California Water Service Group
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The return (from both
regulated and non-regulated operations) on average common equity was
9.3% in 2005 compared to 9.8% in 2004. Acquisitions Although there were no significant acquisitions in the periods presented, the following acquisitions were completed in 2005 and 2004: In April 2005, the Company acquired the water system assets of the Los Trancos Water District for $125,000 in cash. The Los Trancos water system and its 270 customers were merged into Cal Water’s Bear Gulch district. The purchase price was approximately equal to rate base and no goodwill was recorded in the transaction. In June 2005, the Company acquired the water system assets of Gamble Bay for $370,000. The Company assumed net liabilities of $336,000 and the balance was paid in cash. The Company merged the water system and its 169 customers into Washington Water. The Company recorded an acquisition adjustment of $18,000, which it believes will be included in rate base. As such, the purchase price is approximately equal to rate base and no goodwill was recorded. In June 2005, the Company acquired the water system assets of the Cypress Gardens Water Company for $312,000 in cash. The Company merged the water system and its 350 customers into New Mexico Water. The purchase price is approximately equal to rate base and no goodwill was recorded. In April 2004, the Company acquired the stock of National Utility Company (NUC) and land from owners of NUC for $0.9 million in cash. The Company retired NUC’s stock and merged it into New Mexico Water. Revenue for NUC for the eight-month period in 2004 was $0.4 million and net income was zero. The purchase price is approximately equal to rate base and an immaterial amount of goodwill was recorded in the transaction. Real Estate Program The Company owns a certain amount of real estate. From time to time, certain parcels are deemed unnecessary for and are not used in water utility operations. Most surplus properties have a low cost basis. A program was developed 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 $2.2 million in 2005, minimal pretax gains were recorded in 2004, and $4.6 million was recorded in 2003. As sales are dependent on real estate market conditions, future sales, if any, may or may not be at prior year levels. As discussed in the “Rates and Regulation” section, future sales may be impacted by the CPUC ruling in its proceeding regarding sales of utility assets. |
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| Critical Accounting Policies and Estimates | |
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The Company maintains its
accounting records in accordance with accounting principles generally
accepted in the United States of America and as directed by the
Commissions to which its 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 and other Notes provide
additional information. The following sections describe the level of
subjectivity, judgment, and variability of estimates that could have a
material impact on the financial condition, operating performance, and
cash flows of the business. Regulated Utility Accounting Because the Company operates extensively in a regulated business, it is subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation.” Application of SFAS No. 71 requires accounting for certain transactions in accordance with regulations defined by the respective Commission of that state. Under SFAS No. 71, a utility may defer certain costs of providing services if the rates established by its regulators are designed to recover the utility’s specific costs and the economic environment gives reasonable assurance that those rates can be charged and collected throughout the periods necessary to recover the costs. In the event that a portion of the Company’s operations were no longer subject to the provisions of SFAS No. 71, 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 it had suffered an asset impairment that would require a write-down in the assets’ valuation. There was no such asset impairment as of December 31, 2005. Additional information relating to regulatory assets and liabilities are listed in Note 2 of the Notes to Consolidated Financial Statements. |
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