## Management’s Discussion and Analysis of Results of Operations and Financial Condition 

California Water Service Group (Company) is a holding company, incorporated in Delaware, with four operating subsidiaries: California Water Service Company (Cal Water), CWS Utility Services (Utility Services), New Mexico Water Service Company (New Mexico Water) and Washington Water Service Company (Washington Water). Cal Water, New Mexico Water and Washington Water are regulated public utilities.Their assets and operating revenues currently comprise the majority of the Company’s assets and revenues.The regu- lated utilities also provide some non-regulated water-related services. Utility Services provides non-regulated water operations and related services to private companies and municipalities.The following discussion and analysis provides information regarding the Company, its assets, operations and financial condition. 

## FORWARD-LOOKING STATEMENTS 

This annual report, including the Letter to Stockholders and Management’s Discussion and Analysis, contains forward-looking statements within the meaning established by the Private Securities Litigation Reform Act of 1995 (Act).The forward-looking statements are intended to qualify under provisions of the federal securities laws for “safe harbor” treatment established by the Act. Forward-looking statements are based on currently available information, expectations, estimates, assumptions and projections, and man- agement’s judgment about the Company, the water utility industry and general economic conditions. Such words as expects, intends, plans, forecasts, predicts, believes, estimates, anticipates, projects or variations of such words or similar expressions are intended to identify forward-looking statements.The forward-looking statements are not guarantees of future performance.They are subject to uncertainty and changes in circum- stances. Actual results may vary materially from what is contained in a forward-looking statement. Factors that may cause a result different than expected or anticipated include: future economic conditions, govern- mental and regulatory commissions’ decisions, changes in regulatory commissions’ policies or procedures, the timeliness of regulatory commissions’ actions concerning rate relief, new legislation, electric power inter- ruptions, access to capital, increases in suppliers’ prices and the availability of supplies including water and power, changes in environmental compliance requirements, acquisitions, the ability to successfully implement business plans, changes in customer water use patterns and the impact of weather on operating results, espe- cially as it impacts water sales.When considering forward-looking statements, the reader should keep in mind the cautionary statements included in this paragraph.The Company assumes no obligation to provide public updates of forward-looking statements. 

## BUSINESS 

Cal Water, which began operation in 1926, is a public utility supplying water service to 440,500 customers in 75 California communities through 25 separate water systems or districts. Cal Water’s 24 regulated systems, which are subject to regulation by the California Public Utilities Commission (CPUC), serve 434,400 customers. An additional 6,100 customers receive service through a long-term lease of the City of Hawthorne’s water system, which is not subject to CPUC regulation. Cal Water accounts for 96% of the Company’s total customers and 98% of the Company’s operating revenue. 

Washington Water’s utility operations are regulated by the Washington Utilities and Transportation Commission (WUTC).Washington Water, which started operations in 1999, provides domestic water service to 14,400 customers in the Tacoma and Olympia areas, and accounts for 2% of the Company’s operating rev- enue. An additional 3,900 customers are served under operating agreements with private owners. 

New Mexico Water acquired the assets of Rio Grande Utility Corporation in July 2002. New Mexico Water provides service to 2,400 water and 1,700 wastewater customers south of Albuquerque. Its regulated operations, which account for less than 1% of the Company’s operating revenue, are subject to the jurisdiction of the New Mexico Public Regulation Commission. It also provides non-regulated meter reading service under contract with a county. 

Rates and operations for regulated customers are subject to the jurisdiction of the respective state’s regulatory commissions.The commissions require that water rates for each regulated district be inde- pendently determined.The commissions are expected to authorize water rates sufficient to recover normal 

