American States Water Company (AWR) Q1 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call discussing First Quarter 2008 results. If you have not yet received the copy of this morning’s news release announcing earnings for the quarter, please call 909-394-3600, extension 710, and one will be faxed or e-mailed to you. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 3:00 p.m. Pacific Time and run through Thursday, May 15, 2008. The toll-free number for the replay is 800-642-1687, and the conference ID number is 44726541. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer Session. (Operator Instructions). As a reminder this call will be recorded and will be limited to no more than one hour. I would like to turn the call over to Robert Sprowls, Executive Vice President and Chief Financial Officer. Please go ahead. Robert J. Sprowls – Executive Vice President and Chief Financial Officer: Good morning or afternoon, ladies and gentlemen and welcome to the presentation on American States Water Company's first quarter 2008 results. I am Bob Sprowls, Chief Financial Officer of American States, and Floyd Wicks, President and CEO of the company, is also with me today. As usual, following the conclusion of our prepared remarks, the call will be opened up for questions. I would like to remind you that certain matters discussed during this conference call are forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. I ask that you review the forward-looking information disclosure in our Form 10-K and Form 10-Qs on file with the Securities and Exchange Commission. The factors underlying the company’s forward-looking statements are dynamic and subject to change. Therefore, these forward-looking statements speak only as of the date they are given. The company is under no obligation to update them; however, we may choose from time to time to update them and if we do so, we will disseminate the updates to the investing public. During our presentation today, Floyd and I may refer to American States Water Company as AWR; our flagship subsidiary, Golden State Water Company, as GSWC; and American States Utilities Services as ASUS. Having said that, let’s begin with the results for the quarter. Basic and fully diluted earnings for the quarter ended March 31, 2008 were $0.31 and $0.30 per share respectively, as compared to basic and fully diluted earnings of $0.40 per share for the same period ended March 31, 2007. Net income for the first quarter ended March 31, 2008 decreased by 24.1% to $5.3 million compared to $7 million for the same period in 2007. The $0.10 per share decreased in diluted earnings for the first quarter of 2008 as compared to the same period of 2007 is primarily due to the following items. An 8.1% decreased in water consumption during the first quarter of 2008 as compared to the first quarter of 2007 due to changes in weather which cause water revenues be lower by approximately $2.6 million or approximately $0.06 per share. The 2007 first quarter results benefited from lower than average precipitation. Second, without adjusting for the decreased consumption just discussed, the water margin would have increased by $4.4 million or $0.15 per share during the first quarter 2008 due to increased water rates approved by the California Public Utilities Commission CPUC, that were effective January 1, 2008 and a favorable mix change. However, due to the decrease in consumption previously discussed, it resulted in an actual net increase of only $2.7 million in the water margin or $0.09 per share. Third, an increase in subsidiary Golden State Water Company's operating and maintenance expenses of $1 million or $0.03 per share, as compared to the same period of 2007 resulting from higher chemical and water treatment costs, along with an increase in routine and emergency maintenance expenses on wells and other water supply sources. Golden State Water Company recorded a net gain of $367,000 on the sale of property or $0.01 per share during the three months ended March 31, 2007. There was no similar gain in the same period of 2008. AWR's subsidiary, American States Utility Services, recorded a pretax operating loss of $541,000 for contracted services for the first quarter of 2008, declining by $2.7 million or $0.09 per share as compared to the same period of 2007, due primarily to a significant wastewater construction project in 2007 at Fort Bliss. During the first quarter of 2007, ASUS recognized pretax operating income of $2.2 million from this wastewater expansion project. There was no similar special project during the three months ended March 31, 2008. Higher administrative and general expenses also contributed to the decrease in American States Utility Services pretax operating income. The recording of an unrealized gain on purchased power contracts of $2.8 million and $2.7 million for the three months ended March 31, 2008 and 2007, respectively, did not materially impact the comparability of the two quarters. Unrealized gains and losses on our purchased power contracts have been impacting Golden State Water Company's earnings since 2002 when Golden State Water entered into certain purchase power contracts that qualified as derivative instruments under SFAS number 133, accounting for derivative instruments and hedging activities. On a monthly basis, the related asset or liability of the purchase power contracts is adjusted to reflect the fair market value of the derivative at the end of the quarter, based on then forward energy prices and the quantities to be purchased during the remaining term of the contract. Unrealized gains and losses will continue to impact the company's earnings until the contracts expire on December 31, 2008. Golden State Water Company has recognized these contracts at fair market value on its balance sheets, resulting in a cumulative unrealized gain at fair market value of $1.3 million at March 31, 2008. The cumulative gain of $1.3 million, recognized on the balance sheet at March 31, 2008 is expected to be recognized as a reduction to income by the end of the contracts, which again expire on December 31, 2008. Higher other expenses contributed to an overall decrease of $0.06 per share to the results of operations. The $0.06 per share decrease is due to, first, an increase in administrative and general expenses due to higher labor and employee benefit costs, and an increase in costs for outside services. Second, an increase in depreciation and amortization expense reflecting among other things, the effects of closing approximately $55.2 million of additions to utility plant during 2007. And third, a higher effective income tax rate of 44.5% for the first quarter of 2008, compared to 41.8% for the same period of 2007. The increase in the effective income tax rate primarily results from differences between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements. This increase in the effective tax rate for the three months ended March 31, 2008 is principally due to a net increase in compensatory related flow-through adjustments. Before I turn the call over to Floyd, I would now like to take some time to discuss the contracted services business at American States Utility Services. Contracted services operating revenues are composed of construction revenues and management fees for operating and maintaining the water and wastewater systems at military bases, the primary services being conducted by American States Utility Services. Such revenues decreased by $5.0 million during the first quarter of 2008, primarily due to revenues in 2007 related to these significant wastewater expansion project at Fort Bliss, which generated $10.4 million of construction revenues in the first quarter of 2007. The reduction in 2008 construction revenues compared to this 2007 project was partially offset by increased construction revenues at Andrews Air Force base, pursuant to its 50 year fixed price contract and the commencement of operation of the water and wastewater systems at military bases in North Carolina and South Carolina in the first quarter of 2008. For the same reason, pretax operating income for the three months ended March 31, 2008 for contracted services decreased by $2.7 million or $0.09 per share as compared to the first quarter of 2008. You may recall that in December of 2006, American States Utility Services finalized an agreement with the U.S. Government for the construction of certain improvements to the existing wastewater infrastructure located at Fort Bliss, which is in El Paso, Texas. The agreement, totaling $20.6 million, was a firm, fixed price contract. The project generated approximately $4.9 million of pretax income or $0.17 per share in 2007. Out of the $4.9 million pretax income from this project in 2007, $2.2 million of pretax income or $0.08 per share was in the first quarter of 2007. $2.1 million of pretax income or $0.07 per share was in the second quarter of 2007 and the remaining $600,000 or $0.02 per share was generated in the third quarter of 2007. The project was completed in August 2007 and there were no further construction revenues associated with this special project after that. There was no similar project in the first quarter of 2008 and we don't anticipate similar sized projects in the second quarter. We may continue to experience decreases in American States Utility Services 2008 earnings as a comparison to its 2007 earnings because of this project. The point here is that earnings and cash flows from these military special projects are intermittent and may or may not continue in future periods. I will now turn the call over to Floyd. Floyd Wicks – President and Chief Executive Officer: Thank you, Bob and good morning, ladies and gentlemen. I'll now discuss the status of key regulatory filings and important actions and those still pending. As Bob mentioned earlier, in January of this year, the PUC approved rate increases for the seven rate making areas in the region one customer service area of Golden State Water Company. The authorized rate increases will provide GSWC additional annual revenues of approximately $6.4 million in 2008, based on an authorized return on equity of 10.2%. In January of this year also, the PUC approved rate increases for regions two and three customer service areas, effective in January -- January 1. The authorized rate increases will provide Golden State Water Company additional annual revenues of approximately $3.6 million for region two, representing the second year of the three-year rate case, approved by the PUC last year. The increase of approximately $3 million for region three is the third year of a three-year rate increase approved in 2006. The combined rate increases for regions one, two and three are designed to generate approximately $13 million additional annual revenues effective January 1, 2008, based upon normalized sales levels approved by the PUC. According to the PUC's new water rate case plan adopted in May of last year, Golden State Water Company will migrate to a rate case schedule that brings all three regions of Golden State Water Company within a single rate case. GSWC will file its general rate case for region two and three and the corporate headquarters in July of this year, using the most recently adopted rate of return on equity of 10.2%. New rates, if approved as scheduled, will be effective January 1 of 2010. Because the region one rate case was just approved in January of this year, the rate case plan calls for a separate region one general rate case filing in 2010. That case will only have a two-year cycle for 2011 and 2012. Region one will then be combined into our next general rate case cycle and all three regions will be reviewed in a single rate case filed in July of 2011 for a three-year rate case cycle starting in 2013. I think it's to recognize that these rate cases are forward-looking in nature, which we believe is a very good benefit for our investors. Also under the new rate case plan, three of the large water utilities, Golden State Water Company, California Water Service Company, and California American Water Company, were required to each file a separate application on May 1 of this year to review the rate of return. Golden State Water Company filed its first cost of capital application under the new rate case plan on May 1 of 2008. The application request commission adopt the return on equity of 12.1% for calendar years 2009, 10, and 11. According to the rate case plan, the commission intends to process the cost of capital proceeding in six months, at which time the rate of return authorized by the commission will be implemented into rates on a company-wide basis. We anticipate having revenue adjustments in all water service regions for 2009 based on a difference between the then approved rate of return in this cost of capital proceeding, and the currently adopted returns. In February of 2007, the PUC opened an order instituting investigation, OII, to consider policies to achieve conservation objectives, known as the Conservation OII. Golden State Water Company is in Phase II of this proceeding in which the PUC will primarily consider the following: Number one, a revenue adjustment mechanism to de couple sales from revenues; number two, a tiered rate design as a means to encourage water conservation; number three, a modified supply cost balancing account; and number four, whether the adoption of a revenue adjustment mechanism should affect the authorized return on equity. Additionally, Golden State Water Company's Bear Valley Electric service division is also in the process of preparing its general rate case with the PUC's electric division. The filing is expected to be made in the second quarter of 2008. Costs incurred in connection with the construction of the recently built 8-megawatt generating facility are also expected to be reviewed by the PUC as part of this rate case filing. Regarding the weather, as Bob discussed earlier, it has played a significant role in the first quarter of 2008. Due to drier than normal weather conditions in the first quarter of last year, water consumption is down by 8.1% for the first quarter of '08 compared to the first quarter of '07, negatively impacting earnings by approximately $0.06 per share. Water supply and revenues are significantly affected both in the short run and long run by changes in weather conditions. The California Department of Water Resources, in its April 1, 2008 bulletin reports states that California precipitation for the water year so far has been 90% of normal. Snow water content is 100% of normal. Reservoirs are 85% of average and the spring runoff from April to July is expected to be about 80% of normal, the report also states that the Colorado River Basin has had 90% of normal precipitation as compared to 10% at this time last year. Lakes Powell, Meed, Mohave and Havasu have a combined storage of 25.9 million acre feed of water or 65% of average. Snow pack above Lake Powell is at a 125% of normal. In the April to July runoff is forecasted to be 130% of normal. However March 2008, was dry with only 20% of the average precipitation level in California. The national weather service also states its concern toward moderate drought conditions for the next months in Southern Nevada, Southern California and Southwest California and Southwest Arizona. We speculate that water demand for the second quarter will be increasing. Because capital investment creates the basis for long-term earnings growth and is a key facet of increasing shareholder value, I would like to briefly discuss the company's program. Construction expenditures were approximately $17 million for capital work performed during the three months ended March 31 of '08. We believe we are on target for our projected construction expenditures of $55 million to $60 million for 2008. As reported in our recent news release, the board of directors of American States Water Company approved a quarterly dividend of $0.25 per share. This action represents the 288th consecutive dividend payment by the company. For more than 53 consecutive years, American States Water Company shareholders have received an aggregate annual increase in dividends. The 6.4% dividend increase last fall was significant, in that the company reached a long-term objective of achieving a 60% payout ratio. American States shareholders should know that using the SEC guidelines for reporting financial performance, a $10,000 investment in the shares of American States Water Company at December 31 of '02 would be worth $18,287 at March 31 of '08. This amounts to an annual compound growth in value of 12.2%. Thank you for your attention and your support and remember that number one, our total return prospects are reflected in our financials, our growth opportunities are coming to fruition, and number three, our management team is focused on the sustainability of the 100% renewable resource provided to our customers, that is, water. Three outstanding reasons we ask for your support in spreading the word to your clients as to why American States Water Company belongs in their investment portfolio. Thank you again, I'll now return the conference over to the operator to entertain any questions you may have and please recall you will need to press one followed by the four on your telephone key pad.

(Operator Instructions). And our first question will come from the line of Debra Coy with Janney Montgomery Scott.

Thank you. Good afternoon, Bob and Floyd or good morning your time.

Hi Debra. Yes how are you?

I am good.

Good.

Coming back to look at the rate cases, a lot of moving parts there. You've got your 2008 pieces in place and with the combined filing pending, how should we -- leaving aside the potential increase in the ROE, how should we think about revenue adjustments on a combined basis for 2009? You mentioned 13 million for full year '08, but can you just remind us where we are in the multiple year kind of rolling process of how that should stack up for '09?

Sure it’s a great question because it is a moving target. As you know, our…

Yeah.

Our own company rate case plan was to file one region in – at one region a year which was essentially….

Per year right?

Now they're combined all three regions in one year is going to transition over time. Regions -- take them one at a time. The region one rate case, which concluded with its first increase being this year, will have another increase in '09 and a subsequent final year increase in 2010.

Right.

I don't have the numbers handy but Bob's looking to…

I think they are in the 10-K. So those will stay as they are with whatever adjustment related to the ROE adjustment.

That’s correct. The other -- region two, which concluded late Inc 2007…

Right.

Was really for calendar years '07, '08and '09..

Right.

So the year – the increase that we announced as part of today's call for January of '08 was actually the second year of that three-year cycle. So there is a planned increase for '09 as well for region two. Region three, which essentially we're…

From the third year?

In the third year, we had the third year increase in January of this year, there is some discussion currently between the company and the commission about a fourth year increase, although I can't say it's a guarantee at this point. But we're hopeful that the commission will allow a fourth year in the 2006 rate case. It will have to be noticed to be but there's not much else I can say about that right now because we don't have any of the details yet.

Okay. Well that helps me because that’s what I was trying to understand because it looked to me like you were missing a year.

Right.

The new rate scheduled in January 2010.

Yes that’s correct. So the worst case would be that region three would skip a year, namely 2009. But we're hoping to have at least some sort of an attrition number applied to the entire investment we have in region three.

Okay. And then on the regulatory front, my only other question is what's your current thought on timing for you of the ram and all the related pieces? By January of '09, is that what you're kind of planning on for implementation in your company?

Yes, we're hoping sooner than that, probably either the second quarter or third quarter of this year.

Okay.

And some companies have already been authorized rams in place. I don't know exactly how many, but we're hoping that we're not too far behind that.

And then you would go ahead and implement it mid-year?

That’s correct

Okay. And then moving across to ASUS, Bob outlined very clearly what the impact of the Fort Bliss contract was. I guess we would have understood that better if we would have had that level of detail last year. But leaving that out and any other potential construction contracts, can you give us an update of how we are doing on the ramp-up for the new contracts and I also know you have number of price adjustments pending. How are things looking in that business? I have kind of been expecting we would see some improvement on operating margins in that business around the middle of this year, based on price adjustments. Can you give us an update?

I will ask Bob to jump in as well. But I believe we did walk through the special project I thought in sufficient detail last year, but…

Well, I just had never heard the cents per share before, that was very helpful to hear it laid out that way.

Yes we put out pre-tax operating income effect.

That’s true, okay good point Debra. I think we will – we are of course learning more as we go in terms of what's the best way we can provide the actual hands-on information to the investing public, and we started identifying ASUS separately, which I think has helped.

It has helped.

We are hopeful that with the two new bases added this year, namely Fort Bragg and Fort Jackson in North and South Carolina respectively, that those will start kicking in in terms of adding value over time. By the way, Fort Bragg is, I believe, the largest military installation in this country and it has a population of close to 100,000 people there, so it's really a medium sized city and we're hoping that that, with regard to their infrastructure needs there, we're going to be seeing more capital work throughout not just that base, but we're hoping others as well. We just can't forecast it yet. I don't know if that helps or not, but….

It does to a certain extent. I mean, I've been looking at that business certainly as having a lot of potential, and other than the Fort Bliss contract, the truth is it's been a money losing operation.

That’s true.

So what I'm trying to understand is, when we get to a more profitable perating income position, excluding these one-off construction contracts.

Well, I think those are all fair questions and I'll take Fort Bliss, for example. The military dragged its feet quite a bit on implementing the privatization contracts themselves and I'll focus on Fort Bliss, because that was our first one and we were working with numbers provided to the government, the initial bid was placed, I believe, in 2002.

Right.

So the numbers were fairly old by the time the bid was awarded. Realizing we have the right to submit price -- for price re-determinations, which has been done and we're -- this is basically like a rate case the way I've kind of identified it, but it's working with really old numbers and that's one of the reasons why, as you mentioned, we're not doing well financially there on the operations side. So hopefully getting through the first round of price redeterminations will help us get back on track from an earnings point of view in that company. Bob, would you like to add more?

Yeah, the redeterminations at the east coast bases have all been filed. We expect to get a resolution to those in 2008 and that will help us. Fort Bliss is a little more complicated because it's a different group that we're dealing with, but the plan there is to complete the filing and just having never been through this, we're not sure whether we'll get the response to the redetermination in 2008 or whether it will be in 2009.

Okay.

Debra, I may have misspoke. I think we're ready – almost ready to file the one at Fort Bliss. The others have been filed.

Okay. That is what I was looking for, was some sense of timing and it sounds like it's still a little unclear.

Yeah, and the other thing, I'm looking for any ray of sunshine as we can. There is indication by our people in charge of that company that the government is looking at having more of a central processing of these price redeterminations instead of having each base deal with it. They'll have more of a focused group, because what we found is some of the folks at the various military bases where we get to know them, then they're gone to some other part of the military, so it's like a revolving door. So we're -- like I said earlier, we're learning the process. We're very -- still very excited about the process with increase of its very good piece of our business and we'll hope to bring better numbers as time goes on here.

Okay. Alright, I'll get back in line. Thanks.

Thank you.

(Operator instruction). Our next question is from the line of Francesca McCann with Stanford Financial.

Hi, there.

Hello Francesca.

I am doing will thing. Well, a lot of questions just summed up there, so thank you, Debra. Another kind of follow-up, on the growth side, looking at potential acquisitions, perhaps moving more out of state, if you could just give us some idea of what you're seeing on the landscape there and what you might be looking into or just areas of potential expansion.

Well, we always are looking at a number of systems, almost constantly, and we have, without giving any information away really, we probably have in California close to a half a dozen small systems, nothing what I would call significant in size but they fit closely with our objective of looking at tuck-in acquisitions. We have one we're looking at as well in Arizona. And beyond that, there isn't a whole lot I can really say at this point. But certainly on our plan to get out there and find – be an acquirer.

Okay. Thank you. And then just other thing if you could remind us of the original ROEs for regions two and three?

I'm going to ask Bob to give me a hand.

Region three was 9.8. Region two 10.1.

Perfect. Thank you. I think that's all. Thank you.

Thank you.

(:

Floyd, a business that we don't talk very much about on these calls, but just to go back and look at the electric business, obviously we're about to wrap up the power hedging contract that has yanked earnings around. But, when I back that out, I'm looking at a business that has substantially lower operating margins than your water business. I don't know about returns, because I can't see those separately. But, I wonder if you could just give us a sense of how you're thinking about that business strategically. You did mention that you're filing a case with a new asset that's been brought into service, but I'm not really seeing the benefit of that business in terms of how I can look at it from where I sit and I'm wondering how you're thinking about it strategically. You know, why is American States still in the electric business?

Fair question. We've had -- we've owned that property up there since about 1935 and many times we haven't emphasized it enough I think in the earlier years, when the company was probably the number one money maker in the -- under Golden State Water Company. It was when it was called Southern California Water Company, you may recall.

I recall.

And what really upset the apple cart was, frankly, very poor regulation in California in the early part of this decade and which you I'm sure recall had PG&E in bankruptcy and Edison close to it. And the electric business in our company affected the entire company dramatically. You could make a filing at the time with regard to rate cases, but you -- it essentially was handcuffing us from really getting the job done from a regulatory point of view until the new regulators came on board here a couple of years ago. The PUC did in fact allow us to file, I'd say partial rate cases, but our last filed rate case, what we refer to as a general rate case, was in 1996. So that's one reason our numbers are fairly old. We believe now that the regulation is -- has improved to the point where we can sit down and get some logical filing done and out the door in a reasonable period of time with some fair rates of return, and that's exactly was we're doing. We're hoping as well that a new -- the new purchased power contracts we're going to enter into before year end will be preapproved by the commission. That's our hope. We're filing in that regard, to get a green light on acceptance of the new purchase power contracts. We're bound by the old one, the old PUC essentially during the bad regulation period, let's say, limited the company as to what it could charge the customer for purchased power.

Right.

And I think what really started the whole mess was that we had built into rates when the energy crisis hit, we had $2.50 per kilowatt hour built into the tariff that the customers were paying for that, the power we were buying. While we were buying from the spot market, power at $9.50 per kilowatt hour, actually higher than that. The $9.50 was the first contract we were able to find and at the time $9.50 was a real bargain. So we were paying the power companies that were providing the power $9.50, but only collecting 2.50 and as you know, you can't make that up on volume. So we really had a very serious cash crunch in the company. We're beyond that now. We're collecting that past amount of money we paid to the power companies, is in the balancing account and we're currently collecting it from the customers. It's about the worst example of regulation I've seen in a long time, but it's very promising, what's there now. The regulators understood or understand what did take place and they're -- they've made very remarkable corrections to the regulation and we're hopeful this rate case that we're filing is going to bring us right back where we were with Bear Valley Electric for nearly six decades in being a good money maker.

So with the filing you said coming in the second quarter, we would assume that we'd get a decision on that sometime early-ish or second of '09 is that right?

No, the expectation is that this will be a shorter term rate case, it would be a 1/1 2009 effective date. We can't guarantee that.

Right, but that's the plan.

That's the plan.

And Then, Bob, can you tell me or give me at least a general sense of kind of what is the rate base in Bear Valley and what you're earning on it now?

We have never really put out rate base specific numbers for any of our entities.

We keep trying because it's the only way to really understand what you're earning on your assets.

Right.

Can you tell me what you are earning on it?

We haven't really –

5%, 4%, 3%...

Yeah, we haven't really published that number.

I think the rate case, when we filed the case coming up, Deborah, will be a public document.

Yes.

And it will be filed this month. So we'll get those numbers put out there because once it's public, we'll be able to at least give that information out.

Okay. Because what I'm getting at, as you can tell, is that there's clearly some -- if you can get that improved, there's clearly some upside potential and I was just trying to quantify what's the amount of under earning and what's the upside if you get that back to where it should be.

I see. That's all good questions and very fair and we'll follow up certainly by our next call.

Okay, thanks very much.

Thank you.

(Operator instruction). Your next question comes from the line of Tim Winter with Smith Moore.

Hello, Floyd and Bob.

Hi, Tim, how are you doing?

Good. I know you guys said you're expecting a decision on the items from California Water action plan come the second or third quarter. Is there a process that we're waiting for, or procedural schedule, or are you just simply waiting for them to return a decision? And then once they do, what's the process for actually implementing these items?

Well, I can give you kind of a bird's eye view with regard to the part of the conservation rate design, where there's a tiered rate that the commission is wanting utilities to implement. We have reached agreement with the PUC staff on the rate itself and so basically, what we're waiting for in that regard is a proposed decision by the administrative law judge. There are other elements of the OII that I'd have to get -- I don't know all the details of that. Bob, maybe is there something we have in the K on that?

Well, my understanding is there not going to be a proposed decision on that. There will just be a decision when a commission is ready to put it out.

Okay. On the tiered rate design?

Okay.

Also my understanding that the -- any ROE adjustment associated with the request will be as part of that decision.

.:

Right.

I'm just trying to figure out why some of the companies have a timing advantage to some of the other companies when it's basically already -- all these items have basically been approved.

Well, yes, Tim, the only thing that is probably holding things up here is the ROE question. That -- for some of the companies that are considered Phase I A companies, the commission hasn't dealt with the ROE issue for them and it's my understanding that that will be taken up when the commission makes a decision on Phase I B.

And there is a potential, at least what I would think would be a more fair way of dealing with it, is to bring it into the return on equity filing that we just made May 1st. So it's taken into account with other risk factors as opposed to only being considered as one item in a whole laundry list of risks. So, that's my understanding. There could be a good possibility that that could be -- that phase of it could be brought into this return on equity filing we just made. By the way, that filing, the energy companies have been processing their filings like this for years, where the commission doesn't – they determine the return on equity for gas and electric companies totally separate from general rate cases. So they're looking at doing this now for the water utilities as well and I think it's a good step forward.

Right. Well, sounds like it's going to get easier, from the consolidated filings, but –

Right.

Also, can you provide a little more color on these rate redeterminations at the military bases? I mean, are you going to be resetting contract prices at several of these bases?

Yes.

And are the actual bases losing money, or is it the fixed cost back at the ASUS level that's causing the negative earnings?

Well, I'd say yes to both of those questions and in terms of -- there are a lot of oh, I'd say moving parts again here because the price re-determinations will indeed look at every element of our bid and will be -- the numbers, we'll be the ones to file for what we believe are the new numbers and then go through a series of discussions with the local bases, but there's also one other factor that enters in, and it's various bases where the inventory, I'll use Fort Bliss again, the inventory at the base upon which we placed our bid was significantly underestimated. In other words, there was -- there were many more assets in place, water and wastewater assets, and there's another part of their price redetermination feature called an equitable adjustment. If we believe, for example, that the inventory in place is significantly different from that which we bid, we can make what's known as an equitable adjustment request, and we have done that as well or we will do in the case of Fort Bliss. I believe two or three other bases as well, Bob.

That’s right. And the way the redetermination process works is two years after commencement of the contract, you have a chance to get a rate increase and then every three years thereafter and as we said, the east coast bases that we've had for a few years, we've already done our filing there and the expectation is we'll have a result to that in '08. And then Fort Bliss is more complicated and as Floyd mentioned we are planing on filing soon in that.

And I think the other thing to keep in mind, Tim and others still on the call, that these bases, these are long-term contracts. These are 50 year contracts. We believe the government wants us there and we want to be there and we believe the early years are obviously difficult because we're still trying to figure out government contracts. I mean, we think we have them figured out but they're not easy. So we're in it, though, because we believe we know how to run water and wastewater systems. It's what we do. And we think it's a good place for our people to spend their time and our shareholders hopefully will be rewarded in a relatively short period of time.

At this time, there are no further questions. I would now like to turn the conference back over to management for closing remarks.

Okay. Well, I would really just like to take this period to thank you all for your participation today. And please listen next time, we'll have more to say about the military operations and other questions we weren't able to answer very well on this call, but thank you for your continued interest and your investment in American States Water Company.

This concludes today's American States Water conference call. If you would like to listen to the replay of this call, it will begin this afternoon in approximately 3.00 p.m. Pacific Time and run through Thursday, May 15, 2008. The toll-free number for the replay is 800-642-1687 and the conference ID number is 44726541. Thank you for your participation, you may now disconnect.