California Water Service Group Annual Report 2005

The Company has two stockholder-approved stock-based compensation plans. Under the Long-Term Incentive Plan that allowed granting of non-qualified stock options, some of which are currently outstanding, there will be no future grants made. Options were granted under the Long-Term Incentive Plan at an exercise price that was not less than the per share common stock market price on the date of grant. At December 31, 2005, 86,500 options were exercisable at a weighted average price of $24.93. The options vest at a 25% rate on their anniversary date over their first four years and are exercisable over a 10-year period. No options were granted in 2005, 2004, or 2003.

The following table summarizes the activity of the Long-Term Incentive Plan:

	Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life	Options Exercisable	Weighted Average Fair Value
Outstanding at December 31, 2002	154,500	24.77	8.2	36,750	--
Cancelled	(5,250)	24.78
Outstanding at December 31, 2003	149,250	24.77	7.2	74,625	--
Exercised	(25,500)	23.67
Cancelled	(2,250)	25.41
Outstanding at December 31, 2004	121,500	24.99	6.3	85,500	--
Exercised	(22,750)	25.15
Cancelled	(750)	25.15
Outstanding at December 31, 2005	98,000	24.95	5.4	86,500	--

In 2005, the Long-Term Incentive Plan was replaced by a stockholder-approved Equity Incentive Plan, which allows granting of incentive and non-qualified stock options, stock appreciation rights, restricted stock awards, and other stock awards. Under the Equity Incentive Plan, a total of 1,000,000 common shares have been authorized for future grants. As of December 31, 2005, there were no grants under the Plan. The Company will be reporting compensation expense related to any grants under this plan in accordance with SFAS No. 123 (revised 2004), as discussed in Note 2.

Note 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 receivables, and accounts payables, 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 $289 million and $301 million as of December 31, 2005, and 2004, respectively, using a discounted cash flow analysis, based on the current rates available to the Company for debt of similar maturities. The book value of the long-term debt is $274 million and $276 million as of December 31, 2005 and 2004, respectively. The fair value of Advances for Construction contracts is estimated at $57 million as of December 31, 2005 and $51 million as of December 31, 2004, based on data provided by brokers who purchase and sell these contracts.

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