American States Water Co (AWR) 2004 Q2 法說會逐字稿

Good day, everyone and welcome to the American States Water Company second quarter 2004 conference call. This call is being recorded. Today's presentation will be available for a replay at 5 p.m. Eastern through August 11th at midnight. You may access the replay by dialing 719-457-0820 or 888-203-1112 and entering the pass code 696750. Again that’s 719-457-0820 or 888-203-1112 and pass code 696750. And at this time I would like to turn the conference over to Mr. Floyd Wicks, President and Chief Executive Officer. Please go ahead, sir.

Thank you, David. Good morning ladies and gentlemen and welcome to this morning's presentation on the results of American States Water Company's second quarter for 2004. My name is Floyd Wicks, President and Chief Executive Officer of the Company. With me today, is Robert Sprowls, our new Chief Financial Officer of American States; and Bud Harris, SVP of American States Utility Services. For those of you that have not seen our news release, recently, Robert Sprowls, Bob as we know him, accepted the position of Chief Financial Officer of American States, effective June 30, 2004. He succeeds Bud Harris, who now has responsibility of SVP of American States Utility Services, our non-regulated subsidiary, focusing on military privatizations. Bud will bring you up-to-date a little later in this call about our military privatization venture later.

I want to take this opportunity to congratulate both of these individuals, and to assure our constituents, investors, and customers alike that these professionals will provide the continuity of excellence for which this company has long been known.

As usual, following the conclusion of our prepared remarks, the call will be opened up for questions. I would like remind you that certain matters discussed during this conference 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 this forward-looking information disclosure in our form 10-K and also the 10-Q 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.

Having said that, let's hear now from Bob Sprowls about the second-quarter results.

Good morning, everyone. First, let me say that I'm very pleased to be a part of the American States Water Company family. And I look forward to working closely with you all. Without further delay, let's discuss the second-quarter results.

Basic and fully diluted earnings for the second-quarter of 2004 were $0.44 cents per share as compared to $0.19 cents per share for the same period in 2003. The higher earnings were primarily the result of an $8.1 million annualized increase in water rates in Southern California Water Companies -- SCW, as we all know it -- Region III service area, effective March 22, 2004; and a favorable California Public Utilities Commission -- also known as the CPUC -- decision on July 8, 2004, regarding a settlement agreement between the SCW and the city of Santa Monica, which resulted in a $5.2 million increase in pretax operating income.

The SCW and the city of Santa Monica reached a settlement agreement in which SCW sold its Charnock Basin water rights to the city, and assigned, to the city, its rights against all potentially responsible parties who've stored, transported and dispense gasoline containing MTBE in underground storage tanks, pipe lines, or other related infrastructure in the Basin.

The total proceeds of $5.7 million from the sale and the assignment of the rights were offset by an impairment loss of $482,000 associated with assets removed from rate dates, pursuant to the CPUC decision, resulting in a $5.2 million net pretax increase in operating income. The city also indemnified SCW from related claims.

During the second-quarter 2004, total operating revenues increased by 14.5 percent when compared with second-quarter of 2003. Water revenues and electric revenues increased by 15.9 percent and 1.8 percent, respectively. The increase in water revenues reflects a 14 percent increase in water consumption, due to changes in weather conditions in the higher water rates in SCW's Region III. The higher electric revenues reflect an increase in demand.

Total operating expenses for the quarter ended of June 30, 2004 increased by 9.8 percent compared to the quarter ended June 30, 2003 due to higher purchased water costs resulting from increased consumption, as mentioned, and additional water needed to replace pumped water supply loss due to wells being removed from service, due to water quality and mechanical issues. In addition, there was an increase in the supply costs balancing account which reflects the recording of $2.2 million of over-collections in the memorandum supply cost accounts filed with the CPUC in the second-quarter of 2004 for Southern California water Regions I and II.

In addition, taxes on income and the unrealized loss on purchased power contracts were higher for the second-quarter of 2004.

The unrealized loss on purchased power contracts represents a loss recorded for SCW's purchased power agreement with Pinnacle West Capital Corporation. The $76,000 pretax unrealized loss on purchased power contracts for the quarter end of June 30, 2004, is due to a decrease in the current forward market prices as compared to an unrealized pretax gain of $1.6 million during the quarter end of June 30, 2003. These increases in operating expenses were partially offset by the $5.2 million net increase in operating income as a result of the CPUC's favorable decision previously mentioned.

Interest charges this quarter decreased by 2.5 percent over the same quarter last year, due primarily to the repayment of $12.5 million of long-term debt in October of 2003, offset by increases in short-term borrowing.

I would like now to turn our attention to the 6 month year-to-date reported results. Basic and fully diluted earnings were $0.52 cents per share, and $0.51 cents per share, respectively, for the first 6 months of 2004 compared to basic and fully diluted earnings of $0.39 cents per share for the same period of 2003. Results recorded for the first 6 months end of June 30, 2004 are consistent with the quarter results discussed previously. Total operating revenues of $106 million for the 6 months end of June 30, 2004 increased by $7.5 million compared to the $98.5 million for the same period of 2003. The higher revenues are due to rate increases and higher consumption. Total operating expenses increased by 7.6 percent for the 6 months end of June 30, 2004 and reflects higher purchased water costs and an increase in the supply costs balancing account, as previously discussed, in the second-quarter results.

Increases are also due to higher administrative and general expenses, resulting from increased outside legal and consulting services, as well as increased pension and benefit costs, a decrease in the unrealized gain on purchased power contracts, and an increase in taxes on income.

As in the quarter, these increases were offset by the $5.2 million net pretax increase in operating income resulting from the CPUC ruling on the settlement with the city of Santa Monica during the second-quarter of 2004, as we discussed previously.

Interest charges for the 6 months end of June 30, 2004 decreased by 3.9 percent over the same period last year, due primarily to the repayment of the $12.5 million of long-term debt in October of 2003; and recovery of carrying cost for the water quality order, instituting investigation matter, authorized by the CPUC, partially offset by the increases in short-term borrowing.

The Company's earnings are driven by our ability to control and recover operating expenses and by earning a return on invested capital. The Company continues with its construction program, primarily for improvement, renewal, and replacement of infrastructure at its SCW unit. Capital expenditures for 2004 are estimated at approximately $65 million.

It will, therefore, be necessary to issue additional financing during last half of 2004 to provide external funding for these projects. Given that we anticipate rate increases from the CPUC later this year, and next year, we believe the additional proceeds, which will additionally be utilized to pay down outstanding bank borrowings, will be accretive. The CPUC rate case process allows a water utility to forecast its need for additional equity, or debt, over the subsequent three-year rate case cycle.

Now I would like to turn the call back over to Floyd.

Thank you, Bob. We presently have these results today and we provide those to you with great pleasure. And hope this is an indication that our efforts are very improved -- with favorable regulatory decisions. As discussed in our press release issued two weeks ago, the PUC issued a favorable decision on July 8, 2004, regarding a settlement agreement between SCW and the city of Santa Monica, as Bob explained.

SCW is directed within the CPUC decision to track the net settlement proceeds of $5.2 million in an interest-bearing memorandum account to fund capital for infrastructure improvements in future years. As a result of this decision, earnings per share have been positively impacted by $0.20 cents per share. The same decision also instructs the Company to refund to customers the net proceeds of $3.5 million received from the potentially responsible parties, which was recorded in 2003 as a regulatory liability, thus having no impact on earnings this year.

On March 22, 2004, the CPUC approved a general rate case for our Region III in Southern California Water Company's unit, which was filed with the PUC in late 2002. New water rates will generate an initial annual increase in revenues of approximately $8.1 million.

Despite the regulatory delay, we do, however, believe it is important to note that we have rate increases approved, that will continue to provide additional revenues for the remainder of this year, with increases expected in 2005, as well, in Region III of SCW.

Just last week, the Administrative Law Judge at the CPUC issued a proposed decision. This happened on July 19 -- adopting a settlement agreement the Company reached with the Office of Ratepayer Advocates at the CPUC. If approved, it will provide for increased revenues totaling $15.4 million over a three-year period in the Company's Region II customer service area.

A final decision by the CPUC is expected in the third corner of this year. Due to delays in the CPUC's review, and processing of this general rate case, Southern California Water Company has obtained authorities from legislation adopted in 2002 for interim rates in Region II, commencing January 1st of this year, which are subject to refund.

The interim rates generate approximately 1.4 million in annual revenues. The new rates for 2004, when authorized, will be retroactive back to January 1 of this year according to the new legislation. This legislation was sponsored by the California Water Association, of which we are a member, and also of which the Senior Vice President of Administration, Susan Conway of our Company, is serving as the current President through the rest of this year.

July 20th of this year, as well, the same Administrative Law Judge issued a proposed decision in 3 customer service areas of the Company's Region I service area. Annual increases of $382,100, if approved, will also be retroactive back to January 1, 2004, again, as a result of this new legislation.

In the same applications submitted in October of 2003, the Company filed a request for a long-term amortization of the costs included in the Aerojet litigation memorandum account net of any reimbursement from Aerojet. The issue will be discussed in Phase II of the proceeding, with a pre-hearing conference scheduled next month. In order to permit sufficient time for resolution of Phase II, the expiration date of the Aerojet litigation memorandum account is extended until January 1, 2006.

In July, 2003, the CPUC approved a Certificate of Public Convenience and Necessity filed in March of 2002 seeking authorization to construct an 8.4 megawatt natural gas fueled generation facility for the Company's Big Bear electric division. The capital cost of the generating facility, which, by the way, is now online -- came in slightly less than the estimated $13 million. The CPUC order authorizes SCW to file a rate application to generate an annual revenue increase of about $2.4 million. The Company plans to file for increased rates using a special filing called a major adjustment clause in the third quarter of this year.

I would now like to briefly update you on the water supply situation. SCW's water supply, in revenues, are significantly affected, both in the short run and in the long run, by changes in meteorological conditions. Current water supplies in California are adequate. As of June, 2004, statewide precipitation levels for the water year are at 85 percent of normal. Similarly, reservoir storage for the state is 72 percent of normal. The water year's run-off peaked early, due to a very warm April, and should be at about 80 percent of average.

Although, overall groundwater conditions remain at adequate levels, certain of SCW's groundwater supplies have been affected to varying degrees by various forms of contamination, which in some cases, has caused SCW to increase its reliance on purchased water in its supply mix. As a result of the low normal precipitation and faster run-off earlier this year, coupled with higher demands by customers, in SCW's Wrightwood Customer service area, our groundwater supply was severely impacted in late June of this year.

In response to this emergency situation, SCW undertook a number of steps to continue providing water service, including trucking water into this area from nearby sources, beginning June 29, 2004; asking customers to implement more stringent conservation; and expediting the drilling and equipping of a new well. This is anticipated that such water haulings should only be needed until the new well is online around the end of this month.

SCW is experiencing increased operating costs associated with the trucking of this water. Management is, however, unable to predict the extent to which additional cost may be incurred, or the extent to which additional problems may be encountered. SCW intends to seek recovery of these costs from the CPUC.

The Company is also engaged a consulting firm to assist in choosing the most cost-effective pipeline route from a more stable groundwater basin which is north of Wrightwood and we will be discussing this project with the CPUC in the near-term.

Arizona and other Colorado River Basin states continue to experience drought conditions. During this water year, precipitation has been well below normal, except for the southeastern portion of Arizona. The Colorado River Basin and southern Arizona, despite recent higher than normal rainfall, still had very low levels of surface water storage. As of June of this year, Lake Powell is at 49 percent of average, and Lake Mead at 69 percent, compared to 62 and 77 percent, respectively, at the same time last year.

The inflow, so far this year, into Lake Powell has been 4.4 million acre feet, which is about 51 percent of the historic average. The Salt and Verde River reservoir systems in Arizona are somewhat improved, with slight increases in storage levels. Currently, the Salt and Verde systems reservoirs are at 44 percent of capacity, approximately 57 percent of average, as opposed to 42 percent last year.

Notwithstanding, having an assured water supply designation by decision and order of the Arizona Department of Water Resources, our subsidiary Chaparral City Water Company in Arizona, it's water supply may be subject to interruption or reduction -- in particular, owing to interruption or reduction of central Arizona project water.

In the event of interruption or reduction in this -- what we call CAP water, CCWC can currently rely on its groundwater supplies for short-term periods. However, in any event, the quantity of water CCWC supplies to some, or all of its customers, may be interrupted or curtailed pursuant to the provisions of its tariffs. CCWC also has the physical capability to deliver water far in excess of that which is currently accounted for in CCWC's insured water supply account.

At this point, I would like to turn the conference over to Bud Harris to brief you on ASUS's efforts on military privatization.

Thank you, Floyd. I very much appreciate the opportunity that has been given to me by Floyd, and the Board of Directors, to assume direct leadership of the Company's non-regulated growth efforts. I took this opportunity knowing full well that the financial matters of the Company will be well represented by Bob.

As we have always stated, our non-regulated objectives have focused on those opportunities that are close to our core business, namely, the provision of utility services. To that end, we embarked about 3 years ago on efforts associated with the privatization by the Department of Defense of most of the country's military bases. The utility infrastructure of many of these military installations has been in need of upgrade and professional management, the strong suit of the American States Water Company family. This process has been a long one, for both the military -- has been a long one, frankly, and both the military and the bidders have learned much. But our efforts are beginning to bear fruit. American States Utility Services reached an agreement to own, operate and maintain the water and wastewater systems at Fort Bliss, located near the city of El Paso, Texas, which is about as far west in Texas as you can get, through a wholly-owned subsidiary -- Fort Bliss Water Services Company.

According to the agreement, the award of Fort Bliss is estimated at more than 196 million in nominal dollars over a 50 year period. And it is subject to periodic price, re-determination adjustments, as well as adjustments in changes in condition and circumstance. Fort Bliss Water Service Company will furnish all necessary labor, management, supervision, permits, equipment, supplies, materials, transportation, and any other incidentals for the complete ownership, operation, maintenance repair, upgrades, and improvements to the water and wastewater utility systems.

The agreement is subject to obtaining regulatory approval from the Texas Commission on Environmental Quality as well as the expiration of a 90-day due diligence period, during which time, the transition from military ownership to that by Fort Bliss Water Services Company will be undertaken. Fort Bliss Water Services Company will own and operate the water and wastewater systems no later than September 21, 2004.

We expect to remain very active in this arena, and have a number of bids currently being considered by various organizations within the Department of Defense. In addition, we continue to analyze additional opportunities as the request for proposals are opened up for competitive bid.

Before I close, I would like to thank each of you for your interest in the Company and for your support during my 7 years as chief financial officer. I am sure, as you get to know Bob, you will like him as much as I have begun to know him in my very short time. Thank you, Bob.

Thank you, Bud. Before concluding our prepared remarks today, I would ask for your support in reminding your clients why American States Water Company belongs in their investment portfolio -- that is, solid total return prospects, growth opportunities, as Bud alluded to here as well. And a management team dedicated to meeting the needs of shareholders and customers. In that regard, I am pleased to inform you that using SCC guidelines for reporting performance, financial performance, $100 invested in shares of American States Water Company as of December 31, 1999 would be worth $119.42 at June 30 of this year. By contrast, that same $100 invested in the S&P 500 would be worth only $81.65.

I want to thank you all for your time and attention and we will now turn the conference back to the operator to entertain any questions you may have.

(OPERATOR INSTRUCTIONS) Dave Schanzer, with Janney Montgomery Scott.

I just wanted to, first of all, to wish Bud Harris all the success in his future endeavors.

Thank you, Dave.

It has been a pleasure working with him. My question was -- my principal question was to do with operating and maintenance expense. If you exclude purchased water costs, what was the actual increase in O&M or was there an increase?

For the regulated side of the business?

Overall.

Are you asking for the quarter or the --

Yes, the quarter.

Okay, the quarter --

And then, while you're looking that up -- the second part to that question is what is your outlook for the last half of the year, for the non-water piece of O&M.

You're saying excluding the (multiple speakers) --

Purchased water, yes.

Yes, the difficulty is that we have got that -- the gain here.

0h, yes. We will have to do some oh, yes. We will have to do some (multiple speakers) --

Okay -- if you can get back to me off-line. And the other piece, of course, was what is your outlook for that, you know, by and large? You can't control the purchase order situation as well as you can your own O&M and that's the thrust of the question. So if I could find that out, and your outlook for the second half, I would appreciate it.

In the question, which is kind of a macro question, it has to do with the commission -- everybody keeps talking about the changes that are going to happen at the end of the year with Governor Schwarzenegger's and his appointments. Is there a feeling that that's firmed up, that he has folks ready to take those positions? And are you -- if he does, are those the kind of people that are familiar enough of the water situation to redress what has historically, not always been the most positive treatment of American States Water?

I think your observations are right on target with regard to -- I think if Governor Schwarzenegger puts -- which he will -- appoint two new people, our belief is that they will be both business-friendly, as opposed to the two that are leaving, have been very difficult, at best -- and that is a kind observation. (Laughter). And I believe -- we're all -- the entire industry in California -- are looking very positive toward 2005 and beyond. From a point of view of just being more correct on how regulation should be run.

Yes, I guess kind of an adjunct question to that is -- is there any observation on your part, collectively, that the remaining Commissioner seems to becoming more up to speed, if you will, on water issues?

I would say yes, absolutely. With regard to the newest Commissioner -- actually, Susan Kennedy, she seems to have taken on the water industry in a favorable way, that is. And actually, she addressed our various Company presidents in a private meeting about 2 months ago -- and very, very upbeat. And she is looking very much, as well, forward to 2005, when she can have two new Commissioners with whom she can deal. It has just been very chaotic, and that, again, is a kind word as well -- for the last two years. And we see that coming to a close here at year-end.

It's comforting to note that at least, based on what she said at the last NAWC conference, that she is living up to her word.

Absolutely, Dave. And you are there.

I was.

She gave that talk at the NAWC meeting, and she has been on target and understands the industry and wants to effectively put the head of a water Commissioner on, which is very good for our industry.

Tim Winter with AG Edwards.

I have a couple of questions. The first is related to the new O&M contract. Can you give us some more specific details on the financials there -- how do you derive that $196 million? Is that anticipated revenues? Will there be any purchase price necessary? And maybe you could talk about what kind of earnings impact we might get there.

Yes, I am happy to do that, Tim. Basically, there are 2 components to this contract. There is revenues that will be derived from the operation and maintenance of the system. And there will be cash, if you will, provided for renewal and replacement. Specifically, capital upgrades.

For the first 2 years, which is the first period before re-determination of price; that amounts to about $4 million of cash, if you will, coming into the Company. Of that, about $2 million will be accounted for as revenues from the O&M. And about the other 2 million will be accounted for as a contribution in aide of construction for future capital expansion.

The bid is set to return to the Company a 15 percent after-tax profit on both O&M and funds received for renewal and replacement. The 196, therefore, is kind of a cash figure, if you will, and it is simply -- roughly the 4 million -- it is not quite 4 million; it's not quite 4 million I think it's 3.9 million something times 50 years. But the contract, as we said, does allow for periodic price re-determination -- initially 2 years, and then 3 years thereafter, during which periods your actual cost will be reviewed -- if they are more expensive than we thought they were, they will be adjusted upward. If we are little more efficient than we should be -- that will be a matter of negotiation, as well.

It does appear that there will be included on the consolidated books of American States Water Company a fair market price purchase value of somewhere between 90 and $100 million for the Fort Bliss water and wastewater system. The amortization of that will be offset by a credit, if you will, on the bill. So there really is no cash being exchanged. We will -- the way the billing will work is that we will bill them the monthly O&M, the monthly renewal replacement, a fee for amortization of the purchase price, and a credit on their bill equal to that same amount. So there is a right of offset that will be in this contract. So there won't be any direct impact to earnings, cash, or any other element of the balance sheet through this contract, Tim. So that is how we intend to account for it.

Okay, so no initial cash outlay?

No initial cash outlay. And we do not anticipate having to put our own cash into this contract at any point, other than our initial purchases for vehicles -- certain types of inventory and things like that, all of which have been included in the O&M costs and the renewal and replacement cash.

Okay. On a simplified basis, if I just take the 15 percent built-in profit off of the 4 million over the two-year period, will that be a rough estimate of what --

That would be a pretty good number. It probably is around $0.5, $0.6, cents a share, I would guess --

Per year. Okay. And then could you talk a little bit more about the military's program to privatize? Are we going to have decisions on a number of different bases within the next to 6 to 12 months?

I had hoped a year ago to make this announcement with Bliss. The process is very long, and it is very deliberate, I will tell you that. The process is very deliberate. We have currently, I think, 15 active bids -- excluding the Fort Bliss -- that we have put in for various Air Force, Army, and one Navy base in various parts of the country, frankly. The process has been rolling out over the last couple of years. It is now being rolled out a little faster because the Air Force is now putting out a lot of RFPs for a number of its bases, and the Navy is still putting out some. The Army has put out a lot of theirs, but there is still a lot yet to do for the Army.

We do hope that -- and due to the fact that we have the 15 bids currently outstanding, we are in negotiations in various stages, candidly, on 4 of those bases, or 4 of those opportunities. We hope, Tim, in the near future to be putting out other announcements. I can't tell you that it will be in the next 12 months. I would like to think that within the next 12 months, I might be able to give you at least 1, maybe 2. But it could very well be more it could be a delay, yet, just given the process.

Something else you should know -- it sounds like I may be dancing, but I kind of have to be careful, because the military has been occupied, obviously, with putting its contract officers with the war in Iraq. So that put a big crimp in the process, frankly. We have gone a long ways with several contracting officers, only to find that they are being shipped to Iraq for 6, 9, or 12 month tour of duty. So it kind of represents a stop in the process until someone else picks it up along with everything else they have had to pickup. So if all things were as they were before the war; I think you would see, probably a lot faster, a number of these being awarded. But I have to tell you, we are still very positive on what we see as our potential.

Okay. And one last question. Is this the first military contract awarded to a private utility? And what -- are you seeing a number of competitors out there, also, with 15 bids out there?

You know, I think that there have been -- I know that there has been 1 other water system that was announced. I believe it was Ford Sill, Oklahoma, and I think that went to the American Water Services subsidiary of RWE. We do see competition, but I will tell you, I think that the way we do business, and the way we put our bids together, we are a very viable competitor. And while there may be some bigger competitors than us, there may be some smaller. I think that we have a very good place in the military's process for this. And I'm still still confident that you are going to see them presenting more successes.

(OPERATOR INSTRUCTIONS) Mike Warner with Kennedy capital.

I want to ask what Tim was kind of referring to and you mentioned regarding the new contract with the military base -- you said 4 million over the first 2 years, and you renegotiate -- you could go back and look at how the contract works from a cost basis. Would you say, roughly, $0.5 to $0.6 cents per year? Or is it over that time period?

It is cash per year of about $4 million. So it is about $0.5 cents per year. Now, I will tell you that we don't anticipate any significant amounts of renewal and replacement in the first -- certainly in the first year. And not much in the second year. Beginning in the third year, is when we have factored into the R&R. While on a cash basis, you would see something in the range of 5 million, if we don't fill the assets, obviously, we are not going to be able to book profits. So we may be in the 3 percent range for the first year or so, but after we start really putting in capital, you'll see a significant bump up.

Okay. And also, could you remind me -- the taxes on income -- why was that so much higher year-over-year again?

The taxes on income is higher because of the pretax operating income being higher.

So that 5.1 million is reflected -- that is reflective of the operating income? I guess that is mainly based on the gain on the sale, right?

Yes. And it results in a higher operating income.

So a more normalized operating income, obviously, you would see lowered -- the taxes on that to be lower.

That's correct.

Okay, I just wanted to clarify that. I think that's all I had -- did you mention that -- was there a mention that the purchased water, the purchased water cost would -- you would show some of that starting in the third quarter, too, because of some issues with both levels of water and some outages? Was that mentioned?

Yes -- effectively, in two of our regions -- actually, there are some in each of the three regions where wells have been shut down due to contamination, which causes a higher volume of purchased water to be bought by the Company, or imported water, I should say. In two of the regions, in regions to in Regions II and III, the most recent rate case decision in Region III incorporates language that if the well is shut down because of certain chemicals found, that we are authorized by those decisions from the PUC, we are authorized to book costs related to the wells being shut down. And if they are shut down for specific contaminants, we can actually book the higher cost of the purchased water, as well.

So if we are getting some different treatment -- favorable treatment, I should say, on the regulatory side, as it relates to water quality. We have language in the settlement agreement that came out last week as mentioned during our discussion here where the Administrative Law Judge agreed with the settlement language in Region II, and that language is even broader, yet. It doesn't really name -- specific contaminants as it does in Region III. In Region III's case, it names 5 chemicals -- Region II's proposed decision is much more broad. If there is a well shut down for any reason related to water quality, then we can book the increased cost in the memorandum accounts for later recovery through PUC due diligence.

So we are getting a lot more recognition of the fact that groundwater contamination is an issue that needs to be dealt with from the regulators and they are recognizing the higher cost incurred by the Company in a favorable way. Note that -- did that address your question favorably?

Yes. One other one that I thought of -- regarding rate settlements -- you had a settlement on -- for Region II that was decided upon last week. Which other ones are you in the works for at this point over the next year and a half or so?

Well, what we've done in California, as you know, provides for regulation on a forward-looking basis. The rate case cycles are 3 year cycles. The new law that I mentioned earlier, that actually allows for interim rates to be put into effective -- if there is a delay in the rate making process, as there was in Region III, a tremendous delay; which actually sparked the need for that the legislation. Our industry really was up in arms because of all the delays. So the Legislature provided this new law that calls for every Class A water company in the state to file a rate case every 3 years. And the Commission must approve the rates in a timely manner. If they don't, and we are allowed to put in an interim rate, which effectively sets the date at which the final decision -- if it takes a year, the final decision in the rate case is retroactive back to the date the interim rate goes into effect.

So there has been a lot of very good things going forward. We do plan to file another case -- going to your question, directly, we are planning to file Region III at the end of this year. It usually takes about 12 months to process. But at least Region III will be under the new legislation this time, as it was not last time. It was filed in 2002, and it took us almost a full 2 years to process the case. And we did lose revenue on that case. So going forward it's going to look a lot better. As much as we complain about regulation in general, at least in California, they have kept the forward-looking test years, which allows this Company and others in California, to address capital needs as far as issuing new equity and our debt. We project those needs into the rate case. The new rates, as defined, would then allow a new issuance of equity or debt to be incorporated without the usual dilution effect that other states might see. So that is a very positive thing from a shareholder point of view. And I didn't need to overemphasize that, but it is something that -- we complain so much about our regulation, but that is a good part of California regulation.

Are you in a rate hearing right now?

We are in -- well actually, Region II, the hearings are completed in there. That was the most recent one. The only one this year that hearings are scheduled relates to the Aerojet memorandum account. Which the prehearing conference is August 10, I believe. But each year, we will be filing a rate case, because our Company, as you know, is divided -- the California operation, at least, is divided into 3 regions.

Typically, we are filing a region a year, so we don't have the entire Company at regulation risk at any one time. So we will be filing Region III next year. Region I, I believe, is on a course right now for a short, more, I would say, miniature rate case, because that is our smallest district. And that may be handled actually, separately even later this year. Region II, then, is set to be filed again, I believe, in 2006. So we are on -- each case is on a 3 year cycle and we are filing in 1 year one at a time -- so that is the idea.

(OPERATOR INSTRUCTIONS) Thank you, everyone, again, I would like remind you that you may listen to a rebroadcast of this conference at 5 p.m. Eastern time today through August 11th at midnight by dialing 719-457-0820, or 888-203-1112, and enter the pass code 696750.

At this time, I will turn the call back over to Mr. Wicks for any additional closing remarks.

Thank you, David. Also, thanks to everybody on the call for your participation today and we will get back to Dave with regard to his questions on the maintenance outlook. I would say generally, we are on course with regard to that budget-wise for the next 6 months or 5 months now. But we really appreciate your interest in American States Water Company as an investment. And again, thank you for participating.

Thanks, everyone, for your participation, and you may disconnect at this time.