
by the purchase of an annuity from a life insurance company. In
2009, the Company paid monthly benefits to retirees, rather than
the purchase of an annuity. Payments are expected to be made in
each year from 2010 to 2014 are $2,487, $3,407, $4,401, $6,014,
and $7,313,
71
Table of Contents
respectively. The aggregate benefits expected to be paid in the
five years 2015 through 2019 would be $57,875. The expected
benefit payments are based upon the same assumptions used to
measure the Company’s benefit obligation at
December 31, 2009, and include estimated future employee
service.
The Company also maintains an unfunded, non-qualified,
supplemental executive retirement plan. The unfunded
supplemental executive retirement plan accumulated benefit
obligations were $16,981 and $15,043 as of December 31,
2009 and 2008, respectively. Benefit payments under the
supplemental executive retirement plan are paid currently and
are included in the preceding paragraph.
The costs of the pension and retirement plans are charged to
expense and utility plant. The Company makes annual
contributions to fund the amounts accrued for pension cost.
Other
Postretirement Plan
The Company provides substantially all active, permanent
employees with medical, dental, and vision benefits through a
self-insured plan. Employees retiring at or after age 58,
along with their spouses and dependents, continue participation
in the plan by payment of a premium. Plan assets are invested in
mutual funds, short-term money market instruments and commercial
paper based upon the same asset mix as the pension plan. Retired
employees are also provided with a five thousand dollar life
insurance benefit.
The Company records the costs of postretirement benefits other
than pension (PBOP) during the employees’ years of active
service. Postretirement benefit expense recorded in 2009, 2008,
and 2007, was $4,926, $3,246, and $2,521, respectively. Prior to
2006, the Company recorded a regulatory asset for the difference
between the Company-funded amount and the net periodic benefit
cost. The remaining net periodic benefit cost was $9,790 at
December 31, 2006, and is being recovered through future
customer rates and is recorded as a regulatory asset. The
expected benefit payments, net of retiree premiums and Medicare
part D subsidies, for the next five years are $1,035,
$1,177, $1,303, $1,471, and $1,634, respectively.
Benefit
Plan Assets
The Company actively manages pensions and PBOP trust (Plan)
assets. The Company’s investment objectives are:
| • | Maximize the return on the assets of the Plan, commensurate with the risk that the Company deem appropriate to, meet the obligations of the Plan, minimize the volatility of the pension expense, and account for contingencies; | |
| • | Generate a rate of return for the total portfolio that equals or exceeds the actuarial investment rate assumption; | |
| • | Additionally, the rate of return of the total fund shall be measured periodically against a special index comprised of 35% of the Standard & Poor’s Index, 15% of the Russell 2000 Index, 10% of the MSCI EAFE Index, and 40% of the Lehman Aggregate Bond Index. The special index is consistent with the rate of return objective and indicates the Company’s long-term asset allocation objective. |
The Company applies a risk management framework for managing the
risks associated with employee benefit plan trust assets. The
guiding principles of this risk management framework are the
clear articulation of roles and responsibilities, appropriate
delegation of authority, and proper accountability and
documentation. Trust investment policies and investment manager
guidelines include provisions to ensure prudent diversification,
manage risk through appropriate use of physical direct asset
holdings and derivative securities, and identify permitted and
prohibited investments.
72
Table of Contents
The Company’s target asset allocation percentages for major
categories of pension and other benefit plans are reflected in
the table below:
|
Minimum
|
Maximum
|
|||||||||||
| Exposure | Target | Exposure | ||||||||||
|
Fixed Income
|
35 | % | 40 | % | 45 | % | ||||||
|
Total Domestic Equity
|
40 | % | 50 | % | 60 | % | ||||||
|
Small Cap Stocks
|
10 | % | 15 | % | 20 | % | ||||||
|
Large Cap Stocks
|
30 | % | 35 | % | 45 | % | ||||||
|
Non-U.S.
Equities
|
5 | % | 10 | % | 15 | % | ||||||
The fixed income category includes money market and short-term
bond funds. The majority of fixed income investments ranges in
maturities from less than one to five years.
Criteria used to select investment funds:
| • | Fund past performance | |
| • | Fund meets criteria of Employee Retirements Income Security Act (ERISA) | |
| • | Timeliness and completeness of fund communications and reporting to investors | |
| • | Stability of fund management company | |
| • | Fund management fees | |
| • | Administrative costs incurred by the Plan |
The fair value measurements standard establishes a framework for
measuring fair value. That framework provides a fair value
hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for
identical assets or liabilities (level 1 measurements) and
the lowest priority to unobservable inputs (level 3
measurements). The three levels of the fair value hierarchy
under the standard are described below:
Level 1 — Inputs to the valuation methodology are
unadjusted quoted prices for identical assets or liabilities in
active markets that the Plan has the ability to access.
Level 2 — Inputs to the valuation methodology
include:
| • | Quoted market prices for similar assets or liabilities in active markets; | |
| • | Quoted prices for identical or similar assets or liabilities in inactive markets; | |
| • | Inputs other than quoted prices that are observable for the asset or liability; | |
| • | Inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
If the asset or liability has a specified (contractual) term,
the level 2 input must be observable for substantially the
full term of the asset or liability.
Level 3 — Inputs to the valuation methodology are
unobservable and significant to the fair value measurement.
73
Table of Contents
All Plan investments are level 1 investments in mutual
funds and are valued at the net asset value (NAV) of the shares
held by the Plan at December 31, 2009 and 2008:
| Pension Benefits | Other Benefits | |||||||||||||||||||||||||||||||
| 2009 | % | 2008 | % | 2009 | % | 2008 | % | |||||||||||||||||||||||||
|
Fixed Income
|
$ | 51,028 | 48 | % | $ | 37,359 | 56 | % | $ | 10,656 | 67 | % | $ | 3,654 | 58 | % | ||||||||||||||||
|
Domestic Equity
|
||||||||||||||||||||||||||||||||
|
Small Cap Stocks
|
16,976 | 8,256 | 3,780 | 1,585 | ||||||||||||||||||||||||||||
|
Large Cap Stocks
|
30,360 | 16,616 | 1,428 | 1,061 | ||||||||||||||||||||||||||||
|
Total Domestic Equity
|
47,336 | 45 | % | 24,872 | 37 | % | 5,208 | 33 | % | 2,646 | 42 | % | ||||||||||||||||||||
|
Non U.S. Equities
|
7,275 | 7 | % | 4,710 | 7 | % | — | 0 | % | — | 0 | % | ||||||||||||||||||||
|
Total Plan Assets
|
$ | 105,639 | 100 | % | $ | 66,941 | 100 | % | $ | 15,864 | 100 | % | $ | 6,300 | 100 | % | ||||||||||||||||
The following table reconciles the funded status of the plans
with the accrued pension liability and the net postretirement
benefit liability as of December 31, 2009 and 2008:
| Pension Benefits | Other Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Change in projected benefit obligation:
|
||||||||||||||||
|
Beginning of year
|
$ | 192,878 | $ | 105,884 | $ | 36,208 | $ | 27,492 | ||||||||
|
Service cost
|
9,119 | 6,423 | 2,261 | 1,430 | ||||||||||||
|
Interest cost
|
12,352 | 8,991 | 2,161 | 1,716 | ||||||||||||
|
Assumption change
|
(59 | ) | 20,239 | (512 | ) | 6,651 | ||||||||||
|
Amendment
|
6,216 | 51,173 | — | — | ||||||||||||
|
Experience (gain) loss
|
345 | 6,135 | 613 | (300 | ) | |||||||||||
|
Benefits paid, net of retiree premiums
|
(1,121 | ) | (5,967 | ) | (1,378 | ) | (781 | ) | ||||||||
|
End of year
|
$ | 219,730 | $ | 192,878 | $ | 39,353 | $ | 36,208 | ||||||||
|
Change in plan assets:
|
||||||||||||||||
|
Fair value of plan assets at beginning of year
|
$ | 66,941 | $ | 85,303 | $ | 6,300 | $ | 8,287 | ||||||||
|
Actual return on plan assets
|
12,319 | (17,856 | ) | 1,012 | (1,206 | ) | ||||||||||
|
Employer contributions
|
27,500 | 5,461 | 9,930 | — | ||||||||||||
|
Retiree contributions and Medicare part D subsidies
|
— | — | 1,062 | 924 | ||||||||||||
|
Benefits paid
|
(1,121 | ) | (5,967 | ) | (2,440 | ) | (1,705 | ) | ||||||||
|
Fair value of plan assets at end of year
|
$ | 105,639 | $ | 66,941 | $ | 15,864 | $ | 6,300 | ||||||||
|
Funded status
|
$ | (114,091 | ) | $ | (125,937 | ) | $ | (23,489 | ) | $ | (29,908 | ) | ||||
|
Unrecognized actuarial or loss
|
44,962 | 51,771 | 13,775 | 14,798 | ||||||||||||
|
Unrecognized prior service cost
|
60,891 | 60,807 | 769 | 885 | ||||||||||||
|
Unrecognized transition obligation
|
— | — | 837 | 1,113 | ||||||||||||
|
Net amount recognized
|
$ | (8,238 | ) | $ | (13,359 | ) | $ | (8,108 | ) | $ | (13,112 | ) | ||||
74
Table of Contents
Amounts recognized on the balance sheet consist of:
| Pension Benefits | Other Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Prepaid (Accrued) benefit costs
|
$ | — | $ | — | $ | (8,108 | ) | $ | (13,112 | ) | ||||||
|
Accrued benefit liability
|
(114,091 | ) | (125,937 | ) | (15,381 | ) | (16,796 | ) | ||||||||
|
Regulatory asset
|
105,853 | 112,578 | 15,381 | 16,796 | ||||||||||||
|
Net amount recognized
|
$ | (8,238 | ) | $ | (13,359 | ) | $ | (8,108 | ) | $ | (13,112 | ) | ||||
Below are the actuarial assumptions used in determining the
benefit obligation for the benefit plans:
| Pension Benefits | Other Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Weighted average assumptions as of December 31:
|
||||||||||||||||
|
Discount rate
|
6.10 | % | 6.40 | % | 6.00 | % | 5.80 | % | ||||||||
|
Long-term rate of return on plan assets
|
7.50 | % | 8.00 | % | 6.50 | % | 7.00 | % | ||||||||
|
Rate of compensation increases
|
4.00 | % | 5.00 | % | — | — | ||||||||||
|
Cost of living adjustment
|
3.00 | % | 3.00 | % | — | — | ||||||||||
The long-term rate of return assumption is the expected rate of
return on a balanced portfolio invested roughly 60% in equities
and 40% in fixed income securities. The average return for the
pension plan for the last five and ten years was 3.0% and 4.7%,
respectively. The company is using a rate of 7.5% which is
between the 25th and 75th percentile of expected results. The
discount rate was derived from the Citigroup Pension Discount
Curve using the expected payouts for the plan.
Net periodic benefit costs for the pension and other
postretirement plans for the years ended December 31, 2008,
2007, and 2006 included the following components:
| Pension Plan | Other Benefits | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
|
Service cost
|
$ | 9,119 | $ | 6,423 | $ | 5,291 | $ | 2,261 | $ | 1,430 | $ | 1,154 | ||||||||||||
|
Interest cost
|
12,352 | 8,991 | 6,522 | 2,161 | 1,716 | 1,317 | ||||||||||||||||||
|
Expected return on plan assets
|
(7,155 | ) | (6,012 | ) | (5,704 | ) | (785 | ) | (574 | ) | (469 | ) | ||||||||||||
|
Net amortization and deferral
|
8,063 | 4,516 | 2,883 | 1,289 | 674 | 519 | ||||||||||||||||||
|
Net periodic benefit cost
|
$ | 22,379 | $ | 13,918 | $ | 8,992 | $ | 4,926 | $ | 3,246 | $ | 2,521 | ||||||||||||
Below are the actuarial assumptions used in determining the net
periodic benefit costs for the benefit plans, which uses the end
of the prior year as the measurement date:
| Pension Benefits | Other Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Weighted average assumptions as of December 31:
|
||||||||||||||||
|
Discount rate
|
6.40 | % | 6.30 | % | 5.80 | % | 6.40 | % | ||||||||
|
Long-term rate of return on plan assets
|
8.00 | % | 8.00 | % | 7.00 | % | 7.00 | % | ||||||||
|
Rate of compensation increases
|
5.00 | % | 3.75 | % | — | — | ||||||||||
For 2008 measurement purposes, the Company assumed a 9.5% annual
rate of increase in the per capita cost of covered benefits with
the rate decreasing to 6.5% by 2012, then gradually grading down
to 5.1% over the next 50 years. The health care cost trend
rate assumption has a significant effect on the amounts
reported. A one-percentage point change in assumed health care
cost trends is estimated to have the following effect:
|
1-percentage
|
1-percentage
|
|||||||
| Point Increase | Point Decrease | |||||||
|
Effect on total service and interest costs
|
$ | 1,022 | $ | (780 | ) | |||
|
Effect on accumulated postretirement benefit obligation
|
$ | 7,640 | $ | (6,018 | ) | |||
75
Table of Contents
The Company intends to make annual contributions to the plans up
to the amount deductible for tax purposes. The Company estimates
in 2010 that the annual contribution to the pension plans will
be $20.9 million and the annual contribution to the other
postretirement plan will be $5.6 million.
| 13 | STOCK-BASED COMPENSATION PLANS |
The Company has two stockholder-approved stock-based
compensation plans.
Long-term
Incentive Plan
The long-term incentive plan was replaced on April 27,
2005, by a stockholder-approved equity incentive plan. The
Long-Term Incentive Plan allowed granting of nonqualified stock
options, some of which are currently outstanding, there will be
no future grants made. The Company had accounted for options
using the intrinsic value method. Options were granted at an
exercise price that was not less than the per share common stock
market price on the date of grant. The options vested at a 25%
rate on their anniversary date over their first four years and
are exercisable over a ten-year period. At December 31,
2009, 62,750 options are fully vested and exercisable at a
weighted average price of $25.50. The intrinsic value of the
vested shares at December 31, 2009 is $710 and the weighted
average fair value at date of grant was $4.67 per share. No
options were granted in 2009, 2008, or 2007.
The following table summarizes the activity of the Long-Term
Incentive Plan:
|
Weighted
|
Weighted
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Exercise
|
Remaining
|
Options
|
||||||||||||||
| Shares | Price | Contractual Life | Exercisable | |||||||||||||
|
Outstanding at December 31, 2007
|
90,500 | $ | 24.94 | 3.3 | 90,500 | |||||||||||
|
Exercised
|
(6,500 | ) | 25.39 | — | — | |||||||||||
|
Outstanding at December 31, 2008
|
84,000 | 24.90 | 2.1 | 84,000 | ||||||||||||
|
Exercised
|
(21,250 | ) | 23.13 | — | — | |||||||||||
|
Outstanding at December 31, 2009
|
62,750 | $ | 25.50 | 1.6 | 62,750 | |||||||||||
Equity
Incentive Plan
The Equity Incentive Plan, which was approved by shareholders on
April 27, 2005, is authorized to issue up to
1,000,000 shares of common stock. In 2009 and 2008, the
Company granted Restricted Stock Awards (RSAs) of 21,000 and
16,630 shares, respectively, of common stock both to
employees and to directors of the Company. Employee awards vest
ratably over 48 months, while independent director awards
vest at the end of 12 months. The shares were valued at the
weighted average price of $37.60 and $38.38 per share,
respectively based upon the fair market value of the
Company’s common stock on the date of grant. In 2009, Stock
Appreciation Rights (SARs) equivalent to 71,500 shares were
granted to employees, which vest ratably over 48 months and
expire at the end of 10 years. The grant-date fair value
for SARs was determined by using the Black Scholes model, which
arrived at a fair value of $6.83 per share. Upon exercise of a
SAR, the appreciation is payable in common shares of the Company.
The assumptions utilized to determine the grant date fair value
of the SARs were:
| 2009 | 2008 | |||||||
|
Expected dividend yield
|
3.07 | % | 3.11 | % | ||||
|
Expected volatility
|
22.01 | % | 21.96 | % | ||||
|
Risk-free interest rate
|
2.84 | % | 2.63 | % | ||||
|
Expected holding period in years
|
6.75 | 6.0 | ||||||
The Company did not apply a forfeiture rate in the expense
computation relating to SARs and RSAs issued to employees as
they vest monthly and, as a result, the expense is recorded for
actual number vested during the period. For outside directors,
the Company did not apply a forfeiture rate in the expense
computation relating to RSAs, as the Company expects 100% to
vest at the end of twelve months.
76
Table of Contents
The table below reflects SARs granted under the Equity Incentive
Plan.
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||
|
Exercise
|
Remaining
|
SAR
|
Fair
|
|||||||||||||||||
| Shares | Price | Contractual Life | Exercisable | Value | ||||||||||||||||
|
Stock Appreciation Rights
|
||||||||||||||||||||
|
Outstanding at December 31, 2007
|
61,640 | $ | 38.59 | 8.49 | 22,070 | $ | 8.77 | |||||||||||||
|
Granted
|
47,070 | 37.60 | — | — | 6.03 | |||||||||||||||
|
Outstanding at December 31, 2008
|
108,710 | $ | 38.16 | 8.22 | 46,304 | $ | 7.58 | |||||||||||||
|
Granted
|
71,500 | 38.38 | — | — | 6.83 | |||||||||||||||
|
Outstanding at December 31, 2009
|
180,210 | $ | 38.25 | 8.00 | 86,881 | $ | 8.97 | |||||||||||||
The Company has recorded compensation expense for the RSAs and
SARs of $993 and $545 in 2009 and 2008, respectively. The
unrecognized future compensation expense for the RSAs and SARs
at December 31, 2009 is $1,321.
| 14 | FAIR VALUE OF FINANCIAL INSTRUMENTS |
For those financial instruments for which it is practicable to
estimate a fair value, the following methods and assumptions
were used. For cash equivalents, accounts receivable and
accounts payable, the carrying amount approximates the fair
value because of the short-term maturity of the instruments. The
fair value of the Company’s long-term debt is estimated at
$367 million and $290 million as of December 31,
2009 and 2008, respectively, using the published quoted market
price, if available, or the discounted cash flow analysis, based
on the current rates available to the Company for debt of
similar maturities and credit risk. The book value of the
long-term debt is $374 million and $287 million as of
December 31, 2009 and 2008, respectively. The fair value of
advances for construction contracts is estimated at
$74 million as of December 31, 2009, and
$66 million as of December 31, 2008, based on broker
quotes.
| 15 | COMMITMENTS AND CONTINGENCIES |
Commitments
The Company leases office facilities and two water systems from
cities, and has long-term commitments to purchase water from
water wholesalers. The commitments are noted in the table below.
|
Office
|
System
|
Water
|
||||||||||
| Leases | Leases | Contracts | ||||||||||
|
2010
|
$ | 826 | $ | 961 | $ | 16,330 | ||||||
|
2011
|
587 | 864 | 16,330 | |||||||||
|
2012
|
430 | 845 | 16,333 | |||||||||
|
2013
|
298 | 845 | 16,333 | |||||||||
|
2014
|
227 | 845 | 16,333 | |||||||||
|
Thereafter
|
2,316 | 3,028 | 349,804 | |||||||||
The Company leases office facilities in many of its operating
districts. The total paid and charged to operations for such
leases was $986 in 2009, $808 in 2008, and $677 in 2007.
The Company leases the City of Hawthorne water system, which in
addition to the upfront lease payment, includes an annual
payment. The
15-year
lease expires in 2011. There were annual payments of $116 in
2009, 2008, and 2007. In July 2003, the Company negotiated a
15-year
lease of the City of Commerce water system. The lease includes
an annual lease payment of $845 per year plus a cost savings
sharing arrangement.
The Company has a long-term contract with the Santa Clara
Water District that requires the Company to purchase minimum
annual water quantities. Purchases are priced at the districts
then-current wholesale water rate.
77
Table of Contents
The Company operates to purchase sufficient water to equal or
exceed the minimum quantities under the contract. The total paid
under the contract was $5,420 in 2009, $6,739 in 2008, and
$6,193 in 2007.
The Company also has a water supply contract with Stockton East
Water District (SEWD) that requires a fixed, annual payment and
does not vary during the year with the quantity of water
delivered by the district. Because of the fixed price
arrangement, the Company operates to receive as much water as
possible from SEWD in order to minimize the cost of operating
Company-owned wells used to supplement SEWD deliveries. The
total paid under the contract was $5,505 in 2009, $5,743 in
2008, and $5,509 in 2007. Pricing under the contract varies
annually.
Estimated annual contractual obligations in the table above are
based on the same payment levels as 2009. Future increased costs
by SEWD are expected to be offset by a decline in the allocation
of costs to the Company, as other customers of SEWD are expected
to receive a larger allocation based upon growth of their
service areas.
On September 21, 2005, the Company entered into an
agreement with Kern County Water Agency (Agency) to obtain
treated water for the Company’s operations. The term of the
agreement is to January 1, 2035, or until the repayment of
the Agency’s bonds (described hereafter) occurs. Under the
terms of the agreement, the Company is obligated to purchase
approximately 11,500 acre feet of treated water in 2010 and
an incrementally higher volume of water for each subsequent year
until 2017, when the Company is obligated to purchase
20,500 acre feet of treated water per year. The Company is
obligated to pay the Capital Facilities Charge and the Treated
Water Charge regardless of whether it can use the water in its
operation, and is obligated for these charges even if the Agency
cannot produce an adequate amount to supply the 20,500 acre
feet in the year. (This agreement supersedes a prior agreement
with Kern County Water Agency for the supply of 11,500 acre
feet of water per year). Total annual cost in 2009 was $5,514,
$4,369 in 2008, and $2,871 in 2007.
Three other parties, including the City of Bakersfield, are also
obligated to purchase a total of 32,500 acre feet per year
under separate agreements with the Agency. Further, the Agency
has the right to proportionally reduce the water supply provided
to all of the participants if it cannot produce adequate
supplies. The participation of all parties in the transaction
for expansion of the Agency’s facilities, including the
Water Purification Plant, purchase of the water, and payment of
interest and principal on the bonds being issued by the Agency
to finance the transaction is required as a condition to the
obligation of the Agency to proceed with expansion of the
Agency’s facilities. If any of the other parties does not
use its allocation, that party is obligated to pay its
contracted amount.
The Agency has issued bonds to fund the project and uses the
payments of the Capital Facilities Charges by the Company and
the other contracted parties to meet the Agency’s
obligations to pay interest and repay principal on the bonds. If
any of the parties were to default on making payments of the
Capital Facilities Charge, then the other parties are obligated
to pay for the defaulting party’s share on a pro-rata
basis. If there is a payment default by a party and the
remaining parties have to make payments, they are also entitled
to a pro-rata share of the defaulting party’s water
allocation.
The Company expects to use all its entitled water in its
operations every year. In addition, if the Company were to pay
for and receive additional amounts of water due to a default of
another participating party; the Company believes it could use
this additional water in its operations without incurring
substantial incremental cost increases. If additional treated
water is available, all parties have an option to purchase this
additional treated water, subject to the Agency’s right to
allocate the water among the parties.
The total obligation of all parties, excluding the Company, is
approximately $82.4 million to the Agency. Based on the
credit worthiness of the other participants, which are
government entities, it is believed to be highly unlikely that
the Company would be required to assume any other parties’
obligations under the contract due to their default. In the
event of default by a party, the Company would receive
entitlement to the additional water for assuming any obligation.
Once the project is complete, the Company is obligated to pay a
Capital Facilities Charge and a Treated Water Charge that
together total $6,700 annually, which equates to $0.32 per acre
foot. Annual payments of $3,600 for the Capital Facilities
Charge began when the Agency issued bonds to fund the project.
Some of the Treated Water Charge of $2,800 began July 1,
2007, when a portion of the planned capacity became available.
Once the entire expansion project is completed the full annual
payments will be $6,700 which will continue through the term of
the agreement. As treated water is being delivered, the Company
is also obligated for its portion of the operating costs;
78
Table of Contents
that portion is currently estimated to be $0.01 per acre foot.
The actual amount will vary due to variations from reimbursable
operating cost estimates, inflation, and other changes in the
cost structure. The Company’s overall estimated cost of
$0.32 per acre foot is less than the estimated cost of procuring
untreated water (assuming water rights could be obtained) and
then providing treatment.
Contingencies
Groundwater
Contamination Matters
As previously reported, in 1995, the State of California’s
Department of Toxic Substances Control (DTSC) named us as a
potential responsible party for cleanup of toxic contamination
plumes, which contain perchloroethylene, also know as
tetrachloroethylene (PCE) in the Chico groundwater. In December
2002, we were named along with other defendants in two lawsuits
filed by DTSC for the cleanup of the plumes. In 2007, we entered
into Court approved consent decrees (Consent Decrees). In
connection with these suits, our insurance carrier, Employers
Insurance of Wausau (Wausau) filed a separate lawsuit against us
for reimbursement of past defense costs which approximate
$1.5 million and a declaratory determination of coverage.
On June 23, 2009, we executed a confidential settlement
with Wausau that did not significantly impact our financial
statements.
Other
Groundwater Contamination
The Company has been and is involved in litigation against third
parties to recover past and future costs related to ground water
contamination in our service areas. The cost of litigation is
expensed as incurred and any settlement is first offset against
such costs. Any settlement in excess of the cost to litigate is
accounted for on a case by case basis, dependant upon the nature
of the settlement.
The Company is involved in a lawsuit against major oil
refineries regarding the contamination of the ground water as a
result of the gas additive MTBE. The Company entered into a
partial settlement with the defendants in April of 2008 that
represent approximately 70% of the responsible parties (as
determined by the Superior Court). On October 22, 2008, the
Company received $34.2 million after deducting
attorneys’ fees and litigation expenses. The Company is
aggressively pursuing legal action against the remaining
responsible parties. The Company has filed with the Commission
to determine the appropriate regulatory treatment of the
proceeds. It anticipates that the proceeds will have been used
by the Company on MTBE capital investments. The Company has also
filed with the Internal Revenue Service a request for a private
letter ruling, regarding the taxability of the re-investment of
proceeds. When an agreement is reached with the Commission
regarding the regulatory treatment, or when the taxability is
determined based upon proceedings with the Internal Revenue
Service, the Company will adjust the accounting of the
settlement, accordingly.
As previously reported, the Company has filed with the City of
Bakersfield, in the Superior Court of California, a lawsuit that
names potentially responsible parties, who manufactured and
distributed products containing 1,2,3 trichloropropane (TCP) in
California. TCP has been detected in the ground water. The
lawsuit seeks to recover treatment costs necessary to remove
TCP. The Court has now coordinated our action with other water
purveyor cases (TCP Cases JCCP 4435) in San Bernardino
County. No trial date has yet been set. Company has entered into
a settlement with one of the distributor defendants, FMC
Corporation. Company will record the proceeds in a memorandum
account until the Commission approves an allocation between
ratepayers and shareholders.
The Company has filed in San Mateo County Superior Court a
complaint (
California Water Service Company v. The Dow
Chemical Company, et al.
CIV 473093) against
potentially responsible parties that manufactured and
distributed products, which contained perchloroethylene, also
know as tetrachloroethylene (PCE) in California, to recover the
past, present, and future treatment costs. The case has not been
consolidated with other PCE cases. Discovery is underway. No
trial date has yet been set.
Other
Legal Matters
From time to time, the Company has been named as a co-defendant
in several asbestos related lawsuits. The Company has been
dismissed without prejudice in several of these cases. In other
cases our contractors and our insurance policy carriers have
settled the cases with no effect on the Company’s financial
statements. As such the
79
Table of Contents
Company does not currently believe that there is any potential
loss which is probable of occurring related to these matters and
therefore no accrual or contingency has been recorded.
From time to time, the Company is involved in various disputes
and litigation matters that arise in the ordinary course of
business. We review the status of each significant matter and
assess its potential financial exposure. If the potential loss
from any claim or legal proceeding is considered probable and
the amount of the range of loss can be estimated, we accrue a
liability for the estimated loss in accordance with the
accounting standards for contingencies. Legal proceedings are
subject to uncertainties, and the outcomes are difficult to
predict. Because of such uncertainties, accruals are based on
the best information available at the time. While the outcome of
these disputes and litigation matters cannot be predicted with
any certainty, management does not believe that when taking into
account existing reserves that the ultimate resolution of these
matters will materially affect our financial position, results
of operations, or cash flows.
| 16 | QUARTERLY FINANCIAL DATA (UNAUDITED) |
The Company’s common stock is traded on the New York Stock
Exchange under the symbol “CWT.”
|
2009
|
First | Second | Third | Fourth | ||||||||||||
|
Operating revenue
|
$ | 86,613 | $ | 116,667 | $ | 139,167 | $ | 106,925 | ||||||||
|
Net operating income
|
6,275 | 15,955 | 24,094 | 11,795 | ||||||||||||
|
Net income
|
2,421 | 12,090 | 19,592 | 6,451 | ||||||||||||
|
Diluted earnings per share
|
0.12 | 0.58 | 0.94 | 0.31 | ||||||||||||
|
Common stock market price range:
|
||||||||||||||||
|
High
|
46.43 | 40.87 | 39.27 | 40.11 | ||||||||||||
|
Low
|
37.83 | 33.54 | 35.52 | 35.18 | ||||||||||||
|
Dividends paid per common share
|
0.2950 | 0.2950 | 0.2950 | 0.2950 | ||||||||||||
|
2008
|
First | Second | Third | Fourth | ||||||||||||
|
Operating revenue
|
$ | 72,921 | $ | 105,581 | $ | 131,702 | $ | 100,108 | ||||||||
|
Net operating income
|
4,831 | 14,482 | 26,762 | 11,394 | ||||||||||||
|
Net income
|
185 | 10,116 | 22,186 | 7,318 | ||||||||||||
|
Diluted earnings per share
|
0.01 | 0.48 | 1.06 | 0.35 | ||||||||||||
|
Common stock market price range:
|
||||||||||||||||
|
High
|
40.68 | 41.04 | 40.22 | 46.43 | ||||||||||||
|
Low
|
33.58 | 31.69 | 31.16 | 29.73 | ||||||||||||
|
Dividends paid per common share
|
0.2925 | 0.2925 | 0.2925 | 0.2925 | ||||||||||||
80
Table of Contents
| 17 | CONDENSED CONSOLIDATING FINANCIAL STATEMENTS |
As discussed in Note 9, on April 17, 2009, Cal Water
issued $100 million aggregate principal amount of 5.875%
First Mortgage Bonds due 2019, which are fully and
unconditionally guaranteed by California Water Service Group
(Parent Company). The following tables present the condensed
consolidating statements of income of California Water Service
Group (Guarantor and Parent), Cal Water (issuer and wholly-owned
consolidated subsidiary of California Water Service Group) and
other wholly-owned subsidiaries of the Company for the years
ended December 31, 2009, 2008 and 2007, the condensed
consolidating statements of cash flows for the twelve-months
ended December 31, 2009, 2008 and 2007, and the condensed
consolidating balance sheets as of December 31, 2009 and
2008. The information is presented utilizing the equity method
of accounting for investments in consolidating subsidiaries.
CALIFORNIA
WATER SERVICE GROUP
CONDENSED
CONSOLIDATING BALANCE SHEET
As of
December 31, 2009
|
All Other
|
Consolidating
|
|||||||||||||||||||
| Parent Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Utility plant:
|
||||||||||||||||||||
|
Utility plant
|
$ | — | $ | 1,604,680 | $ | 111,581 | $ | (7,199 | ) | $ | 1,709,062 | |||||||||
|
Less accumulated depreciation and amortization
|
— | (488,577 | ) | (23,538 | ) | 1,130 | (510,985 | ) | ||||||||||||
|
Net utility plant
|
— | 1,116,103 | 88,043 | (6,069 | ) | 1,198,077 | ||||||||||||||
|
Current assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
532 | 6,000 | 3,334 | — | 9,866 | |||||||||||||||
|
Receivables
|
28 | 54,117 | 4,395 | — | 58,540 | |||||||||||||||
|
Receivables from affiliates
|
11,026 | 12,827 | 2,140 | (25,993 | ) | — | ||||||||||||||
|
Other current assets
|
— | 23,025 | 810 | — | 23,835 | |||||||||||||||
|
Total current assets
|
11,586 | 95,969 | 10,679 | (25,993 | ) | 92,241 | ||||||||||||||
|
Other assets:
|
||||||||||||||||||||
|
Regulatory assets
|
— | 202,268 | 1,836 | — | 204,104 | |||||||||||||||
|
Investments in affiliates
|
422,287 | — | — | (422,287 | ) | — | ||||||||||||||
|
Long-term affiliate notes receivable
|
11,155 | — | — | (11,155 | ) | — | ||||||||||||||
|
Other assets
|
— | 24,026 | 7,337 | (204 | ) | 31,159 | ||||||||||||||
|
Total other assets
|
433,442 | 226,294 | 9,173 | (433,646 | ) | 235,263 | ||||||||||||||
| $ | 445,028 | $ | 1,438,366 | $ | 107,895 | $ | (465,708 | ) | $ | 1,525,581 | ||||||||||
|
CAPITALIZATION AND LIABILITIES
|
||||||||||||||||||||
|
Capitalization:
|
||||||||||||||||||||
|
Common stockholders’ equity
|
$ | 420,634 | $ | 389,127 | $ | 39,592 | $ | (428,719 | ) | $ | 420,634 | |||||||||
|
Affiliate long-term debt
|
— | — | 11,155 | (11,155 | ) | — | ||||||||||||||
|
Long-term debt, less current maturities
|
— | 370,900 | 3,369 | — | 374,269 | |||||||||||||||
|
Total capitalization
|
420,634 | 760,027 | 54,116 | (439,874 | ) | 794,903 | ||||||||||||||
|
Current liabilities:
|
||||||||||||||||||||
|
Current maturities of long-term debt
|
— | 12,246 | 707 | — | 12,953 | |||||||||||||||
|
Short-term borrowings
|
12,000 | — | — | — | 12,000 | |||||||||||||||
|
Payables to affiliates
|
11,983 | 12 | 13,998 | (25,993 | ) | — | ||||||||||||||
|
Accounts payable
|
86 | 41,405 | 4,628 | — | 46,119 | |||||||||||||||
|
Accrued expenses and other liabilities
|
325 | 34,580 | 4,369 | 12 | 39,286 | |||||||||||||||
|
Total current liabilities
|
24,394 | 88,243 | 23,702 | (25,981 | ) | 110,358 | ||||||||||||||
|
Unamortized investment tax credits
|
— | 2,318 | — | — | 2,318 | |||||||||||||||
|
Deferred income taxes, net
|
— | 90,330 | 1,374 | 147 | 91,851 | |||||||||||||||
|
Pension and postretirement benefits other than pensions
|
— | 137,127 | — | — | 137,127 | |||||||||||||||
|
Regulatory and other liabilities
|
— | 74,956 | 10,824 | — | 85,780 | |||||||||||||||
|
Advances for construction
|
— | 183,555 | 1,472 | — | 185,027 | |||||||||||||||
|
Contributions in aid of construction
|
— | 101,810 | 16,407 | — | 118,217 | |||||||||||||||
| $ | 445,028 | $ | 1,438,366 | $ | 107,895 | $ | (465,708 | ) | $ | 1,525,581 | ||||||||||
81
Table of Contents
CALIFORNIA
WATER SERVICE GROUP
CONDENSED
CONSOLIDATING BALANCE SHEET
As of
December 31, 2008
|
All Other
|
Consolidating
|
|||||||||||||||||||
| Parent Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Utility plant:
|
||||||||||||||||||||
|
Utility plant
|
$ | — | $ | 1,488,227 | $ | 102,051 | $ | (7,199 | ) | $ | 1,583,079 | |||||||||
|
Less accumulated depreciation and amortization
|
— | (451,350 | ) | (20,354 | ) | 992 | (470,712 | ) | ||||||||||||
|
Net utility plant
|
— | 1,036,877 | 81,697 | (6,207 | ) | 1,112,367 | ||||||||||||||
|
Current assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
427 | 3,025 | 10,417 | — | 13,869 | |||||||||||||||
|
Receivables
|
72 | 44,049 | 3,848 | — | 47,969 | |||||||||||||||
|
Receivables from affiliates
|
9,295 | 11,976 | 372 | (21,643 | ) | — | ||||||||||||||
|
Other current assets
|
142 | 17,877 | (59 | ) | — | 17,960 | ||||||||||||||
|
Total current assets
|
9,936 | 76,927 | 14,578 | (21,643 | ) | 79,798 | ||||||||||||||
|
Other assets:
|
||||||||||||||||||||
|
Regulatory assets
|
905 | 196,990 | 398 | — | 198,293 | |||||||||||||||
|
Investments in affiliates
|
404,064 | — | — | (404,064 | ) | — | ||||||||||||||
|
Long-term affiliate notes receivable
|
10,851 | — | — | (10,851 | ) | — | ||||||||||||||
|
Other assets
|
— | 20,242 | 7,612 | (205 | ) | 27,649 | ||||||||||||||
|
Total other assets
|
415,820 | 217,232 | 8,010 | (415,120 | ) | 225,942 | ||||||||||||||
| $ | 425,756 | $ | 1,331,036 | $ | 104,285 | $ | (442,970 | ) | $ | 1,418,107 | ||||||||||
|
CAPITALIZATION AND LIABILITIES
|
||||||||||||||||||||
|
Capitalization:
|
||||||||||||||||||||
|
Common stockholders’ equity
|
$ | 402,949 | $ | 372,337 | $ | 38,139 | $ | (410,476 | ) | $ | 402,949 | |||||||||
|
Affiliate long-term debt
|
— | — | 10,851 | (10,851 | ) | — | ||||||||||||||
|
Long-term debt, less current maturities
|
— | 283,820 | 3,678 | — | 287,498 | |||||||||||||||
|
Total capitalization
|
402,949 | 656,157 | 52,668 | (421,327 | ) | 690,447 | ||||||||||||||
|
Current liabilities:
|
||||||||||||||||||||
|
Current maturities of long-term debt
|
— | 2,121 | 697 | — | 2,818 | |||||||||||||||
|
Short-term borrowings
|
12,000 | 28,000 | — | — | 40,000 | |||||||||||||||
|
Payables to affiliates
|
9,642 | 201 | 11,800 | (21,643 | ) | — | ||||||||||||||
|
Accounts payable
|
— | 38,003 | 3,769 | — | 41,772 | |||||||||||||||
|
Accrued expenses and other liabilities
|
1,165 | 34,563 | 2,878 | — | 38,606 | |||||||||||||||
|
Total current liabilities
|
22,807 | 102,888 | 19,144 | (21,643 | ) | 123,196 | ||||||||||||||
|
Unamortized investment tax credits
|
— | 2,392 | — | — | 2,392 | |||||||||||||||
|
Deferred income taxes, net
|
— | 70,003 | 2,341 | — | 72,344 | |||||||||||||||
|
Pension and postretirement benefits other than pensions
|
— | 152,685 | — | — | 152,685 | |||||||||||||||
|
Regulatory and other liabilities
|
— | 75,362 | 7,950 | — | 83,312 | |||||||||||||||
|
Advances for construction
|
— | 174,625 | 1,538 | — | 176,163 | |||||||||||||||
|
Contributions in aid of construction
|
— | 96,924 | 20,644 | — | 117,568 | |||||||||||||||
| $ | 425,756 | $ | 1,331,036 | $ | 104,285 | $ | (442,970 | ) | $ | 1,418,107 | ||||||||||
82
Table of Contents
CALIFORNIA
WATER SERVICE GROUP
CONDENSED
CONSOLIDATING STATEMENT OF INCOME
For the
year ended December 31, 2009
|
All Other
|
Consolidating
|
|||||||||||||||||||
| Parent Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Operating revenue
|
$ | — | $ | 420,412 | $ | 28,960 | $ | — | $ | 449,372 | ||||||||||
|
Operating expenses:
|
||||||||||||||||||||
|
Operations:
|
||||||||||||||||||||
|
Purchased water
|
— | 121,360 | 335 | — | 121,695 | |||||||||||||||
|
Purchased power
|
— | 21,254 | 6,998 | — | 28,252 | |||||||||||||||
|
Pump taxes
|
— | 8,982 | 555 | — | 9,537 | |||||||||||||||
|
Administrative and general
|
— | 68,103 | 7,140 | — | 75,243 | |||||||||||||||
|
Other
|
— | 49,560 | 7,477 | (460 | ) | 56,577 | ||||||||||||||
|
Maintenance
|
— | 17,918 | 619 | — | 18,537 | |||||||||||||||
|
Depreciation and amortization
|
— | 37,740 | 2,176 | (138 | ) | 39,778 | ||||||||||||||
|
Income taxes (benefits)
|
(222 | ) | 23,919 | 398 | 717 | 24,812 | ||||||||||||||
|
Taxes other than income taxes
|
— | 14,727 | 2,095 | — | 16,822 | |||||||||||||||
|
Total operating expenses (income)
|
(222 | ) | 363,563 | 27,793 | 119 | 391,253 | ||||||||||||||
|
Net operating income
|
222 | 56,849 | 1,167 | (119 | ) | 58,119 | ||||||||||||||
|
Other Income and Expenses:
|
||||||||||||||||||||
|
Non-regulated revenue
|
901 | 12,408 | 6,379 | (1,498 | ) | 18,190 | ||||||||||||||
|
Non-regulated expense
|
— | (7,972 | ) | (4,480 | ) | — | (12,452 | ) | ||||||||||||
|
Gain on sale on non-utility property
|
— | 560 | — | — | 560 | |||||||||||||||
|
Income tax benefit (expense) on other income and expense
|
(367 | ) | (2,036 | ) | (808 | ) | 661 | (2,550 | ) | |||||||||||
|
Net other income (expense)
|
534 | 2,960 | 1,091 | (837 | ) | 3,748 | ||||||||||||||
|
Interest:
|
||||||||||||||||||||
|
Interest expense
|
505 | 23,719 | 1,207 | (1,037 | ) | 24,394 | ||||||||||||||
|
Less: capitalized interest
|
— | (2,359 | ) | (722 | ) | — | (3,081 | ) | ||||||||||||
|
Net interest expense
|
505 | 21,360 | 485 | (1,037 | ) | 21,313 | ||||||||||||||
|
Equity earnings of subsidiaries
|
40,303 | — | — | (40,303 | ) | — | ||||||||||||||
|
Net income
|
$ | 40,554 | $ | 38,449 | $ | 1,773 | $ | (40,222 | ) | $ | 40,554 | |||||||||
83
Table of Contents
CALIFORNIA
WATER SERVICE GROUP
CONDENSED
CONSOLIDATING STATEMENT OF INCOME
For the
year ended December 31, 2008
|
All Other
|
Consolidating
|
|||||||||||||||||||
| Parent Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Operating revenue
|
$ | — | $ | 389,659 | $ | 20,653 | $ | — | $ | 410,312 | ||||||||||
|
Operating expenses:
|
||||||||||||||||||||
|
Operations:
|
||||||||||||||||||||
|
Purchased water
|
— | 111,450 | 276 | — | 111,726 | |||||||||||||||
|
Purchased power
|
— | 21,424 | 4,515 | — | 25,939 | |||||||||||||||
|
Pump taxes
|
— | 8,413 | 486 | — | 8,899 | |||||||||||||||
|
Administrative and general
|
— | 54,025 | 5,404 | — | 59,429 | |||||||||||||||
|
Other
|
— | 46,538 | 5,115 | (457 | ) | 51,196 | ||||||||||||||
|
Maintenance
|
— | 18,500 | 469 | — | 18,969 | |||||||||||||||
|
Depreciation and amortization
|
— | 35,407 | 2,077 | (145 | ) | 37,339 | ||||||||||||||
|
Income taxes
|
— | 24,106 | 69 | 332 | 24,507 | |||||||||||||||
|
Taxes other than income taxes
|
— | 13,342 | 1,497 | — | 14,839 | |||||||||||||||
|
Total operating expenses (income)
|
— | 333,205 | 19,908 | (270 | ) | 352,843 | ||||||||||||||
|
Net operating income
|
— | 56,454 | 745 | 270 | 57,469 | |||||||||||||||
|
Other Income and Expenses:
|
||||||||||||||||||||
|
Non-regulated revenue
|
439 | 7,825 | 6,782 | (816 | ) | 14,230 | ||||||||||||||
|
Non-regulated expense
|
— | (10,084 | ) | (5,013 | ) | — | (15,097 | ) | ||||||||||||
|
Gain on sale on non-utility property
|
— | 7 | — | — | 7 | |||||||||||||||
|
Income tax benefit (expense) on other income and expense
|
(179 | ) | 918 | (695 | ) | 332 | 376 | |||||||||||||
|
Net other income (expense)
|
260 | (1,334 | ) | 1,074 | (484 | ) | (484 | ) | ||||||||||||
|
Interest:
|
||||||||||||||||||||
|
Interest expense
|
147 | 20,107 | 697 | (360 | ) | 20,591 | ||||||||||||||
|
Less: capitalized interest
|
— | (3,366 | ) | (45 | ) | — | (3,411 | ) | ||||||||||||
|
Net interest expense
|
147 | 16,741 | 652 | (360 | ) | 17,180 | ||||||||||||||
|
Equity earnings of subsidiaries
|
39,692 | — | — | (39,692 | ) | — | ||||||||||||||
|
Net income
|
$ | 39,805 | $ | 38,379 | $ | 1,167 | $ | (39,546 | ) | $ | 39,805 | |||||||||
84
Table of Contents
CALIFORNIA
WATER SERVICE GROUP
CONDENSED
CONSOLIDATING STATEMENT OF INCOME
For the
year ended December 31, 2007
|
All Other
|
Consolidating
|
|||||||||||||||||||
| Parent Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Operating revenue
|
$ | — | $ | 351,098 | $ | 15,984 | $ | — | $ | 367,082 | ||||||||||
|
Operating expenses:
|
||||||||||||||||||||
|
Operations:
|
||||||||||||||||||||
|
Purchased water
|
— | 106,145 | 603 | — | 106,748 | |||||||||||||||
|
Purchased power
|
— | 21,727 | 2,247 | — | 23,974 | |||||||||||||||
|
Pump taxes
|
— | 7,769 | 392 | — | 8,161 | |||||||||||||||
|
Administrative and general
|
— | 50,902 | 3,360 | — | 54,262 | |||||||||||||||
|
Other
|
— | 42,860 | 3,907 | (457 | ) | 46,310 | ||||||||||||||
|
Maintenance
|
— | 17,925 | 411 | — | 18,336 | |||||||||||||||
|
Depreciation and amortization
|
— | 31,959 | 1,757 | (153 | ) | 33,563 | ||||||||||||||
|
Income taxes (benefits)
|
(3 | ) | 16,947 | 623 | 320 | 17,887 | ||||||||||||||
|
Taxes other than income taxes
|
— | 12,643 | 1,028 | — | 13,671 | |||||||||||||||
|
Total operating expenses (income)
|
(3 | ) | 308,877 | 14,328 | (290 | ) | 322,912 | |||||||||||||
|
Net operating income
|
3 | 42,221 | 1,656 | 290 | 44,170 | |||||||||||||||
|
Other Income and Expenses:
|
||||||||||||||||||||
|
Non-regulated revenue
|
436 | 9,154 | 4,601 | (634 | ) | 13,557 | ||||||||||||||
|
Non-regulated expense
|
— | (6,185 | ) | (2,929 | ) | — | (9,114 | ) | ||||||||||||
|
Gain on sale on non-utility property
|
— | 2,516 | — | — | 2,516 | |||||||||||||||
|
Income tax benefit (expense) on other income and expense
|
(177 | ) | (2,235 | ) | (681 | ) | 257 | (2,836 | ) | |||||||||||
|
Net other income (expense )
|
259 | 3,250 | 991 | (377 | ) | 4,123 | ||||||||||||||
|
Interest:
|
||||||||||||||||||||
|
Interest expense
|
8 | 19,347 | 541 | (177 | ) | 19,719 | ||||||||||||||
|
Less: capitalized interest
|
— | (2,585 | ) | — | — | (2,585 | ) | |||||||||||||
|
Net interest expense
|
8 | 16,762 | 541 | (177 | ) | 17,134 | ||||||||||||||
|
Equity earnings of subsidiaries
|
30,905 | — | — | (30,905 | ) | — | ||||||||||||||
|
Net income
|
$ | 31,159 | $ | 28,709 | $ | 2,106 | $ | (30,815 | ) | $ | 31,159 | |||||||||
85
Table of Contents
CALIFORNIA
WATER SERVICE GROUP
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
For the
year ended December 31, 2009
|
All Other
|
Consolidating
|
|||||||||||||||||||
| Parent Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Operating activities:
|
||||||||||||||||||||
|
Net income
|
$ | 40,554 | $ | 38,449 | $ | 1,773 | $ | (40,222 | ) | $ | 40,554 | |||||||||
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
||||||||||||||||||||
|
Equity earnings of subsidiaries
|
(40,303 | ) | — | — | 40,303 | — | ||||||||||||||
|
Dividends received from affiliates
|
24,476 | — | — | (24,476 | ) | — | ||||||||||||||
|
Depreciation and amortization
|
— | 39,649 | 2,132 | (138 | ) | 41,643 | ||||||||||||||
|
Amortization of debt premium and expense
|
— | 970 | — | — | 970 | |||||||||||||||
|
Other changes in noncurrent assets and liabilities
|
(1,491 | ) | 4,602 | 532 | 45 | 3,688 | ||||||||||||||
|
Change in value of life insurance contracts
|
— | (4,107 | ) | — | — | (4,107 | ) | |||||||||||||
|
Gain on sale of non-utility property
|
— | (560 | ) | — | — | (560 | ) | |||||||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||||||||||
|
Net advance to affiliates
|
(160 | ) | (1,039 | ) | 1,199 | — | — | |||||||||||||
|
Other changes, net
|
476 | (11,161 | ) | 909 | 12 | (9,764 | ) | |||||||||||||
|
Net adjustments
|
(17,002 | ) | 28,354 | 4,772 | 15,746 | 31,870 | ||||||||||||||
|
Net cash provided by (used in) operating activities
|
23,552 | 66,803 | 6,545 | (24,476 | ) | 72,424 | ||||||||||||||
|
Investing activities:
|
||||||||||||||||||||
|
Utility plant expenditures
|
— | (100,182 | ) | (10,426 | ) | — | (110,608 | ) | ||||||||||||
|
Proceeds from sale of non-utility assets
|
— | 810 | — | — | 810 | |||||||||||||||
|
Reduction of loans to affiliates
|
415 | — | — | (415 | ) | — | ||||||||||||||
|
Purchase of life insurance
|
— | (1,813 | ) | — | — | (1,813 | ) | |||||||||||||
|
Restricted cash increase
|
— | (3,104 | ) | — | — | (3,104 | ) | |||||||||||||
|
Net cash provided by (used in) investing activities
|
415 | (104,289 | ) | (10,426 | ) | (415 | ) | (114,715 | ) | |||||||||||
|
Financing Activities:
|
||||||||||||||||||||
|
Short-term borrowings
|
— | 20,000 | — | — | 20,000 | |||||||||||||||
|
Repayment of short-term borrowings
|
— | (48,000 | ) | — | — | (48,000 | ) | |||||||||||||
|
Reduction of affiliate note receivable
|
— | — | (415 | ) | 415 | — | ||||||||||||||
|
Proceeds from long-term debt, net of issuance cost of $3,390
|
— | 97,884 | 96 | — | 97,980 | |||||||||||||||
|
Retirement of long-term debt
|
— | (5,938 | ) | (834 | ) | — | (6,772 | ) | ||||||||||||
|
Advances and contributions in aid for construction
|
— | 4,981 | — | — | 4,981 | |||||||||||||||
|
Refunds of advances for construction
|
— | (5,968 | ) | (71 | ) | — | (6,039 | ) | ||||||||||||
|
Dividends paid to non-affiliates
|
(24,476 | ) | — | — | — | (24,476 | ) | |||||||||||||
|
Dividends paid to affiliates
|
— | (22,498 | ) | (1,978 | ) | 24,476 | — | |||||||||||||
|
Issuance of common stock
|
614 | — | — | — | 614 | |||||||||||||||
|
Net cash provided by (used in) financing activities
|
(23,862 | ) | 40,461 | (3,202 | ) | 24,891 | 38,288 | |||||||||||||
|
Change in cash and cash equivalents
|
105 | 2,975 | (7,083 | ) | — | (4,003 | ) | |||||||||||||
|
Cash and cash equivalents at beginning of period
|
427 | 3,025 | 10,417 | — | 13,869 | |||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 532 | $ | 6,000 | $ | 3,334 | $ | — | $ | 9,866 | ||||||||||
86
Table of Contents
CALIFORNIA
WATER SERVICE GROUP
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
For the
year ended December 31, 2008
|
All Other
|
Consolidating
|
|||||||||||||||||||
| Parent Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Operating activities:
|
||||||||||||||||||||
|
Net income
|
$ | 39,805 | $ | 38,379 | $ | 1,167 | $ | (39,546 | ) | $ | 39,805 | |||||||||
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
||||||||||||||||||||
|
Equity earnings of subsidiaries
|
(39,692 | ) | — | — | 39,692 | — | ||||||||||||||
|
Dividends received from affiliates
|
24,348 | — | — | (24,348 | ) | — | ||||||||||||||
|
Depreciation and amortization
|
— | 37,102 | 2,528 | (145 | ) | 39,485 | ||||||||||||||
|
Amortization of debt premium and expense
|
— | 673 | — | — | 673 | |||||||||||||||
|
Other changes in noncurrent assets and liabilities
|
— | 10,174 | 485 | — | 10,659 | |||||||||||||||
|
Change in value of life insurance contracts
|
— | 3,763 | — | — | 3,763 | |||||||||||||||
|
Gain on sale of non-utility property
|
— | (7 | ) | — | — | (7 | ) | |||||||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||||||||||
|
Net advance to affiliates
|
8,615 | (17,061 | ) | 8,446 | — | — | ||||||||||||||
|
Other changes, net
|
(12,018 | ) | (2,102 | ) | 15,473 | (1 | ) | 1,352 | ||||||||||||
|
Net adjustments
|
(18,747 | ) | 32,542 | 26,932 | 15,198 | 55,925 | ||||||||||||||
|
Net cash provided by (used in) operating activities
|
21,058 | 70,921 | 28,099 | (24,348 | ) | 95,730 | ||||||||||||||
|
Investing activities:
|
||||||||||||||||||||
|
Utility plant expenditures
|
(103,619 | ) | (4,185 | ) | (107,804 | ) | ||||||||||||||
|
MTBE settlement received
|
— | 34,217 | — | — | 34,217 | |||||||||||||||
|
Proceeds from sale of non-utility assets
|
— | 7 | — | — | 7 | |||||||||||||||
|
Loans to affiliates
|
(11,990 | ) | — | — | 11,990 | — | ||||||||||||||
|
Reduction of affiliate note receivable
|
990 | — | — | (990 | ) | — | ||||||||||||||
|
Acquisitions, net of cash acquired
|
— | — | (24,924 | ) | — | (24,924 | ) | |||||||||||||
|
Proceeds from redemption of affiliate preferred stock
|
3,718 | — | — | (3,718 | ) | — | ||||||||||||||
|
Purchase of life insurance
|
— | (1,373 | ) | — | — | (1,373 | ) | |||||||||||||
|
Net cash provided by (used in) investing activities
|
(7,282 | ) | (70,768 | ) | (29,109 | ) | 7,282 | (99,877 | ) | |||||||||||
|
Financing Activities:
|
||||||||||||||||||||
|
Short-term borrowings
|
16,000 | 40,000 | — | — | 56,000 | |||||||||||||||
|
Repayment of short-term borrowings
|
(4,000 | ) | (12,000 | ) | — | — | (16,000 | ) | ||||||||||||
|
Borrowings from affiliates
|
— | — | 11,990 | (11,990 | ) | — | ||||||||||||||
|
Repayment of affiliate long-term debt
|
— | — | (990 | ) | 990 | — | ||||||||||||||
|
Issuance of long-term debt, net of expense
|
— | 494 | 161 | — | 655 | |||||||||||||||
|
Retirement of long-term debt
|
— | (2,124 | ) | (747 | ) | — | (2,871 | ) | ||||||||||||
|
Advances and contributions in aid for construction
|
— | 7,618 | 609 | — | 8,227 | |||||||||||||||
|
Refunds of advances for construction
|
— | (6,661 | ) | (1 | ) | — | (6,662 | ) | ||||||||||||
|
Redemption of preferred stock
|
(3,718 | ) | (3,718 | ) | — | 3,718 | (3,718 | ) | ||||||||||||
|
Dividends paid to non-affiliates
|
(24,349 | ) | — | — | — | (24,349 | ) | |||||||||||||
|
Dividends paid to affiliates
|
— | (23,368 | ) | (980 | ) | 24,348 | — | |||||||||||||
|
Net cash provided by (used in) financing activities
|
(16,067 | ) | 241 | 10,042 | 17,066 | 11,282 | ||||||||||||||
|
Change in cash and cash equivalents
|
(2,291 | ) | 394 | 9,032 | — | 7,135 | ||||||||||||||
|
Cash and cash equivalents at beginning of period
|
2,718 | 2,631 | 1,385 | — | 6,734 | |||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 427 | $ | 3,025 | $ | 10,417 | $ | — | $ | 13,869 | ||||||||||
87
Table of Contents
CALIFORNIA
WATER SERVICE GROUP
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
For the
year ended December 31, 2007
|
All Other
|
Consolidating
|
|||||||||||||||||||
| Parent Company | Cal Water | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Operating activities:
|
||||||||||||||||||||
|
Net income
|
$ | 31,159 | $ | 28,709 | $ | 2,106 | $ | (30,815 | ) | $ | 31,159 | |||||||||
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
||||||||||||||||||||
|
Equity earnings of subsidiaries
|
(30,905 | ) | — | — | 30,905 | — | ||||||||||||||
|
Dividends received from affiliates
|
24,123 | — | — | (24,123 | ) | — | ||||||||||||||
|
Depreciation and amortization
|
— | 31,959 | 1,757 | (153 | ) | 33,563 | ||||||||||||||
|
Amortization of debt premium and expense
|
— | 674 | (1 | ) | — | 673 | ||||||||||||||
|
Other changes in noncurrent assets and liabilities
|
— | (163 | ) | (99 | ) | — | (262 | ) | ||||||||||||
|
Gain on sale of non-utility property
|
— | (2,515 | ) | (1 | ) | — | (2,516 | ) | ||||||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||||||||||
|
Net advance to affiliates
|
(4,097 | ) | 2,927 | 1,170 | — | — | ||||||||||||||
|
Other changes, net
|
2,170 | (11,510 | ) | (3,286 | ) | 63 | (12,563 | ) | ||||||||||||
|
Net adjustments
|
(8,709 | ) | 21,372 | (460 | ) | 6,692 | 18,895 | |||||||||||||
|
Net cash provided by (used in) operating activities
|
22,450 | 50,081 | 1,646 | (24,123 | ) | 50,054 | ||||||||||||||
|
Investing activities:
|
||||||||||||||||||||
|
Utility plant expenditures
|
(84,518 | ) | (4,945 | ) | (89,463 | ) | ||||||||||||||
|
Proceeds from sale of non-utility assets
|
— | 2,495 | — | — | 2,495 | |||||||||||||||
|
Loans to affiliates
|
(1,579 | ) | — | — | 1,579 | — | ||||||||||||||
|
Reduction of affiliates note receivable
|
154 | — | — | (154 | ) | — | ||||||||||||||
|
Acquisitions
|
— | (388 | ) | (1,091 | ) | — | (1,479 | ) | ||||||||||||
|
Net cash provided by (used in) investing activities
|
(1,425 | ) | (82,411 | ) | (6,036 | ) | 1,425 | (88,447 | ) | |||||||||||
|
Financing Activities:
|
||||||||||||||||||||
|
Issuance of common stock
|
372 | — | — | — | 372 | |||||||||||||||
|
Borrowings from affiliates
|
— | — | 1,579 | (1,579 | ) | — | ||||||||||||||
|
Repayment of affiliate long-term debt
|
— | — | (154 | ) | 154 | — | ||||||||||||||
|
Issuance of long-term debt, net of expense
|
— | — | 264 | — | 264 | |||||||||||||||
|
Retirement of long-term debt
|
— | (1,170 | ) | (810 | ) | — | (1,980 | ) | ||||||||||||
|
Advances and contributions in aid of construction
|
— | 11,798 | 4,791 | — | 16,589 | |||||||||||||||
|
Refunds of advances for construction
|
— | (5,611 | ) | (695 | ) | — | (6,306 | ) | ||||||||||||
|
Dividends paid to non-affiliates
|
(24,124 | ) | — | — | — | (24,124 | ) | |||||||||||||
|
Dividends paid to affiliates
|
— | (22,908 | ) | (1,215 | ) | 24,123 | — | |||||||||||||
|
Net cash provided by (used in) financing activities
|
(23,752 | ) | (17,891 | ) | 3,760 | 22,698 | (15,185 | ) | ||||||||||||
|
Change in cash and cash equivalents
|
(2,727 | ) | (50,221 | ) | (630 | ) | — | (53,578 | ) | |||||||||||
|
Cash and cash equivalents at beginning of period
|
5,445 | 52,852 | 2,015 | — | 60,312 | |||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 2,718 | $ | 2,631 | $ | 1,385 | $ | — | $ | 6,734 | ||||||||||
88
Table of Contents
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None
| Item 9A. | Controls and Procedures |
Management’s
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Rules 13a-15(e)
and 15d -15(e) under the Securities Exchange Act of 1934, as
amended) that are designed to ensure that information required
to be disclosed in our reports filed or submitted under the
Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported, within the time periods
specified in the Security and Exchange Commission’s rules
and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding required disclosure.
In designing and evaluation the disclosure controls and
procedures, management, including the Chief Executive Officer
and Chief Financial Officer, recognized that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Accordingly, our disclosure controls
and procedures have been designed to provide reasonable
assurance of achieving their objectives.
Our management, with the participation of our Chief Executive
Officer and our Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of
December 31, 2009. Based on that evaluation, we concluded
that our disclosure controls and procedures were effective at
the reasonable assurance level.
There was no change in our internal control over financial
reporting during the quarter ended December 31, 2009, that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Management’s
Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, as amended).
Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2009. In making
this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in “Internal Control-Integrated
Framework.” Management has concluded that, as of
December 31, 2009, our internal control over financial
reporting is effective based on these criteria. Our independent
registered public accounting firm, Deloitte & Touche
LLP, has audited the effectiveness of our internal control over
financial reporting as of December 31, 2009, as stated in
their report, which is included herein.
| Item 9B. | Other Information |
None.
| Item 10. | Directors and Executive Officers and Corporate Governance |
The information required by this Item as to directors of the
Company and the Company’s Audit Committee is contained in
the sections captioned “Board Structure” and
“Proposal No. 1 — Election of
Directors” of the 2010 Proxy Statement, and is incorporated
herein by reference.
Information required by this Item regarding executive officers
is included in a separate section captioned “Executive
Officers of the Registrant” contained in Part I of
this report.
89
Table of Contents
Information required by this Item as to our Code of Ethics is
contained in the section captioned “Other
Matters — Code of Ethics” of the 2010 Proxy
Statement, and is incorporated herein by reference.
Information required to be disclosed by this Item as to
compliance with Section 16(a) filing requirements is
contained in the section captioned “Stock Ownership of
Management and Certain Beneficial Owners” of the 2010 Proxy
Statement, and is incorporated herein by reference.
| Item 11. | Executive Compensation |
The information required by this Item is contained under the
captions “Compensation Discussion and Analysis,”
“Report of the Organization and Compensation Committee of
the Board of Directors on Executive Compensation,” and
“Organization and Compensation Committee Interlocks and
Insider Participation” of the 2010 Proxy Statement and is
incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item regarding security
ownership of certain beneficial owners and management is
contained in the section captioned “Stock Ownership of
Management and Certain Beneficial Owners” of the 2010 Proxy
Statement and is incorporated herein by reference.
Information required by this Item regarding our equity
compensation plans is included in a separate section captioned
“Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities” contained in Part I of this report.
The following table represents securities authorized to be
issued under our equity compensation plans:
|
Number of
|
||||||||||||
|
Securities
|
||||||||||||
|
Number of
|
Remaining Available
|
|||||||||||
|
Securities to be
|
for Future Issuance
|
|||||||||||
|
Issued upon
|
Under Equity
|
|||||||||||
|
Exercise of
|
Weighted-Average
|
Compensation Plans
|
||||||||||
|
Outstanding
|
Exercise Price of
|
(Excluding
|
||||||||||
|
Options, Warrants
|
Outstanding
|
Securities
|
||||||||||
|
and Rights
|
Options, Warrants
|
Reflected in Column
|
||||||||||
|
Plan Category
|
(a) | and Rights | (a)) | |||||||||
|
Equity compensation plans approved by security holders
|
242,960 | $ | 29.60 | 763,453 | ||||||||
|
Equity compensation plans not approved by security holders
|
-0- | -0- | -0- | |||||||||
|
Total
|
242,960 | $ | 29.60 | 763,453 | ||||||||
| Item 13. | Certain Relationships and Related Transactions and Director Independence |
The information required by this Item is contained in the
sections captioned “Certain Related Persons
Transactions” and “board Structure” of the 2010
Proxy Statement and is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services |
The information required by this Item is contained in the
section captioned “Report of the Audit Committee” and
“Relationship with the Independent Registered Public
Accounting Firm” of the 2010 Proxy Statement and is
incorporated herein by reference.
90
Table of Contents
| Item 15. | Exhibits, Financial Statement Schedules |
(a) As part of this
Form 10-K,
the following documents are being filed:
1.
Financial Statement:
See “Index
to Consolidated Financial Statements” in Part II,
Item 8 of this
Form 10-K.
2.
Financial Statement Schedules:
No
financial statement schedules are being included since the
information otherwise required is included in the financial
statements and the notes thereto.
3.
Exhibits:
The exhibits listed in the
accompanying index to exhibits are filed or incorporated by
reference.
91
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized
CALIFORNIA WATER SERVICE GROUP
| By |
/s/ Peter
C. Nelson
|
PETER C. NELSON,
President and Chief Executive Officer
Date: February 26, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
/s/ Robert
W. Foy
|
Chairman, Board of Directors | Date: February 26, 2010 | ||||
|
/s/ Douglas
M. Brown
|
Member, Board of Directors | Date: February 26, 2010 | ||||
|
/s/ Edwin
A. Guiles
|
Member, Board of Directors | Date: February 26, 2010 | ||||
|
/s/ Edward
D. Harris, Jr.
|
Member, Board of Directors | Date: February 26, 2010 | ||||
|
/s/ Bonnie
G. Hill
|
Member, Board of Directors | Date: February 26, 2010 | ||||
|
/s/ Richard
P. Magnuson
|
Member, Board of Directors | Date: February 26, 2010 | ||||
|
/s/ Linda
R. Meier
|
Member, Board of Directors | Date: February 26, 2010 | ||||
|
/s/ Peter
C. Nelson
|
President and Chief Executive Officer, Principal Executive Officer, Member Board of Directors | Date: February 26, 2010 | ||||
|
/s/ George
A. Vera
|
Member, Board of Directors | Date: February 26, 2010 | ||||
|
/s/ Martin
A. Kropelnicki
|
Chief Financial Officer and Treasurer; Principal Financial Officer | Date: February 26, 2010 | ||||
|
/s/ Calvin
L. Breed
|
Controller, Assistant Secretary and Assistant Treasurer; Principal Accounting Officer | Date: February 26, 2010 | ||||
92
Table of Contents
EXHIBIT INDEX
Unless filed with this
Form 10-K,
the documents listed are incorporated by reference to the
filings referred to:
|
Exhibit
|
||||
|
Number
|
||||
| 3 | .1 | Certificate of Incorporation of California Water Service Group (Exhibit 3.1 to the Quarterly Report on Form 10-Q filed August 9, 2006) | ||
| 3 | .2 | Restated Bylaws of California Water Service Group as amended on November 28, 2007 (Exhibit 3.1 to Current Report on Form 8-K filed December 3, 2007) | ||
| 4 | .1 | [reserved] | ||
| 4 | .2 | Certificate of Designations regarding Series D Participating Preferred Stock, as filed with Delaware Secretary of State on September 16, 1999 (Exhibit 4.2 to Annual Report on Form 10-K for the year ended December 31, 2003) | ||
| 4 | .3 | Thirty-Ninth Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee (Exhibit 4.1 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .4 | Fortieth Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 9.86% First Mortgage Bonds due 2020, Series CC. (Exhibit 4.2 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .5 | Forty-First Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 5.875% First Mortgage Bonds due 2019, Series LL. (Exhibit 4.3 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .6 | Forty-Second Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 6.94% First Mortgage Bonds due 2012, Series KK. (Exhibit 4.4 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .7 | Forty-Third Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 7.28% First Mortgage Bonds due 2025, Series AAA. (Exhibit 4.5 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .8 | Forty-Fourth Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 6.77% First Mortgage Bonds due 2028, Series BBB. (Exhibit 4.6 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .9 | Forty-Fifth Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 8.15% First Mortgage Bonds due 2030, Series CCC. (Exhibit 4.7 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .10 | Forty-Sixth Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 7.13% First Mortgage Bonds due 2031, Series DDD. (Exhibit 4.8 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .11 | Forty-Seventh Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 7.11% First Mortgage Bonds due 2032, Series EEE. (Exhibit 4.9 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .12 | Forty-Eighth Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 5.90% First Mortgage Bonds due 2017, Series FFF. (Exhibit 4.10 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .13 | Forty-Ninth Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 5.29% First Mortgage Bonds due 2022, Series GGG. (Exhibit 4.11 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .14 | Fiftieth Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 5.29% First Mortgage Bonds due 2022, Series HHH. (Exhibit 4.12 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .15 | Fifty-First Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 5.54% First Mortgage Bonds due 2023, Series III. (Exhibit 4.13 to Current Report on Form 8-K filed April 21, 2009) | ||
93
Table of Contents
|
Exhibit
|
||||
|
Number
|
||||
| 4 | .16 | Fifty-Second Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 5.44% First Mortgage Bonds due 2018, Series JJJ. (Exhibit 4.14 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .17 | Fifty-Third Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 4.58% First Mortgage Bonds due 2010, Series KKK. (Exhibit 4.15 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .18 | Fifty-Fourth Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 5.48% First Mortgage Bonds due 2018, Series LLL. (Exhibit 4.16 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .19 | Fifty-Fifth Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 5.52% First Mortgage Bonds due 2013, Series MMM. (Exhibit 4.17 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .20 | Fifty-Sixth Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 5.55% First Mortgage Bonds due 2013, Series NNN. (Exhibit 4.18 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .21 | Fifty-Seventh Supplemental Indenture dated as of April 17, 2009, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 6.02% First Mortgage Bonds due 2031, Series OOO. (Exhibit 4.19 to Current Report on Form 8-K filed April 21, 2009) | ||
| 4 | .22 | [reserved] | ||
| 4 | .23 | [reserved] | ||
| 4 | .24 | [reserved] | ||
| 10 | .1 | Water Supply Contract between Cal Water and County of Butte relating to Cal Water’s Oroville District; Water Supply Contract between Cal Water and the Kern County Water Agency relating to Cal Water’s Bakersfield District; Water Supply Contract between Cal Water and Stockton East Water District relating to Cal Water’s Stockton District. (Exhibits 5(g), 5(h), 5(i), 5(j), Registration Statement No. 2-53678, which exhibits are incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1974) | ||
| 10 | .2 | Water Supply Contract between the City and County of San Francisco and wholesale customers in Alameda County, San Mateo County and Santa Clara County for a term of twenty-five years beginning on July 1, 2009 and ending on June 30, 2034. The agreement was dated June 24, 2009. Water Supply Contract dated July 1, 2009 between the City and County of San Francisco and California Water Service Company to provide water to Bear Gulch and Bayshore service areas for a term of twenty-five years beginning July 1, 2009 and ending June 30, 2034. (Exhibit 10.3 and 10.4 to Quarterly Report on Form 10-Q for the quarter ending September 30, 2009). | ||
| 10 | .3 | Water Supply Contract dated January 27, 1981, between Cal Water and the Santa Clara Valley Water District relating to Cal Water’s Los Altos District (Exhibit 10.3 to Annual Report on Form 10-K for the year ended December 31, 1992) | ||
| 10 | .4 | Amendments No. 3, 6 and 7 and Amendment dated June 17, 1980, to Water Supply Contract between Cal Water and the County of Butte relating to Cal Water’s Oroville District. (Exhibit 10.5 to Annual Report on Form 10-K for the year ended December 31, 1992) | ||
| 10 | .5 | Amendment dated May 31, 1977, to Water Supply Contract between Cal Water and Stockton East Water District relating to Cal Water’s Stockton District. (Exhibit 10.6 to Annual Report on Form 10-K for the year ended December 31, 1992) | ||
| 10 | .6 | Second Amended Contract dated September 25, 1987, among Stockton East Water District, California Water Service Company, the City of Stockton, the Lincoln Village Maintenance District, and the Colonial Heights Maintenance District Providing for the Sale of Treated Water. (Exhibit 10.7 to Annual Report on Form 10-K for the year ended December 31, 1987) | ||
| 10 | .7 | Water Supply Contract dated April 19, 1927, and Supplemental Agreement dated June 5, 1953, between Cal Water and Pacific Gas and Electric Company relating to Cal Water’s Oroville District. (Exhibit 10.9 to Annual Report on Form 10-K for the year ended December 31, 1992) | ||
| 10 | .8 | [reserved] | ||
| 10 | .9 | [reserved] | ||
94
Table of Contents
|
Exhibit
|
||||
|
Number
|
||||
| 10 | .10 | Agreement between the City of Hawthorne and California Water Service Company for the 15-year lease of the City’s water system. (Exhibit 10.17 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1996) | ||
| 10 | .11 | Water Supply Agreement dated September 25, 1996, between the City of Bakersfield and California Water Service Company. (Exhibit 10.18 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1996) | ||
| 10 | .12 | Water Supply Contract dated November 16, 1994, between California Water Service Company and Alameda County Flood Control and Water Conservation District relating to Cal Water’s Livermore District (Exhibit 10.15 to Annual Report on Form 10-K for the year ended December 31, 1994) | ||
| 10 | .13 | [reserved] | ||
| 10 | .14 | California Water Service Group Directors’ Retirement Plan (As amended and restated on February 22, 2006) (Exhibit 10.14 to the Annual Report on Form 10-K for the year ended December 31, 2005) | ||
| 10 | .15 | [reserved] | ||
| 10 | .16 | Unsecured Credit Agreement dated as of October 27, 2009 among California Water Service Group and certain of it subsidiaries from time to time, as borrowers, Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, Banc of America Securities LLC, as sole lead arranger and sole book manager, CoBank, ACB and Bank of China, Los Angeles Branch, as co-syndication agents, Compass Bank and U.S. Bank National Association, as co-documentation agents, and the other lender parties thereto (Exhibit 10.1 to the current report on Form 8-K of the registrant dated October 27, 2009). | ||
| 10 | .17 | Unsecured Credit Agreement dated as of October 27, 2009 among California Water Service Company, as borrower, Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, Banc of America Securities LLC, as sole lead arranger and sole book manager, CoBank, ACB and Bank of China, Los Angeles Branch, as co-syndication agents, Compass Bank and U.S. Bank National Association, as co-documentation agents, and the other lender parties thereto (Exhibit 10.2 to the current report on Form 8-K of the registrant dated October 27, 2009). | ||
| 10 | .18 | Executive Severance Plan (Exhibit 10.24 to Annual Report on Form 10-K for the year ended December 31, 1998)* | ||
| 10 | .19 | California Water Service Group Long-Term Incentive Plan (filed as Appendix A of the California Water Service Group proxy statement dated March 17, 2000)* | ||
| 10 | .20 | California Water Service Group Deferred Compensation Plan effective January 1, 2001 (Exhibit 10.22 to Annual Report on Form 10-K for the year ended December 31, 2000)* | ||
| 10 | .21 | California Water Service Company Supplemental Executive Retirement Plan effective January 1, 2001 (Exhibit 10.23 to Annual Report on Form 10-K for the year ended December 31, 2000)* | ||
| 10 | .22 | Amendment No. 1 to California Water Service Company Supplemental Executive Retirement Plan effective January 1, 2001 (Exhibit 10.22 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)* | ||
| 10 | .23 | [reserved] | ||
| 10 | .24 | Water Supply Contract 99-73 between the City of Bakersfield and California Water Service Company, dated March 31, 1999 (Exhibit 10.25 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2003) | ||
| 10 | .25 | Amendment No. 1 to Water Supply Contract between the City of Bakersfield and California Water Service Company, dated October 3, 2001 (Exhibit 10.26 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2003) | ||
| 10 | .26 | [reserved] | ||
| 10 | .27 | Amendment No. 2 to California Water Service Company Supplemental Executive Retirement Plan effective January 1, 2001 (Exhibit 10.27 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)* | ||
| 10 | .28 | [reserved] | ||
| 10 | .29 | [reserved] | ||
| 10 | .30 | California Water Service Group Equity Incentive Plan (filed as Appendix B of the California Water Service Group proxy statement dated March 25, 2005, for its Annual Meeting of Stockholders to be held on April 27, 2005, as filed with the SEC on March 22, 2005 (File No. 1-13883))* | ||
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| 10 | .31 | The registrant’s policy on option repricing under its Equity Incentive Plan (incorporated by reference to Item 8.01 Other Events in the registrant’s Current Report on Form 8-K dated April 7, 2005)* | ||
| 10 | .32 | Water Supply Contract dated September 21, 2005, between Cal Water and the Kern County Water Agency. (Exhibit 10.1 to Current Report on Form 8-K filed on September 21, 2005) | ||
| 10 | .33 | Separation Agreement between California Water Service Group and Richard D. Nye. (Exhibit 10 to Current Report on Form 8-K filed on December 22, 2005)* | ||
| 10 | .34 | Form of Stock Appreciation Right Grant Notice under the California Water Service Group Equity Incentive Plan. (Exhibit 10.34 to the Annual Report on Form 10-K for the year ended December 31, 2005) | ||
| 10 | .35 | Form of Stock Appreciation Right Agreement under the California Water Service Group Equity Incentive Plan with Notice of Exercise. (Exhibit 10.35 to the Annual Report on Form 10-K for the year ended December 31, 2005) | ||
| 10 | .36 | Form of Restricted Stock Award Grant Notice under the California Water Service Group Equity Incentive Plan. (Exhibit 10.36 to the Annual Report on Form 10-K for the year ended December 31, 2005) | ||
| 10 | .37 | [reserved] | ||
| 10 | .38 | Form of Restricted Stock Award Agreement under the California Water Service Group Equity Incentive Plan with Assignment Separate From Certificate and Joint Escrow Instructions. (Exhibit 10.38 to the Annual Report on Form 10-K for the year ended December 31, 2005) | ||
| 10 | .39 | Form of Stock Option Grant Notice for outside director under the California Water Service Group Equity Incentive Plan. (Exhibit 10.39 to the Annual Report on Form 10-K for the year ended December 31, 2005) | ||
| 10 | .40 | Form of Stock Option Grant Notice under the California Water Service Group Equity Incentive Plan. (Exhibit 10.40 to the Annual Report on Form 10-K for the year ended December 31, 2005) | ||
| 10 | .41 | Form of Stock Option Agreement (Incentive Stock Option or Nonstatutory Stock Option) under the California Water Service Group Equity Incentive Plan with Notice of Exercise. (Exhibit 10.41 to the Annual Report on Form 10-K for the year ended December 31, 2005) | ||
| 10 | .42 | Offer Letter between the registrant and Martin A. Kropelnicki, dated February 15, 2006 (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to Current Report on Form 8-K of the registrant, dated February 22, 2006) | ||
| 10 | .43 | Underwriting Agreement between California Water Service Group and Robert W. Baird & Co. Incorporated, as representative of the underwriters, October 5, 2006 (incorporated by reference to Exhibit 1.1 to Current Report on Form 8-K filed on October 6, 2006) | ||
| 10 | .44 | Form of Indemnification Agreement to be entered between California Water Service Group and its directors and officers. (Exhibit 10.44 to the Annual Report on Form 10-K for the year ended December 31, 2006) | ||
| 10 | .45 | [reserved] | ||
| 10 | .46 | [reserved] | ||
| 12 | .1 | Computation of Ratios of Earnings to Fixed Charges | ||
| 21 | . | Subsidiaries of the Registrant | ||
| 23 | .1 | Consent of Independent Registered Public Accounting Firm | ||
| 23 | .2 | Consent of Independent Registered Public Accounting Firm | ||
| 31 | .1 | Chief Executive Officer certification of financial statements pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31 | .2 | Chief Financial Officer certification of financial statements pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32 | . | Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| * | Management contract or compensatory plan or arrangement |
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TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors and Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules