Fourth Quarter Results, as reported

The $0.19 per share decrease in reported diluted earnings for the fourth quarter of 2008, as compared to the same period of 2007, is due to the following items:

A goodwill impairment charge of $7.7 million, or $0.27 per share, was recorded to reflect the impairment of goodwill at Chaparral City Water Company (CCWC), an AWR subsidiary and a regulated utility in Arizona, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. During our 2008 goodwill impairment review, it was determined that the goodwill of $11.2 million associated with the acquisition of CCWC back in 2000 had been impaired primarily due to the downturn in the economy and the current regulatory environment in Arizona. CCWC has $3.5 million of goodwill remaining as of December 31, 2008.

The unrealized gain on purchased power contracts increased pretax income by $788,000, or $0.03 per share, during the fourth quarter of 2008, as compared to $522,000, or $0.02 per share during the same period in 2007, a $0.01 per share increase in earnings between the two periods.

A favorable decision issued by the CPUC on November 16, 2007 added around $3.3 million to pretax income, or $0.11 per share, to the 2007 fourth quarter results, related to a water margin shortfall for the first nine months of 2007. There was no corresponding amount in the fourth quarter of 2008. The CPUC decision approved general rate increases, with rates retroactive to January 1, 2007, in the Region II customer service area of AWR’s Golden State Water Company (GSWC) unit, and authorized additional rate increases in the Region II and Region III customer service areas to recover general office expenses at the corporate headquarters.

In summary, removing the effects of the items discussed above, adjusted diluted EPS was $0.40 per share for the fourth quarter of 2008 as compared to $0.22 per share, for the same period in 2007. The increase of $0.18 per share in adjusted diluted earnings is due to the following items:

Excluding the effects of the CPUC decision discussed above, the dollar water margin increased by $2.6 million, or $0.09 per share, during the fourth quarter of 2008 due primarily to increased water rates approved by the CPUC effective January 1, 2008.

American States Utility Services, Inc. (ASUS), an AWR subsidiary, recorded pretax operating income (before interest expense) of $1.6 million for contracted services during the fourth quarter of 2008, an increase of $3.2 million, or $0.11 per share, as compared to the fourth quarter of 2007 due primarily to an increase in construction activities at the various military bases and a decrease of $677,000 in bad debt expense due to favorable subsequent cash receipts.

A significant decrease in the effective income tax rate due to changes between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements favorably impacted earnings by $0.08 per share during the fourth quarter of 2008 as compared to the same quarter of 2007.

Higher other operating expenses at GSWC during the fourth quarter of 2008, primarily consisting of other operating expenses and administrative and general expenses, contributed to an overall decrease of $0.10 per diluted share to the results of operations.

Total operating revenues increased by $10.2 million to $84.2 million for the fourth quarter of 2008, compared to revenues recorded in the fourth quarter of 2007, an increase of 13.8%. The table below sets forth summaries of operating revenues by segment:

Water revenues for the fourth quarter of 2008 decreased by $172,000 or 0.3%. Contributing to this decrease was the favorable CPUC decision, previously discussed, which authorized retroactive revenues of $5.5 million for the first nine months of 2007 in the fourth quarter of 2007. There was no similar amount in the fourth quarter of 2008. This decrease was largely offset by higher water rates effective January 1, 2008, which added around $3.3 million to water revenues for the fourth quarter of 2008. In addition, GSWC recorded $1.3 million additional revenues in the Water Revenue Adjustment Mechanism (WRAM) account implemented in late November of 2008 as compared to the consumption approved by the CPUC.

Although the recording of the WRAM added $1.3 million of water revenues, this favorable impact to earnings was reduced by the amount of related supply costs tracked in the Modified Cost Balancing Account (MCBA). The MCBA, also implemented in late November 2008, had an over-collection of around $500,000 in the fourth quarter of 2008. As a result, pretax income was favorably impacted by around $800,000, or $0.03 per share, during the fourth quarter of 2008 that would have previously been lost due to conservation. The implementation of the WRAM and MCBA help mitigate fluctuations in the Company’s earnings caused by changes in water sales and supply costs.

Electric revenues from GSWC’s Bear Valley Electric Division decreased by 6.9% to $6.7 million compared to $7.2 million for the three months ended December 31, 2007 due primarily to a 10.5% decrease in electric usage, and lower connection and reconnection fees.

Contracted services revenues are composed of construction revenues and management fees for operating and maintaining the water and/or wastewater systems at certain military bases. Such revenues increased by $10.9 million during the fourth quarter of 2008 primarily due to an increase in construction revenues and related activities at military bases located in Texas and Virginia under existing firm-fixed price contracts with the U.S. government. Additional revenues of $3.2 million were also generated from operating and maintaining the water and wastewater systems under two new contracts for military bases located in North Carolina and South Carolina, both of which began during the first quarter of 2008. Interim price increases at various military bases also resulted in around $372,000 additional revenues in the fourth quarter of 2008.

Total operating expenses for the fourth quarter of 2008, increased by $18.5 million to $76.6 million as compared to the $58.1 million recorded for the same period in 2007. Primarily impacting the comparability of the two periods were: (i) a goodwill impairment charge of $7.7 million related to CCWC, previously discussed; (ii) an increase of $7.6 million in ASUS construction expenses due to higher construction activities at the military bases, and (iii) increases of $2.5 million in administrative and general expenses due to higher labor and employee benefit costs, and additional costs associated with the commencement of operations at the new military bases in North Carolina and South Carolina.

Interest expense remained flat at $5.2 million for the fourth quarter of 2008 as compared to the same period of 2007 primarily reflecting an increase in short-term borrowings offset by lower interest rates. Average bank loan balances outstanding under an AWR credit facility for the fourth quarter of 2008 were around $71 million, as compared to an average of $32 million during the same period of 2007. This was offset by lower short-term interest rates. The average interest rate on short-term borrowings for the fourth quarter of 2008 was 3.0%, as compared to an average of 5.5% during the same period of 2007.

Interest income decreased by $221,000 during the fourth quarter of 2008 due primarily to decreases in the interest earned on short-term cash surplus and the interest accrued on the uncollected balance of the CPUC authorized Aerojet litigation memorandum account caused by lower interest rates.