Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 1  ORGANIZATION AND OPERATIONS California Water Service Group (Company) is a holding company 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),Washington Water Service Company (Washington Water) and New Mexico Water Service Company (New Mexico Water) provide regulated utility services under the rules and regulations of their respective state’s regulatory commissions (jointly referred to as Commissions). CWS Utility Services provides non-regulated water utility and utility-related services. The Company operates primarily in one business segment, providing water and related utility services. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated. Reclassifications 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. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make esti- mates 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 and waste 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. Expense balancing and memorandum 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 and memorandum accounts until the Commission 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 accumu- lated depreciation. Maintenance of utility plant is charged primarily to operation expenses. Interest is capitalized on plant expenditures during the construction period and amounted to $1,473,000 in 2002, $858,000 in 2001, and $703,000 in 2000. Intangible assets acquired as part of water systems purchased are stated at amounts as pre- scribed by the Commissions. All other intangibles have been recorded at cost and are amortized over their useful life. Included in intangible assets is $6,515,000 paid to the City of Hawthorne in 1996 to lease the city’s water system and associated water rights.The asset is being amortized on a straight-line basis over the 15-year life of the lease. Depreciation Depreciation of utility plant for financial statement purposes is computed on the straight-line remaining life method at rates based on the estimated useful lives of the assets, ranging from 5 to CALIFORNIA WATER SERVICE GROUP 41 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES