American States Water Co (AWR) 2008 Q2 法說會逐字稿

Welcome to the American States Water Company conference call discussing second quarter 2008 results. If you have not yet 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 you would like to listen to the replay of this call, it will begin this afternoon at approximately 2:00 PM Pacific time and run through Thursday, August 14, 2008. The toll-free number to dial for the replay is 800-642-1687, and the conference ID number is 56212702. 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 it will be limited to no more than one hour. Thank you. I would now like to turn the call over to Mr. Robert Sprowls. Please go ahead.

Thank you. Good morning or afternoon, ladies and gentlemen, and welcome to the presentation on American States Water Company's second quarter 2008 results. I am Bob Sprowls, Chief Financial Officer of American States -- and Floyd Wicks, President and CEO of the company, is also with me today. As usual, following the conclusions of our prepared remarks, the call will be opened up for questions.

I would like to remind you that certain matters discussed during this conference call are forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. I ask that you review the forward-looking information disclosure in our Form 10-K and Form 10-Qs on file with the Securities and Exchange Commission. The factors underlying the company's forward-looking statements are dynamic and subject to change. Therefore, these forward-looking statements speak only as of the date they are given. The company is under no obligation to update them. However, we may choose from time to time to update them, and if we do so, we will disseminate the updates to the investing public. During our presentation today, Floyd and I may refer to American States Water Company as AWR, our flagship subsidiary Golden State Water Company as GSWC, and American States Utility Services as ASUS. Before I talk about the results, I would like to mention that we plan to file the 10-Q tomorrow, and within our 10-Q, we have divided nearly each line of our income statement by segment -- that is water, electric, and contracted services. This should provide more transparency on the results of American States Utility Services.

Having said, that let's begin with the results for the quarter. Basic and fully diluted earnings for the quarter ended June 30, 2008, were $0.54 and $0.53 per share respectively, as compared to basic and fully diluted earnings of $0.42 per share for the same period ended June 30, 2007. Net income for the second quarter ended June 30, 2008 increased by 26.8% or $0.11 per diluted share to $9.3 million, compared to $7.3 million for the same period in 2007.

The $0.11 per share increase in diluted earnings for the second quarter of 2008 is due to the following items. First, we recorded a pre-tax unrealized gain on purchase power of $1.7 million for the second quarter of 2008, or a gain of $0.06 per share, compared to a $236,000 unrealized loss or a loss of $0.01 per share for the same period of 2007, a net increase of $0.07 per share. As many of you are aware, unrealized gains and losses on our purchase power contracts have been impacting Golden State Water Company's earnings since 2002 when Golden State entered into certain purchase power contracts that qualified as derivative instruments under SFAS Number 133, Accounting For Derivative Instruments and Hedging Activities. On a monthly basis, the related asset or liability of the purchase power contracts is adjusted to reflect the fair market value of the derivative at the end of the month, based on the then forward energy prices and the quantities to be purchased during the remaining term of the contract. Unrealized gains and losses will continue to impact the company's earnings until the contracts expire on December 31, 2008. Golden State Water has recognized these contracts at fair market value on its balance sheets, resulting in a cumulative unrealized gain at fair market value of $3.0 million at June 30, 2008. The cumulative gain of $3.0 million recognized on the balance sheet is expected to be recognized as a reduction to income by the end of the contracts, which expire on December 31, 2008.

Secondly, for the quarter, the dollar water margin increased by $3.0 million or $0.10 per share due to increased water rates approved by the California Public Utilities Commission subsequent to June 30, 2007. The effect of the rate increases was slightly offset by a decrease of approximately 1.5% in water sales.

Third, American States Utility Services, AWR subsidiary, recorded a pre-tax operating loss of $608,000 for contracted services for the second quarter of 2008, declining by $2.1 million or $0.07 per share, as compared to the second quarter of 2007, due primarily to a significant wastewater expansion project in 2007 at Fort Bliss. ASUS recognized pre-tax operating income of $2.1 million, from the wastewater expansion project during the second quarter of 2007. While ASUS's subsidiaries did undertake similar construction activity in the second quarter of 2008, the projects were on a smaller scale and there was no singular significant project.

Fourth, Golden State Water Company recorded a net pre-tax gain on the sale of property of $238,000, or $0.01 per share, during the three months ended June 30, 2007. There was no similar gain in the same period of 2008.

Fifth, Golden State Water Company recorded $480,000 of interest income or $0.02 per share during the second quarter of 2008, in connection with the Internal Revenue Service's examination of AWR's 2002 income tax return.

Lastly, higher other operating expenses at Golden State Water Company contributed to an overall net decrease of $0.02 per share to the results of operation. The $0.02 per share net decrease is mainly due to an increase in administrative and general expenses, due to higher labor and employee benefit costs, and an increase in depreciation and amortization expense, reflecting among other things the effective closing -- approximately $55.2 million of additions to utility plant during 2007. The increase in other operating expenses was completely offset by a lower effective income tax rate, ETR, of 38.4% for the second quarter of 2008 compared to 41.6% for the same period of 2007. The decrease in the ETR is principally due to changes between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements.

Now, on to the year to date 2008 results. Net income for the six months ended June 30, 2008 increased by 2% to $14.6 million, compared to $14.3 million for the same period in 2007. Basic and fully diluted earnings were $0.84 per share for the year to date June 30, 2008, as compared to basic and fully diluted earnings of $0.83 and $0.84 per share respectively for the same period in 2007.

The $0.02 per share increase in diluted earnings for the six months ended June 30, 2008 was composed of the following items. First, due to increasing energy prices during the first six months of 2008, AWR recorded a pre-tax unrealized gain on purchase power of $4.5 million or $0.15 per share, compared to a $2.5 million unrealized gain or $0.09 per share for the same period of 2007, a net increase of $0.06 per share.

Second, the dollar water margin increased by approximately $5.7 million or $0.19 per share during the six months ended June 30, 2008, due to increased water rates approved by the California Public Utility Commission subsequent to June 30, 2007, and a favorable supply mix change. However, this increase was partially offset by a decrease in water sales. A 5% decrease in water sales during the six months ended June 30, 2008 resulted in a $3.5 million decrease in water revenues. The 2008 water revenues were impacted by changes in weather and the effects of conservation due to increased customer awareness.

Third, pre-tax operating income for American States Utility Services declined by $4.8 million or $0.16 per share during the six months ended June 30, 2008, due primarily to the significant wastewater construction project in 2007 at Fort Bliss. ASUS recognized pre-tax operating income of $4.3 million for this wastewater expansion project, during the six months ended June 30, 2007. There was no similar large special project in 2008. Higher operating maintenance and administrative and general expenses also contributed to the decrease in the American States Utility Services pre-tax operating income.

Fourth, the Golden State Water Company recorded a net gain on the sale of property of $605,000 or $0.02 per share during the six months ended June 30, 2007. There was no similar gain in the same period of 2008.

Fifth, Golden State Water Company recorded $480,000 of interest income or $0.02 per share during the second quarter of 2008 in connection with the IRS's examination of the 2002 income tax return.

And lastly, higher other expenses at Golden State Water Company, partially offset by a lower effective income tax rate on a companywide basis, contributed to an overall net decrease of $0.07 per share to the results of operations for the year to date 2008. The $0.07 per share net decrease is due to an increase in other operating maintenance and administrative and general expenses at Golden State Water Company due to higher labor and benefit costs, and an increase in depreciation and amortization expense, reflecting among other things the effects of closing approximately $55.2 million of additions to utility plant during 2007.

Partially offsetting these increases was a lower effective income tax rate of 40.8% for the six months ended June 30, 2008, compared to 41.7% for the same period of 2007. And as I mentioned in the quarter, the decrease in the effective income tax rate is principally due to differences between book and taxable income that are treated as flow-through adjustments.

Before I turn the call over to Floyd, I would now like to take some time to discuss the contracted services business at American States Utility Services, or ASUS. Contracted services operating revenues are composed of construction revenues and management fees for operating and maintaining the water and/or wastewater systems at military bases, the primary services being conducted by ASUS. Such revenues decreased by $8.5 million during the six months ended June 30, 2008, primarily due to revenues in 2007 related to the significant wastewater expansion project at Fort Bliss, which generated $19.5 million of construction revenues in the first six months of 2007.

You may recall that in December of 2006, ASUS finalized an agreement with the US government for the construction of certain improvements to the existing wastewater infrastructure located at Fort Bliss, in El Paso, Texas. The agreement totaling $20.6 million was a firm fixed price contract. The project generated approximately $4.9 million of pre-tax income or $0.17 per share in 2007. Out of the $4.9 million of pre-tax income from this project in 2007, $2.2 million of pre-tax income or $0.08 per share was in the first quarter of 2007, $2.1 million of pre-tax income or $0.07 per share was in the second quarter of 2007, and the remaining $600,000 or $0.02 per share was generated in the third quarter of 2007. The project was completed in August 2007, and there were no further construction revenues associated with this special project after that. There was no singular significant project in the first and second quarters of 2008, and we don't anticipate similar-sized projects in the third and fourth quarters of 2008. As such, we may continue to experience decreases in ASUS's 2008 earnings as a comparison to its 2007 earnings because of this project.

The point here is that earnings and cash flows from these military special projects are intermittent and may or may not continue in future periods. When modeling projections, we recommend normalizing the earnings by excluding such special projects on military bases with the US government. However, the reduction in 2008 construction revenues compared to 2007 as a result of the wastewater project at Fort Bliss was partially offset by increased construction revenues at Andrews Air Force Base, pursuant to its 50-year fixed price contract, and the commencement of operation of the water and wastewater systems at military bases in North Carolina and South Carolina, in the first quarter of 2008. The timely receipt of price redeterminations is critical in order to cover ASUS's increasing costs for operating and maintaining the water and wastewater systems at the military bases.

The contract price for each of these military contracts is subject to price re-determination two years after commencement of operations, and then every three years thereafter. Re-determinations have been submitted and are under review by the US government for ASUS's operations in Virginia and Maryland. Resolution of these price re-determinations is expected later in 2008 and to date, ASUS has received interim increases to the management fees received for operating and maintaining the water and wastewater systems at Fort Eustis, Fort Story, and Fort Monroe in Virginia, and the wastewater system at Fort Lee, also in Virginia. ASUS has experienced delays in the re-determination of prices at Fort Bliss, following the completion of the first two years of operation in October 2006. However, ASUS is also preparing the price redetermination for Fort Bliss and expects to file it in the third quarter of 2008. I will now turn the call over to Floyd.

Thank you, Bob. And good morning, ladies and gentlemen. Before we start on the status of key regulatory filings, I would like to take this opportunity to congratulate Bob Sprowls on his appointment to succeed me as Chief Executive Officer and President of the company, effective January 1, 2009, as identified in a news release earlier this week. I will continue as a director of the company and effective January '09 as well, as the Vice Chair of the board of directors. It is gratifying to me personally that an insider, so-called, was selected as my successor. Bob and I are already working on a transition plan which will include a company-wide tour to meet with all employees and key business leaders as well.

Now, let's discuss the status of key regulatory filings and important actions and those still pending. As Bob mentioned earlier, the PUC approved rate increases subsequent to June 30 of '07, including the seven rate making areas in Region 1, customer service areas, effective January 1 of '08. The authorized rate increases are anticipated to provide Golden State Water with additional annual revenues of approximately $6.4 million in 2008, based on authorized return on equity of 10.2%. The PUC also approved rate increases for Regions 2 and 3, customer service areas, also effective January 1 of this year. The authorized rate increases will provide Golden State Water Company with additional annual revenues of approximately $3.6 million for Region 2, which represents the second year of a three-year rate case, approved in '07, and an increase of $3 million for the Region 3, which is the third year of the three-year rate increase approved in 2006. The combined rate increases for all three regions -- 1, 2, and 3 -- are designed to generate approximately $13 million in additional annual revenues effective January of this year, based upon normalized sales levels approved by the PUC.

According to the PUC's new water rate case plan which was adopted in May of last year, Golden State Water will migrate to a rate case schedule that brings all three regions of Golden State Water within a single rate case. Golden State filed its general rate case for Regions 2 and 3 -- and the corporate office -- this year, actually last month, using the most recently adopted return on equity of 10.2%. New rates, if approved as scheduled, will be effective in January of 2010. Because the Region 1 rate case was just approved in '08 of this year, or January this year, the rate case plan calls for separate Region 1 general rate case filing in the year 2010. That case will have a two-year cycle for 2011 and 2012, and then will be combined into our next rate case cycle with the other two regions, which will then all be reviewed in a single case filed in July of 2011 for a three-year rate case cycle beginning 2013.

Also under the new rate case plan, three of the large water utilities -- Golden State Water, Cal Water Service Company, and California American Water Company -- were required to each file a separate application on May 1 of this year to review the cost of capital. Golden State Water filed its first cost of capital application under the new rate case plan on May 1 of this year. The application requested the commission adopt a return on equity of 12.1% for calendar years '09, 2010, and 2011. According to the rate case plan, the commission intends to process the cost of capital proceeding in six months' time, at which time the rate of return authorized by the commission will be implemented into rates on a company-wide basis in 2009. We anticipate having revenue adjustments in all water service regions for 2009 based on the difference between the then approved rate of return in the pending cost of capital proceeding, and the currently adopted returns.

In February of '07, the PUC opened an order instituting investigation, OII, to consider policies to achieve conservation objectives known as the Conservation OII. Golden State Water is in Phase II of this proceeding in which the PUC will primarily consider the following. Number one, the revenue -- water revenue adjustment mechanism to decouple sales from revenues, affectionately called WRAM. Tiered rate design, number two, as a means to encourage water conservation. A modified supply cost balance account, number three. And four, whether the adoption of a revenue adjustment mechanism should affect the authorized return on equity.

In May of '07, the PUC issued a ruling in the Conservation OII, which directed the parties in the proceeding to address the issue of whether the adoption of a revenue adjustment mechanism should affect the water utilities' authorized rate of return. In July of '08, the assigned administrative law judge issued a proposed decision in this Conservation OII. In addition, on the very same day, an alternate decision was issued by the assigned commissioner's office. Both of these proposed decisions recommend approval of the Golden State Water and division of rate pair advocates settlement agreement regarding the conservation rate design, implementation of the WRAM, and a modified supply cost balancing account. The two proposed decisions differ with regard to their recommendations to change the authorized rate of return. The administrative law judge's proposed decision recommends an adjustment to the rate of return, with the implementation of the WRAM -- and the alternate decision from the commissioner's office, recommends deferring this issue to the recently filed cost of capital proceeding. Golden State Water Company expects the PUC to issue a final decision on this matter in the third quarter of this year.

In the fourth quarter of '07, Chaparral City Water Company in Arizona filed its new general rate case with the Arizona Corporation Commission. In the '07 filing, Chaparral City Water Company requested rate increases which are expected to generate approximately $3.1 million in additional revenues. The processing of this case was expected to take about 18 months. However, the ACC suspended processing of this rate case until completion of the proceeding on remand from an appeal of the 2004 rate case. On July 17 of this year, the ACC rendered its final decision on the '04 case with a proposed $12,000 revenue increase. As a result of the final determination, Chaparral City Water Company intends to renew pursuit of the 2007 case, as promptly as possible.

Additionally, Golden State Water Company's Bear Valley Electric Service Division filed its general rate case with the PUC's Electric Division in June of this year. Costs incurred in connection with the company's recently constructed 8.4-megawatt generating facility are also expected to be reviewed by the PUC as part of the 2008 general rate case. The filing requests an overall annual revenue increase of $6.8 million, which represents an overall increase of about 23% over current rates.

As you all know, our regulated business, primarily that of Golden State Water, is capital intensive and requires considerable capital resources. A portion of these resources are provided by internally generated cash flows from operations. When necessary, we obtain funds from external sources in the capital markets, and through bank borrowings. American States Water Company has access to a revolving credit facility with aggregate bank commitments of $85 million, which is currently utilized to support operations. Up to $20 million of this facility may be used for letters of credit. As of June 30, of this year, an aggregate of $56.8 million in cash borrowings were included in the company's current liabilities and approximately $11.1 million of letters credit were outstanding under this facility. As of June 30, '08, American States Water has $17.1 million available to borrow under the credit facility. AWR may seek to increase the $85 million revolving credit facility by up to $30 million, and/or issue common stock in 2008. The proceeds from the issuance of common stock would be used to pay down short-term borrowings.

Regarding the weather conditions in the state of California primarily, in June of this year, governor Arnold Schwarzenegger proclaimed a statewide drought and issued an executive order to address, quote, a dire situation, end quote. Which takes immediate action to deal with serious drought conditions and water delivery reductions in California. Water storage in many of the state's major reservoirs is far below normal. The Colorado River basin, which provides water to southern California by way of the Metropolitan Water District of southern California, is experiencing a record eight-year drought. The above average precipitation level in early 2008 in California, was offset by extremely dry weather experienced since March of this year. The precipitation level in the state for the three months ended June 30 was a mere 0.78 inches, which is much lower than the 10-year average precipitation of 2.6 inches for the same period. The precipitation level for the month of June was only 0.02 inches, the fourth driest month on record for the past 113 years. According to the US Drought Monitor's July 3, 2008 publication, it forecasted little rainfall across California, and is unlikely that the state will experience significant improvement in the near future.

Golden State Water is aggressively investing in infrastructure improvements to protect water supplies from source to tap, and intends to implement an increasing block rate design as a means to encourage water conservation. Because capital investment creates the basis for long-term earnings growth and is a key facet of increasing shareholder value, I would like to briefly discuss the company's program. Construction expenditures were approximately $39 million for capital work performed during the first six months of this year. We believe we are on target for our projected construction expenditures of $55 million to $60 million for 2008.

As reported in our recent news release, the board of directors of American States Water Company approved a quarterly dividend of $0.25 per share. This action represents the 289th consecutive dividend payment by the company. For more than 54 consecutive years now, American States Water Company shareholders have received an aggregate annual increase in dividends. The 6.4% dividend increase last fall was significant in that the company reached a long-term objective of achieving a 60% payout ratio. American States shareholders should know that using the SEC guidelines for reporting financial performance, the $10,000 invested in the shares of American States Water at December 31, 2002 would be worth $17,880 at June 30 of this year. This amounts to an annual compound growth in value of 11.1%.

Thank you all for your attention and for your support, and remember that our total return prospects are reflected in our financials. Growth opportunities are coming to fruition. And our management team is focused on the sustainability with a 100% renewable resource provided to our customers, namely water -- three outstanding reasons we ask for your continued support in spreading the word to your clients as to why American States Water Company belongs in their investment portfolio. Thank you again, and I will now turn the conference over to the operator to entertain any questions you may have.

We will now entertain any questions you may have about the information presented today. (OPERATOR INSTRUCTIONS) For the record, please state your name and your company prior to asking your question. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Heike Doerr of Janney.

Good morning, guys, how are you today?

Good. How are you?

Good. Can we start with the regulatory matters in California? When will Golden State be implementing the [WRAM]?

We're hopeful that it will be implemented this year, whether it is going to be the -- during this quarter or the fourth quarter. We're hoping before the end of the third quarter, but it is not certain yet.

Had it always been that you had plans to go after Cal Water? I know they had implemented theirs either last month or the month before. I had thought that you would both be implementing around the same time.

No, just as we're on different schedules for filing rate cases, the PUC has really categorized each of the class A companies on a very strict schedule. And we're following Cal Water and I think Cal American was the other one that is ahead of us. I'm not sure of that.

And they divided up the companies into two phases, and we are getting into the second phase.

Okay. But the way it gets implemented is similar, right? The accounting doesn't change from company to company?

That's right. Yes, that's right.

Okay. And I believe this is the first that I'm hearing of the rate case last month, perhaps I'm out of the loop -- can we have some numbers around the Region 2, Region 3 request that you recently made?

Yes, hold on one second. I believe that is going to be in the Q tomorrow, right?

Yes, it is.

If it is not handy I can hold off until tomorrow -- it is not a big deal.

Give us another couple seconds here. Good question.

For Region 2, $20.3 million is the increase effective 2010. And then it is $2.6 million in 2011 and $4.2 million in 2012. And for Region 3, it is $30 million in 2010, $1.7 million in 2011, and $3.7 million in 2012.

And now, do those numbers assume the, let's call it, 10.25% ROE that you have been getting currently? Or how does that work?

Yes, the 10.2%, yes. Now, the 10.2% that we're currently getting is really on Region 1.

Right. But that gets applied to future rate cases until the cost of capital proceeding gets completed, right?

Right.

Although in theory, the cost of capital should be completed before this decision comes out?

Yes, it should.

Okay.

That's right.

And just as a final question, can you talk a little bit more about ASUS and the efforts to get price increasing on these military contracts?

Yes, it has been quite an extensive operation to get these filings made for price re-determinations as well as equitable adjustment filings. And as you know, as we've mentioned before, these filings in many ways emulate what we do in terms of filing a rate case. In the case of the military bases, our regulator frankly is the US government, and it is new for them as well. And I think that is frankly why it is taking a little longer than we would anticipate. But we're making progress, they have included -- there have been some recent interim adjustments while we're waiting for the final increase to be determined. So that is -- I believe we're on track for having better news by the end of the third quarter.

And is there additional information on this in the Q as well? Or is it kind of mum is the word until a decision gets made from the government?

Well, at this point, we have filed the re-determinations for the East Coast bases -- Virginia and Maryland bases. So those are being considered. For Fort Bliss, we expect to file that price re-determination in the third quarter. And there is more detail in the 10-Q, but it is -- that is is the process we're going through. Fort Bliss has been a little bit of a problem in terms of this particular item, but we're working through it. It is also the base where we had the significant wastewater projects, so we look at it as a lot of opportunity there. But it is just a little tougher to work through the red tape, I guess.

With regard to that, Bob makes a good point -- if you can imagine moving in 30,000 people into an already existing fairly good-sized base within a short period of time, two to three years, it is very busy place. And we believe there will be other opportunities there, but we don't -- we can't forecast that at this point.

Okay. Thanks. Appreciate your help.

You bet. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Alan Seymour with Columbia Management.

Yes, I have two questions. First one is, your return on equity request of 12.5%, can you give me some sense of the history of how that has worked out in the past? And then the second question has to do with when a developer in your area does a development and requests water, how do you handle that capital expenditure? And are there any accounts referable associated with any developers that you may have to get reimbursement from?

Do you want to handle the -- ?

Yes, the return we've requested in the water rate case for Regions 2 and 3 is 12.1% ROE. And typically, we will go in for rate increase and request an ROE that is -- we think it is valid, but we seldom do we get what we ask for. And a number of cases, we've been requesting between 11.5% and 11.50% (sic), and we come out in the neighborhood of 10%. So I don't want you to think you can just sort of scale a 12.1$ down that way, because what happens typically in a rate case is a lot of cases you end up settling this particular issue with the department of rate pair advocates. So even though you file direct testimony, you don't -- it doesn't make it to the hearing in terms of putting your witnesses on the stand. Well, given the new ROE approach for the water companies, there will be cross-examination given to rate of return witnesses, because they basically bifurcated the return on equity component, or the cost of capital component from the general rate case approach. And it used to be that there would be a little bit of horse trading in terms of we will take a -- possibly take a slightly lower return, if we get this particular capital project in, or this particular operating expense, or vice versa. And Floyd, you want to handle the second question?

Regarding the developer projects, where we deal frankly throughout the state of California, typically we follow the rules as set up through the California Public Utilities Commission where developers would put in all the infrastructure required to serve the development, and then over a period of 40 years, that developer would get a pay-back pretty much pro rata on 1/40th each year, with no interest. That is what we affectionately call Rule 15. And it has been in place for quite a number of years in California, but we do not put our own capital at risk in these developer-related projects. I don't know if that fully answers your question or not. I would be happy to try again.

Well, they do contribute basically -- they contribute the dollars they spent on this infrastructure to the company.

Oh, correct. That's right.

And if you look at the liability side of a company's balance sheet, you will see two lines there, customer advances for construction, and contributions in aid of construction, and that is where these dollars, or this infrastructure has been contributed. On the left-hand side you will see the assets that have been contributed and on the right-hand side you will see these liabilities or the customer advances for constructions we have to pay back to the customer over time, and that's what Floyd described. At some point some of this property turns into contribution and [aid] of construction, but those are dollars we don't have to pay back.

The dollars we pay back under the so-called advance -- the developer advances the dollars, and we pay them back, those are dollars that over time find their way into rate base. So that does build rate base over time. But at a much slower pace than if we paid for that capital up front and imposed it in the rate base.

Okay. Great. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) There are no further questions at this time. I will now turn the call back to management for any closing remarks.

Well, thank you all again. We really appreciate your participation today and for your continued interest in the company. And we thank you for following our news releases here this week and congratulations again to Bob Sprowls.

Thank you.

Thank you all.

Thank you.

This concludes today's American States Water Company conference call. As a reminder, the call will be available for replay beginning at approximately 2:00 PM Pacific time. The toll-free number for the replay is 800-642-1687, and the conference ID number is 56212702. You may also access the replay at www.ASwater.com. Thank you for your participation. You may now disconnect.