(Dollar amounts in thousands, except where otherwise noted and per share amounts)

FORWARD LOOKING STATEMENTS

This quarterly report, including all documents incorporated by reference, contains forward-looking statements within the meaning established by the Private Securities Litigation Reform Act of 1995 (Act). Forward-looking statements in this quarterly report are based on currently available information, expectations, estimates, assumptions and projections, and our management's beliefs, assumptions, judgments and expectations about us, the water utility industry and general economic conditions. These statements are not statements of historical fact. When used in our documents, statements that are not historical in nature, including words like "expects," "intends," "plans," "believes," "may," "estimates," "assumes," "anticipates," "projects," "predicts," "forecasts," "should," "seeks," or variations of these words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not guarantees of future performance. They are based on numerous assumptions that we believe are reasonable, but they are open to a wide range of uncertainties and business risks. Consequently, actual results may vary materially from what is contained in a forward-looking statement.

Factors which may cause actual results to be different than those expected or anticipated include, but are not limited to:

† governmental and regulatory commissions' decisions, including decisions on proper disposition of property;

†            changes in regulatory commissions' policies and procedures;



†            the timeliness of regulatory commissions' actions concerning rate
relief;

† changes in the capital markets and access to sufficient capital on satisfactory terms;

† new legislation;

† changes in accounting valuations and estimates;

† changes in accounting treatment for regulated companies, including adoption of International Financial Reporting Standards, if required;

† electric power interruptions;

† increases in suppliers' prices and the availability of supplies including water and power;

† fluctuations in interest rates;

†            changes in environmental compliance and water quality requirements;



†            acquisitions and the ability to successfully integrate acquired
companies;

† the ability to successfully implement business plans;

† civil disturbances or terrorist threats or acts, or apprehension about the possible future occurrences of acts of this type;

† the involvement of the United States in war or other hostilities;

† our ability to attract and retain qualified employees;

† labor relations matters as we negotiate with the unions;

† federal health care law changes that could result in increases to Company health care costs and additional income tax expenses in future years;

† changes in federal and state income tax regulations and treatment of such by regulatory commissions;

†            implementation of new information technology systems;



†            changes in operations that result in an impairment to acquisition
goodwill;

† restrictive covenants in or changes to the credit ratings on current or future debt that could increase financing costs or affect the ability to borrow, make payments on debt, or pay dividends;

† general economic conditions, including changes in customer growth patterns and our ability to collect billed revenue from customers;

† changes in customer water use patterns and the effects of conservation;

† the impact of weather on water sales and operating results;

† the ability to satisfy requirements related to the Sarbanes-Oxley and Dodd Frank Acts and other regulations on internal controls; and

† the risks set forth in "Risk Factors" included in the Company's Annual Report on Form 10-K.

In light of these risks, uncertainties and assumptions, investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this quarterly report or as of the date of any document incorporated by reference in this report, as applicable. When considering forward-looking statements, investors should keep in mind the cautionary statements in this quarterly report and the documents incorporated by reference. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES

We maintain our accounting records in accordance with accounting principles generally accepted in the United States of America (GAAP) and as directed by the Commissions to which our operations are subject. The process of preparing financial statements in accordance with GAAP requires the use of estimates on the part of management. The estimates used by management are based on historic experience and an understanding of current facts and circumstances. Management believes that the following accounting policies are critical because they involve a higher degree of complexity and judgment, and can have a material impact on our results of operations, financial condition, and cash flows of the business. These policies and their key characteristics are discussed in detail in the 2011 Form 10-K. They include:

† revenue recognition and the water revenue adjustment mechanism;

† modified cost balancing accounts;

† expense balancing and memorandum accounts;

† regulatory utility accounting;

† income taxes;

† pension benefits;

† workers' compensation and other claims;

† goodwill accounting and evaluation for impairment; and

† contingencies.

For the three and six month periods ended June 30, 2012, there were no changes in the methodology for computing critical accounting estimates, no additional accounting estimates met the standards for critical accounting policies, and there were no material changes to the important assumptions underlying the critical accounting estimates.

Overview

Second quarter of 2012 net income was $13.0 million or $0.31 per diluted common share compared to net income of $12.2 million or $0.29 per diluted common share in the second quarter of 2011. The increase in net income is primarily attributable to 2011 rate increases from the General Rate Case (GRC) and a decrease in net interest expense, which was partially offset by higher operating expenses.

Operating Revenue

Operating revenue increased $12.2 million or 9% to $143.6 million in the second quarter of 2012. As disclosed in the following table, the increase was primarily due to rate increases.

The factors that primarily impacted the operating revenue for the second quarter of 2012 compared to 2011 are:

Rate increases                                                      $  8,873
Net change due to actual versus adopted results, usage, and other      3,282
Net operating revenue increase                                      $ 12,155

The net change due to actual versus adopted results, usage, and other in the above table refers primarily to the revenue impact year over year of the change in revenue recognized by the WRAM and MCBA. The WRAM is impacted by changes in consumption patterns from our historical trends as well as an increase in conservation efforts. The MCBA, which records the differences in production costs from the adopted costs, is recorded as an element of revenue as it represents pass through costs which are billed to customers. The MCBA is impacted by changes in total production quantities, the production mix of the source of water, the price paid for purchased water and power, and the amount of pump taxes paid.

The components of the rate increases are listed in the following table:

Purchase water offset increases     $ 5,929
Step rate increases                   2,184
General rate case (GRC) increases       681
Other                                    79
Total increase in rates             $ 8,873

Total Operating Expenses

Total operating expenses were $123.9 million for the second quarter of 2012, compared to $111.8 million for the same period in 2011, an 11% increase.

Water production expense consists of purchased water, purchased power, and pump taxes. It represents the largest component of total operating expenses, accounting for approximately 43% of total operating expenses in the second quarter of 2012. Water production expenses increased $7.9 million, or 18%, during the second quarter of 2012 compared to the same period last year due to purchased water and power price increases, and pump taxes were higher due to increased usage of wells subject to pump taxes during the second quarter of 2012. These cost increases were partially offset by reductions in customer usage. Our 100% owned operating subsidiaries, Washington Water, New Mexico Water, and Hawaii Water obtain all of their water supply from wells.

Sources of water as a percent of total water production are listed in the following table:

Three months Ended June 30

                      2012             2011
Well production             47 %             46 %
Purchased                   47 %             47 %
Surface                      6 %              7 %
Total                      100 %            100 %

The components of water production costs are shown in the table below:

Three months Ended June 30

                     2012          2011     Change
Purchased water   $    41,935    $ 34,938   $ 6,997
Purchased power         7,995       7,482       513
Pump taxes              2,748       2,325       423
Total             $    52,678    $ 44,745   $ 7,933

Purchased water costs increased due to price increases from water wholesalers. Total water production, measured in acre feet, increased by 4% during the second quarter of 2012 as compared with the second quarter of 2011 due to higher customer usage.

Administrative and general expense and other operations expense increased 10% to $39.9 million. The primary reasons for the increase were increases in employee benefits and wage costs, and conservation program expenses during the second quarter of 2012. Wage increases became effective January 1, 2012. At June 30, 2012, there were 1,114 employees and at June 30, 2011, there were 1,132 employees.

Maintenance expenses decreased by 13% to $4.6 million in the second quarter of 2012 compared to $5.3 million in the second quarter of 2011, due to a decrease in main and service repairs.

Depreciation and amortization expense increased $1.3 million, or 11%, mostly due to 2011 capital additions.

Federal and state income taxes charged to operating expenses and other income and expenses increased $0.4 million, from a provision of $8.8 million in the second quarter of 2011 to $9.2 million in the second quarter of 2012, due to an increase in pretax income and a higher effective tax rate in 2012. We expect the effective tax rate to be between 38% and 42% for fiscal year 2012.

Other Income and Expense

Other income, net of income taxes, increased less than $0.1 million during the second quarter of 2012 mostly due to a decrease in the unrealized loss on our benefit plan insurance investments during 2012.

Interest Expense

Total interest expense, net of interest capitalized, decreased $0.7 million to $6.9 million for the second quarter of 2012 compared to the same period last year. This decrease was attributable to an increase in capitalized interest charged to construction projects and a reduction in line-of-credit interest rates and fees during the second quarter of 2012 compared to the same period last year.

Company Health Care Benefits

In March 2010, both the federal "Patient Protection and Affordable Care Act"
(P.L. 111-148) and "Health Care and Education Reconciliation Act" (H.R. 4872)
were enacted. We have not determined the impact of this legislation on the Company's health care costs during 2012 and in future years. However, we anticipate that the Company's health care and other costs will increase as a result of the new federal health care laws and based on available information. A new memorandum account was established for Cal Water, effective January 1, 2011, to account for health care cost changes due to federal legislation, as these costs were not included in the 2009 GRC decision.

Amounts in thousands except per share data

Overview

Overview

Net income for the six-month period ended June 30, 2012 was $14.1 million or $0.34 per diluted common share compared to net income of $14.9 million or $0.36 per diluted common share for the six month period ended June 30, 2011. The decrease in net income during the six month period ended June 30, 2012 was mostly due to a nonrecurring income tax adjustment recorded during the first quarter of 2011 that reduced income taxes by $1.6 million. Other income increased $0.7 million mostly due to an increase in the amount of unrealized gains on our benefit plan insurance investments during the six month period ended June 30, 2012 compared to the same period last year.

Operating Revenue

Operating revenue increased $30.8 million or 13% to $260.3 million in the six month period ended June 30, 2012. As disclosed in the following table, the increase was due to increases in usage (includes an additional $9.5 million of net WRAM and MCBA operating revenues that were deferred as of December 31, 2011) and rates.

The factors that impacted the operating revenue for the second quarter of 2012 compared to 2011 are as follows:

Usage (includes WRAM and MCBA deferral adjustment)          $ 19,823
Rate increases                                                14,564
Net change due to actual versus adopted results and other     (3,632 )
Net operating revenue increase                              $ 30,755

The net change due to actual versus adopted results, usage, and other in the above table refers primarily to the revenue impact year over year of the change in revenue recognized by the WRAM and MCBA. The WRAM is impacted by changes in consumption patterns from our historical trends as well as an increase in conservation efforts. The MCBA, which records the differences in production costs from the adopted costs, is recorded as an element of revenue as it represents pass through costs which are billed to customers. The MCBA is impacted by changes in total production quantities, the production mix of the source of water, the price paid for purchased water and power, and the amount of pump taxes paid.

The components of the rate increases are as follows:

Purchased water offset increases    $  9,762
Step rate increases                    3,570
General rate case (GRC) increases        953
Other                                    279
Total increase in rates             $ 14,564

Total Operating Expenses

Total operating expenses were $234.1 million for the six month period ended June 30, 2012, compared to $200.0 million for the same period in 2011, a 17% increase.

Water production expense consists of purchased water, purchased power, and pump taxes. It represents the largest component of total operating expenses, accounting for approximately 39% of total operating expenses in the six month period ended June 30, 2012. Water production expenses increased 20% compared to the same period last year mostly due to increased costs for purchased water. Our 100% owned operating subsidiaries, Washington Water, New Mexico Water, and Hawaii Water obtain all of their water supply from wells.

Sources of water as a percent of total water production are listed in the following table:

Six months Ended June 30

                     2012            2011
Well production            46 %            45 %
Purchased                  49 %            48 %
Surface                     5 %             7 %
Total                     100 %           100 %

The components of water production costs are shown in the table below:

Six months Ended June 30

                    2012        2011      Change
Purchased water   $  73,791   $ 60,469   $ 13,322
Purchased power      13,137     12,332        805
Pump taxes            4,702      3,902        800
Total             $  91,630   $ 76,703   $ 14,927

Purchased water costs increased primarily due to price increases from water wholesalers. Total water production measured in acre feet increased by 11,935 acre feet for the six month period ended June 30, 2012, or 7% over the six month period ended June 30, 2011.

Administrative and general expense and other operations expense increased 21% to $86.7 million. The primary reason for the increase was an additional $7.7 million of net WRAM and MCBA expenses resulting from the reversal of amounts deferred as of December 31, 2011, increases in employee benefits and wage costs, and increases in conservation program expenses during the six month period ended June 30, 2012. Wage increases became effective January 1, 2012.

Maintenance expense decreased by 1% to $10.4 million during the six month period ended June 30, 2012 compared to $10.5 million during the six month period ended June 30, 2011, due to a decrease in transmission and distribution mains repairs.

Depreciation and amortization expense increased $2.7 million, or 11%, mostly due to 2011 capital additions.

Federal and state income taxes charged to operating expenses and other income and expenses increased $2.2 million, during the six month period ended June 30, 2012 mostly because of a 2011 nonrecurring income tax adjustment which reduced income taxes $1.6 million during the first quarter of 2011. We expect the effective tax rate to be between 38% and 42% for fiscal year 2012.

Other Income and Expense

Other income, net of income taxes, increased $0.7 million mostly due to an unrealized gain on our benefit plan insurance investments of $1.6 million for the six month period ended June 30, 2012, compared to an unrealized gain of less than $0.1 million in the same period last year.

Interest Expense

Net interest expense, net of interest capitalized, decreased $1.7 million, or 11%, to $13.6 million for the six month period ended June 30, 2012 compared to the same period last year. The decrease was mostly due to an increase in capitalized interest charged to construction projects, a reduction in line-of-credit interest rates and fees, and the end of temporary interest rate balancing account (TIRBA) interest expenses as of December 31, 2011.

REGULATORY MATTERS

The state regulatory commissions have plenary powers setting rates and operating standards. As such, state commission decisions significantly impact Cal Water's revenues, earnings, and cash flows. The amounts discussed herein are generally annual amounts, unless specifically stated, and the financial impact to recorded revenue is expected to occur over a 12-month period from the effective date of the decision. In California, water utilities are required to make several different types of filings. Most filings result in rate changes that remain in place until the next General Rate Case (GRC). As explained below, surcharges and surcredits are used to recover balancing and memorandum accounts as well as general rate case interim rate catch-up. Surcharges and surcredits are temporary rate changes, which have specific time frames for recovery.

GRCs, escalation rate increase filings, and offset filings change rates to amounts that will remain in effect until the next GRC. The CPUC follows a rate case plan, which requires Cal Water to file a GRC for each of its regulated operating districts every three years. In a GRC proceeding, the CPUC not only considers the utility's rate setting requests, but may also consider other issues that affect the utility's rates and operations. The CPUC is generally required to issue its GRC decision prior to the first day of the test year or authorize interim rates. In accordance with the rate case plan, the Commission issued a decision on Cal Water's 2009 general rate case filing in the fourth quarter of 2010 with rates effective on January 1, 2011. Cal Water filed its 2012 GRC on July 5, 2012, which will be applicable to all of its California Districts. Any rate change as a result of this filing is expected to be effective on January 1, 2014.

Between GRC filings utilities may file escalation rate increases, which allow the utility to recover cost increases, primarily from inflation and incremental investment, during the second and third years of the rate case cycle. However, escalation rate increases are subject to a weather-normalized earnings test on a district-by-district basis. Under the earnings test, the CPUC may reduce the escalation rate increase if, in the most recent 12-month period, this earnings test reflects earnings in excess of authorized for that district.

In addition, California water utilities are entitled to make offset filings. Offset filings may be filed to adjust revenues for construction projects authorized in GRCs when the plant is placed in service or for rate changes charged to the Company for purchased water, purchased power, and pump taxes (referred to as "offsettable expenses"). Such rate changes approved in offset filings remain in effect until the next GRC is approved.

The Water Revenue Adjustment Mechanism (WRAM) and Modified Cost Balancing Account (MCBA) are required by the CPUC to encourage Cal Water to promote lower water consumption levels with water conservation programs. In order to maintain revenue neutrality, the CPUC de-coupled Cal Water's revenue requirement from ratepayer usage with the WRAM/MCBA. Under the WRAM/MCBA, Cal Water recovers the full quantity revenue amounts authorized by the CPUC by using advice letter filings for any unbilled quantity revenue amounts or refunds for overcollection, regardless of customer usage volumes.

Surcharge and surcredit advice letters to amortize balances in the WRAM and MCBA accounts are filed between February and April of each year based on the district balances for the last calendar year. Based on current CPUC interpretations, surcharges are generally amortized over 12 or 18 months. The WRAM and MCBA amounts are cumulative, so if they are not amortized in a given calendar year, the balance will be carried forward and included with the following year balance.

2012 Regulatory Activity

Changes in CPUC's Procedures for WRAM Amortization

Cal Water, along with four other investor-owned water utilities filed a joint application to change the amortization periods to 24 months or less. The CPUC issued a proposed decision regarding the amortization periods on March 23, 2012 and a final decision on April 19, 2012. The final decision shortened the amortization for undercollected balances for calendar years 2011, 2012, and 2013. Also, the decision authorized Cal Water to bill and collect all year-end undercollected balances. Cal Water anticipates most of the undercollected balances during calendar years 2011, 2012, and 2013 will be collected using 12 and 18- month amortization periods. The collection periods for calendar year 2014 and future years will be determined during the 2012 GRC.

Remaining Balances from Previously Authorized Balancing Accounts Recoveries/Refunds

Prior to the adoption of the MCBA on July 1, 2008, the CPUC required incremental cost balancing accounts (ICBA) memorandum and balancing accounts. The ICBA refunds and billings will be completed during calendar year 2012. As of June 30, 2012, a $0.7 million regulatory asset and a $0.3 million regulatory liability were recorded for the remaining unbilled or un-refunded balances.

California Cost of Capital Applications

Cal Water, along with the three other large water utilities in California, filed an application with the CPUC in May of 2011 to review its cost of capital for 2012 through 2014. The Company and the other applicants reached a settlement with the Division of Ratepayer Advocates that was approved by the CPUC in Decision D.12.07.009. The decision required Cal Water to adopt a 9.99% return on equity and 53.4% equity capital structure for rate setting purposes. It also continues the Water Cost of Capital Mechanism, which would adjust allowed equity returns if there is a large change in the Moody AA utility bond index. The decision also discontinued the Temporary Interest Rate Balancing Account (TIRBA) and required Cal Water to refund the balance of $1.1 million to customers via a 12-month surcredit. Because this proceeding was scheduled to set the authorized rate of return for the Company's investment starting on January 1, 2012 and a decision had not been issued, the CPUC required Cal Water to file an advice letter to establish a Cost of Capital interim rate memorandum account. This will serve as a mechanism to true up rates to reflect the final decision in this proceeding.

2012 California GRC filing

On July 5, 2012, Cal Water filed its 2012 GRC application covering all district and general office revenue requirements. The GRC application requested an increase of $92.7 million or 19.4% in rates for 2014, $17.2 million or 3.0% in rates for 2015 and $16.9 million or 2.9% in rates for 2016. The GRC also asks the CPUC consider a number of special requests. Any rate change as a result of . . .