Revenues for 2008 included an additional $42.0 million from rate increases and $4 million in sales to new customers. The net effect of the Water Revenue Adjustment Mechanism (WRAM) and Modified Cost Balancing Account (MCBA), that went into effect July 1, 2008, increased revenue by $2.0 million. Sales to existing customers declined $2.2 million while other decreases accounted for $2.6 million.

Total operating expenses increased 9% or $29.9 million to $352.8 million for the year. Of this amount, water production costs increased 6% or $7.7 million to $146.6 million. Other operations expense increased 10% or $10.1 million to $110.6 million, due primarily to increases in health and welfare plan expense, professional and other outside services costs, and additional water treatment expenses.

Maintenance expense increased 3% or $0.6 million to $19.0 million. Depreciation increased 11% or $3.8 million to $37.3 million for the full year.

Net interest expense remained similar to last year at $17.1 million, while income tax increased 16% or $3.4 million to $24.1 million, due to the higher pretax income.

According to president and chief executive officer Peter C. Nelson, California Water’s achievements in 2008 were those related to implementing the California Public Utilities Commission’s Water Action Plan. Receiving recovery of reasonably incurred costs was critical to this year’s results, as was implementing both a WRAM and an MCBA which allows us to promote water efficiency, Nelson said. We also made some key acquisitions, made important and necessary infrastructure upgrades, and continue our focus on improving the way we serve our customers.

Fourth Quarter 2008 Results

For the fourth quarter 2008, net income was $7.3 million, down 9% or $0.7 million from net income of $8.0 million in the fourth quarter of 2007, and diluted earnings per common share were $0.35, a decrease of 10% from $0.39 per common share for the same period last year.

Revenue for the fourth quarter increased to $100.1 million, up 17% or $14.2 million for the same period last year. Revenues reflected an additional $13.8 million from rate increases, an increase of $2.3 million in sales to new customers and an additional $0.9 million in revenue from the WRAM and MCBA. These increases were offset by a $1.6 million reduction in sales to existing customers and other decreases of $1.2 million.

Total operating expenses for the quarter were $88.7 million, an increase of 17% or $12.8 million over operating expenses in the same period last year. Water production costs were up 12% or $3.7 million to $34.4 million, due to increases in production and higher rates charged by wholesalers. Other operations expense increased 22% or $5.5 million to $30.6 million, due mainly to health and welfare plan expenses, increases in professional services, and increased water treatment costs.

Maintenance expense increased around 40% or $1.7 million to $6.1 million, which includes increased expenditures on water mains, reservoirs, and pumping equipment. Depreciation expense increased 14% or $1.2 million to $9.6 million due to increases in utility plant. Taxes other than income increased 18% or $0.6 million to $3.7 million, primarily due to increases in property taxes.

Net other income decreased $2.1 million from the same period in 2007, primarily due to no property sales in the fourth quarter and a negative mark to market adjustment of $1.6 million associated with long-term investment assets held by the company.

Regulatory Update for 2008

In July 2008, the CPUC approved California Water Service company’s (the company) 2007 General Rate Case filing, authorizing rate increases of $33.4 million for eight districts, and an additional $13.7 million in 24 districts for General Office expenses. Additionally, the company requested recovery of increases in offsettable expenses, including purchased water, power, and pump taxes, and others were made to recover incremental cost increases and certain capital expenses incurred in the districts in between the three-year General Rate Case cycle.

Also in 2008, the CPUC approved the company’s request for a WRAM, which effectively decouples water sales from revenues, as well as a tiered rate structure for most California districts. Having a WRAM effectively removes a major disincentive for the company to pursue and promote water efficiency and conservation. In the same decision, the CPUC approved an MCBA, which will enable the company to capture changes in costs resulting from utilizing different sources and volumes of supply. Both mechanisms support principals expressed in the CPUC’s Water Action Plan, which reflects best practices in water utility regulation.

Pursuant to the CPUC’s Rate Case Plan, the company will file a General Rate Case in 2009 for all California districts, including general office, with a scheduled effective date of January 1, 2011; if the decision is delayed, the company will seek interim rates and recovery of lost revenues resulting from any delay. Subsequent General Rate Cases will be filed for all California districts every three years.

2008 Acquisitions

The most significant growth in 2008 occurred in Hawaii, beginning with HWS Utility Services’ acquisition of multiple water and wastewater operations contracts on the Island of Hawaii. In the second quarter of 2008, Hawaii Water Service company (Hawaii Water) received approval from the Hawaii Public Utilities Commission (HPUC) to acquire a wastewater system serving around 800 customers in the community of Pukalani on the Island of Maui, and in the third quarter, Hawaii Water completed its acquisition of Waikoloa Resort Utilities, Waikoloa Water company, Inc., and Waikoloa Sanitary Sewer company, Inc. (collectively known as West Hawaii Utilities), which together provide water utility services to 1,970 customer accounts and wastewater services to 300 customer accounts on the Island of Hawaii. Finally, in the fourth quarter, Hawaii Water completed its acquisition of a water and wastewater system serving around 250 customers in Kukio on the Island of Hawaii.

Additionally, in California, the company agreed to acquire Skyline County Water District, a 465-connection system adjacent to Cal Water’s Bear Gulch District, and signed an agreement to purchase the Woodside Mutual Water company, another adjacent system serving 43 customers.