American States Water Company (AWR) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company, AWR Conference Call, discussing the company's third quarter 2015 results. This call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 5 p.m. Eastern Time and run through November 11, 2015, on the company's website, www.aswater.com. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] This call will be limited to an hour. As a reminder, certain matters discussed during this conference call may be forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. Please review a description of the company's risks and uncertainties in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission. At this time, I would like to turn the call over to Eva Tang, Chief Financial Officer of American States Water Company.

Thank you, Allison. Welcome, everyone and thank you for joining us today. On the call with me is our President and CEO, Bob Sprowls. For the third quarter of 2015, diluted earnings were $0.56 per share, compared to $0.54 per share for the same period in 2014. Earnings at our Water segment increased by $0.03 per share. Earnings at our Electric and Contracted Services segments were flat. Earnings at the parent company decreased by $0.01 per share for the quarter. For the quarter, Water revenue increased by $573,000 to $97.3 million as compared to the same period in 2014. The increase is primarily due to third-year rate increases, and the interest generated from revenue recovery and capital projects approved by the California Public Utilities Commission or the CPUC through advice letter filings. Billed consumption decreased 24% during the quarter as compared to the third quarter last year, as we continue to work with our customers to meet the state-mandated conservation targets. This decrease in consumption has not had a significant impact on the company's water gross margin due to CPUC authorized the water revenue adjustment mechanism or the WRAM. The WRAM mechanism is in place for all of our water service areas. Excluding the effect of surcharges, which has no impact to pre-tax earnings, our Water gross margin approximates the authorized Water margin approved by the CPUC. Bob will discuss the company's effort in dealing with the drought situation in California later in the call. It is however important to remember that we have -- we can recognize the under-collected revenue only if Golden State Water collects its rent balances within 24 months following the year in which they are recorded as required by the accounting guidance for such revenue recognition. Due to the lower level of water usage experienced this year in response to the state’s mandate, conserve water, Golden State Water has recorded a $36 million WRAM under collection for the nine months ended September 30, 2015. We estimate that this balance will be collected in 24 months during the end -- following the end of 2015 and therefore has included this $36 million as part of our revenue through September 30. However, if we continue to experience decline by the usage, the 2015 WRAM under collection will continue to increase through the end of this year. A large WRAM balance may result in amortization periods greater than 24 months under the current CPUC amortization guidelines. This could affect the timing of when we record our fourth quarter WRAM revenue for certain making areas, resulting in the deferral of -- pushing of fourth quarter revenues to future periods. Again, this is pursuant to the accounting guidance for revenue recognition in this area. There is now recoverability issue with the CPUC. But rather, a timing issue of which this revenue can be recorded under the accounting rules. Another key point to note here is that forecasted consumptions used to set rates for 2016 through 2018 independent rate case reflects state-mandated consumption levels. Therefore, we do not expect the WRAM balances to continue growing beyond 2015 at the same rate as in 2015. Moving onto our other segments revenues, for the third quarter of 2015, revenue from Electric operations were 7.9 million as compared to 8.6 million for the same period last year. The decrease is primarily due to a change in the monthly allocation of the annual base revenue requirement as stipulated in the CPUC's November 2014 final decision on our electric general rate case. Differences in the monthly allocation of the annual adopted revenue for 2015 versus 2014 are expected to reverse by the end of this year. Revenues for our Contracted Services business, American States Utility Services or ASUS, decreased $5.3 million to $27.8 million for the third quarter of 2015. This decrease was due largely to completion of several large capital projects during 2014, which did not recur in 2015. The decrease was partially offset by increasing O&M management fees due to successful resolution of various price re-determination received during the quarter. These price re-determinations resulted in higher monthly O&M management fees, which increased earning by $0.01 per share for this quarter. The favorable resolution also included retroactive O&M management fees of $3.5 million recorded during the quarter. In the third quarter last year, ASUS also received $2.4 million of retroactive revenue in connection with price re-determination. So, in comparison, retroactive O&M revenue received this quarter increased earning by $0.02 per share. Our water and electric supply costs were $31.4 million for the third quarter of 2015. Any changes in supply costs for both the water and electric segments as compared to the adopted supply costs are tracked in balancing accounts, which will be recovered from or refunded to our customers in the future. Other operating expenses increased by $98,000 for the third quarter of 2015, primarily due to an increase at the contracted services business, as a result of a higher percentage of labor attributable to operation related activities, partially offset by lower expenditures at the water segment. The decrease at Water segment was due to lower water treatment costs driven by lower consumption, partially offset by increase in drought related costs such as printing and postage incurred for customer notifications related to drought awareness. We have been authorized by the CPUC to track incremental drought related costs incurred in a memorandum account for possible future recovery. Such incremental drought related costs are being expensed until recovery is approved by the CPUC. Administrative and general expenses for the third quarter decreased at the water segment due to lower legal and other outside services costs for condemnation and other activities as compared to the same period last year. However, we expect to incur additional legal costs in the future to defend two of our water systems from condemnation actions. A&G expenses for Contracted Services increased primarily due to increase in labor and other indirect costs for A&G related activity in support of various functions for all military bases. This increase was largely offset by a decrease in such costs included in construction expenses as compared to the third quarter of last year. Construction expenses at ASUS decreased by $5.6 million to $14.9 million during the quarter as compared to the same period in 2014 due primarily to decrease in construction activities, as well as a shift in labor and other indirect costs incurred as A&G activities, while in the same period of 2014, a higher percentage was incurred for construction related activities. Income tax expenses increased by $918,000 to $14.4 million as compared to the same period last year, driven by an increase in pre-tax income as well as overall higher effective income tax rate, due primarily to differences between book and taxable income that are treated as a flow-through adjustments according to regulatory requirements. Moving on to liquidity and capital resources, net cash provided by operating activity decreased by $34 million to $86.1 million for the nine months ended September 30, 2015 as compared to $120.1 million for the same period last year. The decrease was primarily due to a decrease in customer water usage, resulting from conservation efforts, which lowered the customer billings at the Golden State Water and increased the WRAM regulatory assets. There was also a decrease in cash generated by Contracted Services due to the timing of billing and cash receipts for construction work at military bases during the nine months ended September 30, 2015. During last year’s nine months ended September 30, 2014, cash payments were received for the completion of several large capital upgrade projects that did not recur during the same period in 2015. In regards to Golden State Water's capital expenditures, we spent $57.6 million in company funded capital expenditures during the nine months ended September 30, 2015. We expect to invest approximately $85 million to $90 million in capital projects during 2015. For additional details on our third quarter and year to date performance, please refer to our earnings release and Form 10-Q issued yesterday. With that, I will turn the call over to Bob.

Thank you, Eva. Good afternoon, everyone. I appreciate everyone joining us today. The company has made good progress on a number of fronts since our last earnings conference call. During the third quarter we continue to execute on our California ground action plan and align with the state’s emergency regulations. Also last month we completed an asset purchase agreement and acquired all of the operating assets of Rural Water Company. In addition, we saw the successful resolution of outstanding price redeterminations at our contracted services segment. I would like to begin by discussing water conservation in light of the ongoing drought situation in California. As a result of the Governor’s executive order expiring in February 2016, we continue to work with our customers to meet the state-mandated water conservation target, which called for reductions in water usage by 25% as compared to 2013 levels. During the third quarter, billed water consumption decreased by 24% as compared to the same period in 2014 due to our customers‘ conservation efforts. All of our water service areas are currently is the stage one of our stage mandatory water conservation rationing plan, which outlines restrictions for outdoor irrigation for Golden State Water customers without imposing penalties. Through October, nearly all of Golden State Water service areas have met their cumulative targets. We intend to implement stage two or higher stages of the staged mandatory conservation and rationing plan in those areas, which have not met their cumulative target. Stages two and higher include penalties for customers that use water in excess of their allotment. In connection with conversation, the commission has authorized us track incremental costs incurred in promoting conservation and implementing restriction measures in drought memorandum accounts for possible future recovery. As for Golden State Water pending general rate case for all of our water regions and the general office, we are waiting for proposed decision from the commission. He rate case will determine rates for the years 2016, 2017, and 2018. As I mentioned in our previous calls, Golden State Water’s requested capital budgets in the application average approximately $90 million a year for the three-year period. For 2016, water gross margin is expected to decrease as compared to the currently adopted levels due in part to a decrease in annual depreciation expense resulting from an updated depreciation study and other expenses. Hearings for the rate case were completed in June of this year and settlements for certain items and legal briefs were filed in July. As Eva mentioned earlier, the consumption level is used to calculate rates for 2016 through 2018. And incorporated into the settlement with the PUC's Office of Ratepayer Advocates in the pending rate case reflect the state-mandated conservation targets for each rate making area. In the settlement, Golden State Water NRA also agreed to a process that would allow adjustments to rates if consumption levels deviate from adopted levels over a certain percentage for 2017 and 2018. Any variances between actual sales volumes and adopted sales volumes of greater than 10% will result in an adjustment to the following years adopted sales volumes by one half of that variance. By having this process in place, adopted sales for the next rate cycle will better reflect actual water usage patterns and should result in smaller WRAM balances. Of course, the CPUC has to first approve the settlement agreement in the current general rate case. On October 14, 2015, we completed the acquisition of all of the operating assets of Rural Water Company for a purchase price of $1.7 million. As a result, Golden State Water now serves approximately 960 new customers near the City of Arroyo Grande in the county of San Luis Obispo, California, which is near our Santa Maria customer service area in postal California. Let me now discuss our contracted services segment. During the third quarter, the US government approved price redeterminations related to the operations at Andrews Air Force base in Maryland, Fort Jackson and South Carolina and the military base ASUS serves in Virginia. These price redeterminations included retroactive operation and maintenance management fees for prior periods. Accordingly, ASUS recorded approximately $3.5 million of retroactive revenues and pre-tax operating income in connection with these contract modifications during the three months ended September 30, 2015, of which $3 million is for the periods prior to 2015. As a result of a successful resolutions of these price redeterminations, pricings on all of our 50-year contracts with the US government is now current. In coordination with the US government, all of 50 year contracts will be transitioning to an annual economic price adjustment model or by operation and maintenance management fees, and renewable and replacement funds will be adjusted annually for inflation as well as for changes in the amount of infrastructure served. By shifting from price redetermination filings every three years to a yearly economic price adjustment model, our contracts will be updated on a timely basis. Filings for price redeterminations and economic price adjustments and requests for equitable adjustment provide our contracted services segment with additional revenues and margins. We also continue to work closely with the US government for contract modifications relating to potential capital upgrade work as deemed necessary for improvement of the water and wastewater infrastructure at the military bases. During the third quarter of this year, the US government awarded us approximately $50 million in new construction projects. The majority of which are expected to be completed during the next 12 months. This compares favorably to the $27 million that we received during the third quarter of last year. In addition, we are actively engaged in pursuing new basis and expect the US government to release additional basis for bidding over the next several years. We remain optimistic about the future of our contracted services business. I'd like to turn our attention to dividends. On October 27, 2015, American States’ Board of Directors approved a fourth quarter dividend of $0.224 per share on the common shares of the company. Dividends on the common shares will be payable on December 1, 2015 to shareholders of record at the close of business on November 16, 2015. American States Water Company has paid dividends every year since 1931, increasing the dividend received by shareholders each calendar year since 1954. Given our current payout ratio compared to the companies that we compete with for capital as well as our high shareholder’s equity as a percentage of total capitalization, there is room to grow the dividend in the future. Additionally, pursuant to the 1.2 million share stock repurchase program approved by our Board in May of this year, we have repurchased approximately 962,000 common shares on the open market through September 30. Before I close with my prepared remarks. I'd like to thank you for your interest in American States Water and I will now turn the call over to the operator for questions.

[Operator Instructions] And our first question will come from Richard Verdi of Ladenburg Thalmann. Please go ahead.

Hi Bob, and Eva, and good afternoon. Actually, I guess good morning out there or good afternoon here. The tail end of your prepared remarks actually dovetail perfectly into what I was wondering. Can you just talk a little bit about the dividend policy and what we should be thinking for next year or maybe then?

Sure, I’d be happy to and hello Richard. Our dividend policy, the driver there is trying to maintain an increase in our dividend of 5% on an annual basis, sort of on a long-term annual basis. So that's really the driver. We do look at payout ratios from time to time and see make sure that we’re -- where we need to be, but it's really trying to grow the dividend at 5% or more each year.

When you're thinking about increasing the dividend and you're looking at buyback program. What is the strategy or the plan between those two and how you determine. Do we increase the dividend or we buyback more shares, what's the balancing act there I guess?

Sure, Richard. Really the impetus behind the buyback program was our shareholder’s equity ratio had gotten to too higher level. We take a look at what sort of a reasonable equity ratio for Golden State Water is, we look at what a reasonable equity ratio [Technical Difficulty] but then based upon their relative sizes, we look at what should the consolidated entities equity ratio be. So really the driver behind the buyback program is to try to bring that equity ratio back down closer to where it needed to be. It was north of 60% at one point in time. As you know in the last rate case, Golden State Water received 55% equity ratio and though ASUS is in a somewhat more competitive business then Golden State Water, if not that much more competitive, so we tend to focus on 60% equity ratio for ASUS. And so when you then wait those, you’re looking at something maybe in the 56%, 57%, 58% range. That was one primary motivator behind the buyback program. The other motivator was we had some substantial cash that the Company has generated over time. Some of that had to do with the fact that we sold our Arizona operation back in 2011 and really didn’t do anything with the extra cash or the extra equity at that particular business. Additionally, we have had extra cash because of bonus depreciation and the repair allowance regulations from a tax payment standpoint. So we had quite a bit of cash, we had the higher equity ratio and that sort of the drive the buyback program. I think dividend is sort of a different animal there. That’s really more – what’s the sustainable earnings of the company, what’s sort of sustainable dividend and earnings going forward support. So that’s really the philosophy we have, but probably more than you wanted to know.

No, that’s – it’s very helpful. Thank you, Bob, it’s great color. And you know – and what you just said there, you had mentioned the equity ratio, where things are now, do you feel comfortable with the equity ratio or do you feel that there is the possibility to implement another buyback program when this current one comes to its close?

Yeah, so we are – as you know, we’ve got some shares still to buy back as part of the second program. We’ll take another look at. Right now, though our cash is not in the same situation it was a year or two ago because of the buyback programs, we spent close to $70 [ph] million, Eva, so we do understand the buyback programs are liked by investors, they tend to be accretive to earnings and but right now, we have no plans for a third buyback program.

Okay. And just last one for me and I’ll jump out. You know, on the ASUS front, and listen, I know for competitive reasons you can only share so much and I don’t blame you. But could you please maybe just give us some sort of color surrounding the progress, how the company is making out on that front and in terms of signing new contracts, what are the opportunity pipeline is right now, just some sort of color would be excellent.

Sure, we have gone through the government records and as to what army and air force basis are they plan to put out in the next five to 10 years, in terms of good water and waste water. We think there is probably, I want to say 30 to 50 bases still to be privatized during that time period. The companies we believe we’ve been very aggressive at bidding on bases and though we haven’t reported any new basis that we have won recently, we are very focused on winning additional bases and feel like we have a really good reputation with the government in terms of the bases we do have. So there is reason I think to be optimistic about us getting our fair share of new bases as these sort of roll out.

Okay, great. And you know, well, just one more Bob. When we are at NAWC a few weeks ago, that Monday, American States announced that they were doing a price redetermination on one of the bases and I am wondering is there anything else in that pipeline where maybe we could see something like that materialize over the next 12 to 24 months or just any sort of color there would be really helpful as well.

Yeah, sure I’d be happy to amplify that. Well, we put out a press release on that before market that Monday just informing the market for a success of these price redeterminations that we had at the Virginia bases and at Fort Jackson in South Carolina. Previously we had one base – redetermination at Andrews Air Force Base in Maryland. We have been real successful in not only getting through the price redeterminations, but also being able to report the retroactive revenues because of the process has been delayed, but the government has true in their word allowed us to get paid for the period that when the redetermination should have started. Right now, we are completely up to date on the redetermination front for the first time in the company’s history. We are proud of that. It’s a for a good news and bad news, the good news is we are up to date, the bad news is we don’t have any pending retroactive revenues that we can pull forward going forward. I did mention that there is a sort of a new plan going forward where we’ve now got an economic price adjustment approach at one set of bases as part of the redetermination process. So in lieu of having sort of these three-year price redetermination processes, we instead will get sort of this inflation adjustment every year on our O&M management fees and on our renewal and replacement fees. And we are in the process of converting each of our current contracts to that EPA type model going forward, which should give us more timely recognition of the need to sort of increase prices to cover operating costs.

Hey, Richard, given that process, even though it’s an inflationary adjustment, we also are able to submit our changes in the asset we manage. As that we are putting more and more capital each year, we will manage more assets down these bases. So doing those annual process would also can true-up the management fee for additional assets that we managed.

One other comment too that was part of that press release, we did sort of mention that we had received $50 million of additional capital work outside of the renewal and replacement, so these are sort of new capital upgrade projects at the bases we serve, and 50 compares to 27 last year and we have been pretty aggressive in working through and identifying what needs to be done at each of the bases and then putting our request in with the US government. And I applaud our folks for doing that and really getting the details put together well in advance of the – the end of the fiscal year for the US government because it is a process and you want to be sure that you’ve got your asking well in advance of when they have got to make decisions because it is – the government is a big group and you’ve got a lot of paperwork to work through, but we should appreciate them as our customer, I can tell you that.

That’s great. Okay, thank you. That’s excellent color. Thank you guys, I appreciate it. I’ll jump out now.

Our next question comes from Jonathan Reeder from Wells Fargo. Please go ahead.

Hi Bob and Eva, I will just continue with ASUS questions, since that’s where we assume to be headed. Previously Bob, you said for ASUS you kind of expected ’15 to look similar to ’14 on an ongoing basis the $0.26. So I guess if we exclude the $0.05 of the retroactive booked in Q3 of this year, it looks like kind of right on pace with that. Is that still the expectations for the full year?

Yeah, so we are looking for – including the $0.05, we are looking to close out the year in sort of this $0.26 to $0.28 a share range, including $0.05.

Okay. And then is it too soon to kind of ask what ’16 looks like based on the $50 million of awards, it seems like quite a step-up from what you had the previous period, just wondering if you kind of shed some light on how that’s going to impact?

Happy to. Recognizing that it’s months away, but in order to project for 2016, we’ll need to determine the amount of capital work that we are going to complete within that calendar year. And that really gets worked out between the company, contracting officer over the contracts and the public works group at respective bases. As we did talk about the $50 million funding, we believe we will have a higher level of construction in 2016 than we have had in 2015. Though we don’t expect any retroactive revenues in 2016 like we had in 2015, we do think ASUS earnings for 2016 could still be in sort this $0.24 to $0.28 per share.

Okay, great. That’s really helpful. And then I guess just in general for kind of Q4 when we look at Q4 ’15 versus Q4 ‘14, what do you think the big drivers are that would impact the comparability of corridors or did it look similar year-over-year, I know Eva was mentioning about the WRAM balance and whether or not you will be able to recognize some of those revenues that could be a little issue, but if you could discuss that a little?

Sure, I think that whether we have to defer revenue is probably potentially an item that would distinguish maybe the fourth quarter of ’15 through – versus fourth quarter of ’14. But Eva, you can sort of add to that.

Yeah, Jonathan, since we’re implemented the WRAM in late 2008, we have not had to defer revenues from the accounting standpoint. Since most of our rate making are being able to collect the WRAM on the collection within the 24 months following the year-end. 2015 has been a unique year as everybody knows and because of the new mandate on consumption, the ’15 run has been larger than in any prior years, given the special circumstances doing our pending rate case, there was acknowledgement from those at the CPUC involving our proceedings of this unprecedented drought situation, then they stack up the WRAM. In fact, there have been discussion about possible recovery separately over a shorter period of time, the WRAM related effect from the drought, which we believe would cover the period. In June when we implemented our drought response actions forward. So if that was the case, we will be able to cover the rent balances over the required 24 months, that’s required by the accounting guidance. However, this is depends on the CPUC’s decision and we require them to issue the decision including this kind of a provision in the decision allowing for shorter amortization period for the portion of our 2015 rent balances. So at this time, it’s really hard to predict if the collectability period for 2015 rent balances will exceed the 24 month or whether we will be required to defer the revenue in the fourth quarter, we are hoping the final decision by the PUC will address that as they talk about in the hearing.

Okay, but just to make sure I understand correctly, the GRC final decision whenever you get that, do you expect the Commission to address perhaps their WRAM recoverability related to the drought separately that could be within that GRC decision?

Yeah, we will hope to seek that. It was discussed during our hearing process with the judge.

Actually brought up by the judge.

By the judge so we are hoping he will put that language in the decision.

Yeah. So I mean it’s interesting. There were two judges on our case which you seldom see, because one of the judges was retiring. So it was the retiring judge I believe that brought it up, but we are keeping good thoughts on hoping, A, that we get the right decision here and, B, that it comes within time before we have to issue our fourth quarter financials.

Yeah.

Sure. Okay, and then – go ahead.

Yeah, the other thing that we should point out is we do expect some higher legal fees in the fourth quarter on our condemnation activities than we’ve had. I am not sure what it was for the last year’s fourth quarter, but we do expect those to be higher than they were in the third quarter, let’s say.

Okay, do you know what the trailing 12 month ROE was at Golden State Water? I know the utility was earning above the 943 authorized the past couple of years and it looks like the utility earnings are up pretty decent year-to-date versus ‘14, so is it safe to assume you are still earning kind of that elevated level?

Yeah, I think we are doing pretty well there and we believe it’s a bit above the authorized level, yes, it continues to be a bit above the authorized level, but we’ve done what I would consider as a great job on controlling our expenses and so that’s why we are able to one of the reasons why we are able to achieve higher than authorized ROE.

Are those new expense levels – are those reflected in the pending rate case?

Generally, yeah, I mean that's how it works is if you can get to lower levels, it does benefit the shareholders temporarily and then it all goes back to customers in the new rate case which is that’s a good thing too, so it works for the them as well. And so we were pretty focused in our rate case on making sure we didn't have an increase in our revenue requirement because we understand what's going on with our customers in terms of how difficult things are. Now may be monthly bills don’t go up, but we do understand that usage is going down and the revenue requirement isn’t -- so isn’t going down as fast, because not all of our costs are variable as you know.

Okay. Two more quick ones and then I will hop out. The current stock repurchase plan, you are over 75% kind of done, do you expect to complete that during this year or I know it goes through June 2017, any comments on the timing to complete?

We have an algorithm in place that decides when we purchase stocks. So it's a bit of a function of how the stock has traded over the last many days. So probably we will get there I think before year end, don’t you think Eva?

I think so.

Yeah, I mean it’s – we don't have that far to go and we’ve got about 250,000 shares left to go.

Okay. And then the last question on the incremental drought-related costs that you are tracking. Those are being expensed right now correct, so that is reflected in your results and what I guess are they significant?

No, Johnson, they are not. In section [ph] today we only spent about $700,000, year-to-date around $600,000, so we use a lot of internal resources to focus on the efforts and lot of costs. It was incurred due to postage and paying out and obviously communication with customers to help them to reach the goals.

Okay, great. Thanks, Eva. Thanks so much for taking the time for my questions.

Thank you.

[Operator Instructions] Our next question will come from Ryan Connors from Boenning & Scattergood. Please go ahead.

Great. Hi, Bob, hi, Eva, thanks for taking my call.

Hi, Ryan.

Hi, Ryan.

I wanted you query you on the WRAM issue from a bigger picture perspective, obviously hopefully it's the issue of timing as you call it Eva, but the PUC has clearly been making some noise lately considering that there are some issues with the WRAM system and it's currently constituted, I understand there was actually a three-day workshop just a few weeks ago on water rate making where this was a really prominent topic and there have been some different proposals thrown out, the straw proposal and so forth by the PUC. So my question is, is there a likelihood that there's going to be some change made to the decoupling for WRAM system as we know it today as an outcome of what's happening here with the drought and with your potential issue in the fourth quarter being a symptom of that?

Yeah, it's hard to say, Ryan. The straw proposal that you are referring to really was in the context of an ongoing rule making by the commission. This particular rulemaking started in November 2011 actually and it was a rulemaking initiated by the Commission to address issues associated with the Commission's Water Action Plan in the overarching objective of setting rates that balance investment, conservation and affordability. So this really – this straw proposal and this rulemaking is really part of the normal rate making process California. As you know, the Commission periodically reviews its processes to see if changes are necessary or warranted. This particularly situation the Commission and in particular the Water Commissioner, Commissioner Sandoval and Commissioner Sandoval is taking the lead in this rulemaking. So she has set a schedule for discussing really the rate making process. One of the motivating factors sort of in this recent straw proposal is the drought and how it may affect consumption patterns long term. And so that's why the Commission scheduled a whole - these workshops to discuss rate making. The Commission encouraged the utilities to think boldly and attach the straw proposal to the ruling as an example of bold and creative thinking. I think it just inspired discussion. At this point I don't think we can draw any conclusions from the proposal itself.

I mean it does seem that or one of the things that’s in there as they talk about how – whereas in theory the WRAM system you would overcollect one and you undercollect another, for seven years running basically you and all of your peers have been perennially undercollecting, so there appears to be one-sided nature to it and so it did seem to me like there were some read in there that they do think that this is kind of unique situation that needs to be addressed. And I guess forecasting is one of the main issues and I did read something where they are thinking about some kind of an ability to adjust the forecasting in between rate cases or seeing some kind of automatic adjustment of forecasting in between rate cases. Can you comment on that?

Yeah, sort of this annual true up on your sales forecast to sort of keep the – try to keep the WRAM balances from getting to be too large.

Yeah, in fact, Ryan, we have that in our current settlement with ORA that each year we look at our consumption level is it going over certain percentage as Bob mentioned. We can adjust our consumption 50% of that for the next following year, so you won’t build up your rent balance as we have been in the past. I think a lot of [indiscernible] have that right. So it will be helpful to control the balance there.

Okay. So just to understand that that’s in the current case where you are waiting your decision that’s actually you have that in there already.

In our settlement, the Commission again has to approve the settlement, but generally if you get an agreement with ORA, it’s not guaranteed, but it’s more likely than not that you are going to get that in the final decision. And so we are hoping.

Yeah. And also for our next three years, ‘16 through ‘18, Ryan, we also – just consumption level each year for that rate case cycle also reflect the governor mandated consumption level for each of our customer service area. So it’s already set at the level pretty much with our goals right now.

Just to amplify that point, we had to do the filing for the case in July of 2014 and what’s happened since 2014 is the 25% reduction got put in place and so at the judge's urging we went back and redid the forecast to include the mandated reductions. So that too will help to mitigate slowing WRAM down.

Got it. Well, that’s very helpful. Thanks for your time today.

Thank you, Ryan.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Bob Sprowls for any closing remarks.

Thank you, Alison. Again I just want to thank everyone for your participation today and for your continued interest and investment in American States Water Company. Everyone have a good day.

This concludes today's American States Water Company conference call.