Exhibit 99.1

CONSOLIDATED FINANCIAL STATEMENTS OF CALIFORNIA WATER SERVICE GROUP

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
California Water Service Group
San Jose, California

We have audited the accompanying consolidated balance sheet of California Water Service Group and subsidiaries (the “Company”) as of December 31, 2008, and the related consolidated statements of income, common stockholders’ equity and comprehensive income, and cash flows for the year ended December 31, 2008. We also have audited the Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statement referred to above present fairly, in all material respects, the financial position of California Water Service Group and subsidiaries as of December 31, 2008, and the respective results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

As discussed in Note 17 to the consolidated financial statements, the Company has included condensed consolidating financial information of the Company and its subsidiaries.

/s/ Deloitte & Touche LLP

San Francisco, California
February 27, 2009, except for Note 17, as to which the date is April 3, 2009

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
California Water Service Group:

     We have audited the accompanying consolidated balance sheet of California Water Service Group and subsidiaries as of December 31, 2007, and the related consolidated statements of income, common stockholders’ equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of California Water Service Group and subsidiaries as of December 31, 2007, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Mountain View, California
February 28, 2008, except for the last paragraph of note 1,
       which is as of February 27, 2009, and note 17,
       which is as of April 3, 2009

Consolidated Balance Sheets

		December 31,
		2008				2007
		In thousands, except per share data
ASSETS
Utility plant:
Land		$	19,058			$	17,191
Depreciable plant and equipment			1,464,904				1,370,409
Construction work in progress			80,649				43,646
Intangible assets			18,468				15,801
Total utility plant			1,583,079				1,447,047
Less accumulated depreciation and amortization			(470,712	)			(436,851	)
Net utility plant			1,112,367				1,010,196
Current assets:
Cash and cash equivalents			13,869				6,734
Receivables, net of allowance for doubtful accounts of $1,210 and $641, respectively:
Customers			22,786				18,600
Other			12,071				8,617
Unbilled revenue			13,112				12,911
Materials and supplies at weighted average cost			5,070				4,744
Prepaid income taxes			4,968				—
Taxes, prepaid expenses, and other assets			7,922				8,369
Total current assets			79,798				59,975
Other assets:
Regulatory assets			198,293				90,908
Unamortized debt premium and expense			6,070				6,745
Goodwill			3,906				—
Other			17,673				16,675
Total other assets			225,942				114,328
		$	1,418,107			$	1,184,499
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $0.01 par value; 25,000 shares authorized, 20,723 and 20,666, outstanding in 2008 and 2007, respectively		$	207			$	207
Additional paid-in capital			213,922				211,885
Retained earnings			188,820				173,617
Total common stockholders’ equity			402,949				385,709
Preferred stock without mandatory redemption provision, $25 par value, 380 shares authorized, -0- and 139, outstanding in 2008 and 2007, respectively			—				3,475
Long-term debt, less current maturities			287,498				289,220
Total capitalization			690,447				678,404
Current liabilities:
Current maturities of long-term debt			2,818				2,701
Short-term borrowings			40,000				—
Accounts payable			41,772				36,694
Accrued other taxes			2,776				2,216
Accrued interest			3,295				3,073
Other accrued liabilities			32,535				24,969
Total current liabilities			123,196				69,653
Unamortized investment tax credits			2,392				2,467
Deferred income taxes			72,344				69,712
Regulatory liabilities			20,728				20,386
Pension and postretirement benefits other than pension			152,685				39,444
Advances for construction			176,163				168,024
Contributions in aid of construction			117,568				118,012
MTBE settlement			34,216				—
Other long-term liabilities			28,368				18,397
Commitments and contingencies			—				—
		$	1,418,107			$	1,184,499

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Income

		For The Years Ended December 31,
		2008				2007				2006
		In thousands, except per share data
Operating revenue		$	410,312			$	367,082			$	334,717
Operating expenses:
Operations:
Purchased water			111,726				106,748				93,426
Purchased power			25,939				23,974				22,738
Pump taxes			8,899				8,161				8,094
Administrative and general			59,429				54,262				52,793
Other			51,196				46,310				42,923
Maintenance			18,969				18,336				15,591
Depreciation and amortization			37,339				33,563				30,652
Income taxes			24,507				17,887				15,297
Property and other taxes			14,839				13,671				12,897
Total operating expenses			352,843				322,912				294,411
Net operating income			57,469				44,170				40,306
Other income and expenses:
Non-regulated revenue			14,230				13,557				10,645
Non-regulated expense			(15,097	)			(9,114	)			(7,208	)
Gain on sale of non-utility property			7				2,516				348
Income tax benefit (expense) on other income and expenses			376				(2,836	)			(1,542	)
Net other (expense) income			(484	)			4,123				2,243
Interest expense:
Interest expense			20,591				19,719				19,669
Less: capitalized interest			(3,411	)			(2,585	)			(2,700	)
Net interest expense			17,180				17,134				16,969
Net income		$	39,805			$	31,159			$	25,580
Earnings per share:
Basic		$	1.90			$	1.50			$	1.34
Diluted		$	1.90			$	1.50			$	1.34
Weighted average number of common shares outstanding:
Basic			20,710				20,665				18,905
Diluted			20,734				20,689				18,925

Consolidated Statements of Common Stockholders’ Equity and Comprehensive Income

For the years ended December 31, 2008, 2007 and 2006

																		Accumulated
										Additional								Other				Total
		Common Stock								Paid-in				Retained				Comprehensive				Stockholders’
		Shares				Amount				Capital				Earnings				Income (Loss)				Equity
		In thousands
Balance at December 31, 2005			18,390			$	184			$	131,991			$	162,968			$	(1,202	)		$	293,941
Net income							—				—				25,580				—				25,580
Reclassification of minimum pension liability to regulatory asset, net of tax effect of $802, in conjunction with the implementation of SFAS no. 158 (see Note 12)							—				—				—				1,202				1,202
Comprehensive income							—				—				25,580				1,202				26,782
Issuance of common stock, net of expenses of $3,680			2,267				23				79,522				—				—				79,545
Dividends paid:
Preferred stock							—				—				(153	)			—				(153	)
Common stock							—				—				(21,813	)			—				(21,813	)
Total dividends paid							—				—				(21,966	)			—				(21,966	)
Balance at December 31, 2006			20,657				207				211,513				166,582				—				378,302
Net income							—				—				31,159				—				31,159
Issuance of common stock			9				—				372				—				—				372
Dividends paid:
Preferred stock							—				—				(153	)			—				(153	)
Common stock							—				—				(23,971	)			—				(23,971	)
Total dividends paid							—				—				(24,124	)			—				(24,124	)
Balance at December 31, 2007			20,666				207				211,885				173,617				—				385,709
Net income							—				—				39,805				—				39,805
Issuance of common stock			57				—				2,037				—				—				2,037
Premium on retirement of preferred stock															(253	)							(253	)
Dividends paid:
Preferred stock							—				—				(115	)			—				(115	)
Common stock							—				—				(24,234	)			—				(24,234	)
Total dividends paid							—				—				(24,349	)			—				(24,349	)
Balance at December 31, 2008			20,723			$	207			$	213,922			$	188,820				—			$	402,949

Consolidated Statements of Cash Flows

		For the Years Ended December 31,
		2008				2007				2006
		In thousands
Operating activities:
Net income		$	39,805			$	31,159			$	25,580
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			39,485				33,563				30,652
Amortization of debt premium and expenses			673				673				665
Other changes in noncurrent assets and liabilities			10,659				(262	)			3,218
Change in value of life insurance contracts			3,763				—				—
Gain on sale of non-utility property			(7	)			(2,516	)			(348	)
Changes in operating assets and liabilities:
Receivables			(6,069	)			(881	)			(5,381	)
Unbilled revenue			(201	)			(1,570	)			104
Taxes, prepaid expenses, and other assets			(4,421	)			(5,781	)			(437	)
Accounts payable			2,610				2,857				(865	)
Material and supplies			(322	)			(228	)			(322	)
Other current liabilities			8,109				(4,282	)			11,045
Other changes, net			1,646				(2,678	)			(2,943	)
Net adjustments			55,925				18,895				35,388
Net cash provided by operating activities			95,730				50,054				60,968
Investing activities:
Utility plant expenditures:
Company-funded			(99,212	)			(75,996	)			(88,382	)
Developer advances and contributions in aid of construction			(8,592	)			(13,467	)			(16,064	)
MTBE settlement received			34,217				—				—
Proceeds from sale of non-utility assets			7				2,495				353
Acquisitions			(24,924	)			(1,479	)			(509	)
Purchase of life insurance			(1,373	)			—				—
Net cash used in investing activities			(99,877	)			(88,447	)			(104,602	)
Financing activities:
Short-term borrowings			56,000				—				—
Repayment of short-term borrowings			(16,000	)			—				—
Issuance of common stock, net of expenses			—				372				79,545
Issuance of long-term debt, net of expenses			655				264				19,879
Advances and contributions in aid of construction			8,227				16,589				24,992
Refunds of advances for construction			(6,662	)			(6,306	)			(6,189	)
Retirement of long-term debt			(2,871	)			(1,980	)			(1,848	)
Redemption of preferred stock			(3,718	)			—				—
Dividends paid			(24,349	)			(24,124	)			(21,966	)
Net cash (used in) provided by financing activities			11,282				(15,185	)			94,413
Change in cash and cash equivalents			7,135				(53,578	)			50,779
Cash and cash equivalents at beginning of year			6,734				60,312				9,533
Cash and cash equivalents at end of year		$	13,869			$	6,734			$	60,312
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized)		$	16,284			$	16,459			$	16,146
Income taxes			22,586				30,220				5,471
Supplemental disclosure of non-cash activities:
Accrued payables for investments in utility plant			10,967				11,186				10,477
Purchase of intangible assets with Company common stock			1,300				—				—
Utility plant contributed by developers			10,222				11,880				9,968

Notes to Consolidated Financial Statements
December 31, 2008, 2007, and 2006
Amounts in thousands, except share data

1 ORGANIZATION AND OPERATIONS

     California Water Service Group (Company) is a holding company that provides water utility and other related services in California, Washington, New Mexico, and Hawaii through its wholly-owned subsidiaries. California Water Service Company (Cal Water), Washington Water Service Company (Washington Water), New Mexico Water Service Company (New Mexico Water), and Hawaii Water Service Company, Inc. (Hawaii Water) provide regulated utility services under the rules and regulations of their respective state’s regulatory commissions (jointly referred to as the Commissions). CWS Utility Services and HWS Utility Services LLC provide non-regulated water utility and utility-related services.

     The Company operates primarily in one business segment, providing water and related utility services.

Basis of Presentation

     The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and include the Company accounts and those of its wholly owned subsidiaries. All intercompany transactions have been eliminated from the consolidated financial statements. In the opinion of management, the consolidated financial statements reflect all adjustments that are necessary to provide a fair presentation of the results for the periods covered.

     The preparation of the Company’s consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the consolidated balance sheet dates and the reported amounts of revenues and expenses for the periods presented. These include, but are not limited to, estimates and assumptions used in determining the Company’s regulatory asset and liability balances based upon probability assessments of regulatory recovery, revenues earned but not yet billed, asset retirement obligations, allowance for doubtful accounts, pension and other employee benefit plan liabilities, and income tax-related assets and liabilities. Actual results could differ from these estimates.

     In connection with the preparation of its financial statements for the year ended December 31, 2008, the Company determined that it had not properly classified the non-cash component related to developer funded construction in its statements of cash flows for the years ended December 31, 2007 and 2006. As a result, investing cash flows and financing cash flows were overstated by $11.9 million and $10.0 million for the years ended December 31, 2007 and 2006, respectively. Management has concluded that these errors are immaterial to its consolidated financial statements. Pursuant to Staff Accounting Bulletin No. 108 (SAB 108), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” the consolidated statements of cash flows for the years ended December 31, 2007 and 2006 have been adjusted to reflect the correction of these errors.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue

     Revenue includes monthly cycle customer billings for regulated water and wastewater services at rates authorized by regulatory commissions and billings to certain non-regulated customers. In addition, effective July 1, 2008 with the adoption of the Water Revenue Adjustment Mechanism (WRAM) and the Modified Cost Balancing Account (MCBA), Cal Water records the difference between what is billed to its regulated customers and that which is authorized by the California Public Utilities Commission (CPUC).

     Under the WRAM, Cal Water records the adopted level of volumetric revenues as authorized by the CPUC for metered accounts (adopted volumetric revenues). In addition to volumetric-based revenues, the revenue requirements approved by the CPUC include service charges, flat rate charges, and other items that are not subject to the WRAM. The adopted volumetric revenue considers the seasonality of consumption of water based upon historical averages. The variance between adopted volumetric revenues and actual billed volumetric revenues for metered accounts is recorded as a component of revenue with an offsetting entry to a current asset or liability regulatory balancing account (tracked individually for each Cal Water district). The variance amount may be positive or negative and represents amounts that will be billed or refunded to customers in the future.

Notes to Consolidated Financial Statements-(Continued)

     Under the MCBA, Cal Water will track adopted expense levels for purchased water, purchased power and pump taxes, as established by the CPUC. Variances (which include the effects of changes in both rate and volume) between adopted and actual purchased water, purchased power, and pump tax expenses are recorded as a component of revenue, as the amount of such variances will be recovered from or refunded to the Company’s customers at a later date. This is reflected with an offsetting entry to a current asset or liability regulatory balancing account (tracked individually for each Cal Water district).

     The balances in the WRAM and MCBA assets and liabilities accounts will fluctuate on a monthly basis depending upon the variance between adopted and actual results. The recovery or refund of the WRAM is netted against the MCBA over- or under-recovery for the corresponding district and is interest bearing at the current 90 day commercial paper rate. When the net amount for any district achieves a pre-determined level at the end of any calendar year (i.e., at least 2.5 percent over- or under-recovery of the approved revenue requirement), Cal Water will file with the CPUC to refund or collect the balance in the accounts. Account balances less than those levels may be refunded or collected in Cal Water’s general rate case proceedings or aggregated with future calendar year balances for comparison with the recovery level. As of December 31, 2008, the net aggregated asset is $4,629 and the aggregate liability is $2,585 and are included in other accounts receivable and accounts payable, respectively.

     The Company provides an allowance for doubtful accounts receivable. The allowance is based upon specific identified, potentially troubled accounts plus an estimate of uncollectible accounts based upon historical percentages. The balance of customer receivables is net of the allowance for doubtful accounts at December 31, 2008 and 2007 of $1,210 and $641, respectively.

     The activities in the allowance for doubtful accounts are as follows:

		2008				2007
Beginning Balance		$	641			$	260
Provision for uncollectible accounts			2,308				2,063
Net write off of uncollectible accounts			(1,739	)			(1,682	)
Ending Balance		$	1,210			$	641

Non-Regulated Revenue

     Revenues from non-regulated operations and maintenance agreements are recognized when services have been rendered to companies or municipalities under such agreements. For construction and design services, revenue is generally recognized on the completed contract method, as most projects are completed in less than three months. Other non-regulated revenue is recognized when title has transferred to the buyer, or ratably over the term of the lease.

Expense Balancing and Memorandum Accounts

     Prior to the adoption of the MCBA, incremental cost balancing accounts (ICBA), and memorandum accounts were used to track suppliers’ rate changes for purchased water, purchased power, and pump taxes that were not included in customer water rates. The cost changes are referred to as “Off-settable Expenses” because under certain circumstances they are recoverable from customers (or refunded to customers) in future rates designed to offset the cost changes from the suppliers. The Company does not record the ICBA and memorandum accounts until the Commission authorizes a change in customer rates and the customer has been billed. As of December 31, 2008, the balance of the ICBA and memorandum accounts not yet recognized is $1.5 million.

Utility Plant

     Utility plant is carried at original cost when first constructed or purchased, or at fair value. When depreciable plant is retired, the cost is eliminated from utility plant accounts and such costs are charged against accumulated depreciation. Maintenance of utility plant is charged to operating expenses as incurred. Maintenance projects are not accrued for in advance. Interest is capitalized on plant expenditures during the construction period and amounted to $3,411 in 2008, $2,585 in 2007, and $2,700 in 2006.

     Intangible assets acquired as part of water systems purchased are recorded at fair value. All other intangibles have been recorded at cost and are amortized over their useful life. Included in intangible assets is $6,515 paid to the City of Hawthorne in 1996 to lease the city’s water system and associated water rights. The asset is being amortized on a straight-line basis over the 15-year life of the lease.

     The following table represents depreciable plant and equipment as of December 31:

		2008				2007
Equipment		$	317,735			$	291,645
Transmission and distribution plant			1,054,329				994,713
Office buildings and other structures			92,840				84,051
Total		$	1,464,904			$	1,370,409

     Depreciation of utility plant for financial statement purposes is computed on a straight-line basis over the assets’ estimated useful lives including cost of removal of certain assets as follows:

		Useful Lives
Equipment		5 to 50 years
Transmission and distribution plant		40 to 65 years
Office Buildings and other structures		50 years

     The provision for depreciation expressed as a percentage of the aggregate depreciable asset balances was 2.8% in 2008, 2.7% in 2007, and 2.6% in 2006. For income tax purposes, as applicable, the Company computes depreciation using the accelerated methods allowed by the respective taxing authorities. Plant additions since June 1996 are depreciated on a straight-line basis for tax purposes in accordance with tax regulations. The Company has a legal obligation to retire wells in accordance with Department of Public Health regulations. In addition, upon decommission of a wastewater plant or lift station certain wastewater infrastructure would need to be retired in accordance with Department of Public Health regulations. The Company has been generally allowed to collect retirement obligation costs from ratepayers through depreciation expense. As of December 31, 2008 and 2007 the retirement obligation is estimated to be $9,365 and $9,548, respectively.

Cash Equivalents

     Cash equivalents include highly liquid investments with remaining maturities of three months or less at the time of acquisition. As of December 31, 2008 and 2007, cash equivalents included certificates of deposits and investments in money market funds in the amount of $25 and $1,775, respectively.

Restricted Cash

     Restricted cash primarily represents proceeds collected through a surcharge on certain customers’ bills plus interest earned on the proceeds and is used to service California Safe Drinking Water Bond obligations. All restricted cash is classified in prepaid expenses. At December 31, 2008 and 2007, restricted cash was $1,248 and $1,197, respectively.

Regulatory Assets and Liabilities

     The Company operates extensively in a regulated business, and as such is subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulations” (SFAS No. 71). In accordance with SFAS No. 71, the Company defers costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that those costs and credits will be recognized in the ratemaking process in a period different from the period in which they would have been reflected in income by an unregulated company. In determining the probability of costs being recognized in other periods, the Company considers regulatory rules and decisions, past practices, and other facts or circumstances that would indicate if recovery is probable. These deferred regulatory assets and liabilities are then reflected in the income statement in the period in which the same amounts are reflected in the rates charged for service. In the event that a portion of the Company’s operations were no longer subject to the provisions of SFAS No. 71, the Company would be required to write off related regulatory assets and liabilities that are not specifically recoverable and determine if other assets might be impaired. If a commission determined that a portion of the Company’s assets were not recoverable in customer rates, the Company would be required to determine if the Company had suffered an asset impairment that would require a write-down in the assets’ valuation. There was no such asset impairment in 2008, 2007 or 2006. The income tax temporary differences relate primarily to the difference between book and federal income tax depreciation on utility plant that was placed in service before the regulatory Commissions adopted normalization for rate making purposes. Previously, the tax benefit of tax depreciation was passed on to customers (flow-through). For state income tax purposes, the Commission continues to use the flow-through method. As such timing differences reverse, the Company will be able to include the impact of such differences in customer rates. These federal tax differences will continue to reverse over the remaining book lives of the related assets.

     In addition, regulatory assets include expense items that are capitalized for financial statement purposes, because they will be recovered in future customer rates. The capitalized expenses relate to asset retirement obligations, pension benefits, postretirement benefits other than pensions (Retiree Group Health), and accrued benefits for vacation, self-insured workers’ compensation, and directors retirement benefits. Asset retirement obligations are recorded net of depreciation which has been recorded and recognized through the regulatory process.

     Regulatory liabilities represent future benefits to ratepayers for tax deductions that will be allowed in the future. Regulatory liabilities also reflect timing differences provided at higher than the current tax rate, which will flow-through to future ratepayers.

     Regulatory assets and liabilities are comprised of the following as of December 31:

		2008				2007
Regulatory Assets
Pension and Retiree Group Health		$	138,677			$	34,809
Income tax temporary differences			35,590				35,604
Asset retirement obligations, net			6,100				6,391
Other accrued benefits			17,926				14,104
Total Regulatory Assets		$	198,293			$	90,908
Regulatory Liabilities
Future tax benefits due ratepayers		$	20,728			$	20,386

Long-Lived Assets

     The Company regularly reviews its long-lived assets for impairment, annually or when events or changes in business circumstances have occurred that indicate the carrying amount of such assets may not be fully realizable. Potential impairment of assets held for use is determined by comparing the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying value of the asset exceeds its fair value. There have been no asset impairments in 2008, 2007, or 2006.

Long-Term Debt Premium, Discount and Expense

     The discount and issuance expense on long-term debt is amortized over the original lives of the related debt on a straight-line basis which approximates the effective interest method. Premiums paid on the early redemption of certain debt and the unamortized original issuance discount and expense are amortized over the life of new debt issued in conjunction with the early redemption. Amortization expense included in interest expense was $673, $673, and $665 for 2008, 2007, and 2006, respectively.

Accumulated Other Comprehensive Loss

     The Company has an unfunded Supplemental Executive Retirement Plan. In 2005, the unfunded accumulated benefit obligation of the plan, less the accrued benefit, exceeded the unrecognized prior service cost which was recorded in accumulated other comprehensive loss, net of tax, as a separate component of Common Stockholders’ Equity. In 2006, with the adoption of Statement of Financial Accounting Standard No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” the Company determined that the amount should be reflected as a regulatory asset, as it will be recovered in future customer rates. As a result, during 2006, the Company recognized $1,202 of previously recorded net accumulated other comprehensive loss as a regulatory asset.

Advances for Construction

     Advances for Construction consist of payments received from developers for installation of water production and distribution facilities to serve new developments. Advances are excluded from rate base for rate setting purposes. Annual refunds are made to developers without interest. Advances of $174,626, and $166,450 at December 31, 2008, and 2007, respectively, will be refunded primarily over a 40-year period in equal annual amounts. In addition, other Advances for Construction totaling $1,537 and $1,574 at December 31, 2008, and 2007, respectively, are refundable based upon customer connections. Estimated refunds of advances for each succeeding year (2009 through 2013) are approximately $6,123, $6,032, $5,995, $5,986, $5,980 and $146,047 thereafter.

Contributions in Aid of Construction

     Contributions in Aid of Construction represent payments received from developers, primarily for fire protection purposes, which are not subject to refunds. Facilities funded by contributions are included in utility plant, but excluded from rate base. Depreciation related to assets acquired from contributions is charged to the Contributions in Aid of Construction account.

Income Taxes

     The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Measurement of the deferred tax assets and liabilities is at enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.

     It is anticipated that future rate action by the Commissions will reflect revenue requirements for the tax effects of temporary differences recognized, which have previously been flowed through to customers. The Commissions have granted the Company rate increases to reflect the normalization of the tax benefits of the federal accelerated methods and available Investment Tax Credits (ITC) for all assets placed in service after 1980. ITCs are deferred and amortized over the lives of the related properties for book purposes.

     Advances for Construction and Contributions in Aid of Construction received from developers subsequent to 1986 were taxable for federal income tax purposes and subsequent to 1991 were subject to California income tax. In 1996, the federal tax law, and in 1997, the California tax law, changed and only deposits for new services were taxable. In late 2000, federal regulations were further modified to exclude contributions of fire services from taxable income.

Workers’ Compensation, General Liability and Other Claims

     For workers’ compensation, the Company estimates the discounted liability associated with claims submitted and claims not yet submitted based on historical data. For general liability claims and other claims, the Company estimates the cost incurred but not yet paid using historical information.

Collective Bargaining Agreements

     As of December 31, 2008, the Company had 929 employees, including 595 non-supervisory employees who are represented by the Utility Workers Union of America, AFL-CIO, except certain engineering and laboratory employees who are represented by the International Federation of Professional and Technical Engineers, AFL-CIO. The union agreements expire at the end of 2009.

Earnings Per Share

     The computations of basic and diluted earnings per share are noted below. Basic earnings per share are computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Restricted Stock Awards are included in the weighted stock outstanding as the shares have all voting and dividend rights as issued and unrestricted common stock.

     Common stock options outstanding to purchase common shares were 84,000, 90,500, and 90,500 at December 31, 2008, 2007, and 2006, respectively. Stock Appreciation Rights (SAR) covering 108,710, 61,640 and 37,969 shares of common stock were outstanding as of December 31, 2008, 2007, and 2006, respectively.

     All options are dilutive and the SARs are antidilutive. The dilutive effect is shown in the table below.

		2008				2007				2006
		(In thousands, except per share data)
Net income, as reported		$	39,805			$	31,159			$	25,580
Less preferred dividends and premium paid upon retirement of preferred stock			368				153				153
Net income available to common stockholders		$	39,437			$	31,006			$	25,427
Weighted average common shares, basic			20,710				20,665				18,905
Dilutive common stock equivalents (treasury method)			24				24				20
Shares used for dilutive calculation			20,734				20,689				18,925
Earnings per share — basic		$	1.90			$	1.50			$	1.34
Earnings per share — diluted		$	1.90			$	1.50			$	1.34

Stock-based Compensation

     In 2006, the Company adopted the provisions of the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards No. 123 — revised 2004 (SFAS 123(R)), “Share-Based Payment” which replaced Statement of Financial Accounting Standards No. 123 (SFAS 123), “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees.” Under the fair value recognition provisions of SFAS 123(R), stock-based compensation cost is measured at the grant date based on the fair value of the award. The Company recognizes compensation as expense on a straight-line basis over the requisite service period, which is the vesting period. The Company elected the modified-prospective method of adoption of SFAS No. 123(R), under which prior periods were not revised for comparative purposes. Using this method, the valuation provisions of SFAS 123(R) apply to new grants and the unvested portion of prior grants on a prospective basis. All options that were granted prior to the adoption date were vested as of the adoption date such that no compensation expense is required.

     Prior to the adoption of SFAS 123(R), the Company presented all tax benefits for deductions resulting from the exercise of stock options and disqualifying dispositions as operating cash flows on its consolidated statement of cash flows. SFAS 123(R) requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow. This requirement reduced net operating cash flows and increase net financing cash flows in periods after adoption. Total cash flow will remain unchanged from what would have been reported under prior accounting rules.

     The adoption of SFAS 123(R) did not have a material impact on the Company’s consolidated financial position, results of operations and cash flows. See Note 13 for further information regarding the Company’s stock-based compensation assumptions and expenses.

Long-Term Incentive Plan

     The Company had a stockholder-approved Long-Term Incentive Plan (which was replaced on April 27, 2005, by a stockholder-approved Equity Incentive Plan) that allowed granting of non-qualified stock options. The Company accounted for options issued under the Long-Term Incentive Plan using the intrinsic value method of accounting as prescribed by APB 25. All outstanding options issued under the Long-Term Incentive Plan have an exercise price equal to the market price on the date they were granted. All options granted under the Long-Term Incentive Plan are fully vested. No compensation expense was recorded in 2008, 2007 or 2006, related to stock options issued under the Long-Term Incentive Plan.

Recent Accounting Pronouncements Adopted

     In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157 “Fair Value Measurements.” The statement defines fair value, establishes a framework for measuring fair values in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement is effective for years beginning after November 15, 2007. The Company adopted SFAS No. 157 on January 1, 2008 and it did not have a material impact on the Company’s financial position, results of operations, or cash flows.

     In February 2007, the FASB issued SFAS No. 159, “the Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The statement is effective for years beginning after November 15, 2007. The Company adopted SFAS No. 159 on January 1, 2008, but did not elect to report any financial assets or liabilities at fair value. The adoption of this statement did not have a material impact to the Company’s financial position, results of operations or cash flows.

Accounting Pronouncements Issued But Not Yet Adopted

     In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” The statement applies prospectively to business combinations for which the acquisition date is on or after years beginning after December 15, 2008. SFAS 141(R) significantly changes current practices regarding business combinations. Among the more significant changes, SFAS 141(R) expands the definition of a business and a business combination; requires the acquirer to recognize the assets acquired, liabilities assumed and noncontrolling interests (including goodwill), measured at fair value at the acquisition date; requires acquisition-related expenses and restructuring costs to be recognized separately from the business combination and requires assets acquired and liabilities assumed from contractual and non-contractual contingencies to be recognized at their acquisition date fair values with subsequent changes recognized in earnings. The adoption of this statement is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” — an amendment of ARB No. 51. the statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. The statement is effective for years beginning after December 15, 2008. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operation, or cash flows.

     In May 2008, the FASB staff revisited Emerging Issues Task Force (“EITF”) issue No. 03-6 and issued FASB Staff Position (“FSP”) No. EITF 03-6-1, “Determining Whether Instruments Granted in Shared-Based Payment Transactions are Participating Securities.” FSP EITF 03-6-1 requires unvested share-based payments that entitle employees to receive nonrefundable dividends to also be considered participating securities, as defined in EITF 03-6. The FSP is effective for fiscal years beginning after December 15, 2008 and interim periods within those years with early adoption prohibited. The Company currently grants certain unvested share-based payment awards that include rights to dividends similar to common shareholders. The Company is currently analyzing the impact that FSP EITF 03-6-1 will have on its computation on earnings per share and financial statements and related footnotes, if any.

     In December 2008, the FASB issued FSP FAS 132(R)-1,“Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP 132(R)-1”). FSP 132(R)-1 amends and expands the disclosure requirements of SFAS No. 132. An entity is required to provide qualitative disclosures about how investment allocation decisions are made, the inputs and valuation techniques used to measure the fair value of plan assets, and the concentration of risk within plan assets. Additionally, quantitative disclosures are required showing the fair value of each major category of plan assets, the levels in which each asset is classified within the fair value hierarchy, and a reconciliation for the period of plan assets which are measured using significant unobservable inputs. FSP 132(R)-1 is effective prospectively for fiscal years ending after December 15, 2009. The Company is currently evaluating the impact of FSP 132(R)-1.

3 OTHER INCOME AND EXPENSES

     The Company conducts various non-regulated activities as reflected in the table below.

		2008								2007								2006
		Revenue				Expense				Revenue				Expense				Revenue				Expense
Operating and maintenance		$	7,180			$	7,327			$	5,705			$	5,247			$	5,141			$	4,476
Meter reading and billing			1,150				898				1,187				902				1,159				865
Leases			2,048				690				1,958				613				1,714				571
Design and construction			1,292				887				1,142				847				1,151				744
Interest income			423				—				1,435				—				758				—
Change in value of life insurance contracts			—				3,763				539				—				615				—
Non-regulated expenses and other			2,137				1,532				1,591				1,505				107				552
Total		$	14,230			$	15,097			$	13,557			$	9,114			$	10,645			$	7,208

     Operating and maintenance services and meter reading and billing services are provided for water and wastewater systems owned by private companies and municipalities. The agreements call for a fee-per-service or a flat-rate amount per month. Leases have been entered into with telecommunications companies for cellular phone antennas placed on the Company’s property. Design and construction services are for the design and installation of water mains and other water infrastructure for others outside the Company’s regulated service areas.

4 ACQUISITIONS

     In 2008, the Company’s wholly-owned subsidiary HWS Utility Services, LLC, acquired contracts to operate and maintain water and wastewater systems in Hawaii. The purchase price of $1.3 million was paid with the issuance of the Company’s common stock. The purchase price is being amortized over the remaining life of the contracts.

     In 2008, after receiving regulatory approval, the Company’s wholly-owned subsidiary, Hawaii Water Service Company, Inc. acquired in two separate transactions, business on the Island of Hawaii which are accounted for under SFAS No. 141. The first acquisition was for all the outstanding stock of three related privately held companies (Waikoloa Resort Utilities, Inc.; Waikoloa Water Company, Inc.; Waikoloa Sewer Company, Inc.) with water and wastewater operations. The combined purchase price was $20,581. Assets acquired were $26,885, including cash of $6,268. Liabilities assumed were $10,209 (net of $12,608 which was paid at close of escrow). Goodwill of $3,906 was recorded. The Company is in the process of finalizing the valuation of certain intangible assets as well as acquired tax operating loss carryforwards; therefore the purchase price is subject to further refinement upon completion. The second acquisition was for the water and wastewater assets of two other companies, (Kukio Utility Company and WB Maninowali) was for a cash price of $10,610 for assets acquired. No liabilities were assumed.

     In 2007, after receiving regulatory approval, the Company’s wholly owned subsidiary, Cal Water, acquired a water system with allowed rate base of approximately $425 for $388 in cash. In addition, the Company’s wholly-owned subsidiary, Washington Water, acquired five water systems for $1,091 in cash, which was the approximate value of rate base of the systems.

     In 2006, after receiving regulatory approval, the Company’s wholly owned subsidiary, New Mexico Water, acquired a water system by purchasing the assets of the system for a purchase price of approximately $500 which was allowed as the rate base of the system

     Condensed balance sheets and pro forma results of operations for these acquisitions have not been presented since the impact of the purchases was not material.

5 INTANGIBLE ASSETS

     As of December 31, 2008 and 2007, intangible assets that will continue to be amortized and those not amortized were:

		Weighted				2008												2007
		Average				Gross								Net				Gross								Net
		Amortization				Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Period				Value				Amortization				Value				Value				Amortization				Value
Amortized intangible assets:
Hawthorne lease			15			$	6,515			$	5,589			$	926			$	6,515			$	5,140			$	1,375
Water pumping rights		usage					1,084				23				1,061				1,084				14				1,070
Water planning studies			9				5,454				1,403				4,051				3,901				1,175				2,726
Leasehold improvements and other			20				2,484				1,391				1,093				1,390				693				697
Total			13			$	15,537			$	8,406			$	7,131			$	12,890			$	7,022			$	5,868
Unamortized intangible assets:
Perpetual water rights and other						$	2,931				—			$	2,931			$	2,911				—			$	2,911

     For the years ended December 31, 2008, 2007, and 2006, amortization of intangible assets was $1,838, $866, and $853, respectively. Estimated future amortization expense related to intangible assets for the succeeding five years is approximately $1,260, $1,276, $628, $529, $483, and $2,955 thereafter.

6 PREFERRED STOCK

     In 2008, the Company redeemed all 139,000 outstanding shares of its 4.4% Series C Preferred Stock, with a par value of $25 per share, at the pre-determined redemption price of $26.75 per share and all shares of the Series C Preferred Stock were cancelled. The resulting premium of $253 was charged to retained earnings and subtracted from net earnings available to common stockholders in the Company’s 2008 earnings per common share.

     See Note 7 for a description of the Series D preferred Stock.

7 COMMON STOCKHOLDERS’ EQUITY

     The Company is authorized to issue 25 million shares of $0.01 par value common stock. As of December 31, 2008 and 2007, 20,723,202 shares and 20,666,204 shares, respectively, of common stock were issued and outstanding.

Dividend Reinvestment and Stock Repurchase Plan

     The Company has a Dividend Reinvestment and Stock Purchase Plan (DRIP Plan). Under the DRIP Plan, stockholders may reinvest dividends to purchase additional Company common stock without commission fees. The Plan also allows existing stockholders and other interested investors to purchase Company common stock through the transfer agent up to certain limits. The Company’s transfer agent operates the DRIP Plan and purchases shares on the open market to provide shares for the Plan.

Stockholder Rights Plan

     The Company’s Stockholder Rights Plan (Plan) expired in February 2008. The Company’s Board elected not to renew the Plan, and the Plan expired by its own terms. The Plan was adopted in 1998 and authorized a dividend distribution of one right (Right) to purchase 1/100^th share of Series D Preferred Stock for each outstanding share of Common Stock in certain circumstances. The Rights were for a ten-year period that expired in February 2008 and no Series D Preferred Stock were issued under the Plan.

8 SHORT-TERM BORROWINGS

     At December 31, 2008, the Company maintained a bank revolving line of credit with Bank of America providing unsecured borrowings of up to $20 million at the prime lending rate less 1.5 percentage points. Cal Water maintained a separate bank revolving line of credit also with Bank of America for an additional $95 million with the same interest rate provision as the Company.

     On September 24, 2008, the Cal Water line of credit was amended to allow borrowings up to $95 million (from the original line of $55 million) for the period between September 30, 2008 and March 31, 2009. The amendment also provided that at any time the borrowings under the revolving credit facility exceed $55 million the entire principal amount outstanding of the revolving facility will bear interest annually at the lender’s prime rate less 1.0 percentage points or alternatively at LIBOR plus 0.75 percentage points. If the borrowings do not exceed $55 million the original interest provisions will apply. The line of credit agreement expires on April 30, 2012.

     As of December 31, 2008, the outstanding borrowings on the Cal Water and Company lines of credit were $28,000 and $12,000, respectively.

     The following table represents borrowings under the bank lines of credit:

		2008				2007				2006
Maximum short-term borrowings		$	44,000			$	—			$	30,250
Average amount outstanding		$	25,748			$	—			$	7,237
Weighted average interest rate			3.24	%			n/a				6.76	%
Interest rate at December 31			1.75	%			n/a				n/a

9 LONG-TERM DEBT

     As of December 31, 2008 and 2007, long-term debt outstanding was:

				Interest				Maturity
		Series		Rate				Date				2008				2007
First Mortgage Bonds:		J			8.86	%			2023			$	3,000			$	3,200
		K			6.94	%			2012				2,900				3,600
		CC			9.86	%			2020				17,800				17,900
Total First Mortgage Bonds													23,700				24,700
Unsecured Senior Notes:		A			7.28	%			2025				20,000				20,000
		B			6.77	%			2028				20,000				20,000
		C			8.15	%			2030				20,000				20,000
		D			7.13	%			2031				20,000				20,000
		E			7.11	%			2032				20,000				20,000
		F			5.90	%			2017				20,000				20,000
		G			5.29	%			2022				20,000				20,000
		H			5.29	%			2022				20,000				20,000
		I			5.54	%			2023				10,000				10,000
		J			5.44	%			2018				9,091				10,000
		K			4.58	%			2010				10,000				10,000
		L			5.48	%			2018				10,000				10,000
		M			5.52	%			2013				20,000				20,000
		N			5.55	%			2013				20,000				20,000
		O			6.02	%			2031				20,000				20,000
Total Unsecured Senior Notes													259,091				260,000
California Department of Water Resources loans				2.6% to 8.0%					2009-32				2,595				2,229
Other long-term debt													4,930				4,992
Total long-term debt													290,316				291,921
Less current maturities													2,818				2,701
Long-term debt excluding current maturities												$	287,498			$	289,220

     The first mortgage bonds and unsecured senior notes are obligations of Cal Water and contain certain restrictive covenants. The Company believes that it is in material compliance with such covenants as of December 31, 2008. All bonds are held by institutional investors and secured by substantially all of Cal Water’s utility plant. The unsecured senior notes are held by institutional investors and require interest-only payments until maturity, except series J which has an annual sinking fund payment amount of $909 annually, and series G and H which have an annual sinking fund requirement of $1,818 starting in 2012, and Series I which has an annual sinking fund requirement of $909 starting in 2013. The terms of the unsecured notes require Cal Water to grant a first mortgage security interest upon the issuance of additional first mortgage debt. The California Department of Water Resources (DWR) loans were financed under the California Safe Drinking Water Bond Act. Repayment of principal and interest on the DWR loans is through a surcharge on customer bills. Other long-term debt includes other equipment and system acquisition financing arrangements with financial institutions. Aggregate maturities and sinking fund requirements for each of the succeeding five years (2009 through 2013) are $2,818, $12,763, $2,645, $6,298, and $46,359, and $219,433, thereafter.

10 OTHER ACCRUED LIABILITIES

     As of December 31, 2008 and 2007, other accrued liabilities were:

		2008				2007
Accrued and deferred compensation		$	11,429			$	10,844
Accrued benefit and workers’ compensation claims			8,118				5,774
Other			12,988				8,351
		$	32,535			$	24,969

11  INCOME TAXES

     Income tax expense consists of the following:

		Federal				State				Total
2008
Current		$	15,233			$	4,679			$	19,912
Deferred			4,486				(267	)			4,219
Total		$	19,719			$	4,412			$	24,131
2007
Current		$	16,028			$	4,662			$	20,690
Deferred			522				(489	)			33
Total		$	16,550			$	4,173			$	20,723
2006
Current		$	10,523			$	3,107			$	13,630
Deferred			3,489				(280	)			3,209
Total		$	14,012			$	2,827			$	16,839

     Income tax expense computed by applying the current federal 35% tax rate to pretax book income differs from the amount shown in the Consolidated Statements of Income. The difference is reconciled in the table below:

		2008				2007				2006
Computed “expected” tax expense		$	22,378			$	18,159			$	14,847
Increase (reduction) in taxes due to:
State income taxes net of federal tax benefit			3,674				2,981				2,437
Investment tax credits			(32	)			(32	)			(32	)
Other			(1,889	)			(385	)			(413	)
Total income tax		$	24,131			$	20,723			$	16,839

     Included in Other in the above table is the recognition of the flow-through accounting for Federal depreciation expense on assets acquired prior to 1982 and retirement costs of such assets. For assets acquired prior to 1982, the benefit of excess tax depreciation was previously passed through to the ratepayers. The tax benefit is now reversing and a higher tax expense is being recognized and is included in customer rates. Offsetting the flow-through depreciation in 2008 and 2007 was the impact of cost to remove pre-1982 assets. Also included is the federal income tax deduction from qualified U.S. production activities, which is being phased in from 2006 through 2011. Qualified production activities include production of potable water, but exclude the transmission and distribution of the potable water. The impact of the deduction is being reported in the year in which the deduction is claimed on the Company’s tax return. The impact was to lower the income tax provision by $1,276, $490, and $260 in 2008, 2007, and 2006, respectively.

     The components of deferred income tax expense were:

		2008				2007				2006
Depreciation		$	4,726			$	2,121			$	3,386
Developer advances and contributions			(521	)			(504	)			(875	)
Prepaid expenses			1,361				378				434
Accrued expenses			(800	)			(1,362	)			(716	)
Investment tax credits			(106	)			(106	)			(106	)
Other			(441	)			(494	)			1,086
Total deferred income tax expense		$	4,219			$	33			$	3,209

     We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48) on January 1, 2007. As of December 31, 2008 and 2007, we had no material unrecognized tax benefits and no adjustments to liabilities or operations were required.

     In connection with the adoption of FIN 48, the Company will include interest and penalties related to uncertain tax positions as a component of income taxes.

     During 2007, there was a federal tax examination covering 2005 which resulted in a tax liability of $87. Tax years of 2006 and 2007, and 2002 through 2007 are subject to examination by the federal and state taxing authorities, respectively. There are no income tax examinations currently in progress.

     The tax effects of differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2008 and 2007 are presented in the following table:

		2008				2007
Deferred tax assets:
Developer deposits for extension agreements and contributions in aid of construction		$	47,055			$	47,588
Federal benefit of state tax deductions			8,925				8,367
Book plant cost reduction for future deferred ITC amortization			1,413				1,457
Insurance loss provisions			2,431				2,434
Pension plan, net			2,043				2,367
Total deferred tax assets			61,867				62,213
Deferred tax liabilities:
Utility plant, principally due to depreciation differences			131,652				127,187
Prepaid expense			4,123				2,762
Premium on early retirement of bonds			1,745				1,961
Other			814				15
Total deferred tax liabilities			138,334				131,925
Net deferred tax liabilities		$	76,467			$	69,712

     A valuation allowance was not required at December 31, 2008 and 2007. Based on historical taxable income and future taxable income projections over the period in which the deferred assets are deductible, management believes it is more likely than not that the Company will realize the benefits of the deductible differences.

12  EMPLOYEE BENEFIT PLANS

     In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106, and 132(R)” (SFAS No. 158). The statement requires an employer to recognize in its statement of financial position an asset for a plan’s over-funded status or a liability for a plan’s under-funded status. The measurement date of the plans’ assets and obligations that determine the funded status is as of the end of the employer’s fiscal year effective in 2006.

Savings Plan

     The Company sponsors a 401(k) qualified, defined contribution savings plan that allows participants to contribute up to 20% of pre-tax compensation. The Company matches fifty cents for each dollar contributed by the employee up to a maximum Company match of 4.0%. Company contributions were $1,786, $1,733, and $1,628, for the years 2008, 2007, and 2006, respectively.

Pension Plans

     The Company provides a qualified, defined-benefit, non-contributory pension plan for substantially all employees. The accumulated benefit obligations of the pension plan are $130,206 and $73,845 as of December 31, 2008 and 2007, respectively. The fair value of pension plan assets was $66,941 and $85,303 as of December 31, 2008 and 2007, respectively.

     Plan assets in the defined-benefit pension plan as of December 31, 2008 and 2007 were as follows:

Asset Category		2008				2007
Cash equivalents			19.0	%			10.9	%
Bond Funds			36.8	%			28.9	%
Domestic Equity Funds			37.2	%			49.5	%
Foreign Equity Funds			7.0	%			10.7	%

     The investment objective of the fund is to maximize the return on assets, commensurate with the risk the Company Trustees deem appropriate to meet the obligations of the Plan, and minimize the volatility of the pension expense. The target allocation of plan assets is to have 55% to 65% invested in equity funds and the balance to be invested in bond funds or cash equivalents. The Trustees periodically measure fund performance against specific indexes in an effort to generate a rate of return for the total portfolio that equals or exceeds the actuarial investment rate assumptions.

     Pension payment obligations are generally funded by the purchase of an annuity from a life insurance company. If monthly benefits are paid to future retirees, rather than with a purchase of an annuity, payments are expected to be made in each year from

2009 to 2013 are $1,822, $2,535, $3,397, $4,431, and $5,914, respectively. The aggregate benefits expected to be paid in the five years 2014 through 2018 would be $50,321. If annuities are purchased for the retirees rather than making monthly payments, the payments for the same period would be approximately, $8,559, $8,994, $12,586, $14,633, and $16,082. The aggregate payments to be paid for annuities in the five years 2014 through 2018 would be approximately $111,014. The expected benefit payments are based upon the same assumptions used to measure the Company’s benefit obligation at December 31, 2008, and include estimated future employee service.

     The Company also maintains an unfunded, non-qualified, supplemental executive retirement plan. The unfunded supplemental executive retirement plan accumulated benefit obligations were $15,043 and $10,340 as of December 31, 2008 and 2007, respectively. Benefit payments under the supplemental executive retirement plan are paid currently and are included in the preceding paragraph.

     The costs of the pension and retirement plans are charged to expense and utility plant. The Company makes annual contributions to fund the amounts accrued for pension cost.

Other Postretirement Plan

     The Company provides substantially all active, permanent employees with medical, dental, and vision benefits through a self-insured plan. Employees retiring at or after age 58, along with their spouses and dependents, continue participation in the plan by payment of a premium. Plan assets are invested in mutual funds, short-term money market instruments and commercial paper based upon the same asset mix as the pension plan. Retired employees are also provided with a $5,000 life insurance benefit.

     The Company records the costs of postretirement benefits other than pension during the employees’ years of active service. Postretirement benefit expense recorded in 2008, 2007, and 2006, was $3,246, $2,521, and $2,369, respectively. The Company has recorded a regulatory asset in prior years for the difference between the Company-funded amount and the net periodic benefit cost. Prior to the adoption of SFAS No. 158, the remaining net periodic benefit cost was $9,790 and is being recovered through future customer rates and is recorded as a regulatory asset. The expected benefit payments, net of retiree premiums and Medicare part D subsidies, for the next five years are $929, $1,068, $1,196, $1,311, and $1,467, respectively.

     The following table reconciles the funded status of the plans with the accrued pension liability and the net postretirement benefit liability as of December 31, 2008 and 2007:

		Pension Benefits								Other Benefits
		2008				2007				2008				2007
Change in projected benefit obligation:
Beginning of year		$	105,884			$	109,077			$	27,492			$	21,659
Service cost			6,423				5,291				1,430				1,154
Interest cost			8,991				6,522				1,716				1,317
Assumption change			20,239				(7,415	)			6,651				2,997
Amendment			51,173				—				—				627
Experience (gain) loss			6,135				(1,538	)			(300	)			443
Benefits paid, net of retiree premiums			(5,967	)			(6,053	)			(781	)			(705	)
End of year		$	192,878			$	105,884			$	36,208			$	27,492
Change in plan assets:
Fair value of plan assets at beginning of year		$	85,303			$	78,393			$	8,287			$	5,547
Actual return on plan assets			(17,856	)			6,021				(1,206	)			403
Employer contributions			5,461				6,942				—				3,042
Retiree contributions			—				—				924				863
Benefits paid			(5,967	)			(6,053	)			(1,705	)			(1,568	)
Fair value of plan assets at end of year		$	66,941			$	85,303			$	6,300			$	8,287
Funded status		$	(125,937	)		$	(20,581	)		$	(29,908	)		$	(19,205	)
Unrecognized actuarial (gain) or loss			51,771				2,042				14,798				6,949
Unrecognized prior service cost			60,807				13,637				885				1,001
Unrecognized transition obligation			—				—				1,113				1,389
Net amount recognized		$	(13,359	)		$	(4,902	)		$	(13,112	)		$	(9,866	)

     Prior to 2006, the unfunded status for the pension plans and other postretirement plans was disclosed primarily in the footnotes to the financial statements. As of December 31, 2006, SFAS No. 158 requires the full recognition of the projected benefit obligation over the fair value of plan assets, reflecting the difference on the balance sheet. Therefore, previously disclosed but unrecognized amounts

of gains and losses, unrecognized prior service costs and credits, net transition assets or obligations and related taxes have been charged to regulatory assets as a cumulative adjustment upon adoption of SFAS No. 158.

     Amounts recognized on the balance sheet, after consideration of the impact of SFAS 158, consist of:

		Pension Benefits								Other Benefits
		2008				2007				2008				2007
Prepaid (Accrued) benefit costs		$	—			$	—			$	(13,112	)		$	(9,866	)
Accrued benefit liability			(125,937	)			(20,581	)			(16,796	)			(9,339	)
Regulatory asset			112,578				15,679				16,796				9,339
Net amount recognized		$	(13,359	)		$	(4,902	)		$	(13,112	)		$	(9,866	)

     Below are the actuarial assumptions used in determining the benefit obligation for the benefit plans:

		Pension Benefits								Other Benefits
		2008				2007				2008				2007
Weighted average assumptions as of December 31:
Discount rate			6.40	%			6.30	%			5.80	%			6.40	%
Long-term rate of return on plan assets			8.00	%			8.00	%			7.00	%			7.00	%
Rate of compensation increases			5.00	%			3.75	%			—				—

     The long-term rate of return assumption is the expected rate of return on a balanced portfolio invested roughly 60% in equities and 40% in fixed income securities. The average return for the pension plan for the last five and ten years was 2.5% and 4.4%, respectively. The expected average return over the next 30 years is expected to be 8.0%. The discount rate was derived from the Citigroup Pension Discount Curve using the expected payouts for the plan.

     Net periodic benefit costs for the pension and other postretirement plans for the years ended December 31, 2008, 2007, and 2006 included the following components:

		Pension Plan												Other Benefits
		2008				2007				2006				2008				2007				2006
Service cost		$	6,423			$	5,291			$	5,347			$	1,430			$	1,154			$	1,153
Interest cost			8,991				6,522				6,055				1,716				1,317				1,144
Expected return on plan assets			(6,012	)			(5,704	)			(5,797	)			(574	)			(469	)			(408	)
Net amortization and deferral			4,516				2,883				2,674				674				519				480
Net periodic benefit cost		$	13,918			$	8,992			$	8,279			$	3,246			$	2,521			$	2,369

     Below are the actuarial assumptions used in determining the net periodic benefit costs for the benefit plans, which uses the end of the prior year as the measurement date:

		Pension Benefits								Other Benefits
		2008				2007				2008				2007
Weighted average assumptions as of December 31:
Discount rate			6.30	%			5.90	%			6.40	%			5.90	%
Long-term rate of return on plan assets			8.00	%			8.00	%			7.00	%			8.00	%
Rate of compensation increases			3.75	%			3.75	%			—				—

     For 2008 measurement purposes, the Company assumed a 9.5% annual rate of increase in the per capita cost of covered benefits with the rate decreasing 1.0% per year for the next three years, then gradually grading down to 5.1% over the next 48 years. The health care cost trend rate assumption has a significant effect on the amounts reported. A one-percentage point change in assumed health care cost trends is estimated to have the following effect:

		1-Percentage				1-Percentage Point
		Point Increase				Decrease
Effect on total service and interest costs		$	631			$	(491	)
Effect on accumulated postretirement benefit obligation		$	6,919			$	(5,446	)

     The Company intends to make annual contributions to the plans up to the amount deductible for tax purposes. The Company estimates in 2009 that the annual contribution to the pension plans will be $26.9 million and the annual contribution to the other postretirement plan will be $9.5 million.

13  STOCK-BASED COMPENSATION PLANS

     The Company has two stockholder-approved stock-based compensation plans.

Long-term Incentive Plan

     Under the Long-Term Incentive Plan that allowed granting of nonqualified stock options, some of which are currently outstanding, there will be no future grants made. Options were granted at an exercise price that was not less than the per share common stock market price on the date of grant. The options vest at a 25% rate on their anniversary date over their first four years and are exercisable over a ten-year period. At December 31, 2008, 84,000 options are fully vested and exercisable at a weighted average price of $24.90. The intrinsic value of the vested shares at December 31, 2008 was $1,763 and the weighted average fair value at date of grant was $4.67 per share. No options were granted in 2008, 2007, or 2006.