Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements NOTE 1. ORGANIZATION AND OPERATIONS NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES December 31, 2001, 2000, and 1999 California Water Service Group (Company) is a holding company incorporated in Delaware that through its wholly owned subsidiaries provides water utility and other related services in California, Washington and New Mexico. California Water Service Company (Cal Water) and Washington Water Service Company (Washington Water) provide regulated utility services under the rules and regulations of their respective regulatory commis- sions (jointly referred to as Commissions). CWS Utility Services provides non-regulated water utility and util- ity-related services in all three states. New Mexico Water Service Company was formed in 2000 to provide regulated utility services. The Company operates primarily in one business segment, providing water and related utility services. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The financial statements give retroactive effect to acquisitions, accounted for as pooling of interests. Accordingly, the Company’s consolidated financial statements and footnotes have been restated to include Dominguez Services Corporation and subsidiaries (Dominguez), which was merged into the Company on May 25, 2000, as if the merger had been completed as of the beginning of the earliest period presented. Intercompany transactions and balances have been eliminated. The accounting records of the Company are maintained in accordance with the uniform system of accounts prescribed by the Commissions. Certain prior years’ amounts have been reclassified, where necessary, to conform to the current presentation. The preparation of consolidated financial statements in conformity with accounting principles gener- ally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Revenue consists of monthly cycle customer billings for regulated water service at rates authorized by the Commissions and billings to certain non-regulated customers. Revenue from metered accounts includes unbilled amounts based on the estimated usage from the latest meter reading to the end of the accounting period. Flat-rate accounts, which are billed at the beginning of the service period, are included in revenue on  a pro rata basis for the portion applicable to the current accounting period. The unearned portion is deferred into the following accounting period. Expense balancing accounts are used to track suppliers’ rate increases for purchased water, purchased power and pump taxes that are not included in customer water rates. The cost increases are referred to as “Offsetable Expenses” because under certain circumstances they are recoverable from customers in future rate increases designed to offset the higher costs. The Company does not record the balancing accounts until the CPUC has authorized a change in customer rates and the customer has been billed. Utility Plant Utility plant is carried at original cost when first constructed or purchased, except for certain minor units of property recorded at estimated fair values at dates of acquisition. Cost of depreciable plant retired is eliminated from utility plant accounts and such costs are charged against accumulated deprecia- tion. Maintenance of utility plant is charged primarily to operation expenses. Interest is capitalized on plant expenditures during the construction period and amounted to $858,000 in 2001, $703,000 in 2000 and $324,000 in 1999. Intangible assets acquired as part of water systems purchased are stated at amounts as prescribed by the Commissions. All other intangibles have been recorded at cost. Included in intangible assets is $6,500,000 paid to the City of Hawthorne to lease the city’s water system and associated water rights. The lease payment is being amortized on a straight-line basis over the 15-year life of the lease. The Company continually evalu- ates the recoverability of utility plant by assessing whether the amortization of the balance over the remaining life can be recovered through the expected and undiscounted future cash flows. 31 CALIFORNIA WATER SERVICE GROUP 30 CALIFORNIA WATER SERVICE GROUP See accompanying notes to consolidated financial statements. In thousands For the years ended December 31, 2001, 2000, 1999 2001 2000 1999 Operating activities: Net income $14,965 $19,963 $21,971 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 19,226 18,368 17,246 Deferred income taxes, investment tax credits, and regulatory assets and liabilities, net 2,919 (3,203) 1,360 Changes in operating assets and liabilities Receivables (2,186) (1,503) (2,324) Unbilled revenue 673 235 (1,187) Accounts payable (2,461) (255) 7,623 Other current assets and liabilities 6,642 1,093 (649) Other changes, net (1,191) (71) 3,334 Net adjustments 23,622 14,664 25,403 Net cash provided by operating activities 38,587 34,627 47,374 Investing activities: Utility plant expenditures Company funded (53,379) (33,540) (35,535) Developer advances and contributions in aid of construction (8,670) (3,621) (12,984) Other investments — — (80) Net cash used in investing activities (62,049) (37,161) (48,599) Financing activities: Net short-term borrowings 7,402 599 (8,951) Issuance of common stock — 644 46 Issuance of long-term debt 20,524 20,326 20,062 Advances for construction 6,498 3,846 7,480 Refunds of advances for construction (4,166) (3,870) (4,056) Contributions in aid of construction 10,868 1,883 4,814 Retirement of long-term debt (2,881) (2,920) (2,318) Dividends paid (17,071) (16,388) (15,415) Net cash provided by financing activities 21,174 4,120 1,662 Change in cash and cash equivalents (2,288) 1,586 437 Cash and cash equivalents at beginning of year 3,241 1,655 1,218 Cash and cash equivalents at end of year $ 953 $ 3,241 $ 1,655 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amounts capitalized) $14,378 $14,785 $13,796 Income taxes 6,238 11,775 11,499 Non-cash financing activity - common stock issued in acquisitions 899 — 922