California Water Service Group Annual Report 2005

Advances for Construction and Contributions in Aid of Construction received from developers subsequent to 1986 were taxable for federal income tax purposes and subsequent to 1991 were subject to California income tax. In 1996, the federal tax law, and in 1997, the California tax law, changed, and only deposits for new services were taxable. In late 2000, federal regulations were further modified to exclude contributions of fire services from taxable income.

Workers’ Compensation, General Liability and Other Claims For workers’ compensation, the Company utilized an actuary firm to estimate the discounted liability associated with claims submitted and claims not yet submitted based on historical data. For general liability claims and other claims, the Company estimates the cost incurred but not yet paid using historical information.

Earnings Per Share The computations of basic and diluted earnings per share are noted below. Common stock options outstanding to purchase common shares were 98,000, 121,500, and 149,250 at December 31, 2005, 2004, and 2003, respectively. All options are dilutive and the dilutive effect is shown in the table below.

	2005	2004	2003
Net income, as reported	$27,2233	$26,026	$19,417
Less preferred dividends	153	153	153
Net income available to common stockholders	$27,070	$25,873	$19,264
Weighted average common shares, basic	18,379	17,652	15,882
Dilutive common stock options (treasury method)	23	22	11
Shares used for dilutive calculation	18,402	17,674	15,893
Earnings per share - basic	$1.47	$1.46	$1.21
Earnings per share - dilutive	$1.47	$1.46	$1.21

Stock-Based Compensation The Company has a stockholder-approved Long-Term Incentive Plan under which non-qualified stock options are outstanding. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock- Based Compensation – Transition Disclosure – An Amendment to SFAS No. 123,” and as permitted by the statement, applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” for its plan. All of the Company’s
outstanding options have an exercise price equal to the market price on the date they were granted. No compensation expense was recorded for the years ended December 31, 2005, 2004, or 2003.

In 2005, the Company adopted a stockholder-approved Equity Incentive Plan that allows certain stock-based compensation awards. There were no awards during 2005. The Company adopted SFAS No. 123 (revised 2004) “Share-Based Payment,” effective January 1, 2006, and will be recording compensation expense in accordance with that standard for any awards granted in the future.

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