SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the period ended June 30, 2005

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-32667

CAP ROCK ENERGY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

TEXAS		75-2794300
(State or Other Jurisdiction of		(I.R.S Employer
Incorporation or Organization)		Identification No.)

500 West Wall Street, Suite 400, Midland, Texas		79701
(Address of Principal Executive Offices)		(Zip Code)

(432) 683-5422

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

As of June 30, 2005, the Registrant had 1,652,261 shares of its $.01 par value common stock outstanding.

CAP ROCK ENERGY CORPORATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Operations – Three and six months ended June 30, 2005 and 2004 (Restated)

Consolidated Balance Sheets – June 30, 2005 and December 31, 2004 (Restated)

Consolidated Statements of Cash Flows - Six months ended June 30, 2005 and 2004 (Restated)

Notes to Consolidated Financial Statements

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits

CAP ROCK ENERGY CORPORATION

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2005			2004			2005			2004
				(Restated)						(Restated)
Operating revenues:
Electric sales	$	20,546		$	22,560		$	38,662		$	42,480
Other	205			272			409			640
Total operating revenues	20,751			22,832			39,071			43,120

Operating expenses:
Purchased power	10,326			9,583			18,850			18,486
Operations and maintenance	2,996			2,115			5,609			4,780
General and administrative	2,555			1,832			4,790			2,980
Stock compensation	3,664			816			4,274			1,677
Depreciation and amortization	1,960			1,659			3,928			3,303
Property taxes	463			772			944			1,559
Other	111			89			210			128
Total operating expenses	22,075			16,866			38,605			32,913

Operating income (loss)	(1,324		)	5,966			466			10,207

Other income (expense):
Interest expense, net of capitalized interest	(1,540		)	(2,098		)	(3,167		)	(4,200		)
Interest and other income	215			157			286			267
Total other expense	(1,325		)	(1,941		)	(2,881		)	(3,933		)

Net income (loss) before income taxes	(2,649		)	4,025			(2,415		)	6,274

Income tax expense (benefit):
Current	112			1,019			176			1,641
Deferred	(910		)	(8		)	(828		)	(156		)
Total income tax expense (benefit)	(798		)	1,011			(652		)	1,485

Net income (loss)	$	(1,851	)	$	3,014		$	(1,763	)	$	4,789

Net income (loss) per common share:
Basic	$	(1.13	)	$	1.93		$	(1.09	)	$	3.06
Diluted	$	(1.13	)	$	1.86		$	(1.09	)	$	2.95

Weighted average number of common shares oustanding:
Basic	1,636,065			1,563,062			1,616,601			1,564,898
Diluted	1,685,239			1,619,377			1,665,775			1,621,213

The accompanying notes are an integral part of these consolidated financial statements.

CAP ROCK ENERGY CORPORATION

Consolidated Balance Sheets

(In thousands)

	June 30,			December 31,
	2005			2004
	(unaudited)			(Restated)
ASSETS
Current assets:
Cash	$	12,092		$	20,968
Accounts receivable:
Electric sales, net	7,542			7,313
Other	296			457
Current portion of notes receivable	267			—
Other current assets	3,679			5,431
Total current assets	23,876			34,169

Utility plant, net	147,943			149,361
Investments and notes receivable	10,176			11,004
Nonutility property, net	1,213			1,227
Regulatory and other assets	4,180			3,926
Total Assets	$	187,388		$	199,687
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	3,423		$	10,005
Accounts payable:
Purchased power	3,987			3,823
Other	1,806			3,603
Purchased power subject to refund	1,056			4,376
Accrued, other and regulatory liabilities	4,266			3,202
Income tax payable	808			633
Total current liabilities	15,346			25,642

Long-term debt, net of current portion:
Mortgage notes	132,346			133,873
Capital leases	137			159
Total long-term debt	132,483			134,032
Deferred credits	6,126			6,569
Stockholders’ equity:
Preferred stock, par value $1 per share, 50,000,000 shares authorized, no shares issued or outstanding	—			—
Common stock, par value $.01 per share, 50,000,000 shares authorized, 1,769,014 shares issued and 1,652,261 shares outstanding at June 30, 2005; 1,733,835 shares issued and 1,617,640 shares outstanding at December 31, 2004	17			17
Paid in capital	13,451			11,683
Retained earnings	21,736			23,499
Less Treasury stock of 116,753 and 116,195 shares, respectively at June 30, 2005, and December 31, 2004	(1,771		)	(1,755		)
Total stockholders’ equity	33,433			33,444
Total Liabilities and Stockholders’ Equity	$	187,388		$	199,687

The accompanying notes are an integral part of these consolidated financial statements.

CAP ROCK ENERGY CORPORATION

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2005 and 2004

(In thousands)

(Unaudited)

	2005			2004
				(Restated)
Cash Flows From Operating Activities:
Net income (loss)	$	(1,763	)	$	4,789
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	3,928			3,303
Amortization of debt issue costs	23			495
Noncash stock compensation	1,698			1,558
Changes in:
Other assets/deferred credits	(720		)	37
Accounts receivable	(68		)	(1,310		)
Purchased power cost subject to refund/recovery	(3,320		)	(182		)
Other current assets	1,752			(28		)
Accounts payable and accrued expenses	(324		)	5,928
Net cash provided by operating activities	1,206			14,590
Cash Flows From Investing Activities:
Utility plant additions, net	(2,496		)	(2,315		)
Collections on note receivable	500			—
Changes to nonutility investments	61			(639		)
Net cash used in investing activities	(1,935		)	(2,954		)
Cash Flows From Financing Activities:
Payments on mortgage notes	(8,055		)	(1,828		)
Payments on capital leases	(76		)	(64		)
Proceeds from capital leases	—			113
Repurchase/acquisition of common stock	(16		)	(62		)
Net cash used in financing activities	(8,147		)	(1,841		)
Increase (Decrease) In Cash and Cash Equivalents	(8,876		)	9,795
Cash and Cash Equivalents:
Beginning of period	20,968			12,170
End of period	$	12,092		$	21,965
Noncash financing activities:
Issuance of stock previously deferred	$	70		$	—
Supplemental Cash Flow Information:
Cash paid during the period for interest	$	3,106		$	3,803

The accompanying notes are an integral part of these consolidated financial statements.

CAP ROCK ENERGY CORPORATION

Notes to Consolidated Financial Statements

1. Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Registrant, Cap Rock Energy Corporation (the “Company”) and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management of Cap Rock Energy Corporation, the accompanying unaudited consolidated financial statements contain all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of June 30, 2005 and 2004, and its consolidated results of operations and cash flows for the three and six months ended June 30, 2005 and 2004. The consolidated results of operations for the three and six months ended June 30, 2005, are not necessarily indicative of the results to be expected for the entire year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual reports on Form 10-K and 10-K/A and the quarterly reports on Form 10-Q and 10-Q/A.

2. Restatement of Previously Issued Financial Statements

In connection with the Company’s conversion from an electric cooperative to an investor owned utility, the Company had independent professional consultants evaluate the corporate structure of the Company and its subsidiaries. Based on that review, the Company believed the subsidiary would continue to qualify as a tax exempt cooperative. Therefore, the Company treated the subsidiary as exempt for both financial and tax reporting purposes. Recently, in connection with an unrelated project, the tax structure of the subsidiary was reviewed and issues arose concerning its exempt status. Because of the complex nature of the issue, the Company is seeking guidance from the Internal Revenue Service regarding the taxable nature of the subsidiary. As a result of the Company’s identification of the issue, on August 24, 2005, Management and the Audit Committee concluded that the Company would amend and restate its Annual Report on Form 10-K for the year ended December 31, 2004, and its Quarterly Report on Form 10-Q for the period ended March 31, 2005, to treat the subsidiary as a taxable entity for financial reporting purposes. The Company had generated net operating losses in earlier periods that would be used to offset the taxable nature of the subsidiary. The use of the net operating losses, earlier than expected, may result in taxes payable that are greater than originally disclosed.

Restated amounts as of and for the period ended December 31, 2004, and June 30, 2004 are as follows:

	As						As
	Reported			Adjustments			Restated
	(In thousands except per share amounts)

As of and for the year ended December 31, 2004:
Balance sheet:
Deferred tax asset	$	3,285		$	(3,285	)	$	—
Valuation allowance for deferred tax asset	(3,285		)	3,285			—
Current income tax payable	—			633			633
Net deferred tax liability	—			1,275			1,275
Statement of operations:
Income tax expense (benefit)	(2,140		)	1,908			(232		)
Net income	5,433			(1,908		)	3,525
Net income per common share:
Basic	3.51			(1.23		)	2.28
Diluted	3.40			(1.19		)	2.21
Statement of cash flows:
Net cash provided by operating activities
Other assets/deferred credits	1,617			1,275			2,892
Income tax receivable	(3,986		)	633			(3,353		)
Net cash flows used in investing activities	(4,006		)	—			(4,006		)
Net cash flows used in financing activities	(8,544		)	—			(8,544		)

As of and for the six months ended June 30, 2004
Balance sheet:
Deferred tax asset	7,691			156			7,847
Valuation allowance for deferred tax asset	(7,691		)	—			(7,691		)
Current income tax payable	1,470			458			1,928
Statement of operations:
Income tax expense (benefit)	908			577			1,485
Net income	5,091			(302		)	4,789
Net income per common share:
Basic	3.25			(0.19		)	3.06
Diluted	3.14			(0.19		)	2.95
Statement of cash flows:
Net cash provided by operating activities
Other assets/deferred credits	193			(156		)	37
Accounts payable and accrued expenses	5,470			458			5,928
Net cash flows used in investing activities	(2,954		)	—			(2,954		)
Net cash flows used in financing activities	(1,841		)	—			(1,841		)

3. Basic and Diluted Weighted Average Number of Shares Outstanding

The table below shows the reconciliation between the basic and diluted earnings per share for the three and six months ended June 30, 2005 and 2004:

	Three Months ended June 30,							Three Months ended June 30,
	2005							2004
	(Loss)							Income
	(In Thousands)			Shares	Per Share (a)			(In Thousands)		Shares	Per Share
								(Restated)			(Restated)
Basic earnings (loss) per share:
Income (loss) from continuing operations available for common stock	$	(1,851	)	1,636,065	$	(1.13	)	$	3,014	1,563,062	$	1.93

Effect of diluted securities:
Shares that have been deferred under the Stock for Compensation plan				49,174						56,315	(0.07		)

Diluted earnings (loss) per share:	$	(1,851	)	1,685,239	$	(1.13	)	$	3,014	1,619,377	$	1.86

	Six Months ended June 30,							Six Months ended June 30,
	2005							2004
	(Loss)							Income
	(In Thousands)			Shares	Per Share (a)			(In Thousands)		Shares	Per Share
								(Restated)			(Restated)
Basic earnings (loss) per share:
Income (loss) from continuing operations available for common stock	$	(1,763	)	1,616,601	$	(1.09	)	$	4,789	1,564,898	$	3.06

Effect of diluted securities:
Shares that have been deferred under the Stock for Compensation plan				49,174						56,315	(0.11		)

Diluted earnings (loss) per share:	$	(1,763	)	1,665,775	$	(1.09	)	$	4,789	1,621,213	$	2.95

(a) Because of the loss position, the effect of the diluted securities is anti-dilutive, and therefore disregarded for purposes of diluted EPS.

4. Regulatory Assets and Liabilities

The significant regulatory assets and liabilities are as follow (in thousands):

	June 30,		December 31,
	2005		2004

Assets:
Rate case costs	$	3,870	$	3,593

Liabilities:
Purchased power subject to refund	1,056		4,373
Excess recovery of costs related to the transfer of the Certificate of Convenience and Necessity	723		723

The Public Utility Commission of Texas (“the PUCT”) will allow the Company to recover certain rate case costs over a period also mandated by the PUCT. Any costs not allowed for recovery will be expensed immediately. A final decision from the PUCT concerning the amount and period of recovery is expected in August 2005. See Note 7.

Regulatory liabilities are expected to be fully refunded to customers in 2005.

5. Income Taxes

The Company identified a technical tax issue related to the income tax treatment for financial reporting purposes regarding the tax exempt status of one of the Company’s subsidiaries. In connection with the Company’s conversion from an electric cooperative to an investor owned utility, the Company had independent professional consultants evaluate the corporate structure of the Company and its subsidiaries. Based on that review, the Company believed the subsidiary would continue to qualify as a tax exempt cooperative. Therefore, the Company treated the subsidiary as exempt for both financial and tax reporting purposes. Recently, in connection with an unrelated project, the tax structure of the subsidiary was reviewed and issues arose concerning its tax exempt status. Because of the complex nature of the issue, the Company is seeking guidance from the Internal Revenue Service regarding the taxable nature of the subsidiary. As a result of the Company’s identification of the issue, on August 24, 2005, Management and the Audit Committee concluded that the Company would amend and restate its Annual Report on Form 10-K for the year ended December 31, 2004, and its Quarterly Report on Form 10-Q for the period ended March 31, 2005, to treat the subsidiary as a taxable entity for financial reporting purposes. The Company had generated net operating losses in earlier periods that would be used to offset the taxable nature of the subsidiary. The use of the net operating losses, earlier than expected, may result in taxes payable that are greater than originally disclosed.

The following is a reconciliation of expected income tax expense to actual expense as well as the reconciliation of the statutory tax rate to the effective rate for the six months ended June 30, 2005 and 2004 (in thousands):

	2005					2004
	Dollars			Percentage		Dollars			Percentage
						(Restated)
Income tax expense at the statutory rate	$	(821	)	(34	)%	$	2,133		34	%
State tax expense	116			5		150			2
Change in valuation allowance	—			—		(1,220		)	(19	)
Other	53			2		422			7
	$	(652	)	(27	)%	$	1,485		24	%

As of June 30, 2005, the Company has net operating loss carryforwards of approximately $14.4 million, which are scheduled to expire in 2011 through 2025.

In early 2004, the IRS notified the Company that it intended to examine the federal income tax return of its predecessor for the year 2001. The Internal Revenue Service determined Cap Rock Electric Cooperative owed no income tax and closed the audit in the first quarter of 2005. A final tax return was filed in March 2005. There was no impact on the Company’s financial position or results of operations.

6. New Accounting Standards

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R revises SFAS No. 123, “Accounting for Stock-Based Compensation.” This new standard generally requires the cost associated with employee services received in exchange for an award of equity instruments be

measured based on the grant-date fair value of the award and recognized in the financial statements over the period during which the employee is required to provide services in exchange for the award. SFAS No. 123R also provides guidance on how to determine the grant-date fair value for awards of equity instruments, as well as alternative methods of adopting its requirements. SFAS No. 123R is effective as of the beginning of the first annual reporting period after June 15, 2005, and applies to all outstanding and unvested share-based payment awards at a company’s adoption date. The Company changed its method of accounting from the intrinsic method per APB Opinion No. 25, to the fair value method per SFAS No. 148, effective January 1, 2003. Therefore, SFAS No. 123R is not expected to have a material impact on the Company’s consolidated financial statements.

7. Contingencies

Because of a change in the Texas Public Utility Regulatory Act (“PURA”), as of September 1, 2003, the Company’s rates became subject to regulation and approval by the PUCT. In accordance with this change in the PURA, the Company filed its tariffs for electric service on September 2, 2003. The staff of the PUCT reviewed those tariffs and provided comments and proposed changes to bring the tariffs into compliance with PUCT rules and regulations. Because the tariffs, when adopted, were not subject to PUCT regulation, some of the provisions did not comply with PUCT rules and regulations since that was not a requirement when the tariffs were adopted. Now that the Company is subject to PUCT regulation, the Company made proposed amendments to its tariff as suggested by the PUCT staff. The PUCT staff reviewed the proposed changes and recommended that the tariff be approved. Prior to the Administrative Law Judge entering a ruling approving the tariff, with the proposed changes, several of the group of intervenors in the case were successful in obtaining a legislative request that the matter be referred to the State Office of Administrative Hearings (“SOAH”) for a hearing on the merits. As a result, the matter was referred to SOAH and a hearing was scheduled for April 2005, and was to be limited to whether the tariffs filed by the Company are the actual tariffs that were properly approved by the Company’s Board of Directors, which was the Company’s previous regulatory authority. Subsequently, the hearing was postponed, and expanded to include the issue of what tariffs were actually in effect on August 31, 2003. A new hearing date has been set for August 22, 2005. The Company believes the issue is moot because any current tariff will be superseded by the tariff that is ultimately approved by the PUCT in the rate case. It is anticipated that a tariff will be approved in the rate case prior to a decision being issued in this proceeding and that tariff, as stated, would supersede the current tariff.

In October 2003, the PUCT initiated an inquiry to determine the reasonableness of the Company’s rates and ordered the Company to submit a rate filing package. The Company prepared and filed a rate filing package that contained a request for a rate increase for some customer classes. The Company initially requested a $6,333,000 overall annual after tax increase but due to adjustments made while preparing for the hearing on the merits in the case, that amount was adjusted downward to $5,021,000. Hearings were held before the State Office of Administrative Hearings from October 5, 2004, through October 14, 2004. During such hearings, the Company presented testimony and evidence in support of its requested rate increase. Numerous intervening parties and the PUCT staff presented evidence and testimony in opposition to the rate increase and in support of a rate decrease.

A hearing was held in December 2004, to determine the amount of rate case costs that the PUCT will allow the Company to recover from its customers, as well as the period of recovery. The Company believes all of its rate case costs are reasonable and necessary and should be recoverable. Any amount not allowed for recovery will be expensed immediately. As of June 30, 2005, $3,870,000 of third party costs had been incurred in connection with the rate case, and are shown on the balance sheet as a regulatory asset because they were deferred pending approval of recovery by the PUCT.

Decision issued on March 17, 2005, and ruled that many of the costs disallowed in the Proposal for Decision, be allowed. A final order was signed on August 5, 2005, which contained a rate decrease of 2.012%. The Company believes there are errors in the number running which was done by the PUCT staff, and that the rate decrease should be even less than is reflected in the order. All parties may file motions for rehearing on any issues they believe are in error. After those motions are ruled on, the parties may appeal to the district court in Travis County and then through the appellate courts.

The Company feels that its rates and its requested small rate increase were justified and that its evidence supported that. Because the amount of the decrease that was ordered is relatively small, even though the Company feels that a small rate increase is justified, based on the current working capital position and the availability of other capital, Management feels the Company has adequate resources to meet its obligations.

The Company received two Notices of Violation (“NOV”) from the PUCT in September 2004. These NOV’s, which contain recommendations of the PUCT staff, are the result of changes in the Public Utility Regulatory Act (“PURA”) passed in 2003, which changed the way the Company was regulated. Prior to September 1, 2003, the Company’s rates were lawfully regulated by its Board of Directors, the same way all electric cooperatives in the state are regulated. During the 2003 legislative session, a small group of customers, who were opposed to the Company’s conversion from an electric cooperative to a shareholder owned corporation, were successful in getting the law changed so that the Company would be regulated by the PUCT instead of its Board of Directors. The changes, which took effect September 1, 2003, applied only to the Company and did not affect the way any other utility in the state is regulated.

The NOV’s cite the Company for charging late fees to residential customers who did not pay their bills on time, and for charging a regulatory surcharge to customers to recover costs incurred in a prior PUCT proceeding. Both of these charges were made in accordance with the Company’s tariff which had been adopted by its Board of Directors in accordance with Texas law at the time. Once the Company came under the regulatory authority of the PUCT on September 1, 2003, it filed those tariffs with the PUCT and the PUCT staff reviewed the tariffs and made recommendations to bring the tariffs into compliance with the rules and regulations of the PUCT and the PURA. The Company amended its tariffs to make all of their suggested changes and the proposed tariff, with the amendments, was filed and is currently awaiting approval by the PUCT. The charges for which the Company was cited relate to charges that were made under the Company’s legally adopted and approved tariff. The Company has filed a proposed tariff which complies with the PUCT rules and regulations, but due to actions of a small group of customers, this tariff has not yet been approved by the PUCT.

The NOV’s also recommend that the Company pay fines and customer refunds in excess of $1.3 million. These are the same claims that a small group of intervenors have been making in the Company’s PUCT tariff proceedings. Once the PUCT ruled that these allegations should not be considered with the Company’s tariff filing, they were made in these enforcement actions. The Company filed answers requesting a settlement conference with the PUCT staff and believed that the matters would be disposed of through that conference. However, a resolution was not reached and in early November the Company and the PUCT staff requested a hearing with the State Office of Administrative Hearings. A hearing was held on July 19, 2005. The Company believes that it proved its case at the hearing and it feels strongly about its legal position on these issues. The Staff’s position is that the fines should continue to increase until the refunds and penalties are paid in order to prevent Cap Rock from benefiting from a delay in making such payments. Under the Staff’s theory, the total amount of fines and refunds would continue to escalate until the final payments are made; therefore, the total amount of potential liability would not be known until payments are made. The Company believes it will ultimately prevail in this matter, although there is a strong likelihood that the matter will ultimately be decided in the appellate courts. Since this issue has become a political issue, despite Cap Rock’s strong legal position, it is difficult to determine what the outcome of the case will ultimately be.

The PUCT has not yet established the procedures and time lines for the Company to comply with the other provisions of the PURA regarding investor owned utilities, including offering customer choice for customer power requirements. The Company anticipates that the PUCT will take relevant factors into consideration in establishing such procedures and time lines that are appropriate and such actions will not adversely affect the

Company.

Discovery is ongoing in the litigation involving the Company and Lamar Electric Cooperative Association, Inc. (“Lamar”) which arose out of Lamar’s termination of the Combination Agreement between Lamar and the Company in October 2002 and the Management Services Agreement in November 2002. Lamar filed suit against the Company in the 62^nd District Court in Lamar County, Texas, seeking a declaratory judgment that it had a right to terminate both agreements without regard to payment of any kind to the Company. The Company believes that Lamar’s stated reason for termination of the Combination Agreement does not fall within the specific allowable exceptions set forth in the agreement, and therefore the Company is seeking reimbursement of all costs and expenses incurred with regard to the attempted combination which amount to at least $1.4 million as well as a cancellation fee of $300,000 for liquidated damages as set out in the terms of the Management Services Agreement. The Company is also seeking damages for the lost opportunity costs due to the failure to close the Lamar Combination Agreement.

In October 2004, the Company filed counterclaims against Lamar’s Board of Directors and two individual directors. The Company also joined several third parties alleging fraud, civil conspiracy and tortuous interference with business relations. Lamar has also amended its suit against the Company, adding claims for fraud and misrepresentation. Discovery is ongoing with regard to the new claims and one of the new parties has requested that the case be transferred to Midland County. The matter will most likely not go to trial until the first half of 2006.

8. Postretirement Benefits

The Company provides continued major medical insurance coverage to retired employees and their dependents. The components of net periodic benefit cost for the six months ended June 30, 2005 and 2004, are as follow (in thousands):

	2005		2004
Service cost	$	108	$	107
Interest cost	291		259
Amortization of experience loss	175		163
Net periodic benefit cost	$	574	$	529

In its financial statements as of December 31, 2004, the Company disclosed that it expected to contribute $849,000 to its postretirement healthcare plan for 2005. As of June 30, 2005, $159,000 of contributions have been made. The Company anticipates that it will make additional contributions of $690,000 in 2005.

The Medicare Reform Act of 2003 allows employers who sponsor a postretirement health care plan that provides a prescription drug benefit to receive a subsidy for the cost of providing that drug benefit. In order for employers to receive the subsidy payment under the Medicare Reform Act, the value of the offered prescription drug plan must be at least actuarially equivalent to the standard prescription drug coverage provided under Medicare Part D. The Company’s plan meets the actuarially equivalent test and qualifies for the subsidy. The reduction in current period service cost due to the subsidy was $34,000 for the year ended December 31, 2004, and the impact on the benefit obligation is $1,562,000.

9. Subsequent Events

On June 14, 2005, the Company announced that William West will become Chief Executive Officer of the Company effective November 12, 2005, upon the resignation of David Pruitt. Mr. Pruitt will remain a member of the Board of Directors and continue to serve as Co-Chairman of the Board. The Board intends to enter into an agreement with Mr. Pruitt for consulting services to the Board and management. The terms of such agreement have not yet been determined.

On September 22, 2005, the Company and NewCorp were served with a lawsuit that alleges failure to pay the former members of Cap Rock Electric Cooperative their share of unallocated patronage capital of New

Corp, at the time of the conversion. The Company believes the suit is frivolous, the claims are barred by the applicable statute of limitations, and by laches and res judicata.

10. Reclassifications

Certain reclassifications have been made to prior periods’ financial statements to conform to the presentation adopted in the current period.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Caution Regarding Forward-Looking Statements

Certain written and oral statements made by our Company or with the approval of an authorized executive officer of our Company may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995, including statements set forth in this Form 10-Q as they relate to Management’s future plans and objectives, and in other filings with the Securities and Exchange Commission. Generally the words “may,” “will,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “believe,” or “continue” or the negative thereof and similar terminology identify forward-looking statements, which generally are not historical in nature.

All statements other than statements of historical facts included in this report, including, without limitation, statements regarding the Company’s future financial position, business strategy, budgets, growth, sales projected costs and plans and objectives of Management for future operations, are forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company’s historical experience and our present expectations or projections. As and when made, management believes that these forward-looking statements are reasonable. However, caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date when made. There can be no assurances that any of these expectations will prove correct or that any of the actions that are planned will be taken. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The following are some of the factors that could cause the Company’s actual results to differ materially from the Company expectations described in or underlying the Company’s forward-looking statements:

• Weather conditions could affect electricity sales and revenues;

• Changes in rate structure and ability to earn a fair return on the rate base and recover the costs of operations could affect operations. A negative outcome in the current rate proceeding could affect the Company’s profits and liquidity;

• Federal and state regulatory actions, and associated legal and administrative proceedings, especially as they relate to the oversight authority of the Public Utility Commission of Texas, could affect revenues, expenses and earnings and could cause a loss of customers through increased competition in the electric utility industry;

• Demands for electric power and the associated costs, including changes in the costs of power plant fuels such as natural gas and coal could cause purchased power cost to increase, which could in turn affect customers’ usage and our revenues;

• Changes in the Company’s cash position and availability of capital resources;

• The impact of changes in interest rates;

• Changes in federal and state tax laws;

• Unexpected changes in operating expenses and capital expenditures.

Actual results may vary materially from those discussed in the forward-looking statements as a result of these and other factors. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances

after the date on which the statement is made even if new information becomes available or other events occur in the future.

Restatement

On August 24, 2005, the Audit Committee of the Company concluded that the Company would amend the Annual Report on Form 10-K for the year ended December 31, 2004 and the Quarterly Report on Form 10-Q for the period ended March 31, 2005, because of a technical tax issue related to the tax exempt status of one of the Company’s subsidiaries. The Company is restating its consolidated financial statements for the year ended December 31, 2004, and the quarter ended March 31, 2005, to treat the subsidiary as a taxable entity for financial reporting purposes. The Company has generated net operating losses in earlier periods that would be used to offset the taxable nature of the subsidiary. Therefore the use of net operating losses earlier than expected may result in taxes payable that are greater than originally disclosed. Because of the complex nature of the issue the Company is in the process of requesting guidance from the Internal Revenue Service regarding the taxable nature of the entity. See Notes 2 and 5 to the accompanying consolidated financial statements for a discussion of the adjustments.

Restated amounts as of and for the period ended December 31, 2004, and June 30, 2004 are as follows:

	As						As
	Reported			Adjustments			Restated
	(In thousands except per share amounts)

As of and for the year ended December 31, 2004:
Balance sheet:
Deferred tax asset	$	3,285		$	(3,285	)	$	—
Valuation allowance for deferred tax asset	(3,285		)	3,285			—
Current income tax payable	—			633			633
Net deferred tax liability	—			1,275			1,275
Statement of operations:
Income tax expense (benefit)	(2,140		)	1,908			(232		)
Net income	5,433			(1,908		)	3,525
Net income per common share:
Basic	3.51			(1.23		)	2.28
Diluted	3.40			(1.19		)	2.21
Statement of cash flows:
Net cash provided by operating activities
Other assets/deferred credits	1,617			1,275			2,892
Income tax receivable	(3,986		)	633			(3,353		)
Net cash flows used in investing activities	(4,006		)	—			(4,006		)
Net cash flows used in financing activities	(8,544		)	—			(8,544		)

	As						As
	Reported			Adjustments			Restated
	(In thousands except per share amounts)

As of and for the six months ended June 30, 2004
Balance sheet:
Deferred tax asset	$	7,691		$	156		$	7,847
Valuation allowance for deferred tax asset	(7,691		)	—			(7,691		)
Current income tax payable	1,470			458			1,928
Statement of operations:
Income tax expense (benefit)	908			577			1,485
Net income	5,091			(302		)	4,789
Net income per common share:
Basic	3.25			(0.19		)	3.06
Diluted	3.14			(0.19		)	2.95
Statement of cash flows:
Net cash provided by operating activities
Other assets/deferred credits	193			(156		)	37
Accounts payable and accrued expenses	5,470			458			5,928
Net cash flows used in investing activities	(2,954		)	—			(2,954		)
Net cash flows used in financing activities	(1,841		)	—			(1,841		)

Overview

Cap Rock Energy Corporation (“the Company”) is an electric distribution company operating in various non-contiguous areas in the State of Texas. The Company purchases power from wholesale suppliers and distributes that power to its retail customers over transmission and distribution lines. Effective September 1, 2003, Cap Rock Energy Corporation became subject to the oversight authority of the Public Utility Commission of Texas (“the PUCT”), and the rates and fees charged to customers by the Company are now subject to PUCT approval. NewCorp Resources Electric Cooperative, Inc. (“NewCorp,”) a transmission affiliate of Cap Rock Energy Corporation, is subject to the oversight authority of the Federal Energy Regulatory Commission (“FERC”).

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company’s annual Form 10-K and 10-K/A for the year ended December 31, 2004, as well as in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following are deliveries of power for the six months ended June 30, 2005 and 2004:

	Six Months Ended
	June 30,
	2005	2004
	(mWh)

Residential	123,551	122,989
Large commercial	114,731	109,858
Small commercial	99,302	95,385
Irrigation	16,021	22,638
Other	27	27
Farmersville contract	12,985	12,666
	366,617	363,563

Results of Operations

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
	(Thousands of dollars)				(Thousands of dollars)
Operating Revenues:
Electric	$	20,546	$	22,560	$	38,662	$	42,480
Other	205		272		409		640
Total operating revenues	$	20,751	$	22,832	$	39,071	$	43,120

The consumption and demand for electricity within the Company’s service areas is greatly impacted by weather conditions and temperatures. The hot temperatures during the summer months, or the third quarter, normally require residential customers to use more electricity in cooling their homes. Rural customers who irrigate crops use more electricity in the summer months for the irrigation process, and if the spring season didn’t bring much rain, these customers may irrigate sooner and longer. Portions of the Company’s service areas had been experiencing a severe long-term drought, but these conditions are much less severe than in the past.

Electric revenues decreased by $2,014,000 and $3,818,000 respectively, for the three and six month periods for 2005 as compared to 2004. This change is the result of the following major factors:

• A decrease of $2,179,000 and $3,501,000, respectively, in power cost recovery for the three and six month comparative periods;

• A decrease in wholesale sales and kWh sales of $84,000 and $221,000, respectively, for the three and six month comparative periods.

The decrease in power cost recovery is related to recovery of higher power costs in revenues in 2004 due to the rate making treatment of capital lease payments associated with the transmission system which were passed through to customers.

The decrease in other operating revenues of $67,000 and $231,000 for the comparative three and six month periods is mainly due to a decline in late fees billed to customers. The Company modified its billing practices in order to be in compliance with PUCT rules. See “Regulatory Matters” under Liquidity and Capital Resources below.

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
	(Thousands of dollars)				(Thousands of dollars)
Operating Expenses:
Purchased power	$	10,326	$	9,583	$	18,850	$	18,486
Operations and maintenance	2,996		2,115		5,609		4,780
General and administrative	2,555		1,832		4,790		2,980
Stock compensation	3,664		816		4,274		1,677
Depreciation and amortization	1,960		1,659		3,928		3,303
Property Taxes	463		772		944		1,559
Other	111		89		210		128
Total operating expenses	$	22,075	$	16,866	$	38,605	$	32,913

Purchased power expense normally moves in relation to electric demand and consumption. Contract terms with wholesale power suppliers provide for pricing based upon the price of fuel, demand and usage. All costs of power are passed through to the Company’s retail customers. Purchased power increased $743,000 and $364,000 for the three and six month comparative periods, which is primarily an increase in power costs.

Factors affecting operations and maintenance expenses are certain weather conditions such as high winds, ice storms and lightning, which cause damage to electric lines and interrupt service. Operations and maintenance expense increased $881,000 and $829,000 for the comparative three and six month periods because of the following factors:

• Increased expenditures for salaries and related expenses of $379,000 and $514,000, respectively, for the three and six month comparative periods:

• Decreased overhead allocation of $229,000 and $230,000 for the respective three and six month periods resulting in higher costs remaining in operations and maintenance;

• Decreased expenditures of $243,000 and $687,000 for the three and six month comparative periods related to maintenance of substations and overhead distribution lines.

General and administrative expenses increased by $723,000 and $1,810,000 for the comparative three and six month periods of 2005 and 2004, because of the following:

• Increased costs in the six month periods of $412,000 related to IT support and outsourced IT functions;

• Increased expenditures for salaries and related expenses of $239,000 and $360,000, respectively for the three and six month periods;

• Increased costs of $119,000 and $204,000 respectively, for the three and six month periods, associated with public relations;

• Increased noncash cost of $113,000 and $134,000 related to the postretirement healthcare benefit obligations;

• Increased expenditures of $249,000 and $309,000 for the comparative three and six month periods related to legal, consulting and other professional services;

• Decreased overhead allocation from 2004 to 2005 six month periods of $245,000 resulted in higher costs remaining in general and administrative;

The Company expects general and administrative expenses to increase in the future because of compliance with PUCT rules and regulations, as well as the Sarbanes Oxley Act of 2002, which will require more resources and personnel.

In late April 2005, an award of stock was granted to employee and officers. This award, of 134,098 shares, was immediately vested, and the fair value of the award of $3,060,000 was expensed, of which 115,178

shares were for officers, with a corresponding fair value of $2,628,000. At June 30, 2005, unearned compensation is $964,000 and expected noncash compensation expense by year for all awards is as follows: 2005 - $4,285,000; 2006 - $324,000; 2007 - $316,000, and 2008 - $108,000.

Depreciation and amortization increased $301,000 and $625,000, respectively, for the comparative three and six month periods. This is primarily because of the amortization in the 2005 period of the costs associated with implementation of the new fully integrated software application. This amortization began in the third quarter of 2004.

Initially the Company had anticipated that property tax expense for 2004 would increase materially because of appraisal methodologies used in the ad valorem valuation of investor owned utilities in Texas as compared to the Company’s former cooperative status. Therefore, substantial increases were reflected in the 2004 periods. When the actual property tax renditions were received at year-end, the respective taxing authorities had not materially modified their approach to valuation of the Company’s properties. Therefore, the Company modified its estimate for 2005.

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(Thousands of dollars)						(Thousands of dollars)
Other Income (Expenses)
Interest expense, net of capitalized interest	$	(1,540	)	$	(2,098	)	$	(3,167	)	$	(4,200	)
Interest and other income	215			157			286			267
Total other income (expense)	$	(1,325	)	$	(1,941	)	$	(2,881	)	$	(3,933	)

Interest expense for the comparative three and six month periods has decreased $558,000 and $1,033,000, respectively, which is the net effect of three components:

• Increase in interest expense related to mortgage debt of $88,000 and $252,000 for the comparative three and six month periods, because of an increase in interest rates;

• Extinguishment of the Beal Bank note in November 2004, caused a decrease in the 2005 comparative periods of $385,000 and $770,000, respectively;

• Amortization in the 2004 period of the fees and costs incurred with respect to the Beal Bank loan caused a decrease in the 2005 comparative periods of $248,000 and $495,000, respectively.

	Three Months Ended June 30,					Six Months Ended June 30,
	2005			2004		2005			2004
				(Restated)					(Restated)
	(Thousands of dollars)					(Thousands of dollars)
Income Tax Expense (Benefit):
Income tax expense (benefit)	$	(798	)	$	1,011	$	(652	)	$	1,485

Income tax expense decreased $1,809,000 and $2,137,000, respectively, for the three and six month comparative periods, based on the Company’s results of operations.

Liquidity and Capital Resources

As of June 30, 2005, the Company had:

• Cash and cash equivalents of $12,092,000;

• Working capital of $8,530,000; and,

• Long-term indebtedness of $132,483,000, net of current portion.

The Company requires capital to fund utility plant additions, working capital and other utility expenditures which represents are recovered in subsequent and future periods through rates. Capital necessary to meet these cash requirements is now derived primarily from operations. As of June 30, 2005, the Company had accumulated a cash balance it believes is sufficient to meet its current and short-term anticipated obligations.

Cash and cash equivalents decreased $8,876,000 since December 31, 2004, primarily because of scheduled mortgage debt payments made in the first quarter of 2005, and the partial refunding to customers of overcollections of power costs.

Mortgage Debt: Through 2001, one of the Company’s primary sources of capital and liquidity had been borrowings from CFC, the Company’s primary lender. These borrowings are collateralized by substantially all of the Company’s utility distribution assets. The existing long-term debt consists of a series of loans from CFC that impose various covenants. The Company is in compliance with all CFC loan covenants.

Substantially all of the CFC mortgage notes are subject to interest rate repricing at the end of various periods, at the Company’s option. Mortgage notes with CFC as of June 30, 2005, and the applicable interest rates are as follows:

Interest Rate			Repricing January	Amount (in thousands)
Fixed	4.85	%	2006	$	6,324
Fixed	5.15	%	2007	63,423
Fixed	4.70	%	2006	32,441
Fixed	4.50	%	2007	5,898
Fixed	4.30	%	—	27,611
Fixed	7.0	%	—	1
	Total mortgage debt			$	135,698

The weighted average interest rate at June 30, 2005, is 4.83%.

Regulatory Matters: Because of a change in the Texas Public Utility Regulatory Act (“PURA”), as of September 1, 2003, the Company’s rates became subject to regulation and approval by the PUCT. In accordance with this change in the PURA, the Company filed its tariffs for electric service on September 2, 2003. The staff of the PUCT reviewed those tariffs and provided comments and proposed changes to bring the tariffs into compliance with PUCT rules and regulations. Because the tariffs, when adopted, were not subject to PUCT regulation, some of the provisions did not comply with PUCT rules and regulations since that was not a requirement when the tariffs were adopted. Now that the Company is subject to PUCT regulation, the Company made proposed amendments to its tariff as suggested by the PUCT staff. The PUCT staff reviewed the proposed changes and recommended that the tariff be approved. Prior to the Administrative Law Judge entering a ruling approving the tariff, with the proposed changes, several of the group of intervenors in the case were successful in obtaining a legislative request that the matter be referred to the State Office of Administrative Hearings (“SOAH”) for a hearing on the merits. As a result, the matter was referred to SOAH and a hearing was scheduled for April 2005, and was to be limited to whether the tariffs filed by the Company are the actual tariffs that were properly approved by the Company’s Board of Directors, which was the Company’s previous regulatory authority. Subsequently, the hearing was postponed, and expanded to include the issue of what tariffs were actually in effect on August 31, 2003. A new hearing date has been set for August 22, 2005. The Company believes the issue is moot because any current tariff will be superseded by the tariff that is ultimately approved by the PUCT in the rate case. It is anticipated that a tariff will be approved in the rate case prior to a decision being issued in this proceeding and that tariff, as stated, would supersede the current tariff.

On March 17, 2005, the Administrative Law Judges (“ALJ’s”) issued a Proposal for Decision (“PFD”). The PFD recommended a 7.49% rate decrease for Cap Rock. This amounts to an annual revenue decrease of approximately five million dollars. Several intervenors had sought rate decreases which were much larger than the recommendation of the ALJ’s. The recommendation by the ALJ’s was considered by the PUCT at an open hearing on June 16, 2005. The PUCT Commissioners disagreed with several items in the Proposal for Decision issued on March 17, 2005, and ruled that many of the costs disallowed in the Proposal for Decision, be allowed. A final order was signed on August 5, 2005, which contained a rate decrease of 2.012%. The Company believes there are errors in the number running which was done by the PUCT staff, and that the rate decrease should be even less than is reflected in the order. All parties may file motions for rehearing on any issues they believe are in error. After those motions are ruled on, the parties may appeal to the district court in Travis County and then through the appellate courts.

The Company feels that its rates and its requested small rate increase were justified and that its evidence supported that. Because the amount of the decrease that was ordered expected is relatively small, even though the Company feels that a small rate increase is justified, based on the current working capital position and the availability of other capital, Management feels the Company has adequate resources to meet its obligations.

rules and regulations, but due to actions of a small group of customers, this tariff has not yet been approved by the PUCT.

Deferred Taxes: The Company’s identification of a technical tax issue related to the income tax treatment, for financial reporting purposes, regarding the tax exempt status of one of the Company’s subsidiaries has resulted in additional income tax expense. This will not require an immediate cash outlay because it affects deferred taxes payable. The Company has generated net operating losses in earlier periods that would be used to offset the presumed taxable nature of the subsidiary. The use of the net operating losses earlier than expected may also result in increased taxes payable and a comparable decrease in earnings in future periods to the extent of the unavailable net operating losses.

Note Receivable: In early May 2005, the Company received the initial $500,000 payment on the note receivable agreement with the shareholder of United Fuel. The remaining principal balance of $800,000 plus accrued interest will be due in three equal annual installments beginning May 2006.

Shareholders’ Trust: When the Company and the Cap Rock Energy Shareholders’ Trust entered into a Voting Agreement in December 2004, the Company recorded a long term liability based on fair value of $129,000, which was for consideration whereby the shares held by the Trust will be voted by the Trustees but as directed by the Company, for as long as the shares are held by the Trust. This liability will be paid out as the owners of the shares are located and the shares are issued to the owner or their heirs. Therefore,

this liability will be paid over future years, and is not expected to require a material amount of cash in any one year.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of changes in the value of a financial instrument caused by fluctuations in interest rates, foreign currency exchange rates, prices of commodities and equity price risks.

Commodity Price Risk

All purchases of electricity are pursuant to long-term wholesale electric power contracts based on a fixed price for kWh usage, transportation and auxiliary services, with a variable charge for fuel cost, which is generally natural gas. This variable cost is affected by unpredictable factors, including weather and worldwide events, which in turn impact supply and demand. In recent years, the cost of natural gas, which is used as fuel to generate power, has increased substantially. The Company’s exposure to purchased power price risk is substantially mitigated because all actual costs of power are able to be recovered from billings to customers.

Credit Risk

The Company’s concentrations of credit risk consist primarily of cash, trade accounts receivable, sales concentrations with certain customers, and notes receivable from third parties.

Credit risk with financial institutions is considered minimal because of the number and various physical locations of different financial institutions utilized. In the past, the Company has utilized repurchase agreements, and may consider using that vehicle again in the future to maximize return and minimize credit risk.

The Company assesses the need for a deposit by retail customers. The deposit amount is normally set as 1/6 of an annual customer billing, with such amounts being refunded or credited to the customer after one year if the customer has paid timely at least 10 of the previous 12 billings. No customer accounted for 10% or more of the operating revenues of the Company.

In 2004, the Company sold its investment in United Fuel and Energy Corporation in exchange for a note receivable of $1,300,000, which is collateralized by the original stock. The initial payment of $500,000 was received in early May 2005, with the remaining principal balance of $800,000 plus accrued interest due in three equal annual installments beginning May 2006.

Interest Rate Risk

The Company is subject to market risk associated with interest rates on the CFC long-term indebtedness. The Company’s mortgage debt with CFC allows for a change from variable rate to fixed rate with no additional fees. Mortgage notes of $6,324,000 with current interest rates of 4.85% are due to be repriced in January 2006, $63,423,000 with current interest rates of 5.15% are due to be repriced in January 2007, mortgage notes of $5,898,000 with current interest rates of 4.50% are due to be repriced in January 2007, mortgage notes of $32,441,000 with current interest rates of 4.70% are due to be repriced in January 2006, and $27,611,000 of mortgage notes were repriced in January 2004 with an interest rate of 4.3% for the term of the note. A 1% change in interest rates would cause a change of $1,357,000 in annual interest expense. The Company attempts to take advantage of low interest rate environments, as well as repricing interest rates over staggered periods.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Our internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements. All internal control systems are designed based in part upon certain assumptions about the likelihood of future events, and, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement presentation and may not prevent or detect all misstatements.

During the period covered by this report, the Company’s chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of June 30, 2005, (the “Evaluation Date”), had concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures (as required by paragraph (b) of the Securities Exchange Act of 1934 Rules 13a-15 or 15d-15) were effective.

Restatement of Previously Issued Consolidated Financial Statements. Subsequent to the Evaluation Date, it was determined that certain tax positions maintained by the Company through its conversion from an electric cooperative to an investor owned utility, might not be correct. In connection with that change in corporate status, the Company had independent professional consultants evaluate the corporate structure of the Company and its subsidiaries. Based on that review, the Company believed the subsidiary would continue to qualify as a tax exempt cooperative. Therefore, the Company treated the subsidiary as tax exempt for both financial and tax reporting purposes. Recently, in connection with an unrelated project, the tax structure of the subsidiary was reviewed and issues arose concerning its exempt status. Because of the complex nature of the issue, the Company is seeking further guidance from the Internal Revenue Service regarding the taxable nature of the subsidiary. As a result of the Company’s identification of the issue, on August 24, 2005, Management and the Audit Committee concluded, after consultation with its independent accountants, that the Company would amend and restate its Annual Report on Form 10-K for the year ended December 31, 2004 and its Quarterly Report on Form 10-Q for the period ended March 31, 2005, to treat the subsidiary as a taxable entity for financial reporting purposes. The Company had generated net operating losses in earlier periods that would be used to offset the taxable nature of the subsidiary. The use of the net operating losses, earlier than expected, may result in taxes payable that are greater than originally disclosed.

After reviewing the circumstances leading to the issue discussed above, it has been determined that there was a material weakness in the Company’s internal controls over financial reporting. The weakness concerned reliance on the opinions of the Company’s outside professionals, and controls surrounding procedures associated with issues and positions proposed by outside professional consultants that are adopted by the Company. The Company’s chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures over financial reporting were not effective at June 30, 2005, to enable the Company to record, process, summarize and report information required to be included in the Company’s SEC filings within the required time period, and to ensure that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting in connection with the evaluation required by paragraph (d) of the Securities Exchange Act of 1934 Rules 13a-15 or 15d-15, that occurred during the quarter ended June 30, 2005, that materially affected, or that were reasonably likely to materially affect, the Company’s internal control over financial reporting.

Subsequent to the identification of the tax matter discussed above, Management determined that it would implement additional procedures for evaluating issues and positions proposed by independent professional consultants that are adopted by the Company. These procedures include formalizing the process for adoption of any outside professional opinion; if a question arises as to the position taken, notification to executive management and the Audit Committee; and seeking further professional opinions and/or guidance. The Company’s management has implemented these additional controls surrounding procedures associated with issues and positions proposed by outside professional consultants that are adopted by the Company, and believe that the controls now in place are adequate to assure that similar errors will not recur.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 7, “Contingencies,” to the consolidated financial statements.

There is no other litigation pending or threatened against the Company, other than certain legal proceedings arising in the ordinary course of business, none of which are expected to have a material impact on the Company’s financial condition, operating results or liquidity.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) None

(b) None

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that may yet be Purchased Under the Plans or Programs

April	281	(1)	$	29.99	n/a	n/a
May	—		—		n/a	n/a
June	126	(1)	$	23.35	n/a	n/a

(1) These repurchases were from departing employees, at a premium over the closing price on the date of purchase.

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

(a) The Annual Meeting of Shareholders of Cap Rock Energy Corporation was held June 14, 2005.

(b)(c) At the Annual Meeting, the only item submitted to a vote of the shareholders was the election of two Class I directors. The vote with respect to each nominee was as follows:

Nominee	For	Withheld
Michael D. Schaffner	989,053	94,555
William L. West	975,608	108,000

There were 5,516 broker nonvotes for each item.

The terms of office of the following directors continued after the meeting: Messrs. Jones and Pruitt (whose terms expire at the annual meeting in 2007) and Messrs. Buchanan and Ritchey (whose terms expire at the annual meeting in 2006).

(d) N/A

Item 5. Other Information

(a) None

(b) None

Item 6. Exhibits

Exhibits:

3.9		Amended and Restated Bylaws of Cap Rock Energy Corporation

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Principal Executive Officer).

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Principal Financial Officer).

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Executive Officer).

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Financial Officer).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CAP ROCK ENERGY CORPORATION


October 3, 2005
	/s/ Celia B. Page
	Celia B. Page
	Vice-President, Chief Accounting Officer,
	Assistant Secretary/Treasurer and Controller
	(Principal Financial Officer)

Exhibit Number		Description of Document

3.9		Amended and Restated Bylaws of Cap Rock Energy Corporation*

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Principal Executive Officer). *

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Principal Financial Officer). *

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Executive Officer). *

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Financial Officer). *

* filed herewith

CAP ROCK ENERGY CORP 10-Q