California Water Service Group Annual Report 2005

During the period under review, Cal Water’s cumulative gains from surplus property sales were $19.2 million, which included an inter-company gain related to a transaction with Utility Services and a like-kind exchange with a third party. On December 1, 2005, the CPUC issued its decision D.05-12-002 (Decision). The Decision found that Cal Water appropriately reclassified all properties as non-utility property prior to being sold. The criteria Cal Water followed to reclassify its properties was reasonable and consistent with the requirements of the CPUC. Since the properties were properly reclassified, CPUC approval was not required prior to the sale and no penalty is warranted. Furthermore, the Decision found that Cal Water should be allowed to include in rate base the remaining $1,182,462 of the Chico customer center costs not yet in rate base and to earn a return on the additional rate base, an increased revenue requirement of approximately $171,000.

However, the Decision did not approve the amount of sale proceeds (or gains) that qualify for reinvestment under the Infrastructure Act, although it concluded that all property sales should qualify and should be accounted for in accordance with the Act. The Decision defers the issues regarding treatment of sale proceeds and allocation of gains on sale to its R.04-09-003 proceeding, where the CPUC intends to set guidelines and a specific rule on allocation of the gain on utility asset sales between shareholders and ratepayers. On November 5, 2005, the Commission mailed its proposed decision (Proposed Decision) regarding the allocation of
proceeds from the sale of utility assets. The Proposed Decision states that the Commission has limited discretion in how it allocates gains on sale of real property, provided that water companies reinvest the proceeds in new water infrastructure. As such, the Company is entitled to earn a full authorized return on the proceeds reinvested in utility plant.

Based on the Decision and the Proposed Decision, Cal Water has not accrued a liability in its financial statements. Cal Water has no knowledge when the CPUC will issue its decision in the matter of R.04-09-003. If the CPUC finds any portion of the property sales should be allocated to the ratepayers, Cal Water’s rate base could be reduced, which would lower future revenues, net income, and cash flows.

The Company is involved in other proceedings or litigation arising in the ordinary course of operations. The Company believes the ultimate resolution of such matters will not materially affect its financial position, results of operations, or cash flows.

Note 15. Quarterly Financial Data (unaudited)

The Company’s common stock is traded on the New York Stock Exchange under the symbol “CWT.”

2005 (in thousands, except per share amounts)		First	Second	Third	Fourth
Operating revenue		$60,303	$81,457	$101,128	$77,840
Net operating income		4,465	11,253	16,103	7,989
Net income		680	7,591	13,115	5,837
Diluted earnings per share		0.03	0.41	0.71	0.32
Common stock market price range:
	High	36.76	38.12	41.90	41.09
	Low	32.12	32.85	37.53	32.64
Dividends paid		.2850	.2850	.2850	.2850
2004 (in thousands, except per share amounts)		First	Second	Third	Fourth
Operating revenue		$60,240	$88,845	$97,104	$69,378
Net operating income		5,391	14,083	14,498	7,511
Net income		1,446	10,054	10,789	3,737
Diluted earnings per share		0.08	0.59	0.59	0.20
Common stock market price range:
	High	29.99	29.75	29.42	37.70
	Low	27.25	26.60	26.19	28.20
Dividends paid		.2825	.2825	.2825	.2825

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