American States Water Co (AWR) 2006 Q4 法說會逐字稿

Good afternoon. My name is Nicole, and I will be your conference operator today.

At this time, I would like to welcome everyone to the American States Water Company fourth quarter 2006 conference call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.

[OPERATOR INSTRUCTIONS]

Thank you.

I would now like to turn the conference over to Mr. Bob Sprowls, Chief Financial Officer.

Sir, you may begin your conference.

Thank you, Nicole, and good morning or afternoon, ladies and gentlemen, and welcome to this presentation on American States Water Company's fourth quarter and year-end 2006 results.

I'm Bob Sprowls, Chief Financial Officer of American States Water Company, and Floyd Wicks, President and CEO of the Company is also with me today. As usual following the conclusion of our prepared remark, the call will be opened up for questions.

I'd 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 and our flagship subsidiary, Golden State Water Company as GSWC. Having said that, let's begin with the year-end results.

Basic and fully diluted earnings for the year-ended December 31, 2006, were $1.34 and $1.33 per share, respectively, as compared to basic and fully diluted earnings of $1.58 and $1.57 per share, respectively, for the same period ended December 31, 2005.

Significantly impacting the comparability of the full-year 2006 results with the results of 2005 were: first, the recording of a pretax unrealized loss of $7.1 million or $0.24 per share on purchase power contracts in 2006, due to decreasing forward energy prices versus a pretax unrealized gain of $5.4 million or $0.19 per share on purchase power contracts in 2005, a negative change of $0.43 per share from 2005 to 2006.

Second, a favorable decision issued by the California Public Utilities Commission, CPUC on July 21, 2005, allowing recovery of the Aerojet memorandum account added about $4.3 million to net income in July 2005 or approximately $0.25 per share to 2005's earnings. Third, the recognition of approximately $2.3 million or $0.08 per share of water rights lease revenues in 2006, representing revenues for 2004 and 2005 pursuant to a favorable decision issued by the CPUC on April 13, 2006.

Prior to that decision, any lease revenues at subsidiary Golden State Water Company collected from the City of Folsom in 2004 and 2005 were included in a regulatory liability account with no amounts recognized as revenues pending the outcome of the April 2006 CPUC decision.

Finally, a recovery in 2005 of $4.3 million or $0.15 per share of previously-incurred supply costs, reflecting the CPUC's approval in authorizing Golden State Water Company to recover supply costs incurred, but not covered in rates in years prior to year 2005. Eliminating the affects of these one-time items, basic and diluted earnings per share for 2006 would have increased by $0.51 per share, that's compared to 2005.

In an effort to more fully explain the nature of the unrealized gains and losses on purchase power contracts, you'll find a detailed explanation in today's news release as well as the 10-K document for 2006, which we plan to file tomorrow. I would like to take a moment right now and discuss unrealized gains and losses on purchase power contracts.

It has come to our attention that the affect of this issue on our Company may be misunderstood. It is complex and can be very confusing. So please indulge me for these few minutes.

Unrealized gains and losses on purchase power contracts have been creating an impact on Golden State Water Company and American States Water Company's earnings since 2002 when we entered into certain purchase power contracts with Pinnacle West Capital Corporation, or Pinnacle West for short. These contracts qualified as derivative instruments under SFAS 133 "Accounting for Derivative Instruments and Hedging Activities."

As previously discussed, Golden State Water Company has reported an unrealized loss of $7.1 million for 2006 and an unrealized gain of $5.4 million for 2005. The unrealized gains and losses are incurred only by Golden State Water Company's Bear Valley Electric Division. Bear Valley Electric operating revenues for the 12 months ended December 31, 2006, were $29.3 million, which was 10.9% of AWR's total consolidated operating revenues of $268.6 million.

Serving 23,000 customers, Bear Valley Electric is a relatively small division compared to all our water divisions. Most of the electric energy sold by Golden State Water to customers in the Bear Valley Electric customer service area is purchased from others. In 2001 during the California energy crisis, Golden State Water entered into a block forward purchase contract with Mirant Americas Energy Marketing, LLP, I will refer to them as Mirant Marketing, for 15 megawatts of electric energy at a price of $95 per megawatt hour beginning April 1, 2001 through December 31, 2006 in an effort to stabilize purchased enery costs for the electric division.

The contract with Mirant Marketing has physical delivery requirements and hence did not require derivative accounting treatment. In order to take advantage of lower energy prices in 2002, Golden State Water Company entered into blend and extend purchase power contracts with Pinnacle West, effective November 2002 and expiring on December 31, 2008.

Under the Pinnacle West agreement, Golden State Water exchanged the 15 megawatt hours -- 15 megawatts at 19 -- at $95 per megawatt hour per the Mirant Marketing contract with Pinnacle West at $74.65 per megawatt hour. As a result, Golden State Water Company paid a net of $74.65 for each megawatt hour of power.

There was an up-front payment by Pinnacle West to Golden State Water Company of $20.35 per megawatt hour for 15 megawatts over the period November 1, 2002, through December 31, 2006. Settlement of the Pinnacle West contracts occurred on a net or cash basis through 2006 when the contracts with Mirant Marketing were in place and now occur by physical delivery through 2008.

Because the Pinnacle West contracts required only the exchange of cash and no physical delivery, they qualify as an embedded financing transaction and are subject to SFAS 133. A derivative financial instrument or other contract derives its value from another investment or designated bench mark.

SFAS 133 requires companies to record derivatives on the balance sheet as assets and liabilities and to measure those instruments at their fair value at the end of each reporting period. On a monthly basis, the related asset or liability of the Pinnacle West contracts is adjusted to reflect the fair market value of the derivative at the end of the month based on the then forward energy prices and the quantities to be purchased from Pinnacle West during the remaining term of the contract.

The forward market price is used to determine the fair value for this derivative instrument, are estimated based on independent sources such as broker quotes and publications. An increase in forward energy prices from the prior reporting period results in the recognition of an unrealized gain on the income statement for the remaining amounts to be purchased under the Pinnacle West contract, while a decrease results in the recognition of an unrealized loss on the income statement.

Golden State Water Company has recognized these contracts at fair market value on its balance sheets, resulting in an unrealized loss of $3.7 million at December 31, 2006, compared to an unrealized gain of $3.4 million at December 31, 2005. The current year's change in these balances of $7.1 million increased the 2006 energy supply expenses on the income statement and negatively impacted the year's earnings by $0.24 per share.

The current unrealized loss of $3.7 million on the Company's balance sheet will be reversed through earnings by the end of the contract in 2008. The purpose of our derivative contract is to stabilize our purchase power contracts for the customers in the Big Bear recreational area of California.

The power purchased on the derivative contract is only used to service our electric customers' demand and the Company does not engage in trading activities of purchased power. Although the unrealized gains and losses result in significant fluctuations to our income statement, it has no affect on our cash flows.

When analyzing the financial performance of the Company, we exclude the affect of derivative gains or losses as they are not reflective of our day-to-day operations. The derivative gains and losses are reflective of changes in electricity costs that are outside of management's control.

I hope that this explanation can heighten everyone's understanding of the derivative devil, but if you still have questions or concern, I welcome you to call me and we can further discuss this issue. And now on to the rest of the year-end results.

Total operating revenues of $268.6 million for the 12 months ended of 2006 increased by 12.8% compared to revenues of $238.1 million recorded for the same period of 2005. Of the total revenues, water revenues increased by 6.7%, due to rate increases approved by the PUC and higher consumption in 2006 resulting from weather changes.

Electric revenues increased by 7.5%, reflecting a 7.0% increase in usage. Additional increases in operating revenues were from the recording by Golden State Water Company of water rights lease revenues for prior years from the City of Folsom as previously discussed, and the ongoing Folsom lease revenues in 2006.

In addition, revenues and expenses are impacted by the amount of military privatization activities performed by our subsidiary American States Utility Services, also known as ASUS, through its wholly own subsidiaries. ASUS has enter agreements with the U.S. Government to operate and maintain the water and waste water systems at various military bases pursuant to 50-year fixed price contracts subject to periodic price redetermination.

During 2006, ASUS began the operation in maintenance of water and waste water systems at military bases located in Maryland and Virginia. Under these contracts, ASUS performs various activities, including: (1) construction projects on the existing water and waste water systems as the general contractor for which revenues and expenses are recognized on the percentage of completion method of accounting, and (2) operation and maintenance of the systems for which a fixed monthly fee is earned as the services are performed.

There was approximately $10.2 million of revenue generated in 2006 from the Company's management of various capital improvement projects at various military bases as compared to $1.8 million in 2005. Construction costs associated with this revenue were reflected as construction expenses under operating expenses. There was also $3.8 million of additional revenue generated from operating and maintaining the water and waste water system -- systems at these military bases pursuant to new contracts with the U.S. Government.

Total AWR operating expenses for the 12 months of 2006 increased to $212.0 million as compared to the $176.1 million recorded for the same period in 2005, reflecting: (1) the recovery of $4.3 million to supply costs in 2005 as discussed. (2) An unrealized loss on purchase power contracts in 2006 compared to a gain in 2005 as discussed, the net affect of which increased expenses by $12.5 million.

(3) Higher operating expenses due primarily to the commencement of operation of the water and waste water systems at new military bases. (4) Increases in administrative and general expenses reflecting higher expenses at new military bases, higher wages, increases in pension and benefit expenses, and increases in stock-based compensation expense. (5) An increase in required maintenance and treatment on Golden State Water Company's wells and water supply sources.

(6) Increased construction activities at various military bases. (7) Increased depreciation and amortization expense reflecting additions to utility plant in 2005, which began depreciating in 2006, an increase in property taxes and payroll taxes, and a net pretax gain of $258,000 on the sale of a parcel of land in 2006 owned by Golden State Water Company versus a net pretax gain of $760,000 on a settlement reach between our Chaparral City Water Company subsidiary and the Fountain Hills Sanitary District in early 2005.

Interest expense increased by 44.1% to $21.1 million, reflecting primarily the approval from the CPUC in July of 2005 of the recovery of previously-incurred expensed interest costs totally $5.1 million for the Aerojet litigation memorandum account. There was also $40 million of additional debt issued in October 2005, which increased interest expense offset partially by a decrease in the amount of short-term debt.

Interest income increased to $2.8 million, due primarily to interest accrued on the uncollected balance of the Aerojet memorandum account and interest income related to a tax refund received in May 2006. In 2006 $459,000 was recorded to other income as a result of the Company's ownership interest in a non-operating equity investment.

Income tax expense decreased by 27.9% to $15.7 million compared to $21.7 million in 2005 as a result of a decrease in pretax income, flow-through adjustments in accordance with regulatory requirements, and a $400,000 tax benefit relating to a $3.0 million tax refund claim.

Now turning our attention to the fourth quarter of 2006, basic and fully diluted earnings were both $0.31 per share for the three months ended December 31, 2006, as compared to basic and fully diluted earnings of $0.30 per share for the same quarter ended December 31, 2005.

The Company recorded an unrealized loss on purchase power contracts of $1.2 million during the fourth quarter of 2006, which negatively impacted earnings by $0.04 per share. Adding this amount back generates adjusted earnings per share for the fourth quarter of 2006 of $0.35 per share. During the fourth quarter of 2005, we recognized a $2.0 million unrealized loss on the derivative representing a loss of about $0.07 per share.

Also, we recognized recovery of prior-period supply costs in the fourth quarter of 2005 of approximately $3.0 million or $0.10 per share. Adjusting fourth quarter of 2005 earnings for these two amounts provides an adjusted earnings per share of $0.27 for fourth quarter of '05. Therefore, on an adjusted basis, 2006 earnings were up about $0.08 per share for the quarter.

Net income for the fourth quarter ended December 31, 2006, increased by 6.1% to $5.3 million compared to $5.0 million for the same period in 2005. Total operating revenues were $66.3 million for the fourth quarter of '06, an increase of 11.1% compared to revenues of $59.7 million recorded in the same quarter of 2005.

This increase reflects water rate increases as authorized and a slight increase in consumption, additional revenues generated from the construction and operation of water and waste water systems at various military bases, and revenues recorded as a result of a decision issued by the PUC on April 13, 2006, that enabled Golden State Water Company to record ongoing water rights lease revenues received from the city of Folsom as income.

Total operating expenses increased by 14.3% to $52.9 million for the fourth quarter of 2006 compared to $46.3 million for the same period in 2005. The increased operating expenses were the result of: one, an increase in supply costs, due primarily to the recording of a reduction to this category of expense in 2005 based on a CPUC decision authorizing the recovery of supply costs incurred in 2001 to 2003; second, an increase in other operating expenses, primarily from the operation of water and waste water systems at military bases in Maryland and Virginia.

Three, increased construction expenses associated with capital projects at various military bases; four, an increase in depreciation and amortization expense reflecting additions to utility plant; and an increase in property and payroll taxes. These increases were partially offset by a decrease in the unrealized loss on purchase power contracts for the fourth quarter of '06, a decrease in administrative and general expenses, and by the recording of a gain on the sale of non-operating property.

Interest expense decreased by $231,000 for the fourth quarter of 2006 compared to the same quarter in 2005, reflecting the recording of a full year of patronage refund in 2006 from a $40 million long-term debt issued in October 2005.

In the fourth quarter of 2006, $459,000 was recorded to other income as a result of the Company's ownership interest in a non-operating equity investment. Income tax expense increased by 7% to $3.6 million for the fourth quarter compared to $3.4 million for the three months ended December 31, 2005, due to an increase in pretax income.

Now, I'll turn the call over to Floyd.

Thank you, Bob, and good morning, everyone.

The Company's earnings were driven by our ability to control and recover operating expenses and by earning a return on invested capital. Our annual capital expenditures, which are in excess of 2.5 times the level of depreciation should enhance revenue and earnings through the rate recovery process.

Over the past four years, for example, American States Water Company, primarily through Golden State Water Company, has invested over $279 million into construction programs for the new improvements and replacement of aging infrastructure.

Our construction expenditures for '06 were approximately $67 million for upgrades to our water supply and distribution facilities, $71 million in '05, $84 million in '04, and approximately $57 million in 2003. A record truly reflective of our commitment to invest in capital projects now and in the future. It also reflects the capital requirements necessary to fulfill our future commitments and planning requirements.

Golden State Water Company relies on external sources, including short-term borrowings from American States Water by way of AWR's credit facility, equity investments from American States, issuance of its own long-term debt, contributions in aid of construction, advances for construction, and install and convey advances to fund the majority of these construction expenditures.

In 2005, Golden State Water issued $40 million in long-term private placement debt to pay down its short-term borrowings from American States and to fund capital projects. In an effort to maintain the Company's debt-to-equity ratio, in 2007 we will be reviewing our cash flow projections with the intention of a possible equity issuance later in the year.

I'll now describe some of the rate orders approved by the PUC during -- the California PUC during 2006 and in early 2007, the status of other key regulatory filings, and other important actions. First, in 2007, January, Golden State Water filed an application with the PUC for rate increases in its Region 1.

In the filing, Golden State requested rate increases which are expected to generate approximately -- excuse me -- 10.6 million in annual revenues starting in 2008 with additional increases of 0.5 million in '09 and 1.0 million in 2010. The decision on this application is expected later this year. Region 1 has received the third year increase from the last rate case in January of this year of approximately $600,000 in additional annual revenues.

In February of '06, Golden State Water filed an application with the PUC for rate increases in its Region 2 area and it also covered general office expenses at the corporate headquarters of American States Water/Golden State Water. Golden State has settled many items with the division of rate payer advocates at the PUC.

If Golden State Water receives a favorable PUC decision on the items that are still contested, we estimate that it will add annualized revenues of approximately $5.2 million. If the PUC's decision favors the division rate for advocates, however, it could result in an estimated $1.5 million reduction in annual revenues.

Due to delays on this application, the PUC approved interim rates subject to refund totaling $1.2 million in annualized revenue that became effective January 1st of 2007. The amount of increase or decrease ultimately decided on -- I'm getting a little static in my phone here.

I may have to change phones, maybe that'll help -- on January -- the final decision on this application is expected in mid-2007. Sorry. I hope everyone is still there.

On January 12, 2006, the PUC approved Golden State Water Company's Region 3 rate case. The authorized rate increase for 2006 was made effective January 19th of '06 and provided Golden State Water Company additional annual revenue approximating $5.4 million in 2006 based on a return on equity of 9.8%.

The PUC in California also approved the second year increases for Region 3 in an estimated amount of approximately 2.3 million, effective January 1 of 2007. In 2006, we also received step increases for Region 1 in an amount of approximately 0.6 million and an attrition increase of approximately 5.2 million for Region 2. Both of which were approved and became effective on January 1st of 2006.

A favorable PUC decision in April of 2006 removed the previous requirement that the recovery of incurred supply costs should be reduced by the amount exceeding the authorized rate of return. This was known as the earnings test. We're very pleased that that was taken care of by the PUC.

In September of '06, Golden State filed its statewide policy application requesting authority from the PUC to implement statewide rates and other changes in certain rate-making mechanisms. In February of 2007, the PUC opened an investigation to consider policies to achieve conservation objectives. Certain of Golden State's proposals in the statewide policy application were consolidated into that investigation.

The Company was also directed by the PUC to file a new application to address the remaining issues in its statewide policy application. In December of '06, a U.S. Court of Appeals issued an opinion granting a petition filed by Golden State for a review of the orders of the Federal Energy Regulatory Commission, which denied the Company's complaint to seek a reduction in the rate under Golden State Water Company's long-term block energy purchase contract with Mirant Marketing.

This was discussed in great detail by Bob, the contract, that is. The court found that the FERC applied the wrong legal standard and ignored relevant factors in denying the Company's complaint. The FERC can request a rehearing by the Court of Appeals.

I am pleased to report that due to improved regulation in California and the adequate and timely rate relief as well as consistently strong cash flow measures and declining debt leverage, Standard & Poor's rating services has affirmed the corporate rating of A-minus for American States Water Company and its primary water utility subsidiary, Golden State Water, and has also revised the rating outlook for both to positive to stable.

Regarding growth in the Company, we have paid dividends since 1931 and have made aggregate annual dividend increases for 53 consecutive years. On October 27th of '06, the Board of Directors of American States Water Company declared a 4.4% increase in the quarterly dividend. This action not only marks the 283rd consecutive dividend payment by the Company, but also represents the largest per-share quarterly dividend increase in more than 10 years.

I would also like to update you on our American States Utility Services, ASUS efforts on military privatization, which is one of our growth initiatives. As Bob discussed before, ASUS generated 10.2 million of revenue in '06 for managing construction projects on the existing water and waste water systems within various military bases, with corresponding construction expenses of 9 million for the year.

I'm also very excited to tell you that Fort Bliss Water Services, a subsidiary of ASUS, finalized an agreement in December of this past year with the U.S. Government for the construction of certain improvements to the existing waste water system located at Fort Bliss in El Paso, Texas. The agreement amounts to $19.8 million and is a firm, fixed price contract subject to change orders if significant issues are encountered during construction, which would increase the overall cost of the project.

This construction project is supplemental to the Company's 50-year contract with the U.S. Government to manage the entire water and waste water systems at Fort Bliss. It is scheduled to be completed by the end of August of this year. ASUS still has a number of currently outstanding bids for similar contracts across the country and we look forward to providing other installations of the U.S. Military with premier water and waste water services.

Finally, as we close out 2006, I want to thank you all for your support, and as always want to take this moment to remind you of our total return prospects, which are reflected in our financials, our growth opportunities that are coming to fruition, and our management team is meeting today's challenges, and is prepared to meet tomorrow's, three outstanding reasons we ask for your continued support in spreading the word to your clients why American States Water Company belongs in their investment portfolio.

American States shareholders should be pleased to know that using SEC guidelines for reporting financial performance, $100 invested in shares of American States Water at December 31 of 2001 would be worth $195.50 at December 31 of '06. By contrast, that same $100 invested in the S&P 500 would be worth only $135.03.

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

Thank you, all.

[OPERATOR INSTRUCTIONS]

Your fist question comes from Debra Coy with Janney Montgomery.

Hi, Floyd, hi, Bob.

Hi, Debora; how are you?

Very well. A couple of small follow-up questions.

First on ASUS, even though that's still the smallest part of your business, you said about $10 million in revenues this year and $9 million in expenses. Does that mean that the business had about a 10% operating margin?

No, that's not what that means.

Just simple math.

Yes. The Company at the -- and we will put out our 10-K tomorrow --

And are you, Bob, just to save us then from going through this, will you break out more of the finances of that segment, so we can understand how it's separate from the utility business?

Yes, we will.

There's a Footnote 15 called Business Segments. In the past we have lumped the ASUS expenses and revenues along with the AWR stand-alone parent costs, but for the first time, we're going to break ASUS separately out in the Business Segment section.

Okay.

So --

That will be helpful. Because what you had said before was that ASUS was close to breaking even. Is that about where we are now?

Yes.

I think at the operating income level, very close to breaking even. There is some interest expenses that are basically funding the losses to date, but much closer than we were in '05.

And it sounds like you're increasing the level of construction work that you're doing, not just straight operations for a fee. That can also screw up your expense ratio as it sounds like it did a little bit in '06.

We're going to see all that separately going forward?

Well, in the 10-K you'll see operating income, you'll see interest expense net and operating revenues. We're still talking about for the first quarter how much beyond that we want to go.

But, yes, your comment about additional work at the bases is a fair comment. Floyd talked about the sewer expansion project at Fort Bliss. What we're seeing is we're getting some opportunities just by sort of being the distant provider.

So that's, I think, what we'll be discussing and making a judgment on between now and when we put out our 10-Q as to how much additional detail we provide.

Okay, that's helpful.

We're really pleased that the base gave us the contract, because they're recognizing that we're really there to provide a service, and they're on some pretty tight time lines because of wanting to bring in about another 30,000 troops into Fort Bliss.

They're literally going to be adding, what you might look at as another city, a lot of ancillary services as well in addition to water and waste water systems, of course. A lot of activity at the base.

Yes, good, so interesting.

Floyd, a separate subject on capital spending, you laid out what as you said has been an aggressive capital spending program, although it's subsiding a little bit from its peak in '04.

About what should we look at for '07?

Pretty much around the average of those last few numbers that I identified, I don't have the number at the top of my head, around the $70 million mark. Bob, am I close to that?

I believe so, Floyd.

In fairness, we're also organizing somewhat differently to deal with these kinds of assets in terms of managing our assets with a separate team of professionals, because it's becoming more and more -- there's an awareness that this increase in capital spending is just not going to go away.

There's just so much infrastructure to build and rebuild and it's not unique with our Company, it's a national issue, as you know. We're addressing it organizationally as well by putting an asset management team together.

Right, yes.

And so your capital spending obviously doesn't change relative to the team in place, but the ideas that they would be able to plan to make the spending be done more efficiently over the next several years, is that the idea?

Exactly.

We found we were burdening a lot of people out in the field with added responsibilities because -- and their primary responsibility is to provide excellent customer service, so you kind of get a feel that we've got to go back to basics in terms of customer service as well.

So this will leave the load out in the field and let the people do their job with the local city managers and city council members and things like that. Being in 75 cities in California, you can imagine a lot of hand holding requiring, even in getting jobs done. That's the idea.

Indeed.

And Debora, we're looking at about 63 million for Golden State and another $2 million for Chaparral City in '07.

So it's about 65?

Sixty five, Yes.

Okay, last question and I'll stop monopolizing your time.

Floyd, you made a very interesting announcement a few weeks back that you were hiring Michael Patrick George to come on and work with your water rights portfolio.

Can you talk a little bit about your strategy there and what you see as the opportunity for American States? Because it's certainly one of the interesting things in terms of an untapped asset, if you will, on the balance sheet.

That's an excellent question.

Of course, Michael George's background is unique because he's had a lot of experience in California and other western states in dealing with water supply issues and transferring water supplies and so on. We're looking at our Company somewhat differently in terms of, in California primarily, with having 40 separate water systems, three-fourths of those systems are interconnected, if you will, with the metropolitan water district of southern California.

And even though the systems we own are not independently integrated they are effectively integrated through the network of pipelines owned by the metropolitan water district. Our Company owns about 46 connections to MWD facilities, so you can look at it as a network of systems we own that are fully integrated with the network of metropolitan water district.

So we don't know exactly all the Ts are not crossed and the Is dotted yet, but we believe that adds value to future development within California in terms of moving water around the state, perhaps some of our own water rights, we just purchased 5,000 acre feet of water rights from Natomas Central Mutual Water Company in northern California.

So we're looking at our assets differently and in terms of asset management that I mentioned earlier, the water rights portfolio that we have certainly belongs in the umbrella definition of asset management. And now that we've really focused on getting the legal right to pump water throughout the state of California through the courts and in the western states, as you know, the water rights have true value.

They actually are traded, either leased or sold on a daily basis. The average value, for example, of water a right in the San Gabriel Valley, recent sale sold an acre foot of water right for $5,000.

So we have over 100,000 acre feet of ground water rights throughout the state of California. We're not earning on those because we have not looked at our Company in a network fashion before and this is what we're starting down the road in doing,because of a recent law enacted by the state of California requiring the utility to guarantee that it has 20 years of water supply for new development.

So we're finding that developers really want to have a water provider that is focused on supply and sustainability issues on a go-forward basis, and that's exactly what's -- what Michael George is focused on initially, looking at those strategies on a go-forward basis.

Great. Very interesting. Thank you.

You bet. Thank you.

[OPERATOR INSTRUCTIONS]

Your next question comes from Tim Winter with AG Edwards.

Floyd and Bob.

Hi, Tim.

Wondering if you can give a little more color on the impact weather had versus last year and versus normal?

That -- I'm not sure what normal is anymore, but we did have somewhat better consumption records for '06 than we did in '05. I don't have the numbers handy.

Bob, do you have the relative change in the two years?

Sure.

Of course, this winter has been fairly dry in southern California, so it should have an impact as well in '07 if it stays as dry as it has been.

Yes. We had about a 2.3% increase in build water consumption year over year.

I'm not so sure how that reflects to normal. We're finding that normal is changing, as a matter of fact, with regard to water supply generally in the west. They found that when they set the allocations and entitlements to the Colorado river, for example, in the 1920s, the data they had then to set those allocations, they felt they had the driest cycle of record at least at that time.

But there's been a five-year period of time just in that last decade that was drier than the five-year cycle that they used in the 20s to set the initial allocation. It's hard to say that normal is kind of a moving target at this point.

Tim, it's a good question because it's one of the issues that we're raising in the Company's policy filing at the PUC where we're asking the Commission to remove the nexus, if you will, between sales and revenue requirement. In other words, that we should not be held at risk if we have a wet year or our shareholders shouldn't be held at risk, and there should be some revenue adjustment mechanism in place to recognize the fact if you miss your sales target, you shouldn't be penalized.

The energy companies have had such a revenue adjustment mechanism for years and the Commission now is looking at -- this -- part of this investigation is to establish that very type of mechanism for the water industry in California also.

Is that weather normalization in your pending case, is there a request for weather normalization in --

Yes, it's part of our policy filing, but not the current general rate case for Region 2, is that what you meant?

Right.

Yes, it's not.

But I do believe that the Commission, what they're attempting to do is get fairness back into regulation, which I just really am very pleased with what's going on at the PUC in terms of that. They're wanting to do it, though, on a statewide arrangement, in other words, all of the private water utilities that are regulated by the Commission, they don't want to have a separate one for our Company and a separate one for San Jose and so on.

That's why this investigation is underway to at least come out with a policy that's more universal for the group of private water companies that are regulated by the Commission. So we're going to be tracking that, obviously, very closely and we'll keep everyone certainly on this call and future calls apprised as to progress in that regard.

Okay.

It was my understanding, though, that as part of the California Water Action Plan that you had to request that in a general rate case filing to get it.

How does that relate to the policy filing that you just filed?

Well, I think there's been some moving of the of that initial mandate where now -- I don't want to misguide you at all, but I do believe there's more intent by the Commission to do something more universal rather than do it on a company-by-company basis.

I can have -- we can get better information from our regulatory affairs Vice President on that point, because it's all public information, I can -- if you want to call back in, we can certainly accommodate that.

Okay.Okay, yes, I will call back in.

Just another question, you've got a roughly 50% increase in earnings per share this year versus last year. Would you attribute that all to rates, weather, and consumption?

No.

I think a lot of it is due to coming out of some bad regulatory environment over the last number of years, not this year or last year, but it takes a while to get out of a hole that, frankly, regulation had a big part of digging that hole. So I think getting rid of the earnings test, for example, that helped.

It brought in additional earnings per share in the last quarter of '05 and now we're booking -- we're not having to book our supply costs separately and go after them in a separate filing. As I understand it, we're just truing them up on a monthly basis now.

So they're --

All of your regions?

In all regions, yes. And not just our Company, of course. This is universal as well.

I think the Commission recognized that it was an unfair practice that was imposed on the industry, one that certainly was not imposed at all on the energy utilities, so why would it make any sense to be fair for water but not for the others?

So I believe the Commission is recognizing some of the past is not right and doesn't really help the customer when you have a utility go bankrupt, it certainly doesn't help credit ratings, which of course drive interest costs up, which are bourn by customers. So the regulation never made sense to me.

I think what's coming out now is pure common sense and good business judgment, and I'm very pleased about it.

One other point, Tim, is the improved performance at ASUS has contributed to the performance year over year.

Yes, that's a good point, Bob.

You'll see once the numbers are identified, the swing from year to year in net operating income for ASUS is pretty dramatic, where over the last few years, it had been a drag on earnings in some years, more than others. This year, it's just really nice to see that the strategies laid out are working and we're hoping that that that goes forward as well. I can't think of another item.

Some of the earnings from last year were -- or from '05, I mean, were Aerojet-related, some pretty significant numbers and of course that -- part of that may have been rightfully spread over a number of years, instead of getting all that back in one year.

I don't know how you accommodate for the difference any better than what we are talking about, but we can give it some more thought.

One other point, Floyd, we are recognizing interest income on the Aerojet memorandum account as we move forward.

True.

That contributed in '06.

And that was missing before, because we had the outstanding application in front of the commission and we were not certain of the outcome.

Would you say the improvement at ASUS is more from the construction projects as opposed to the O&M side of the business?

Well, I think it's obviously both, but the construction, if it's a substantial construction project, as the one in Fort Bliss is, we'd certainly add more than what a normal earnings per share might be for the year.

It's hard to say, Tim, what the construction side of it, certainly with a little more history in operations and we've had the five bases back east now for just a year, so we'll have more history as we get more bases coming on, one would tend to think that once we go from six bases, currently, to maybe double that to 12, that there would be some balancing from one to another.

You might have more construction in one but less the next year in that one, but more in another one the following year. So we're just not sure how to really forecast that at this point.

One additional point there.

You have to put in a certain amount of critical mass, of management to operate a new business and then you go out and get the contracts. What's happening is as we've added contracts to the Company, they are working to cover more of that fixed cost of operating a business.

So each contract comes in and contributes to covering the fixed costs.

Okay.

Sorry. I can give other peoples a chance to ask questions, Bob, are you going to be around this afternoon?

I will be, yes.

Okay. Thank you.

Thank you, Tim.

Sir, there are no further questions at this time.

Are there any closing remarks?

Yes.

Just again, to thank everyone, for taking time with us and for your participation, and also for, obviously, for your continued interest in American States Water Company.

Thank you all very much.

Thank you for participating in today's teleconference.

You may now disconnect.