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Looking at California Water Service Group through the eyes of a diverse group of stockholders, it is clear that our company appeals to investors for a variety of reasons. Some like the dividend; others look for long-term growth. Some buy our stock because of their confidence in our management; others are attracted by the reputation our employees have earned for providing excellent customer service. What they share, whether they are customers, retirees, employees, or business professionals, is an appreciation for our stability.
California Water Service Group (CWSG) is the second largest, investor-owned water utility in the United States, operating as a holding company for five subsidiaries: California Water Service Company, CWS Utility Services, New Mexico Water Service Company, Washington Water Service Company, and Hawaii Water Service Company. Except for CWS Utility Services, which controls non-regulated water operations, CWSG's subsidiaries are regulated by state public utilities commissions and provide water utility services to more than two million customers. The largest and oldest of the subsidiaries is California Water Service Company, a provider of water service to more than 450,000 customers in 75 communities. Washington Water Service Company provides water service to 15,000 customers in Tacoma, Washington, and the state's capital, Olympia. The holding company's New Mexico operations serve nearly 6,500 water and wastewater customers in the Belen, Los Lunas, and Elephant Butte areas of the state. In Hawaii, the company serves nearly 500 customers on the island of Maui. Together, the three subsidiaries operating outside of California account for 4 percent of CWSG's annual revenues. CWSG's non-regulated operations consist of operating water systems owned by other companies, providing meter reading and billing services, brokerage services for water rights, and testing services for water quality.
The formation of CWSG in 1997 created a corporate structure that facilitated profound changes for a 70-year-old business, a business that for decades had led a somewhat staid existence. The two eras had one common trait, supplying water to residential and commercial customers, but in all other respects glaring differences jumped out to the observer. CWSG was the agent of change, its formation ushering in a period of unprecedented expansion. Within a decade of the holding company's formation, a business that had constrained its activities within northern California spread its influence throughout the western United States, assuming the profile of a utilities giant. The executive who spearheaded the remarkable transformation, Peter C. Nelson, left an indelible imprint on the history of the California Water name, doing more to amplify the business's recognition than the cumulative effect of his predecessors.
The heart of the legacy inherited by Nelson was California Water Service Company. Formed in 1926, the company was based in San Jose, operating as a public utility serving communities surrounding its home base. During its first 60 years in business, the utility expanded across several counties, using a combination of wells and surface water to serve its customers. By the end of the 1980s, California Water Service Company provided water service in 21 water-service districts, a territory that comprised 38 northern California communities and boasted a customer base of slightly more than 335,000 customers. By using surface water for 52 percent of its annual production total of 98 billion gallons of water and wells for the remaining 48 percent, the company served its customers, representing a fundamental component of the infrastructure supporting residents and businesses in communities such as Cupertino, Los Altos Hills, Mountain View, and Sunnyvale, among others. Operating as such, the company concluded its last decade as a one-state utility. The 1990s ushered in a period of transformation, a decade that saw Nelson occupy the symbolic corner office at California Water Serve Company's San Jose headquarters.
In early 1996, California Water Service Company's directors were searching for a new chief executive officer. The criteria for their search, a recruitment effort overseen by the utility's chairman, Robert Foy, were specific. The directors demanded an executive with experience in public utilities, finance and marketing know-how, management expertise with an emphasis on social skills, and the ability to adapt to changing conditions in the water-service market. Their search chewed through candidates and eventually focused on one individual, a former executive at Pacific Gas & Electric Co. "It was a perfect fit," Foy said of Nelson in a September 23, 1996 interview with the Business Journal. "It was too good to be true." Foy was sold, but Nelson had his own stipulations, declining to accept the post before he assessed the companies he was asked to lead. Nelson, without revealing who he was, placed a service call to California Water Service Company to witness its response and he paid a visit to the company's main offices, asking employees what they thought of the company. His incognito research yielded evidence that pointed in the company's favor, encouraging him to accept the title of chief executive officer. The Pacific Gas & Electric Co. executive, with an undergraduate degree in engineering from the University of California's Davis campus and a master's in business administration from the University of Massachusetts, took the helm in mid-1996.
When Nelson took charge, California Water Service Company ranked as the largest private water company in California, serving 1.5 million customers. He soon sought to elevate the company's stature by using the formation of CWSG as his vehicle for expansion. In April 1997, shareholders voted to adopt a holding company structure at the board of directors' urging, agreeing that such a structure, according to an April 6, 1997 filing with the Securities and Exchange Commission, "will help the company to respond more effectively and efficiently to competitive changes occurring in the water industry and to new non-regulated business opportunities that may arise from these changes." After receiving regulatory approval from the California Public Utilities Commission, the holding company was formed, making its debut on the last day of 1997. When CWSG was incorporated, it became the parent company of two operating subsidiaries, California Water Service Company, and a newly formed entity, CWS Utility Services, which was created to provide non-regulated water operations and related services.
Nelson announced the first step in his expansion campaign within a year of orchestrating the formation of CWSG. In November 1998, CWSG announced what was believed to be the largest merger of private water utilities in the history of California business, the $53 million, all-stock purchase of Dominguez Services Corp. Dominguez Services Corp. operated Dominguez Water Co., a company formed in 1911 to irrigate the farmlands of one of the first Spanish land grants in California. The company also operated Antelope Valley Water Co., located in northern Los Angeles County, and Kern River Valley Water Co., a northern California water company. Additionally, Dominguez Service Corp. held a 20 percent stake in San Jose-based Chemical Services Co., a supplier of onsite chlorine generation equipment. Nelson explained the significance of the acquisition in a statement quoted in the November 18, 1998 edition of Knight Ridder/Tribune Business News, saying, "The post-merger firm will be well-positioned to play an active role in the growth and consolidation taking place in the water industry." Nelson continued, "In combining our adjacent properties, we will pool our human resources and achieve economies of scale that will not only benefit our shareholders and customers, but also make us a more attractive and viable partner to public and private water providers."
Geographic Expansion with the New Millennium
The Dominguez Services Corp. acquisition was completed in 2000 after receiving regulatory approval, making CWSG the fourth largest, investor-owned water utility in the United States. Nelson's next move put the holding company's structure to use, as he spearheaded the most aggressive geographic expansion in the company's history. For the first time, the California Water Service banner was unfurled outside California after the holding company purchased Harbor Water Company and South Sound Utility in 1999 and merged them to form its third operating subsidiary, Washington Water Service Company, in December 1999. The acquisitions and subsequent merger created the state's largest, investor-owned water utility, an entity that served two water districts with more than 12,000 customers. Several months after the subsidiary was created, its operations were expanded by an acquisition announced in April 2000. The purchase, a $500,000 deal, consisted of 700 metered connections in King County operated by Mirrormount Water Services.
As CWSG established a presence to the north in Washington, it also pressed to the east, adding another operating subsidiary to its holdings. New Mexico Water Service Company was created in 2000 to house the acquisition of Rio Grande Utility Corp., a utility that served 2,265 water and 1,600 wastewater customers in Valencia County, situated 30 miles south of Albuquerque. The acquisition, which was not approved by the New Mexico Public Regulatory Commission until June 2002, was completed for $2.3 million in cash and the assumption of $3.1 million in debt, giving CWSG a total of more than two million customers in 98 communities. The company's New Mexico operations were bolstered later by the acquisition of National Utility Company in 2004. CWSG paid $630,000 to gain 700 customers adjacent to New Mexico Water Service Company's Middle Rio Grande water system and 950 water customers residing 150 miles south of Albuquerque.
CWSG Entering Hawaii in 2003
Nelson's next move represented the greatest geographic leap in the company's history. In August 2002, he signed an agreement to acquire Ka'anapli Water Corp., a water utility serving the island of Maui in Hawaii. The utility, which was acquired from AquaSource Utilities, Inc. for $8 million, gave CWSG approximately 500 customers, including six large resorts and eight condominium complexes. "We are thrilled to be entering our fourth state," Nelson said in an April 30, 2003 statement quoted by Business Wire that coincided with the completion of the acquisition. "This was a great opportunity that fit perfectly into our growth strategy, which is to seek good quality systems in the western United States that will add immediately to stockholder value."
As CWSG neared the end of its first decade in business, its acquisition campaign reflected an industry trend. The water utility industry was undergoing a period of consolidation during Nelson's first years in charge, pursuing a strategy aimed at attracting investors. Conservative investors typically were attracted to investor-owned water utilities, drawn to the sector because of regulated rates, consistent dividends, and the stability of the water business. An acquire-or-be-acquired mentality gripped water utility executives, winnowing the ranks of investor-owned water utilities to only 11 throughout the United States by the time CWSG expanded into Hawaii. Of these 11 utilities, CWSG ranked as the second largest by the mid-2000s, benefiting from Nelson's commitment to be a consolidator in the industry. The financial gains from his expansion campaign were not astounding: During CWSG's acquisition spree, its revenues only increased from $225 million in 1997 to $315 million in 2004, with the company's operations in Washington, New Mexico, and Hawaii generating just 4 percent of total annual sales. Perhaps of greater significance was the geographic diversity the acquisition campaign gave CWSG, enabling it to hold sway as the second largest company of its kind in the country.
In the years ahead, Nelson and his successors were expected to pursue a disciplined growth strategy, endeavoring to give the company's shareholders a low-risk, consistent return on their investment dollars. "After all," he wrote to CWSG's shareholders in the company's 2004 annual report, "we know why stockholders invest in California Water Service Group. They choose our company because of our people and the service they provide, because we are regulated and provide a basic necessity, because we have provided stability and growth over the long term, and because we have declared dividends for 60 consecutive years. In short," he concluded, "they invest in our company because we deliver a return on their investment."
California Water Service Company; CWS Utility Services; New Mexico Water Service Company; Washington Water Service Company; Hawaii Water Service Company.
American States Water Company; American Water Works Company, Inc.; Southwest Water Company.
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