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California Water Service Group (NYSE:CWT)

Q4 2007 Earnings Call

February 28, 2008, 11:00 am ET

Executives

Peter Nelson – President and Chief Executive Officer

Martin Kropelnicki – Vice President, Chief Financial Officer and Treasurer

Analysts

Debra Coy – Janney Montgomery Scott

Justin (inaudible) – Stifel Nicolaus

Tim Winter - Smith Moore

Francesca McCann - Stanford Financial

Operator

Good day, ladies and gentlemen and welcome to your fourth quarter and year end 2007 results conference call. (Operator Instructions) I would now like to introduce your host for today’s conference, Mr. Marty Kropelnicki, Vice President and Chief Financial Officer at California Water Service Group.

Martin Kropelnicki

Thanks and good morning. Welcome everyone to our fourth quarter 2007 and year end 2007 conference call. With me today is Pete Nelson, President and CEO.

I would like to remind everyone that a replay of today’s call is available and this call being recorded. The replay will be available from today through April 28 and the dial-in number for the replay is 1-888-266-2081, ID 835974. Last night, at the end of the day, we released our earnings. If you haven’t received the press release, it’s available on our website at www.californiawater.com.

I would like to remind you every one and make a few comments about forward-looking statements. In particular during the course of this conference 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 uncertainty found in our Form 10-K, 10-Q and other reports filed from time-to-time with Securities and Exchange Commission.

We will start off today talking about the fourth quarter of 2007: revenue for the fourth quarter 2007 was $85.9 million, up $5.2 million or 6.5% over the same period last year. Contributing to the revenue increase was $3.3 million in and rate relief, $1.4 million in increased usage by existing customers and $500,000 in increased sales to new customers.

Water production costs for the quarter increased 7% or $2 million to $30.7 million; embedded in that number are three components; purchased water increased $2.2 million to $24.6 million, which represented a 10% increase. Purchased power was down slightly approximately $152,000 or 3% to $4.7 million and pump taxes were up slightly, $35,000 or 2.5% to $1.4 million.

Other operations increased 1.5% or $400,000 to $25.1 million. Two primary drivers there, one is the purchase of chemicals and filters used in water production, as well as a slight increase that we booked in our allowance for doubtful accounts.

Maintenance expense for the quarter increased 6.5% or $300,000 to $4.4 million; depreciation was up 11% or $800,000 to $8.4 million, primarily driven by the company’s capital expenditure program.

Income taxes were up approximately 6% or $1.4 million to $4.1 million and total operating expenses came in at $75.9 million up 7% or $4.9 million over the same period last year.

In other income and expense, it came in at $1.78 million, up $800,000 or 82% over the same period last year; included in that number is the gain of sale of $2.6 million from two properties that were no longer used or useful in utility operations, and those properties were sold during the quarter.

Net interest for the quarter decreased 11.8% or $500,000 to $3.7 million, and that was primarily driven by the increased construction activity the company saw during the fourth quarter. Net income for the quarter was $8 million, up $1.6 million or 25% over Q4 last year.

Earnings per share on a fully diluted basis were $0.39 per share, up $0.08 a share or 25.8% over Q4 of last year. Overall, Q4 was a very good Q4 for the company, and we finished the year strong. Having said that, I’d like to take a moment to walk through the financial results for the full year 2007.

Revenue for the full year was $367 million, up $32.4 million or 10% from $334 million in 2006. Contributing to the increased revenue was increased rate relief of $15 million; $14.7 million driven by increases in usage by existing customers and $2.7 million to sales to new customers.

Total water production costs for the year were up 12% or $14.6 million to $138.9 million. Other operations was up 5% or $4.9 million to $100.6 million for the year. Maintenance expense was up $2.7 million or 18% to $18.3 million.

Depreciation was up 9.5% or $2.9 million to $33.6 million for the year. Income taxes were up slightly and property taxes were up slightly as well. Total operating expenses were up $28.5 million or 10% to $322.9 million for the full year ended December 31.

Other income expense was up approximately 84% or $1.9 million to $4.1 million and included in that number is the real estate sales that we saw in Q4. Net interest expense was up just slightly at $165,000 of the increase to $17.1 million. Net income for the full year was $31.1 million, up 22% or $5.6 million over the previous year.

Earnings per share on a fully diluted basis were $1.50 per share compared to $1.34 in 2006, an increase of 12%. Included in the full year of 2007, is the dilution associated with the stock offering that we completed in October of 2006, which equated to approximately $0.15 of dilution for the full year.

So, overall it was one of the best years recorded revenue for Cal Water as well as net income. We finished the year strong, and I would now like to put it over to Pete, to give some comments on what’s happening and then I will come back and talk about the balance sheet.

Peter C. Nelson

Thanks very much Marty. Good morning everyone. I am going to cover two areas; first is an update on our rate proceedings, which I usually do on these calls; and second I will talk about some new acquisitions that we were able to either close last year or expect to close some time this year.

So first, rate cases, and I’ll talk about three here. First is our 2006 general rate case. This is the case we filed in July of 2006, expecting a decision in July 2007. It covers 8 of our 24 districts for general rates and we now have a decision in that case.

We did not have a decision in July as we expected in 2007, so we were able to start interim rates of about $2 million annual revenue back in July of 2007. We now have the rate case approved in December for a total amount of $7.7 million. So we have rates going into effect with that additional $5.7 million, starting January 1 this year.

Due to the delay in the decision there was what we’d call lost revenue from the July to December period of about $2.7 million that would have been in rates, if the Commission would have made a decision on time. So we were able to file and we will be recovering that $2.7 million over 12 months beginning March of this year as a surcharge to customers. This puts the 2006 general rate case to bed. It’s the last time I have to talk about it.

Let’s move on to the 2007 general rate case, which is our $68 million request annual revenue, which also covers 8 of our 24 districts, but more importantly allows us to reflect our corporate or headquarters costs in all of our 24 districts at one time.

This would go a long way to help mitigate the regulatory lag created by the process we have been using for years, which can actually delay recovery of corporate costs up to seven years, which is, we think, unreasonable. We are deep in the process of the 2007 rate case, working with the Commission and it’s generally on schedule and we expect a final decision some time in the third quarter this year.

The third proceeding is what we call the conservation proceeding, and this is an important proceeding for the entire State. But there are two regulatory mechanisms that are being worked through in this proceeding that are really important to us and other water companies.

The first is the water revenue adjustment mechanism, which is the decoupling mechanism which would allow us to separate sales from revenue, which would allow us to promote conservation much more aggressively in the State.

The second mechanism is what we call the modified cost balancing account, which would allow the changes in the supplying mix to be included in our balancing accounts for ultimate recovery.

You may know that right now, if we have changes in our unit cost of supply, if electric costs go up, the unit cost of electricity goes up, or if wholesalers raise their rates, those changes in unit costs are recoverable in balancing accounts.

But if we have to change the mix of purchased versus pumped water − let’s say customers use more water and we have to rely on more expensive sources − that change in mix is generally not recoverable in rates.

This modified cost balancing account, if approved, would allow us to include all the costs of supply in balancing accounts for ultimate recovery; also, a key component in allowing us to promote conservation much more aggressively in the State.

That proceeding does have a proposed decision; it was issued in the first or second week of January this year. And the proposed decision only allows us to cover residential customers in the water revenue adjustment mechanism, not commercial or industrial.

We don’t think that’s reasonable; we don’t think makes sense from a conservation point of view. So, we are working with the Commission to try to have an ultimate decision that would allow all customers to be included in the water revenue adjustment mechanism, which we think makes much more sense from a conservation, and a public policy point of view.

So that’s the rate update. I will move on to mergers and acquisitions. We were able last year and we will be able early this year to add some small acquisitions in two of our states and I will talk about both of them.

First the state of Hawaii; we added some systems on the Big Island, the Island of Hawaii, principally on the Kona Coast, two acquisitions there. The first is the Waikoloa Resort Utilities, Waikoloa Water Company and Waikoloa Sanitary Sewer Company, together we call those the West Hawaii Utilities.

That’s a stock deal which is water and waste water systems in basically the Waikoloa area and Waikoloa village. It’s about 9000 customers; we have an application with the Hawaii Utility Commission which we filed in January this year, and we expect a file a decision sometime this year on that application.

Also on the Big Island we are close to closing a smaller transaction for a non-regulated business called Island Utility Services. This is a small operations and maintenance service provider. This would be an asset purchase. They have about 20 O&M contracts on I will say the western half of the Big Island. We hope to close that acquisition in sometime in March this year.

Moving to Maui, where we now have operations, we purchased the Pukalani Sewerage Treatment Works, which is a regulated system, pretty much in the center of the island of Maui, in the Pukalani area. This is a regulated system as I mentioned, sewer only, about 800 connections and we expect that to close sometime the second quarter of this year.

So we are happy with the growth pace in Hawaii and very happy with being able to add a second island to our operations there, the Big Island and that should be fully closed sometime this year.

Secondly, in the state of Washington. We were able to add five smaller systems in the state of Washington last year and add contracts to operate systems for others, and you add all that together its about 600 new customers.

We’re able to add systems in the north part of state in the San Juan Islands, where we added the Rosario Resort and other customers out of Orcas Island. So we are also happy with the pace of growth in Washington, being able to add such small systems and a larger footprint in that state also.

So, now I’ll turn this back to Marty to talk about capital and financing and the balance sheet

Martin A. Kropelnicki

Thanks Pete. Couple of things on the balance sheet that we wanted to share with everyone today. First and foremost, the net utility plant passed up $1 billion in December. We think that’s significant. If you look at the capital program for 2007, total CapEx was approximately $102 million, a little bit more than 10% of our utility plant.

The company funded portion of the CapEx came in at about $77 million of the portion that we earned our authorize rate of return on. So, that came in about 8% of our total utility plant. That was a couple of million short of our internal target. Our target was approximately $80 million.

However, we did finish of the year with work in progress up slightly, from where it was the previous year. So, overall nice growth in rate base and we ended the year with work in progress balance of approximately $39 million, which is approximately $3 million from where we were the year before.

We completed 2007 with no new financings, and no new equity offerings. As you may recall, in the fall of 2006, we completed a 2 million share deal and we also completed $20 million in senior unsecured debt. In 2007, we had no new financings and we ended the year with nothing outstanding on our line of credit, and an additional $6 million in the bank.

Overall balance sheet is looking good. Our debt to equity ratios were approximately 43% debt, 57% equity, which is about where we ended up 2006; debt, 57% equity is the ratios that we used going into the 2007 general rate case and those equity ratios are included in our filings for the 2007 general rate case.

Looking out at 2008, we expect the capital program to continue. The relevant range here is probably between $80 and $100 million of CapEx. That’s a pretty broad range, but you have to remember, in California, sometimes permitting could be a little bit more difficult getting final sign-off from the Department of Health Services and also the size of the projects, it will have an impact on scheduling.

We do have a whole host of projects, none of which are significant themselves. If you look at the top 10 projects for 2007, they equated about 20% of the total budget. So there is no super projects out there that are taking the biggest portion of projects. There is lot of pumps and pipes and main replacements etcetera, but nothing that’s dominating or commanding a big chuck of the total CapEx budget.

2008 is off and running and they will look to see what happens in 2008, but I think $80 to $100 million is the relevant range for CapEx for the year.

Couple of other significant points, as the debt markets have had some instability due to the subprime fallout, the company has maintained its S&P rating. There has been no change there. They rate us as stable and I believe we are in the top tier of the water companies that have publicly rated debt with S&P. And so that has continued to go well.

In January, we declared our 45th consecutive annual dividend increase and we are about ready to pay our 253rd consecutive quarterly dividend. We think that bodes well to the financial condition of the company and the shape that we are in.

So going into 2008, we feel the balance sheet is healthy. There is plenty of room to finance our expense program. As Pete mentioned, we have completed some acquisitions that we think increase our footprint in growing markets. And overall, our financial results we feel are very, very good for 2007.

Pete, any other thoughts?

Peter C. Nelson

I will just reiterate. In closing, we feel very good about 2007, a good year. Able to post solid financial results; continuing to implement the California Commission’s Water Action Plan, which we feel is good public policy and we are very pleased that the Commission remains fully committed to the plan as well.

And happy that we are able to expand our footprint in Hawaii, to a new island, and in the state of Washington with acquisitions that were very important to us. At this point, I think I we will take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Francesca McCann - Stanford Financial.

Francesca McCann - Stanford Financial.

Good morning and congratulations on a good quarter and year. Looking forward to more. A quick question on the purchase of water costs and the increase there, if you can detail that out a little bit more and then also tell us what you see there moving forward, trend wise, what we can expect?

Martin Kropelnicki

That’s actually a very good question and when we haven’t been in our blackout period, I’ve actually gotten quite a few calls about this issue, because some of the other issues that are popping up with other water companies within the state then have add some issues this year.

The 10-K will be filed hopefully today or sometime tomorrow, and in the 10-K on page 35, we break out our water production. And really, when you look at this issue and how it works, I think there is a couple of things that are really important when looking at us versus other companies.

First and foremost, mix matters. In total, the company produced approximately 141 billion gallons of water during the year. Of that amount, approximately 50% was purchased water from wholesalers, and the other 50% came from our own wells and surface water.

When you look at the 50% that’s ours, the majority of that comes from our own wells. Approximately 46.4%; only about 3.7% of the surface water, came from our surface water plants of which we had four, and that was just down slightly.

In total of the $141 billion of water produced, $5 billion came from our surface sources, and that was down slightly from $5.6 billion the year before. So, as the reservoirs have had lower water levels, etcetera, that has affected our ability to run the plant. But in terms of it being a material part of our overall portfolio, it is really not.

The second thing is, given the fact that we have the largest number of districts in the state of California, I think we have gotten better at rate making around these issues and as you may recall in our rate making process, every year we’ve had 8 districts come in for rates, and we file our rate case for each of those 8 districts every year. That has allowed us to address the mix issue every year in districts that change. So I think we have gotten fairly sophisticated at our estimates in terms of how we look at the total demand.

And then ultimately, we are big on trying to keep our wells productive. And so, as we saw some increases in demand this year, we have been able to increase our well production.

Peter Nelson

That’s right. In the L.A. basin we were able to increase production from our wells down there.

Martin Kropelnicki

I think Francesca the 50-50 is probably a good ratio. Part of the CapEx program, we like to drill so many new wells every year as well. So obviously it’s more economically advantageous to us to pump water. But I think that 50-50 mix ratio is what to look at and again when the K comes out, look at page 35, because we break it out, all the percents so you can see it.

Francesca McCann - Stanford Financial.

Perfect. Okay and the acquisition landscape, congratulations on what you did in this quarter and through the year, and if you can talk a little bit about additional growth opportunities, either in Washington or Hawaii, or elsewhere and then as a second part of that, where your focus is going to be for O&M versus full system?

Peter Nelson

Francesca we prefer to buy regulated systems, of course, at book value, so they are accretive immediately. In Hawaii, the O&M acquisition was a strategic one. That does serve 20 separate areas, up and down the Kona Coast and inland on the Big Island.

I expect us to remain in our four states and look for prudent acquisitions in all four. This was a good year for Hawaii, as opposed to maybe two or three years ago, it was a very good year in New Mexico. So they kind of go in cycles, but I think what you have seen, 2007 and 2008 is pretty much the pace and the strategic direction you will see from us in the future.

Francesca McCann - Stanford Financial.

Okay. Perfect. And any obstacles that you see looking forward as you expand your acquisitions?

Peter Nelson

Can you be more specific on obstacles?

Francesca McCann - Stanford Financial.

More so on the regulatory side?

Martin Kropelnicki

Francesca, this question has come out throughout the years. We do look at a lot of opportunities. Part of the challenge is finding opportunities that we can make money on, and that we can grow. As Pete said, growing rate based and growing the regulated business is always our first priority.

However you are capped at how much you can pay for those systems and make money on them. So having a strong, disciplined approach on the M&A side is really, really important to both Pete and I, in making sure we can do deals that are accretive.

So we go where we think we can make money and where the opportunities are. We are not going to spend shareholder money on places where we can’t make money, unless we think it is a strategic opportunity that we think will lead to future profits by expanding our footprint.

Francesca McCann - Stanford Financial.

Okay. Perfect. And then just a quick question on the tax rate, which was not lower than last quarter, but lower than we’ve seen in a little while. So any further detail on that?

Martin Kropelnicki

The tax rate does bounce around a little bit. If you look at where we were, the effective tax rate in Q1 was 40.3%; the effective tax rate in Q2 was 40.8% and in Q3, it dropped to 40.2%; in Q4 dropped to 40.3% and we ended the year with an average blended effective tax rate about 40.40%.

I think it’s going to stay between that 40% and 41%, and you see some volatility there, because you have the effects of flow-through accounting and some of the tax changes that we have to look at and address quarterly.

So we have a quarterly tax provision that gets reviewed by the public accountants in our tax department. But then we have an annual true-up. But I think between 40% and 41% is the relevant range and 40.5% is probably a pretty good benchmark to model off of.

Francesca McCann - Stanford Financial.

Okay, perfect. Thank you so much.

Operator

Our next question comes from Debra Coy – Janney Montgomery Scott.

Debra Coy – Janney Montgomery Scott

Just to follow up a little bit on the acquisition, can you just give us a total aggregate number of about what the consideration was for the whole lot of what you have acquired in the last quarter, and what the revenue contribution would be?

Martin Kropelnicki

I think we need to talk about each deal independently, because they are different types of deals.

Debra Coy – Janney Montgomery Scott

And that’s even better. But I was just trying to get a sense of the size. It sounds like each one, other than the one on the Big Island, most are fairly small. But how do they add up?

Martin Kropelnicki

Right. The purchase price for the one on the Big Island was $21.5 million and that includes the repayment of third-party debt, which was approximately $13 to $14 million. That’s probably the biggest one.

That was an actual stock deal, so it was a developer built plant; it’s a growing area. That’s the one that adds 9,000 new customers to our business there, and that’s a regulated entity. That application has been filed with the HPUC and certainly you can pull information off that application.

Debra Coy – Janney Montgomery Scott

All right. Okay.

Martin Kropelnicki

The Island Utility Services one, that’s an asset deal that we are paying with company stock. That’s not a really big deal. It’s under $1.5 million. But as Pete said, that one’s very strategic, because it gets us into the non-regulated O&M business on the Island, and we deem that as being important.

The Pukalani deal was an asset deal that we paid cash for and that was $2 million. These are at different phases, obviously the one on the Big Island, the Waikoloa, that has not closed yet. That will close some time this year. If I was to peg a date, I would hope by August. But that really is subject to the review and approval of the Commission of Hawaii. The Island Utility Services is pending as of right now and Pukalani is pending as well; it has been filed.

Debra Coy – Janney Montgomery Scott

Okay. That’s helpful Marty, and similar on the Washington deals?

Martin Kropelnicki

It’s a little bit different landscape in Washington, and most of the deals in Washington, we have paid cash for. Obviously as a public company, we like asset deals better than stock deals, because it limits the liability to the subsidiary, as well the parent company. But all the ones in Washington are closed.

Debra Coy – Janney Montgomery Scott

Okay. And the aggregate value of the Washington deals? Will that be in the K?

Martin Kropelnicki

They are not…

Debra Coy – Janney Montgomery Scott

They are not material?

Martin Kropelnicki

A couple million dollars total, Debra, it’s not a whole lot.

Peter Nelson

Little over $1 million if we add them altogether.

Debra Coy – Janney Montgomery Scott

Okay. Actually that’s helpful. I just wanted to get a sense. So thanks for that. Pete, coming back to the regulatory situation. Two things, I’m interested in why you think the Commission has tried to separate out residential versus commercial and industrial customers from the RAM mechanism, and then how you think the timing of that processes is likely to go?

Peter Nelson

The Commission did not separate. The ALJ’s proposed decision did.

Debra Coy – Janney Montgomery Scott

This comes from the ALJ, not from the Commission?

Peter Nelson

Yes, we’ve worked with staff and interveners all of whom agree that all customers should be included in the Revenue Adjustment Mechanism. The ALJ wasn’t clear on how the rate making mechanism would work for the commercial industrial customers. It was more of a clarity issue, but all the parties agreed that all customers should be included in the Revenue Adjustment Mechanism. So that’s what we are trying to change.

Debra Coy – Janney Montgomery Scott

Okay.

Peter Nelson

As far as timing, it could be today, we don’t know. It could be soon. Actually it could be held today. I think it was on the agenda for today, but it could have been held; we will just have to see.

Debra Coy – Janney Montgomery Scott

So, if we get a resolution on that, that all parties are happy with, it would take effect when?

Martin Kropelnicki

It looks like July 1 would probably be the optimal time. Obviously, it’s a huge change to the front side of our business and on the revenue side. It will probably be the one of the largest single changes our industry goes through, and that affects the work that my team has to do. But obviously, we would like to cut that over on the quarter, so it’s a clean cut over.

Debra Coy – Janney Montgomery Scott

And particularly, given the timing of your rate cases?

Martin Kropelnicki

Yes, exactly.

Debra Coy – Janney Montgomery Scott

And in terms of that, one of the surprises, Marty you mentioned earlier the mix issues relative to what we are hearing from other companies. But the other thing that we really didn’t see from you this quarter and perhaps it’s geographic as much as anything else.

But we are certainly hearing about some conservation related reductions and usage. You talked a bit about that in the third quarter. Are you really not seeing much of a conservation impact on your revenues, since usage was up in the quarter, or do you think that was just more weather related?

Martin Kropelnicki

That’s a very good question and just let’s go back to Q3 and when we talk about revenue, we always break out the three components: what was you know rate relief, what was changes in demand by existing customers and what is sales to new customers. In Q3, we didn’t see an increase in demand by existing customers. In Q4, we did see that go up by I think I mentioned it was $1.4 million.

Debra Coy – Janney Montgomery Scott

Right.

Martin Kropelnicki

But we had a dry fall and we went into winner relatively dry. So I think it’s probably a combination of both, it was overall a drier year and conservation. But it’s hard to disaggregate the two to see which is which?

Debra Coy – Janney Montgomery Scott

Obviously we are still on the midst of 1Q, but it has been relatively rainy. Can you comment on how you are seeing trends as we start into the new year?

Martin Kropelnicki

Not giving any forward guidance personally.

Debra Coy – Janney Montgomery Scott

No, of course not.

Martin Kropelnicki

If you go back and look at 2006, it rained almost everyday in January and close to everyday in February, and we had one of the rainiest quarters on record for the state of California. This year, we have had a lot of rain and we have had a lot of snow. But they have been pocket storms. The storm rolls in, we get a storm for a week and it rolls out.

Last week it rained, this week at 70 degrees here in San Jose and in the Bay area. So I think, when I looked at the weather patterns, we were about 135% to 140% of normal as of last week. The snowpack was looking good, because they got that big storm last week. But it’s a little different than what it was in 2006; it was just constantly raining.

Debra Coy – Janney Montgomery Scott

Okay. So we are normal-ish, is the way it looks so far? Whatever normal means anymore.

Martin Kropelnicki

I don’t know if there is such thing as normal in California. But I think that the pattern is probably getting back to what we have typically seen in the past.

Debra Coy – Janney Montgomery Scott

Okay. Thanks. That’s helpful.

Operator

Our next question comes from Tim Winter - Smith Moore.

Tim Winter - Smith Moore

I was just wondering if you could clarify the numbers for the 2006 general rate case, did you say $7.7 million of revenue increase?

Peter Nelson

Let me try that one. I thought that might be confusing. The total increase in revenue from that rate case is $7.7 million. We started $2 million of that back in July of 2007, which was interim rates and then we added the $5.7 million additional starting January 1 this year.

Tim Winter - Smith Moore

Okay. And what was ROE?

Martin Kropelnicki

ROE is 10.2%.

Tim Winter - Smith Moore

Okay. And did you record any of the difference or the gain between the interim and actual increase in 2007 results? And if not, will you be recording that in 2008’s results?

Martin Kropelnicki

That’s a very good question. We recognize revenue when it’s billed; that’s been our revenue recognition policy, that’s what’s on file with the SEC and that’s within our 10-K and in our footnotes. Obviously, as we move to implement, that changes, and there is a very good chance those balancing accounts will be balanced and recognized on a go-forward basis.

So when we look at 2007, in our current world, we ended the year with approximately $3 million in balancing accounts; that was down slightly from $3.9 million in Q3. So I think that will change, but the short answer to your question is no, we don’t recognize that revenue until we bill it, and then we recognize it over a time period as consumption is used.

Tim Winter - Smith Moore

Okay. So, the surcharge that you will be charging through 2008 will be to make up for the delayed timing?

Peter Nelson

Actually it will start in March 2008 and finish in February 2009; 12-month recovery.

Tim Winter - Smith Moore

So we can expect an additional $0.05 to $0.06 of revenue recognition that was actually billed in 2007?

Martin Kropelnicki

Potentially, yes.

Peter Nelson

Not billed in 2007, Tim.

Martin Kropelnicki

It wasn’t billed; it was deferred.

Tim Winter - Smith Moore

It was used.

Peter Nelson

That’s right. Water was used, expenses were recorded and recording the revenue March this year to February next year.

Tim Winter - Smith Moore

Okay. And can you guesstimate how much that negatively impacted 2007 results − the delay, the difference between the $7.7 million and the interim had it been in place?

Martin Kropelnicki

We talked about that on the Q3 call, and if my memory serves me right which every year I get older, so there’s no guarantee on this, folks. This is why we do that Safe Harbor Provision at the beginning of this call.

I believe we recognized a couple of cents of increase in Q3 and Q4, but it would have been close to the $0.05. So there is probably a net $0.03 incremental difference there. And again I am working from memory; I would have to pull notes from the Q3 call.

Tim Winter - Smith Moore

Okay, thank you.

Operator

(Operator Instructions). Next question comes from Justin (inaudible) – Stifel Nicolaus.

Justin (inaudible) – Stifel Nicolaus

Quick question for you. When I’m looking at the non-regulated expenses, it looks like you were up slightly over $1 million over the last year. I was hoping you could add a little clarity on what’s pushing that higher?

Martin Kropelnicki

Sure. You have a couple of things that flows through that line and again I will call everyone’s attention to the 10-K when gets filed here in the next 24 hours. We have a couple of things that flows through there. One, we have antenna leases; we lease our space to cellular companies to put antennas up.

We have our Extended Service Program, ESP, that flows through that line and then we also have non-regulated contracts that we operate. So, you have three primary vehicles there. The cellular lease program continues to grow every year. Our ESP program continues to grow. So those are the three primary vehicles that roll through there.

Justin (inaudible) – Stifel Nicolaus

No acquisition costs or asset sale costs are built in here?

Martin Kropelnicki

Not yet. It depends on the deal. Obviously if it’s a regulated deal, you have to throw it all above the line into the regulated balance sheet. If it’s a non-regulated deal, it would go below the line. But those costs usually all get netted through as you close the deal and as it comes out of that scrub.

Justin (inaudible) – Stifel Nicolaus

Great. Thank you very much.

Operator

(Operator Instructions). Next question comes from Debra Coy – Janney Montgomery Scott .

Debra Coy – Janney Montgomery Scott

Pete, just to follow-up on the acquisition outlook. Interesting that we really haven’t seen acquisitions in California. You mentioned earlier, you are looking at all of your service territories for opportunistic acquisitions. Can you talk a little bit about the environment in California, why we really haven’t seen much M&A activity in the state, what the outlook might be?

Peter Nelson

We just don’t see the opportunities in California at this point. We are working on several things that are in motion now, but nothing huge, and I am not sure why that is…

Debra Coy – Janney Montgomery Scott

I am not sure why that is either; it seems considering the same needs for capital spending and developer systems and so on.

Peter Nelson

And the pressure that some of the cities are having right now on their financials, it’s a little surprising. But I think if you look at the other California companies, you won’t see many California acquisitions either.

Debra Coy – Janney Montgomery Scott

No, that’s completely true. And I was just wondering your take on that. We’re hearing from some of the other companies in other states that they are beginning to see some opportunities in municipal market, because of the budget pressures as you’ve mentioned, but you are not really seeing that in California to-date?

Peter Nelson

Not yet. It’s probably going to be a little delayed, I would guess here. We do have a one city in the Bay Area that’s close to bankruptcy. But I’ve just not seen the opportunities, and that’s why we have moved our focus to Hawaii and Washington.

Debra Coy – Janney Montgomery Scott

Okay. Thanks.

Operator

(Operator Instructions). I’m showing no one at the queue at this time sir.

Martin A. Kropelnicki

Thanks Syed. I’ll just make a couple brief closing remarks on the financial side, and then I’ll turn it over to Pete to close that on the operating side. Again obviously, 2007 was a good year for Cal Water. We have remained steadfast and focused on addressing the regulatory lag issues that has kept us from heading our authorized rate to return, and return on equity.

As Pete said, we are aggressively going after the water action plan and we remain from a financial standpoint, focused on building out long term shareholder value. So we do have a number of analysts to cover us and we want to thank everyone for their support throughout the year. We have some excellent analysts and excellent coverage out there, and I know for me, I look forward to the next conference call. Pete?

Peter C. Nelson

Me too. Thanks Marty. Thanks to everyone for being on the call this morning. I really appreciate it. 2007 was a good year for us and 2008 should be a very exciting year as we go through and expect a decision on our 2007 general rate case and on the conservation proceeding. So I think it’s going to be a lot of activity in 2008 for us. Thanks very much, have a good day.

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Source: California Water Service Group Q4 2007 Earnings Call Transcript
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