Good day, ladies and gentlemen, and thank you for standing by. Welcome to the California Water Service Group second quarter 2008 earnings results conference. (Operator Instructions) I would now like to turn the conference over to your host, Mr. Martin Kropelnicki, Vice President and Chief Financial Officer. Mr. Kropelnicki, you may begin.

Thank you, Christopher. Good morning, everyone, and welcome to the second quarter 2008 earnings conference call for California Water Service Group. With me today is Pete Nelson, President and CEO. I'd like to remind everyone that a replay of today's call is available from July 31 through September 29 at 1-888-266-2081, ID 125334. Prior to going to the results of the quarter, I'd like to take a minute to talk about forward-looking statements. In particular, during the course of this call, the company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from the company's current expectations. Because of this, the company strongly advises all current stockholders, as well as all interested parties, to carefully read and understand the company's disclosures on risks and uncertainties found in our Form 10-K, Form 10-Q, and other reports filed from time to time with the Securities and Exchange Commission. Our format today, I'm briefly going to cover the income statement and the results from the quarter, I'm going to turn it over to Peter, who will give you an update on the regulatory side, then I'll come back and go through a couple highlights of the balance sheet, and then from there we'll open up for question and answer. For the second quarter of 2008, the company had consolidated revenue of $105.6 million, up 10%, or $9.8 million, over the second quarter last year. Contributing to our increases in revenue, rate increases added $6 million, sales to existing customers increased $3.6 million, and sales to new customers were $200,000. Looking at water production cost, water production costs for the quarter were up $3.1 million overall. In that, there are three primary areas. Purchase water was up…

Thanks very much, Marty. And good morning, everyone. The big news for this quarter again is regulation in California, and there's several milestones I'm going to talk about that have taken place in the last four weeks. All these were anticipated. We had really no surprises here. But I do know that in the past few quarters a fair percentage of this call, at least from my point of view has been taken up with anticipated rate changes in California, and today we can put most of those to bed, which I think is going to be good news for almost everybody on the call here today. The challenge is going to be to organize the material so it's understandable. So, I'm going to talk about three areas. First is the conservation proceedings, and there were two of those, 1A and 1B. This has really dealt with decoupling mechanisms. The second item I'll talk about is our 2007 general rate case, which covered 8 of our 24 districts in California plus our headquarters, and there's two pieces of that decision. And then third, I'll talk about future rate cases, and there's two of those also. One is the cost of capital, and the second is our 2009 generate rate case. And I think I'll also just mention at the end the earthquake that hit California on Tuesday about midday because we have had some calls about any damage to our facilities. So, first the conservation proceedings. These are in two parts, 1A and 1B. 1A dealt with the decoupling mechanism. And the objective here from the commission's point of view, is to remove the disincentives for water companies to promote conservation. There was a decision in the second quarter, and July 1st we implemented three rate mechanism changes in California.…

Thanks, Pete. I first want to talk about cash flow given our flavor of cash flow for the quarter. Cash flow provided by operations was approximately $31.1 million. Overall investment activities, company capital expenditures for the quarter company funded was $39.6 million, and utility plan expenditures that are developer funded, so work that may or may not be done by us but funded by developers was approximately $11.3 million. That gave us total CapEx for the quarter of approximately $51 million. Finance and activities, we had net short-term borrowings of approximately $23 million that we used on the line during the quarter. And we ended the quarter with approximately $6.1 million in cash and cash equivalents, down just slightly from where we were at $6.7 million at yearend. Overall, capital expenditures, we think, were healthy at the company fund level at $40 million. Our target this year is approximately $90 million for the year so we feel we're tracking that number. Our capital expenditures tend to ramp up throughout the year, and then we have a push at yearend to get them all in the rate base. Looking at WIP, work in progress, so this is when we actually incur costs before the plant goes in service, we ended the quarter with WIP balances of $80 million. That's up approximately $23 million, or 40%, from where it was at the end of Q1 '08, and on a year-over-year basis is up 18%, or $22 million, from $68 million in the second quarter of 2007. Overall, feeling good about our capital expenditure program. Net utility plant for the quarter, we ended the quarter with $1.048 billion of net utility plant. That's up approximately 10%, or $96 million over the same period last year. So, overall, where we are with our program, we feel like we're on track. We are continuing to look at our financing options for going forward given the uncertainty of the market. We've been fairly conservative and just working with our short-term line of credit, and moving forward, we'll continue to evaluate what our options are for financing. But overall, we feel like we have continued to perform well and the balance sheet is in good shape, as was the income statement, for the quarter. So, Christopher, with that, we will open up for questions and answers from the participants, please.

Thank you, sir. (Operator Instructions) Our first question or comment is from the line of Michael Gresens with Robert W. Baird. Your line is open.

Good morning, everybody.

Hi Michael. How you doing?

Morning, Michael.

Good. On the capital expenditure plans, it looks like you've then -- the second quarter you've done almost $67 million year to date, implying only $23 million left to spend for the remainder of the year; is that correct?

That's a little bit difficult to answer because you have to -- our projects will span multiple periods, which is why I like to give kind of the company funded and what's sitting in work in progress. So, I think you're on the right track with that. A harder issue is kind of when does something come out of work in progress and actually go into utility plant? A lot of times these are multiyear projects that getting the permits and then getting the approval from Department of Health Services and getting it in the ground and getting the commission approval on will stretch multiple periods. So, overall, we feel like we're on track to come in about where we thought we would be for the year, and we're tracking to our plan.

And the acquisitions during the quarter. You had mentioned the Hawaii. Was that indeed closed, and is that the explanation for the increase in the outstanding shares?

The increase in outstanding shares, no. We have not -- increase in outstanding shares really is due to changes with FAS 123R. So, we have not issued any new shares in conjunction with any acquisition other than with IUS at the end of 2007. We had a small amount of shares that were issued to fund that acquisition. We talk about in the press release [Kukio]. We filed with the commission for that, and then we are closing on the Pukalani acquisition now.

Okay. Thank you.

Thanks, Michael.

Thank you. (Operator Instructions) Our next question or comment is from the line of Heike Doerr with Janney Montgomery Scott. Your line is open.

Good morning. Glad to hear everyone is safe and sound in the Cal Water family.

Hi, Heike. How are you?

You never know. It's a big state. Don't know where you guys are. A couple of quick housekeeping questions first. The deprecation was up about 10% year over year. Is that a good run rate to think of going forward as we look into '09 what the depreciation level is going to be?

Depreciation potentially has the ability to change when we get new depreciation schedules from the CPUC. I think that 10% is probably about right, and if there was a significant change with the commission, we'll highlight it in our disclosures and on these calls.

Okay. And as we look at acquisitions, this is now two quarters that we've heard of a new acquisition that's happening in Hawaii. Has your strategy changed, and can you talk about maybe where you see attractive acquisitions in the non-California states that you operate in? I believe historically, we've seen more in Washington than we have in Hawaii.

Heike, that's right. We've seen more in Washington and New Mexico in previous years. Right now the action seems to be in Hawaii on the Island of Maui and on the Big Island, particularly the Kona Coast, which is where the Kukio system is so that just happens to be where the market is at the moment. These are not huge acquisitions, but they're strategic, and they get us a good footprint on both islands.

Can you maybe give us a little Hawaii refresher since we don't talk about it much? How many customers do you have there? I believe that you got that as part of the AquaSource transaction and maybe what the CapEx and rate needs are down there?

I can start there. On the island of Maui, we purchased the [Ka'anapali] system right from AquaSource. And then the Pukalani system, which we mentioned in the press released, is also on that island. I'm going to say there's, I'll take a rough guess, about 6,000 -- well, I'm sorry. There's about 600 customers on that island, but a lot of those are major resorts so it's hard to do an equivalent test on that. So, it's probably the equivalent of, I'd say, 10,000 customers.

Did you treat that like a bulk water contract then if your customers are the Marriott and the Sheraton and whatever else is down there?

No. They're retail customers. It's just that they're large customers on Maui. And then on the Big Island, we've got the Kukio system now, a company with several contracts, I think 26 contracts to operate. I just haven't run the map on the numbers there.

Sorry. I didn't mean to put you on the spot. We don't talk about it much.

It's not significant to the bottom line yet so –

No. They're not material yet, and if you go back at the end of Q1, we published information in the press release in terms of what the customer counts are on those pending acquisitions. And then with the Pukalani one, we are picking up 800 customers, and then Kukio is another 250 customers. So, again, these are not real big, earth-shattering, kind of move-the-bottom-line type of acquisitions, but they are strategic, and that has allowed us to build a net work of utilities in Hawaii. And as we've talked about doing acquisitions as a utility, it's somewhat difficult because you have to buy them, and you can easily fall into a trap of, if you buy one, they require a lot of capital expenditures, and if you can't get in rates, you start losing money. So, we continue to be very strategic in how we buy these acquisitions. We like to get them accretive within the first year. And overall in Hawaii, we feel like we're building a fairly good footprint in terms of Hawaii water service company and growing the business over there.

That's helpful. Thank you. Sorry. Didn't mean to get too into the weeds with you on that. As we look at Bond's alternative decision in the IB proceeding, has he commented on what he thought the basis point impact should be or just that he thinks it needs to be tabled for the cost of capital?

The latter. He just is thinking it should be considered with all the other risks in the cost of capital proceeding.

Okay. And as a final question, Marty, I don't how much clarity you can give us, but for this water revenue adjustment mechanism, going forward we would think that revenues would be pretty stable. Are we going to need to wait 12 months until we're looking at the third quarter of '09 to know going forward what a normalized number is, or will the company be disclosing in the Q what, for the next two quarters, would be an assumed, normalized number?

That's a very good question and it's…

We'd, obviously, all prefer the latter.

Pete and I, last week at our board meeting, we had several presentations on this topic and a couple noteworthy points. As Pete talked about, this is probably one of the most significant changes within the state of California and maybe potentially within the United States for a water company to go through. That coupled with the fact, from the time it was approved, implementation was 120 days, and I've spent half my career in the utility industry, and frankly, this is one of the fastest regulatory changes I've seen. So, there are a lot of moving parts. And part of that is taking what has typically been an annualized adopted revenue number, now breaking it down by district, breaking out the revenues, breaking out the costs, looking at the ROE, and we're in the process of doing that now and testing that. So, I don't have an answer for you other than we're really glad we have Deloitte & Touche as our independent third-party accountants because they have a lot of experience in this area. We have dedicated our best and brightest over the last four months to work on this, and it's been moving very, very fast. And ultimately, we're looking at hosting an analyst day the end of September, maybe the first week in October, to walk everybody through kind of where we are and what it's looking like. Until the accountants sign off on the accounting and everything, it's going to stay kind of squishy, which I know isn't the answer everyone wants. But ultimately I think we will get to the latter of what you said, it's just a matter of we have to go through the process to get there.

Well, then I guess we'll just keep with the squishy for the next couple of quarters. Well, thank you. I appreciate you taking the time to follow up with me.

Sure. When we gave the board presentation last week, that was one of the things that we said, you're probably going to have a lot of questions, the board, that we won't be able to answer at this point because this really is all happening kind of real time. So, it's been very dynamic, very exciting, and very, very busy, but I think we are on track, and I think, as we roll it out, I think it'll create transparency and clarity for all involved.

We're happy to see you ahead of the curve.

Thank you.

Thank you. Our next question or comment is from the line of Tim Winter with Jesup & Lamont. Your line is open.

Good morning, Marty and Pete.

Good morning, Tim.

Morning, Tim.

First of all, I want to congratulate you guys on your work over the last several years working with the commission and the rate-payer advocate to get this regulatory process streamlined, and it's great to see the WRAM in place and the modified cost balancing account in a rate decision in under 12 months. So congratulations. I'm looking forward to seeing this all fall to the bottom line over the next few years and making our life a lot easier. On that note, though, I've got a couple questions on the '07 general rate case. The overhead expenses that you mentioned that you can still recover, I think you said $13.7 million. How will that be recovered and when? I think you said it was going to be an advice letter and it would be a near-term?

Actually, Tim, those were advice letters already filed right after the 10th of July so those are all in place, and we're collecting the revenue now.

You are collecting it?

Yes, we are.

Okay. And then for the step increases in years two and three on the '07, could I get the numbers for those?

Yes. I've got. Wait one second, Tim. Yes, I have those. Step increases, it's about $10.4 million for the eight districts in 2009, July of 2009 and $5.6 million in July 2010 for the eight districts.

Okay. Okay. And then moving on with the action plan, I guess the next principle that we want to see in place is infrastructure improvement charge or some sort of automatic adjustment for work in progress. Any thoughts on that or if the commission's considering implementing that type of mechanism? I believe in the action plan it was called the…

Yes. It says to consider it a disc-type mechanism, and we have worked with the commission unsuccessfully in having a water infrastructure mechanism adopted. This rate case, of course, it's forward-looking. So, there's capital expenditures in the rate case, and there's also several projects that we don't -- they're not big enough to be in the press release that will be filed by advice letter when they are completed. Marty, do you want to add anything to…

Yeah, I think in terms of the disc, I think that's probably kind of too standard deviation are a couple steps out. They're kind of the next big issue is that we'll go through is really the cost of capital, and that'll take place throughout the fall. And then the next thing really is really on the conservation side. I mean, you've heard Pete and you've heard me talk about that we believe conservation is really the wave of the future. And I think for anyone struggling to understand the WRAM and the modified cost balancing account, if you go back and look at what happened in electric and gas industry when they decoupled and the results of the conservation, clearly, conservation's going to be a big deal here, and we think that's the right way to go.

Okay. Great. And then on the cost of capital proceeding, is there any important events or scheduled things we should be looking for as this proceeds?

We just got the scoping document from Judge Long here about a week and a half ago. We'll be testifying the week of September 8. One of the things that's a little unique is it looks like we're going to have a panel of witnesses. So for Cal Water I'm the witness, for the other two companies they'll have their witnesses, and we'll be participating in a panel format. So, it's a little bit different format. As Pete mentioned, I personally was very pleased with Bond's alternate because he went to what I would consider a more neutral position on any reduction in ROE because of the new mechanisms, and he said it should be considered as a basic risk factor like any other risk factors that the company has in their cost of capital. So, look for the proceedings to start in the fall, and, hopefully, they're scheduled to conclude right before Christmas if we can stay on schedule.

Tim, one more thought there. There's been a little misconception that because several water companies are included in the same proceeding that we could all end up with the same return on equity, and that's not true. It's more likely that each water company coming out of the cost of capital would end up with a different authorized rate of return.

Okay. Thank you, guys.

Thanks, Tim.

Thank you. Our next question or comment is from the line of Jonathon Breeder with Wachovia. Your line is open.

Good morning, gentlemen.

Hi, Jonathon. How are you?

Doing well. I'm going to stay on the cost of capital subject and the ALJ recommendation, the 50 or 25 basis point haircut. If that would be adopted, then I guess, in the cost of capital filing, they just strip out the effects of the lower risk, so to speak, from the WRAM, as well as the modified cost balancing accounts; is that correct then?

Well, I think the theory is that, if the WRAM and if the modified cost balancing accounts reduce the risk, then overall it would be a less risky stock and, therefore, you should have a reduction in your ROE. As our lead witness and me and my team have put together our testimony, I don't agree with that. I think I can argue that debate on several fronts. First and foremost, the electric and gas companies with the same mechanisms have a higher-allowed ROE. Secondly, we have been an increasing-cost industry here in the last couple of years, and the need for CapEx has continued to grow. So, in order to attract higher levels of CapEx, we're going to have to pay higher levels of returns to keep those investors interested in our company. So, I think it's going to be a very interesting process that we go through and a very interesting debate that we have with the commission and the commission's witness, but overall, I think, if you look to the free market and you look to what the indicators are, I think we have a very strong case.

I think, Jonathon, your question can't be answered, actually. If the administrative law judge's proposed decision is adopted in the 1B proceeding, I don't think anybody knows the impact that will have on the cost of capital proceeding. This is all new ground being plowed here so…

Right. That's what I'm trying to get at is, is it, if they say, okay, 50 basis point reduction in ROE, then is that taken on top of whatever the judgment is in the cost of capital proceeding or what? I mean, just logically it would make sense to do what Bond has suggested and take them in all in stride at one time, rather than in two separate ones.

Yes. We're with you.

Yes. I don't think we know that yet. I think we have to go through the process and see. I will tell you, when we had the prehearing conference with the three water companies, Commissioner Bond was there for the prehearing conference. And I know part of what Commissioner Bond's goal has been is to just improve transparency, and I think his theory has been, if you can improve transparency within the state of California in the rate-making mechanisms, the rate payer benefits, the investor benefits, and the water utility benefits. And so, as you guys know, as anyone has ever tried to add up and figure out what our total ROE is, it's almost impossible unless you take every single district and add up their numbers. And even then, the way the geo lag has been, et cetera, it's very, very difficult to do, and, in fact, you could probably say it's almost impossible to do.

Right. And then, I guess, is there a timeline for a final decision based on this proposed decision by the ALJ and the alternate proposed decision?

No. It has to wait 30 days, and then there's no target date to get it on the commission agenda.

So it could, theoretically, just kind of linger out there until the cost of capital really gets rolling and then…

Possible. Hard to say. I think the significant thing here is that the lead commissioner for the proceeding, who's also the water commissioner, has proposed an alternate decision.

Right. How often does that happen, I guess, if an ALJ comes out with a proposed decision that a commissioner immediately kind of steps in with an alternate proposed?

I'm not the best judge, but I don't think it's that common to have the alternate decision released on the same day as the proposed decision. That's pretty weighty, actually, to have that happen.

Yes, and it just seems like there's complete disagreement from the start, I guess, between the commissioner, which I mean, in my opinion, I would think carry much more weight than the ALJ. Is that accurate or…

That's hard to answer. I mean, to think Pete's point, this is kind of we're plowing new ground here, and on multiple fronts, whether it's the WRAM, the MCBA, now we're plowing new ground in the cost of capital, and I don't think we know until we get there. But I think that the thing that's important to communicate to our shareholders is that we know we need to raise capital, and we know we need to attract capital, and we're very focused on doing what we need to do to take care of the rate payer and the shareholders.

I mean, in all honestly, I kind of like having these changes going on. It gives me something else to talk about when we're talking in the water industry rather than the same old stuff.

Glad to be of help there.

One last question, just a little detail item. The other income, you said, decreased by $0.5 million as a result of mark-to-market, as well as interest income. How much was the mark-to-market portion?

Mark-to-market was approximately $500,000.

Okay. It was the bulk of that so…

Correct.

You might add back $0.02 or so?

It all depends on what the market's going to do, and as you guys know probably better than anyone, it's been a very cantankerous market. Economic data's been flying up and down and all over. We do have these assets that change in value as the market value changes, and we have to mark-to-market those on a quarterly basis.

Right. Okay. That's all I've got today. Thanks, guys.

Thanks, Jonathon.

Thanks, Jonathon.

Thank you. I'm showing no further questions in queue at this time.

Great. Well, we want to thank everyone for their support over especially the last six months, as we've gone through a lot of regulatory changes. Certainly, we have made significant progress over the last six months in implementing the Water Action Plan that we think will improve the environment for rate payers and shareholders, and we look forward to talking to everyone at the end of Q3, when we'll have more progress to report. So, thank you for your continued support, and we'll talk to everyone later. Thank you.

Ladies and gentlemen, this does conclude today's conference. We again thank you for your participation. You may all disconnect at this time. Good day.