California Water Service Group
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For measurement in 2005,
management estimated the discount rate at 5.60%, which approximates the
average return on long-term corporate bonds as of year-end. Using the
interest rate curve developed by Citigroup as of December 31, 2004 and
2005, the equivalent level discount rates were 5.74% and 5.58%,
respectively. Accordingly, the discount rate was lowered in 2005 from 6%
to 5.60%. Management assumed the rate of compensation to increase 3% in
its 2005 calculation. Any change in these assumptions would have an
effect on the service costs, interest costs, and accumulated benefit
obligations. Additional information related to employee benefit plans is
listed in Note 12 of the Notes to Consolidated Financial Statements. Workers’ Compensation, General Liability, and Other Claims The Company is self-insured for a portion of workers’ compensation and general liability claims. Excess amounts are covered by insurance policies. For workers’ compensation, the Company utilizes an 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 general liability claims and 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 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 for recording under SFAS No. 5 or other accounting standards. If management’s assessment is incorrect, these items could have a material impact on the financial condition, results of operations, and cash flows of the Company. |
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| Financial Risk Management | |
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The Company does not
participate in hedge arrangements, such as forward contracts, swap
agreements, options, or other contractual agreements relative to the
impact of market fluctuations on its assets, liabilities, production, or
contractual commitments. The Company operates only in the United States
and, therefore, is not subject to foreign currency exchange rate risks. Terrorism Risk Due to terrorist risks, the Company has heightened security at its facilities over the past few years and has taken added precautions to protect its employees and the water delivered to customers. The Company has complied with EPA regulations concerning vulnerability assessments and has made filings to the EPA as required. In addition, communication plans have been developed as a component of the Company’s procedures related to this risk. While the Company does not make public comments on its security programs, the Company has been in contact with federal, state, and local law enforcement agencies to coordinate and improve water delivery systems’ security. Interest Rate Risk The Company is subject to interest rate risk, although this risk is lessened because the Company operates 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 debt is long-term, fixed rate. Interest rate risk does exist on short-term borrowings within the Company’s credit facilities, as these interest rates are variable. The Company also has interest rate risk on new financing, as higher interest cost may occur on new debt if interest rates increase. Stock Price Risk Because the Company operates primarily in a regulated industry, its stock price 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. For example, prior to 2004, the Company believes its stock price was adversely affected by analyst reports, which stated the Company’s earnings were negatively impacted by the delays of certain CPUC decisions. An adverse change in the stock price could make issuance of common stock less attractive in the future. Stock Market Performance Risk The Company’s stock price could be impacted by changes in the general market. This could impact the costs of obtaining funds through the equity markets. Stock market performance could also impact the Company through the investments by the Company’s defined benefit plan and postretirement medical benefit plan. The Company is 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 the Company would be able to recover these higher costs in customer rates. Equity Risk The Company does not have equity investments and, therefore, does not have equity risks. |
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| Recent Accounting Pronouncements and Law Changes | |
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The description and impact
of recent accounting pronouncements that are effective for the period
reported are described in Note 2 of the Notes to Consolidated Financial
Statements. As of the filing date, there were no other accounting pronouncements affecting future periods that are expected to have a material impact on the Company’s financial condition, results of operations, or cash flows. |
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