American States Water Co (AWR) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing second quarter 2007 results. If you have not received a copy of this morning's news release announcing earnings for the quarter, please call 909-394-3600, extension 710 and one will be faxed or e-mailed to you. If would you like to listen to the replay of this call it will begin this afternoon at approximately 3:00 p.m. Pacific time and run through Thursday, August 16th, 2007. The toll free number for the replay is 1-800-642-1687 and the conference ID number is 11781036. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this call will be recorded and will be limited to no more than one hour. I would now like to turn the call over to the CFO of American States Water Company, Mr. Bob Sprowls. Please go ahead, sir.

Thank you. Good morning or afternoon, ladies and gentlemen, and welcome the presentation of American States Water Company's second quarter 2007 results. I am Bob Sprowls, Chief Financial Officer of American States Water. And Floyd Wicks, President and CEO of the company is also with me today. As usual, following the conclusion of our prepared remarks, the call will be opened up for questions. I would like to remind you that certain matters discussed during this conference call are forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. I ask that you review the forward-looking information information disclosure in our Form 10-K and 10-Qs on file with the Securities and Exchange Commission.

Factors underlying the company's forward-looking statements are dynamic and subject to change. Therefore, these forward-looking statements speak only as of the date they are given. The company is under no obligation to update them. However, we may choose from time to time to update them and if we do so, we will disseminate the updates to the investing public.

During our presentation today Floyd and I may refer to American States Water Company as AWR. Our flagship subsidiary Golden State Water Company at GSWC and American States Utility Service as ASUS.

Having said that, let's begin with the results for the quarter. Basic and fully diluted earnings for the quarter ended June 30th, 2007 were $0.42 per share, as compared to basic and fully diluted earnings of $0.36 per share for the same period ended June 30th, 2006. Significant items that impacted the earnings for the second quarter of 2007 in comparison to the same period of 2006 were, first, an increase in the margin for the water segment's pretax operations of $6.1 million or $0.21 per share as compared to the same period of 2006, due to increased water rates approved by the California Public Utility's Commission or CPUC, that were effective January 1st, 2007. An increase in water consumption over that in the prior period and a favorable change in the supply mix.

Second, an unrealized loss on purchase power contracts which decreased pretax income by $236,000 or approximately $0.01 per share for the three months ended June 30th, 2007, as compared to a $923,000 unrealized loss or $0.03 per share for the three months ended June 30th, 2006. Third, an increase in ASUS's pretax operating income of $2.3 million, or $0.08 per share as compared to the same period of 2006 for operating, maintaining and improving the water and waste water systems at military bases for the U.S. government. The increase in pretax operating income is primarily due to a special waste water project at one of the military installations undergoing significant expansion. The project is scheduled to be completed by August 15th, 2007, and there will be no further construction revenues associated with this special project after that date. Fourth, higher operating expenses, a change in the effective income tax rate and other items to be described resulted in a decrease of $0.25 per share compared to the results of operations from 2006.

Let's discuss these items further. Total operating revenues increased by $16.2 million to $79.2 million for the second quarter of 2007, compared to revenues of $63.0 million recorded in the second quarter of 2006. An increase of 25.7%. We break down operating revenues into water revenues, electric revenues and contracted services revenues, which are primarily from ASUS. Water revenues increased by $7.4 million or 13.8% due to a 17.1% increase in billed water consumption during the warmer weather in 2007. This increased revenues by $6.3 million dollars. Certain rate increases in 2007 also contributed to the increase in water revenues by about $1.1 million. Included in the rate increases in 2007 was an interim rate increase effective January 1st, 2007, subject to refund, totaling approximately $260,000 for the second quarter. $1.2 million for the entire 2007 year. Due to the CPUC's delays in processing Golden State Water Company's general rate applications for rate increases in region 2 and to cover general office expenses at the corporate headquarters. A proposed decision and an alternate decision were issued on July 24th, 2007, which Floyd will discuss in more detail later in the call.

Electric revenues decreased by 11.0%, due a reduction in residential and commercial usage caused by warmer weather during the second quarter of 2007. Contracted services operating revenues, all of which were through ASUS, increased by $9.6 million during the second quarter of 2007, to $12.2 million, due to an increase in ASUS construction revenues for special waste water infrastructure expansion project performed by its Fort Bliss water service company subsidiary. There was also an increase in revenues due to other special projects at the military bases in Maryland and Virginia. It is important to note that earnings from these military special projects are intermittent and may or may not continue in future periods. Unlike the annual renew and replacement projects, which are an integral part of the 50 year contracts with the military bases.

Total American States Water Company consolidated operating expenses for the quarter increased to $61.8 million as compared to the $48.9 million reported for the same period in 2006, reflecting an overall increase in water supply costs resulting from increased water supply demand due to higher customer consumption. Increases in other operating expenses due to higher chemical and water treatment costs. Increases in administrative and general expenses due primarily to higher labor costs and increased outside tax and legal services, an increase in required and emergency maintenance activities on Golden State Water Company's wells and water supply sources, increased depreciation and amortization expense reflecting, among other things, the effects of closing approximately $73 million of additions to utility plant during 2006, higher property taxes and payroll taxes and a significant increase in construction expenses reflecting primarily the costs incurred for the special waste water expansion project at Fort Bliss. These increases were partially offset by a net pretax gain of $238,000 on the sale of non utility property in 2007, and the pretax unrealized loss of $236,000 on purchase power contracts in 2007, compared to a $923,000 pretax unrealized loss in 2006, previously mentioned.

Interest expense increased to $5.6 million, compared to $5.4 million for the same period of 2006, primarily reflecting an increase in short term cash borrowings at higher interest rates. Interest income decreased by $377,000, due primarily to the receipt of interest from the IRS related to a $3.0 million tax refund in May, 2006. The second quarter's 2007 income tax expense increased to $5.2 million, compared to $3.4 million for the same period of 2006, due primarily to a 29.0% increase in pretax income and a higher effective income tax rate.

Unrealized gains and losses on purchase power contracts continue to impact our earnings and are incurred only by Golden State Water Company's Bear Valley Electric division. Bear Valley Electric's operating revenues for the second quarter of 2007 were $6.3 million, which was about 8% of the company's total consolidated operating revenues of $79.2 million. An increase in forward energy prices results in the recognition of non realized gain on the income statement for the remaining amounts to be purchased under the purchase power contracts while a decrease in energy prices results in the recognition of unrealized loss on the contracts. Golden State Water Company has recognized these contracts at fair market value on its balance sheets, resulting in accumulative unrealized loss of $1.2 million at June 30th 2007, compared to accumulative unrealized loss of $944,000, at March 31, 2007. The current quarter's change of $236,000 in these balances increased expenses on the income statement and negatively impacted the quarter's earnings by $0.01 per share. The current cumulative unrealized loss of $1.2 million will be reversed through earnings by the end of the purchase power contract in 2008.

I would like to remind everyone once again that although the unrealized gains and losses result in significant fluctuations to our income statement, they have no effect on our cash flows. When analyzing the financial performance of the company, we exclude the effect of unrealized gains or losses as they are not reflective of our day-to-day operations. The unrealized gains and losses are reflective of changes in electricity costs that are outside of management's control.

Now on the year-to-date 2007 results. Basic and fully diluted earnings were $0.83 and $0.82 per share respectively, for the six months ended June 30th, 2007, as compared to basic and fully diluted earnings of $0.71 per share for the six months ended June 30th, 2006. The $0.11 per share increase in diluted earnings for the six months ended June 30th, 2007 reflects primarily first, an unrealized gain on purchase power contracts in 2007 versus an unrealized loss on purchase power contracts in 2006. The unrealized gain on purchase power contracts increased pretax income by approximately $2.5 million, or $0.09 per share for the six months ended June 30th, 2007. As compared to a $3.1 million unrealized loss or $0.11 for the six months ended June 30th, 2006.

Second, a decision issued by the California Public Utility Commission on April 13th, 2006 regarding the accounting treatment of Golden State Water's water rights lease revenues, which increased pretax operating income by about $2.3 million in March 2006 or approximately $0.08 per share when compared to the same period in 2007. Excluding the $2.3 million of water rights lease revenues, as just discussed, an increase in the 2007 margin for the water segment of $3.8 million or $0.13 per share as compared to the same period of 2006 due to increased water rates and increase in water consumption and a favorable supply mix. Fourth, an increase in American State's Utility Services pretax operating income of $3.4 million dollars or $0.12 per share as compared to the same period of 2006, for operating, maintaining and improving the water and waste water systems at military bases for the U.S. government and includes increases in revenues recognized for the waste water system expansion project discussed in the second quarter 2007 results.

Finally, other higher operating revenues and expenses, a change in the effective income tax rate as well as other items to be discussed. Total operating revenues of $151.5 million for the first six months of 2007 increased by 18.9%, compared to revenues of $127.4 million reported in the same period in 2006. Of the total increase in revenues, water revenues increased by 6.7% due to rate increases and higher consumption due to warmer and drier weather. Electric revenues decreased by 1.6% to $15.1 million, reflecting lower kilowatt hour usage by residential and commercial customers, also due to the warmer and drier weather conditions. ASUS's revenue comprised of construction revenues and management fees for operating and maintaining the water and waste water systems at military bases increased to $25.2 million, a $17.4 million increase for the six months ended June 30th, 2007, due primarily to the waste water expansion system at Fort Bliss.

Total operates expenses for the first six months of 2007 increased to $117.2 million, as compared to the $99.1 million recorded for the same period in 2006. Impacting the comparability of the two periods were increased water supply costs reflecting higher consumption, partially offset by a favorable change in the supply mix caused by less purchase water needed to replace ground water supply not pumped in the prior year, an increase of $5.6 million in the unrealized gain on purchase power contracts due to a rise in forward energy prices, increased other operating expenses due to higher chemical and water treatment costs as well as operation of the Maryland and Virginia military bases for a full six months in 2007, increased administrative and general expenses resulting from higher outside services costs, increased depreciation and amortization, higher maintenance expense reflecting emergency and scheduled maintenance on wells an water supply sources. Higher property and other taxes due to increased assessed property values and payroll taxes, higher construction expenses at fort bliss and other military bases, and a net gain on the sale of property.

Interest expense for the six months ended June 30th, 2007 reflect an increase in short term interest rates and a slight increase in the average short term borrowings. Interest income was lower for the six months ended June 30th, 2007, due primarily to the initial recording in the first quarter 2006 of interest accrued on the uncollected balance of the Arrow Jet Litigation Memorandum account authorized by the California Public Utilities Commission and their receipt of interest payments from the IRS as previously discussed. Now I will turn the call over to Floyd.

Thank you, Bob and good morning ladies and gentlemen. I'll now discuss the status of key regulatory filings and important actions in the last quarter and those still pending. In January of this year, Golden State Water Company filed an application with the Public Utility Commission in California for rate increases in region 1. In the filing GSWC requested rates which are expected to generate an additional $10.6 million in annual revenues starting in 2008. With further increases of $0.5 million in 2009 and $1 million in 2010. A decision on this application is expected late this year.

I'm very pleased to report that a proposed decision, PD, and an alternate decision, AD, on the company's region 2 and general office rate cases, those two proposed decisions were issued on July 24th of 2007. Both the PD and the AD recommend rate increases in 2007 for region 2 ranging from $6.3 million to $6.7 million respectively. Both proposed decisions also change the revenue requirements related to the adopted rates for the supply cost memorandum accounts. It will also be retroactive to January 1st of this year. Accordingly, Golden State Water Company will recalculate among other items the amount recorded in region 2's supply cost memorandum account based on these new rates.

As of June 30, 2007, an amount of $1.3 million was recorded as an undercollection of supply costs which positively has impacted earnings and increased regulatory assets. If either of the proposed decisions is approved, we expect most of the undercollected amount as recorded to be reversed. Partially offsetting the retroactive revenues upon a final decision issued by the CPUC. Any revenue increase ultimately decided by the CPUC will be retroactive to January 1st, 2007. We will recognize the net impact of the retroactive revenues and expenses during the quarter when the final decision is issued. We expect a final decision on this application in the third quarter of this year.

The PD issued on July 24th, 2007 also recommends rate increases of $3 million for 2007 to recover the general office expenses allocated to the company's region 3. The amounts ultimately decided by the CPUC will also be retroactive to January 1st, 2007. The final decision on the general office expenses may result in increased administrative and general expenses being allocated to American States Utility Services, a subsidiary of American States Water Company

Let's now turn our attention to a review of water supply issues. Water supply and revenues are significantly affected in both the short run and long run by changes in weather conditions. Both California and Arizona have been experiencing lower than normal precipitation. Severe drought conditions continue in California and Arizona and from July of '06 to June of '07 Los Angeles has experienced the driest year on record. It was also the fifth driest year for the entire state. Even with the low precipitation, California reservoirs at the end of June of this year were at 88% of average level for this time of year, resulting from the average -- above average precipitation in 2005 and 2006. The Colorado River storage was at 65% of average. In flow into lake Powell for the water year has been 72% of average which is slightly better than the total season prediction of 70%. In Arizona, the salt river system is 11% above average, and the birdie river system is at 65% of average. These are the two water storage systems closest to Chaparro City water company.

Over the next three months, National Weather Service's Climate Prediction Center expect the drought conditions to continue or worsen in California while Arizona may have received some relief due the summer thunderstorm season. According to the CPC outlook for the rest of the year, after reviewing several weather forecasting models, above average rainfall is not in the forecast for the rest of 2007. Metropolitan water district of Southern California MET, the provider of most of the supplemental imported water in Southern California has recently launched a large conservation effort encouraging all consumers and businesses to voluntarily save water to stretch supplies. MET has indicated it has enough stored water an imported supplies to meet this year's demands. DSWC obtained approximately 45% of its water supply from MET and 55% from its portfolio of ground water supplies.

Lighter variability of water supplies available in the Western United States, we continue our efforts to be good stewards of the resource and to send active conservation messages to our customer. However, customer conservation can result in lower water sales than would otherwise occurs and lower volumes of water sold can have a negative impact on our earnings. In order to remedy the financial disincentive associated with water conservation we've worked with the CPUC and the Arizona Corporation Commission to address rate structure issues which promote conservation of the resource.

Thirdly, we are actively participating in the CPUC's conservation order initiating investigation. Through the conservation OII as it's referred, the CPUC proposes to eliminate disincentives to promoting conversation. Among other potential solutions being considered by the CPU are revisions to tariff structures to create increasing rate blocks so that greater consumption will be tempered by higher unit pricing to consumers. Sales adjustment mechanisms to partially decouple volume of sales from GSWC's revenue. I'm pleased to report also that during the second quarter of 2007, ASUS effort on military privatization have resulted in a $2.3 million increase in pretax operating income or an $0.08 per share increase as compared to the same quarter of last year. ASUS generated $12.2 million of revenues in the second quarter this year, from managing construction projects on the existing water and waste water systems in various military bases as compared to $2.6 million in the second quarter of '06. The increases in revenues and operating income are primarily due to the $20 million special contract with the U.S. government for the construction of certain improvements to the existing waste water system located at Fort Bliss, Texas. This construction 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 August 15th and as discussed by Bob above, this project has positively impacted the company's earnings for the second quarter of '07 as well as for the six months ended June 30, '07. There is also an increase in special projects at the military bases in Virginia and Maryland in the second quarter of '07. Again, it should be noted that earnings and cash flows from these military special projects are intermittent and may or may not continue in future periods.

Thank you for your attention and for your support. Please remember that our total return prospects are reflected in our financials, our growth opportunities are coming to fruition. Our management team is meeting today's challenges and is prepared to meet tomorrow's. Three outstanding reasons why we ask for your continued support in spreading the word to your clients why American States Water Company belongs in their investment portfolio. As reported in our recent news release, the Board of Directors of American States Water Company approved a quarterly dividend of $0.235 per share on the common shares of the company. This action marks the 285th consecutive dividend payment by the company and also for more than 53 consecutive years, American States Water Company shareholders have received an aggregate annual increase in dividends. American states shareholders should know that using the SEC guidelines for reporting financial performance, $100 invested in shares of American States at December 31 of '02 would be worth $177.35 at June 30th of '07. Thank you again. I will now turn the conference over to the operator to entertain any questions you may have

(OPERATOR INSTRUCTIONS). We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Steve [Gambusi] from Longbow Capital.

Good afternoon.

Hello.

I had a couple questions, actually. First, I was wondering if you could tell me what the combined rate base of the entire -- all the utilities is currently. The cost, water, gas, Arizona and California.

We typically don't give a utility rate base out. But you could use as a proxy net utility plant and --

Plus advances in deferred taxes?

Typically net utility plant, less deferred taxes and less contributions in aid, and advances for construction.

Okay. And just a couple questions on ASUS. What was the -- I was trying to pull this out of the release. I'm not sure all the numbers were there. What was the total revenues year-to-date for ASUS?

We're going to be filing our 10-Q today.

It will have that in it?

It will definitely have it in there.

Can you mention how much the -- you mentioned $20 million special contract that is occurring at ASUS this year. Will $20 million be the aggregate amount of revenue that are booked between December of -- January '07 and August '07.

Yes. It's actually a $20.6 million contract.

So at the end of the third quarter, there will be -- when we look at the year-to-date results next quarter there will be $20.6 million of total revenue from this project that is essentially non recurring.

That's right. This project goes away. Just want to point out that we had a special project in '06 as well. Unit of action project. And we don't want to make promises that we're going to continue to get these special projects. However, by being on the bases as special projects come up, you know, we are at least one potential contractor to do the work on these projects. It's not something that we can make any promises on.

For the contract that you have in terms of these long, 30,40,50 year contracts that you have, what, based on your current portfolio of contracts, what's kind of the annual run rate of revenues at ASUS?

It varies because the contracts are -- there's two revenue streams that the company gets from these contracts. One is for renewal and replacement as we replace what would be considered repair replacement on the projects. That's one revenue stream. And then there's an operation and maintenance component to it. So to the degree there's more capital work to be done, you know, revenues go up. And we really haven't put out a number on that but I will tell you that I think when we issued press releases on the initial contracts --

You included the revenues?

Yes, but it was a revenue stream of I believe it was $240 million over 50 years for Fort Bliss and a number of -- around $200 million for the other five bases that we have.

Can you mention what the special project was in 2006? How much that was?

Let's see here.

While you're looking that up, it's fair to say the $240 million that he mentioned was based on dollars when the contract was signed. In other words, every two years, prices are redetermined on a go forward basis. So in many respects it's like akin to a rate case, if you will, but the regulator being the U.S. government.

I can just give you a ballpark at this point on that. The other project was about $4 million.

Finally, I was just wondering if you could elaborate on the comments, I thought I heard you make, regarding cost allocation between ASUS and the utility in terms of allocating certain O&M costs? Can you just elaborate on that a bit and perhaps put some parameters around what the numbers involved are?

Sure. Floyd, do you want me to do that or would you like to?

Yes, I think because there are two proposed decisions, one was from the administrative law judge, what we refer to as the PD. The alternate decision, AD, was actually proposed by the assigned commissioner in this case I believe it was John Bond's office. Bob, Is that right?

That's right.

Because they're effectively some ways competing proposed decisions, we're hoping that we can do a little bit more lobbying in respect to what the allocated percentages are and it's not too far removed from what our proposed allocation was in the rate case itself.

What is your proposed allocation?

Well, I'd rather wait until the decisions are not in proposed format to really go any further.

There's some costs that are born at the holding company level, which are split between--now some it goes to ASUS and so of it goes Utility and the issue is how much do you--

That's exactly.

How much will be recovered in rates versus how much will not be.

The costs are accumulated at the Golden State level and then there isn't a judgment as to how much of that then gets allocated to ASUS.

Okay.

So it's -- I don't want you to think that we allocate at the -- they accumulate at the parent level. They don't. They accumulate at the Golden State level and a portion gets allocated to ASUS.

When do you think you'll have an answer on this?

We're hopeful that the proposed decision will -- one of them will emerge here before the end of this month.

Thank you very much for your time.

Steve, the proposed and alternate decisions are available on the CPUC website if you are interested.

Good point.

Thanks.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of [Deborah Coe with Jamie Montgomery].

Hi, Floyd, hi, Bob.

Hey.

Just wanted to follow up with a couple questions, coming back to the rate case process. Floyd, as I understand, I understand the proposed decision and the alternative decision from commissioner Bonds' office. One thing I wasn't clear on is when you said you have the $3 million for '07 for general office recommended by the proposed decision that as we just discussed could push potentially some expense to ASUS. Is there a difference on that decision versus the alternate decision? I will go look at what's on the website. Is that a point of contention as well as the total region 2 rate increase or are those two largely the same?

On that point they're the same as I understand it, Deborah. The main point difference in the two proposed decisions related to the number of additional employees that we're adding at the corporate office.

Okay. Fair enough.

The alternate decision is more favorable than the ALJ's decision.

And generally the alternate decision is favorable than the ALJ's decision.

Yes.

Can you talk about what the implied (inaudible) would be for the two propose as?

That was a stipulated matter, Bob, as I recall, can you bring that number out?

How did they get from 6.3 to 6.7, if they were stipulated?

It's related to the number of positions being allowed versus -- some were being under the ALJ's proposed decision, there was a --

That's where the difference in the rate increase come from? We're back to this issue of staff and allocation.

That's the primary difference.

Okay.

ALJ was offering in certain cases 90% of a person and other cases, 50% of a person. I don't know how you can manage that way.

How we can cut them up that way, those poor people.

That's right.

And then just in terms of how once this gets done and decided at some point in 3Q and it's retroactive to the beginning of the year, you will recognize on a cash and earnings -- well, actually on a cash basis relative to an earnings basis, how will you recognize it? It sounds like you're going to recognize it all in earnings in 3Q when it's decided an then you'll collect it over some billing cycles?

Well, that's the structure is such that it would be recognized in the third quarter.

The entire amount of the retroactive?

Right. It's not the full amount of revenues and I can't say exactly what the number is at this point. There's some moving parts related to the supply cost memorandum account that I mentioned in my earlier comment.

And also you had the temporary rates or the interim rates.

The temporary rates out. So there's going to be a net increase of, favorable of course to the bottom line. But it could go retroactive to January 1 and we'll actually collect the cash through a surcharge on rates, probably over a 12-month period.

Over a 12-month period. Okay. I was just trying to understand how we should expect that to flow through, we'll obviously know better when the final decision comes out.

There's also an adopted level of assumed consumption which keeps you from being able to sort of completely pinpoint the impact. It's revenues, rates being charged to customers over an adopted level of consumption.

Okay.

Good point. Because we've had higher than normal usage for the first six months and we would not be allowed to utilize that usage in determining what the -- you know, to effectively go back in time and add revenues we lost for the first six months.

I see. So even though you -- if you had had the rates you would have had higher numbers, cause you have had higher usage but It won't necessarily be that way.

It will be the adjudicated sales level as I understand it.

I guess the simplest way to thing about it then is that we'll get a one time bump up in earnings in 3Q and then we'll sort of normalize after that?

Yes, I think it's a good thing to remember that our company and several others in the state were successful in getting new legislation that allows for this retroactive look regarding revenues. Otherwise, prior to that law going into place, we lost anything that if we had a late decision, we just lost those revenues forever. So it's a fair way of dealing with delays in rate cases and I think it holds the staff's feet to the fire as well as our own.

Yes. That's good. And my other question is we've talked also a bit about the -- about ASUS and the one time contract. Bob, can you say what in terms of trying to understand what the run rate is going forward and I understand that it moves around a bit relative to repair and replace versus the base O&M business, but can you say what the roughly what the underlying quarterly run rate would have been in 2Q, ex the special projects? If we came in at $12 million, would it have been $5? Would it have been -- in other words, if we take that $20 million break it out over three quarters, is it roughly equally divided? That would be the other way to get at it.

Yes, well, over three quarters, it would not be equally divided, I can tell you that. It would be front end loaded to first and second quarters.

Okay. So these big quarters that we've just had are the bulk of the 20 million?

Yes.

Okay.

The project has to be done by August 15th and it is -- and will be done by August 15th.

Got it. So that implies that the underlying run rate for the business excluding any special projects is somewhere in the range of $3 million to $4 million on an annualized basis I mean on a quarterly basis. That is about right?

Yes, the --

I'm not looking for a specific number but just sort of a general range.

Yes, it's -- yes.

I think it's fair also to remind everyone that these 50 year contracts Bob mentioned the renewal and replacement side of our revenue. In addition to these special projects, we also are responsible for replacing through a master planning effort the water and waste water infrastructure that's on the base serving the older parts of the base. In Fort Bliss there is a dramatic increase in the base expansion because of their proposal, the government's proposal to expand the base for another 30,000 troops, I believe, over the next couple of years. And this -- it's hard to say just how much of that will spill over to ASUS but our position, because we are a regulated utility in Texas, Fort Bliss Water Utility services is a regulated business in the state of Texas. We therefore have within the context of that a defined boundary within which we operate and that's our position regarding future business activity as well and not only at this base but the others in Virginia and Maryland as well.

Which implies that other projects will certainly come up even though you're not predicting them and they'll be intermittent?

Well, that's our hope, Deborah. We don't have enough years of experience yet to really forecast and probably wouldn't anyway, but we believe we're in a really good position and because we have met the contract day, the August 15th deadline a month ahead of schedule, that really bodes well for future business, we believe.

But you don't have any booked currently looking into '08?

Not booked but there are certainly ongoing discussions at the various bases.

Okay.

It does vary by base as to -- some bases there are other parties that would like to be considered for doing work on the water and waste water system but it seems to vary by base. So some places we're -- looks like it's all going to be our work and other places there is a certain amount of politics involved.

Sure.

So it does vary by base.

Okay. That's helpful. I have one last question. Floyd, I asked about this before but wondering if you have any thoughts or updates, particularly given your comments earlier about drought in the state and increased focus by MET and other agencies on water supplies. Can you give us any further update on your thinking about the potential to more efficiently utilize your own water rights portfolio in terms of storage or leases or sales or any combination thereof?

We did not mention our activities at [Notomus] Mutual Water Company in Northern California. There are continuing to be ongoing talks about potential water transfers from that organization to -- actually there was a news article defining a proposal to the city of Fulsom for certain number of acre feet on a water transfer which we don't have a lot of detail on it yet, but we'll be bringing more of that information to our next call certainly as that develops further. Within our own spear of influence, Golden State Water Company itself, we have spent substantial amounts of capital to shore up our rights to ground water and as I mentioned during some of our discussions, as well as presentations, our company has the most court adjudicated ground water rights in the entire state of California. We feel that puts us in a good position for sustainability of the resource. We're not saying if it never rains ever again in California, which we know it will, there will be some problems with those rights certainly. But right now, we have about 2/3 of our almost 100,000-acre feet of ground water rights, about 2/3 of those rights have gone through the courts to get a right, legal right to pump. Many other utilities have not gone that direction in terms of shoring up those rights from a legal point of view. We think it really in times of drought gives us a little bit of a leg up to know that 55% of our supply which comes from ground water is more of a sustainable resource and so that -- when you're pumping from a ground water basin, the water in that basin certainly below ground is not going to evaporate. It's going to be a long-term source. It's effectively a huge bathtub that you're going to be able to pump from for a sustainable period of time. I don't know if that helps or not but --

It does and it sounds like this will continue to develop so my very last question on this, sorry to take so much time, is that it appears that in fact you're already beginning to see some benefit of that effort because I was surprised to see that you had a favorable water mix in the quarter given your relatively high demands and it looks like you actually were able to increase your pumped versus purchase mix, I wouldn't have expected. Is that partly because of the effort that you're making to get more adjudicated rights available to you?

Well, not only adjudicated part. I think going through the courts just in my mind kind of gives you that more of a strong assurance that you have that right to go get that water. What we also do is take advantage of the lease market that's out there. We have leased ground water rights from others and because we have additional pumping capacity, we have nearly 300 production wells throughout the state. If we can get a good price on leasing water from others, we'll take advantage of that and it will provide for more favorable mix in that regard as well. With respect to metropolitan's push on conservation, we were encouraged, frankly, that they've only gone to the position of being man -- not mandatory rationing but rather voluntary conservation. It's a strong message out there but they're hopeful that the people will come and do the right thing and cut back to some extent. But their supplies have been shored up as well through the addition of the Diamond Lake Reservoir in Riverside county which they've -- they're near capacity in that lake right now. They feel like they're in pretty good shape for this year.

Okay. Thanks, Floyd. Thanks, Bob.

Thank you.

(OPERATOR INSTRUCTIONS). At this time, there are no further questions. Are there any closing remarks?

Just thanking everybody for their participation. We really appreciate the questions and look forward to our next call. Thank you all for your continued interest and investment in American States Water Company.

This concludes today's conference call. You may now disconnect.