American States Water Co (AWR) 2008 Q4 法說會逐字稿

Today is March 12th, 2009. Welcome to the American States Water Company conference call discussing fourth quarter 2008 and year-end results. If you have not received a copy of this morning's news release announcing the earnings for the quarter, please dial 909-394-3600, extension 651 and someone will fax or e-mail the printout to you. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 1:00 p.m. Pacific Time and run through Thursday, March 19, 2009. The toll free number for the replay is 1-800-642-1687 and the conference ID number is 87921415.

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. At this time, I would like to turn the call over to Eva Tang, Chief Financial Officer of American States Water Company. Ma'am, please go ahead.

Thank you, Tina. Good morning or good afternoon, everyone, I want to thank each of you for joining us today and for your continued interest in American States Water Company. Bob Sprowls, President and CEO, is also with me today. 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 (inaudible) 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-Q on the file with the SEC. The factors underlying the Company's forward-looking statements are dynamic and subject to change. Therefore the forward-looking statement speaks 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. If we do so, we will disseminate the updates to the investing public. During our presentation today Bob and I may refer to American States Water Company as AWR, Golden State Water Company as GSWC and American States Utility Services as ASUS. I will begin with the results for the quarter. Basic and diluted earnings as reported for the quarter ended December 31, 2008, were $0.16 per share as compared to basic and diluted earnings of $0.36 and $0.35 per share respectively for the same period ended December 31, 2007. The decrease of $0.19 in diluted earnings was a result of three onetime noncash items that affected the comparability between the two periods. We believe that when analyzing our fourth quarter results, the items should be excluded because they were either triggered principally by market factors that were largely out of the control of management or were onetime in nature and did not reflect the day to day operations of the Company.

Those onetime and noncash items are as follows. The first one, during our 2008 goodwill impairment review, it was determined that the goodwill of $11.2 million associated with the acquisition in 2000 of Chaparral City Water Company had been impaired. Chaparral City Water Company is a regulated utility in Arizona. Due to the downturn in the economy and the current regulatory environment in Arizona, a goodwill impairment charge of $7.7 million or $0.27 per share was recorded during the fourth quarter of 2008 in accordance with accounting standards. As you may know, many Company were faced with similar write-offs during the current financial crisis. Although the goodwill impairment charge negatively impact our reported results, the charge is a noncash item that did not and will not affect our liquidity or cash flow. The second item is one we have consistently removed from analyzing our results, which is the unrealized gains and losses on the purchase power contract.

The cumulative unrealized gain on purchase power contract includes pre-tax income by $788,000 or $0.03 per share during the fourth quarter of 2008 as compared to $522,000 or $0.02 per share during the same period in 2007. That is $0.01 per share including earnings between the two periods. Lastly, another item affecting the comparability between those two periods has to do with the favorable decision issued by the CPUC on November 16, 2007. The decision added about $3.3 million to pre-tax income or $0.11 per share to the 2007 fourth quarter results. However, the $0.11 per share is related to the water margin shortfall for the first nine months of 2007. There was no corresponding amount in fourth quarter of '08 as we have previously disclosed the CPUC's decision approved January increases with rates retroactive to January 1, 2007 in Golden State Water region to customer service area and authorized additional rate increases in the region two and the region three to recover general office expenses at the Corporate headquarter.

Because of the CPUC's delay in proceeding, our general rate cases and increases were retroactive to January 1, 2007. However, all were recorded in the fourth quarter of 2007. So in summary, removing the fact of the three items just discussed, adjusted diluted EPS was $0.40 per share for the fourth quarter of 2008 as compared to $0.22 per share for the same period in 2007. The increase of $0.18 per share in adjusted earnings is due to the following items. First, excluding the fact of the CPUC decision discussed previously, the water margin increased by $2.6 million or $0.09 per share during the fourth quarter of 2008. This is due to increased water rates approved by the CPUC in 2008. Rate increases added about $3.3 million to the Company's fourth quarter revenues. Second, I am very pleased to report that our contracted service operations under American States Utility Services, or ASUS, recorded pre-tax operated income of $1.6 million during the fourth quarter of 2008.

That is an increase of $3.2 million or $0.11 per share as compared to the fourth quarter of 2007. This is due to an increase in construction activities at various military bases and the decrease of $677,000 in bad debt expense due to favorable subsequent cash receipts. Third, a significant decrease in the effective income tax rate due to changes between book and taxable income that are treated as flow-through adjustments in accordance with the CPUC requirements. The lower effective tax rate favorably impact earnings by about $0.08 per share for this quarter of '08 as compared to 2007 fourth quarter. Lastly, the increase in earnings described previously were offset by increases in our other operating expenses and amortization and general expenses at the Golden State Water in the 2008 fourth quarter. The higher expenses resulted in an overall decrease of $0.10 per diluted share to the results of operations.

Before I move on to the year-end result, I want to talk about one important step we took in 2008 to our future earnings stability, which was securing the CPUC's approval of a water revenue adjustment mechanism or WRAM. The WRAM allow us to decouple revenue from sales and avoid the volatility in our revenue stream caused in years past by drought, unseasonable temperatures and other factors. We implemented the WRAM along with a modified cost balancing account in late November, 2008 which favorably impact earnings by approximately $0.03 per share that would have been lost due to conservation. We are proud of this accomplishment, which we believe will mitigate the volatility in our future earnings due to consumption effect and supply cost changes. Now, I'm going to briefly talk about the actual results for the year. Net income for year 2008 decreased by 21.5% to $22 million compared to $28 million for the same period in 2007.

Again, excluding the effect of the $0.27 per share goodwill impairment charges in 2008 and a $0.05 and $0.07 per share of unrealized gain on power purchase contract for the year 2008 and 2007 respectively, adjusted diluted earnings would be $1.48 and $1.54 per share for 2008 and 2007 respectively. The decrease of $0.06 in adjusted earnings despite the increases in revenue discussed later and the lower effective tax income -- excuse me, a lower effective income tax rate, as I mentioned earlier in the call, is due primarily to the following items. First, Golden State Water's water sales in 2008 decreased by about $0.05 as compared to 2007. That is $0.18 per share due to conservation efforts. However, the implementation of the WRAM and the modified cost balancing account in late November, 2008 to decouple sales from revenue favorably impacted earnings by about $0.03 per share.

As I said earlier, the $0.03 would have been lost due to conservation. Therefore the net impact due to lower sales in 2008 was $0.15 per share. Second, Golden State Water incurred higher operating expenses during 2008, primarily related to higher labor costs and employee related benefits. And third, although ASUS has a favorable fourth quarter result, the financial performance of ASUS to contracted services operation at military bases for the year do negatively impact the Company's earnings. This was due to an increase in operating expenses incurred at two new Carolina bases, which Bob will discuss in more detail later. Revenue for the year ended December 31, 2008, increased by $17.3 million to almost $319 million over 2007 revenues due to water rate increases of $13.2 million, partially offset by decrease in consumption discussed previously and an increase in revenue generated from ASUS contracted services.

Revenue from contracted services increased in 2008 [all because]. Finally in new management fees generated from operations at two new military bases, which began June the first quarter of 2008. The increase of $1.8 million in construction revenues at various military bases and $666,000 of increases in management fee due to enterprise increases at various military bases. Before I turn the call over to Bob, I would like to take some time to discuss the Company's liquidity and capital resources. Despite the country's economic downturn and credit crunch, Golden State Water Company has successfully completed a ten-year senior note of $40 million at a fixed rate of 6.7% just two days ago. The Company also increased its syndicated credit facility by $30 million to $115 million during 2008.

We believe our sound capital structure and stable credit rating combined with our financial discipline will enable us to stay on course prudently investing our infrastructure and to grow our regulated utilities by earning adequate rate of return on the investments, while continuing to improve our services to our customers. For 2008 capital expenditure were approximately $77 million. That is an increase of $27 million over 2007. We expect our capital expenditures to be maintain at similar level during 2009. We will continue to access debt and equity market to support this ongoing important course strategy of ours. I would now turn the call over to Bob.

Thank you, Eva, and once again good morning or good afternoon, ladies and gentlemen. As discussed by Eva, I am pleased to say that ASUS had a good fourth quarter due to increases in construction revenues at military bases in Texas and Virginia. We also received interim price increases for Fort Bliss in October, 2008, adding about $100,000 a month to the O&M revenues. During our third quarter conference call, we mentioned that we incurred higher than anticipated costs and emergency construction costs at the Carolina bases that were not anticipated in the contracts, due to the age and preexisting condition of the infrastructure. As a Company, we have determined that if the scope of the contracted services changes in the future, ASUS would first seek contract modification approval from the government before any work begins in order to minimize loss on these firm fixed price contracts, unless it is emergency related work. I believe this practice has helped ASUS's earnings in the fourth quarter.

I will now discuss the status of key regulatory filings for the Company. As Eva mentioned earlier, earnings were negatively impacted in the first nine months of the year due to statewide customer water conservation efforts. On November 25, we implemented a water revenue adjustment mechanism, WRAM, to decouple sales from revenues and a modified cost balancing account that allows recovery of supply costs that deviate from those costs included in rates authorized by the California Public Utility Commission. As a result, our earnings were favorably impacted by $0.03 per share in the fourth quarter that would have previously been lost due to conservation. Prior to implementing increasing block rates to encourage conservation, we undertook customer education initiatives including providing customers with conservation rate notices as a bill insert which explained the impact of conservation rates on customer bills.

In addition, in a separate proceeding, the California Public Utility Commission also approved an advice letter filing to allow Golden State Water Company to create and implement a water conservation memorandum account to track the extraordinary expenses and revenue shortfall associated with the conservation measures in conjunction with a declared drought in California. The water conservation memoranda account was effective August 18, 2008 and has been used to track the revenue shortfall until the WRAM and modified supply cost balancing account were implemented on November 25, 2008. In January, 2009, Golden State Water Company filed an advise letter seeking authorization to recover about $1.9 million of the revenue shortfall from August 18th to November 25th.

While the water conservation memorandum account to track the revenue shortfall has been replaced by the WRAM after November 25, 2008, the conservation memorandum account will still be tracking extraordinary expenses associated with the drought in California. However, unlike the WRAM which is probable for recovery according to the August 21st CPUC decision, the recovery of the water conservation memorandum account is not certain and will not be recorded on our financial statements until approved by the CPUC. This is why the decrease in consumption during the first nine months of 2008 negatively impacted earnings. If the $1.9 million is approved as filed, Golden State Water Company will then record a regulatory asset and an increased income. For 2009, the following regulatory proceedings at AWR's regulated utilities are expect to impact earnings.

First, the California Public Utility Commission has approved escalation year rate increases for all three Golden State Water Company water rate making areas effective January 1, 2009. The total estimate of additional revenues for 2009 due to these escalation year increases approximates $9.4 million. Second, revenues will be adjusted prospectively for all regions based on the result from the cost of capital proceeding. A proposed decision was issued with a return on equity of 10.2%. The proposed decision has been held by Commissioner Bond until March 26, 2009. Third, Golden State Water Company's Bear Valley Electric Service division filed its general rate case with the CPUC's electric division in June, 2008 requesting an annualized revenue increase of $6.8 million in 2009 and incremental increases of $3.7 million over the three-year period 2010 to 2012. We expect a decision to be issued in June or July.

Additionally, Golden State Water Company executed new purchased power contracts in October, 2008 that began providing power to Bear Valley Electric effective January 1, 2009 at a fixed cost over a five year term. We have filed an amended application to request California Public Utility Commission approval of the contract and also requested regulatory accounting treatment for all unrealized gains and losses on the new contract to avoid having to recognize an earnings impact from derivative accounting. We think a final decision on the power contract application will be issued in the second quarter of 2009. Fourth, Chaparral City Water Company also has a rate case proceeding in front of the Arizona Corporation Commission requesting an annualized revenue increase of $3.1 million. We hope we will receive a final decision in the third quarter of 2009. Let's talk a little bit about water supply issues. The drought in California is a hot topic these days.

In order to help ensure the reliability, quality and affordability of water, Golden State Water Company manages a portfolio of water supplies, including groundwater production, the use of treated surface water and arrangements with water wholesalers. Golden State Water Company provides approximately 55% of its demand through pumping its own wells. And we purchase about 45% of our supply. Golden State Water has contracts with various governmental entities, principally member agencies of the Metropolitan Water District of Southern California, MWD for short, and other parties to purchase water for distribution to the Company's retail customers. MWD's principal sources of water are the Colorado River and the state water project. And as you know, the state water project conveys water from Northern California.

Water supplies available to MWD through the state water project have historically varied from year to year based on weather. Although MWD has generally been able to provide sufficient quantities of water to satisfy the needs of its wholesale customers. However, a key link in the state water project is the Sacramento/San Joaquin River delta which exits to the San Francisco Bay. Due to the Federal court ordered pumping restrictions for the delta, the current outlook for deliveries from the state water project has not improved. In light of pressure on all of its sources of imported water, including the drought mentioned earlier, MWD has indicated that a regional shortage of 10% to 25% or more is possible for 2009, and has stated there is a 75% chance of mandatory rationing occurring within its service territories in 2009. MWD had declared restrictions on water availability for ground water replenishment and other supply programs. MWD has also announced planned increases to its water rates beginning in 2009.

Increases in prices from wholesalers, such as MWD, flow through the water supply balancing account for Golden State Water Company. Golden State Water also purchases water from the Contra Costa Water District for use in its Bay Point Service territory. The Contra Costa Water District, which also relies on water flow through the delta, has also announced plans for mandatory water allocations and restrictions in 2009. Golden State Water Company is working closely with Contra Costa Water District to ensure continued supply to customers in Bay Point service territory through implementation of possible mandatory water conservation activities. Golden State Water Company is closely monitoring developments and working with its water suppliers to safeguard the supply and evaluate potential emergency responses to a prolonged reduction in imported supplies.

In addition the Company has began to aggressively pursue voluntary conservation measures among its customers and implement customer education initiatives to help to deal with supply variability and the general scarcity of water supplies. 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 at its January, 2009 meeting. This action represents the 291st consecutive dividend payment by the Company. For more than 54 consecutive years American States Water Company shareholders have received an aggregate annual increase in dividends. The Company presently intends to continue to pay in quarterly cash dividends in the future subject to earnings and financial conditions and such other factors as the board of directors may deem relevant.

American States shareholders should know that despite the difficult stock market conditions, the American State Water share price continued to outperform both the Dow Jones and S&P 500 indices. Using the SEC guidelines for a reporting financial performance, $10,000 invested in the shares of American States Water at December 31, 2003 would be worth $15,285 at December 31, 2008. This still amounts to an annual compound growth in shareholder value of 8.9%. Before I turn the conference over to the operator to entertain questions, I'd like to thank you again for your continued support and interest in the Company.

(Operator Instructions). Our first question will come from the line of Debra Coy with Janney.

Good afternoon, Bob, good afternoon, Eva, or good morning to you actually.

Hi, Debra.

Hi, Debra.

A couple of follow-up questions. First on ASUS, it's great to see that contributing in the fourth quarter and I am wondering what you can tell us about how things are shaping up for 2009. Number one, where you stand on any additional rate increases or adjustments there and, number two, what the prospects are for additional construction work or whether the construction work you were doing on the east coast bases was wrapped up in the fourth quarter.

Let's talk about perspective financial information, we typically haven't provided that for ASUS.

I know, but just generally directionally.

Well, that business has been volatile and as you said fourth quarter was improved performance there. We are glad to see that. It's one of these things where we don't know whether we are out of the woods at this point and don't want to say we are before we are. So we are going to be conservative in terms of saying where we are there. Regarding the major construction projects, we still have I think a little bit to go there in terms of a couple of these major projects that we are doing on the east coast, but I'll tell you there's a number of construction projects that need to be done at Fort Bragg and it's just timing of that is we are a little bit unclear.

So we are going to continue to do these construction projects and it is going to probably vary base to base. Regarding the price redeterminations, we have done filings for price redeterminations on our east coast bases, so that has to run its course. We have a request for equitable adjustment in at Fort Bliss. Once that gets completed, we feel we can then go in and file for a request for price redetermination there. So really we've asked for price increases everywhere we can except Fort Bliss and that's because we have got to resolve this inventory issue first. Eva, I don't know if you have anything to add to all that.

Debra, I think -- .

If you can just -- I'm sorry, just to back up.. If you can explain the inventory issue. You mentioned that you did get a $100,000 a month increase at Fort Bliss starting in October. That's an interim partial increase? What exactly is the situation at Fort Bliss?

Yes, that is an interim increase. We are waiting for kind of a final decision there that will deal with where we head prospectively as well as, I believe, there is some consideration of whether any of this is retroactive. But as you know, the situation there is we've taken over significantly more assets at Fort Bliss than we were led to believe in the RFP that was sent out. So it's a goal to try to get that run to ground here and moving forward and that will affect the price redetermination at Fort Bliss.

That is the inventory issue you referred to is the inventory of assets?

Yes.

Okay. Understood. I'm sorry, Eva, go ahead.

I'm sorry, Debra. What I was trying to say is that the losses for '08, the majority of it come from the new bases, the two bases in Carolina, and we have to make a policy that we will seek contract modification approval from the government before any work begin unless it is emergency related work. So I think that will definitely help us going forward. That's just something I would like to add here.

Okay. So that you wouldn't -- so that the additional work that you were doing that was resulting in operating losses, you won't do that any more unless you get preapproval?

Unless it's emergency work.

Right.

Admittedly some of the work at Fort Jackson was emergency related and it's just the situation there was so difficult. We didn't feel like we could not fix the sewer system there. So we've now filed for a request for equitable adjustments for those dollars and hope to receive one in 2009.

That's right.

Okay. And on Golden State, our understanding on the 10.2% ROE, you mentioned that that decision is being held until March 26th. What does that mean?

It's supposed to be on the agenda today. They got postponed to the next agenda.

I see.

Right. So I think the commissioner still discussing the issues and I don't know what exactly will come out with that but the PD is out there.

But, Eva, there's no guarantee that it will be dealt with on March 26th.

For now they've postponed it to March 26th.

So it could be postponed further. So that is still a matter of debate is the fair conclusion that we can take from that?

I think that is right. They know that everyone is waiting for them. They are trying to move it along is what I've heard. But that doesn't -- there is no guarantee that at March 26th it will get -- we will get a final there.

Okay. And then just as a reminder in terms of how to calibrate it, if we were to get the 10.2 that is in the proposed decision, what sort of adjustments would that mean for you across your jurisdictions? I can't recall exactly where your current allowed ROEs are.

Region three is at 9.8. Region two is actually at 10.2. And region one is at 10.1.

So it would be a net benefit for you?

It will be a net benefit because it would not be a take away in any of those areas. Now of course region two and three are our biggest region. So region two would be a wash. Region three there will be some pretty good upside between 9.8 and 10.2 and region one, a smaller area for us. 10.1 is our current ROE there.

Okay. That's helpful. So that would -- we -- when that is finalized, that would take effect presumably at this point perhaps sometime in the second quarter?

Yes.

Yes, it will be a perspective, there will not be any retroactive back to January 1st.

Okay. On Arizona, we knew that you had the rate case there that had been dragging on and on and you mentioned both the economy and the regulatory situation as a cause for the goodwill write-down. Which of those two pieces is the bigger and how should we -- Arizona has been small, but how should we think about that going forward?

Well, I think the economy is a pretty good impacter to that impairment analysis. We have to do this impairment analysis every year and I don't want to give you the impression that though the regulatory situation over there is not all that favorable, I don't want to give you the impression that it's gotten considerably worse because it really hasn't.

We hope it's gotten better, actually, with some of the changes.

The hope is that it has gotten better. But you still have an elected commission, you still have a historical test year, and with each year that passes, it's really getting more difficult for us to prove that it is improving, but it's during 2008 our remand proceeding didn't work out very well for us. So we had to factor that into the impairment analysis. Eva, if you want to jump in here? We spent quite a bit of time analyzing whether there's been an impairment and this is what we've concluded.

Can you say at this point what your rate base is in Arizona?

I think about $24 million, $25 million.

Okay. And we can assume that you are under earning, significantly under earning what even is your -- what is your current allowed ROE in Arizona?

Well, that is a confusing answer or a confusing question because we -- under a original cost rate base the ROE there is 9.3%. Now when we file the remand to get fair value treatment for our rate base, the commission came in and basically gave us the fair value rate base, but reduced the ROE to basically compensate for the difference in rate base. So at the end of the day we came out with, I think, a $12,000 increase in annual revenues.

Got it.

So that was what 7. -- .

4, I think.

Yes. Somewhere in the neighborhood of 7.2 to 7.4 was the allowed ROE on fair value rate base.

Okay. Understood. So the delta would be if you can -- whatever the final decision is if you can do some catch up there.

Yes. I'd focus on 9.3 on original cost rate base. The number Eva gave was the original cost number, not the fair value.

So the fair value rate base is higher?

Yes, yes.

For what you put into there since then.

Yes.

All right. That's helpful.

It is a historical rate making area over there. So you always to have a regulatory lag in the state. By the time they authorize the rate of return, which is kind of low, even lower than California ROE, then it's already a year and a half later than the time you spent the money. So there is always a lag in Chaparral City Water Company. That is something we evaluated as well when we were forecasting.

So, Eva, this rate case we filed in '07 is using a test year of '06.

And it still hasn't been determined?

Yes, we still haven't got -- .

So you are way behind, right?

That's the trouble with historical test year states and I had the opportunity to go over there and testify about that, but it didn't seem like they said oh, you are right. You should change. It really is -- well, it really is a state that difficult regulatory environment.

It raises the question of why we have those assets at all, but I guess we can leave that for another time. My last question is you mentioned higher labor and employee cost expense. Is that partly pension related and can you comment on where your current pension expense is and will be? That has been a topic that has come up as all of our companies have been reporting this time around.

Yes. The higher employee cost is we've add people at the staff at American States Utilities Services just because that business is growing and then we have some wage increases. Eva, I don't think pension cost were a big driver for 2008.

It's not for '08 but it will be for '09.

Why don't you talk a little bit about pension.

Okay. Debra, as you know, for our Company we are supposed to recover our FAS 87 expenses rates and due to the market downturn our current assets at the end of the year, like everyone else, has a loss and discount rate to calculate the present value of the projected benefit application also lower resulting in higher PPO balances. So both of those factors increase our funded status and the reflected increased accrual liability on pension cost. There are more detailed discussion in our 10-K which will be issued tomorrow, I believe, and note 11 talks in-depth of those kinds of discussions.

The thing I wanted to talk about in 2009 pension cost that (inaudible) was from a decision issued back in 2007, because as you know our new decision won't come out until 2010. So none of us anticipated market downturn back then. What I can say is that our '09 FAS 87 expenses will most likely be higher than what is authorizing the rate. That is probably facing a lot of utility companies these days. But good news is early this month we filed an advice letter requesting to establish pension cost memoranda account. If that is approved, then it will track the difference between the cost authorized by the CPUC and our actual costs.

So we shouldn't actually see the impact then in earnings because you'll just be tracking it in the memorandum account and recovering it at some point?

Yes, we will be tracking, but until we receive the recovery from the CPUC, I think earning will still negatively impact by the increase in pension account because you know the difference between the memoranda account and balancing account is balancing account is more assurance (multiple speakers) CPUC and memoranda account is tracking mechanism and to the extent that your cost in that account becomes bigger then you can go in to file for recovery. So until we receive the recovery, we will probably impact earnings by this increases in pension cost.

Okay. All right. That's helpful. I'll get back in line. I've asked my share. Thanks.

Okay.

Our next question will come from the line of Michael Gaugler with Brean, Murray, Carret.

One quick question regarding the acquisition pipeline, I'm wondering if the current economic environment has brought more opportunities to the table for you.

Are you asking about small companies, big companies or just generally?

Just generally.

Generally. Well, we've seen sort of a smaller, I guess, water district type companies that are in some cases having some trouble meeting their CapEx requirements. So troubled systems I think what we'll see is potentially more opportunities there and our Company's position on that is we would like to get comfort that the PUC is going to allow us to go in there and invest the kind of dollars we need to write those systems before we go and start buying those systems. But as part of the water action plan at the commission, there is a component to the water action plan that allows us to do that, but it's one of those things you have got to do your missionary work with PUC staff before you go and do that. So we are seeing a little bit of that. There's, I don't know, other potential acquisitions on the forefront but it's still starting to materialize I guess.

All right. Again that's really all I had. Thank you.

Thank you, Michael.

Our next question will come from the line of Tim Winter with Jesup & Lamont.

-- and Eva, I am just trying to fully understand the military privatization contracts a little better. What specifically was the construction activity in the fourth quarter that was the big surprise? And how do you determine the difference between like what's an emergency construction that doesn't fall into the contract and what goes into cost plus? If you can answer that and then I'll follow up with how would you characterize your contentment with this business and the military with you guys and opportunities for expanding to other bases. Are they still out there? Is military coming to you because you are doing so well that they want you to do some more bases? If you can just talk a little bit more about that whole business, I would appreciate it.

Okay. One of the construction projects was combat aviation brigade project at Fort Bliss and there's work to, my understanding is to relocate an air field there and with that you've got -- you have to be doing, making adjustments to water and waste water systems around that. So that's been a project that we've been working on in 2008. Also there's a project at Fort Lee in Virginia that we've been working on . And then these special projects come up from time to time as the government sees the need to do these special projects. In some cases they are outside the realm of the contract that we have signed with them, so we have to get a contract modification. So that's what those projects were. I am trying to think through the other questions. One was are we happy with this business to date? We are not happy with the financial performance of that business.

We are happy that we are moving up the learning curve on that business and I think we have some competitive intelligence as to how to operate that business after having operated it since October of 2004. So we have focused on improving our performance there. I know that in 2008 we struggled in terms of the bottom-line at ASUS. One bright spot was we did a much better job of cash collection with the government and that contributed actually to, in the fourth quarter, to our reducing our allowance for doubtful accounts. So we are learning the business and it's taken us a while to do that. In terms of additional base activity, we are still bidding on additional bases at this point and I don't have a sense though that the government has stepped up the letting of these bases. But we are bidding on some and that is just going to have to run its course. I think more of our focus in 2009 will be to make these bases that we have

And one discipline, Tim, is we try to aim for is to review the contract scope and get modification before we started work if we think the cost will be over what our original contract would be. So that's something we are aiming for. For the emergency, those are the things we have to do, otherwise it's a liability issue. So for that we track it and we ask for recovery later. But for things we can foresee and we make a target that we will ask for recovery first before we started work. So that's something we all try to achieve for the coming year.

If you look at your whole portfolio of contracts, are there some of them that are very profitable and some that you've experienced some challenges that may bring down the whole portfolio?

Yes. Actually the two new bases, Fort Bragg in North Carolina, Fort Jackson in South Carolina, those two new bases have really been a drag on the performance in 2008. Fort Jackson in particular because we expended a significant amount of dollars in our sewer repair activities really in the third quarter that hurt that business somewhat. Fort Bliss we're, I think, we are making some progress there, financial performance-wise. The Virginia bases have been pretty good performers, as well as Andrews Air Force base in Maryland. I think working through the price redetermination process the first time is real important because it's clear from our interaction with the government that this is not a streamline process from their end. And so we are all kind of learning this together. Fort Bliss we are dealing directly with them on the price redetermination. The east cost bases in Virginia and Maryland we are dealing with the Defense Energy Support Center and making progress there. So I think 2009 will be a pretty key year for us in the price redetermination process. It will be a good understanding of what this business can do for us.

And then one last question on the topic. Did you -- were there any major projects, construction projects in the military bases that you are aware of currently that might be material to earnings?

Going forward?

Yes. In 2009.

Well, the projects that existed in 2008 -- let's go back to 2007. We had a significant waste water expansion project there, $21 million. In 2008 we had these two much smaller projects, one at Fort Bliss, one at Fort Lee. I guess there's no project like the 2007 project that we're aware of at this point. The smaller projects do come up from time to time, but I don't know that, Eva, we've stated publicly whether there are any of these smaller projects. I think to the degree we get a large project, we'll tell the market about it when we get it. We haven't put anything out there.

Okay. Thanks, Bob. Okay.

(Operator Instructions). Our next question will come from the line of Jonathan Reeder with Wachovia.

Good morning, how are you guys doing?

Hi, Jon, doing good.

Got a couple of questions. I may have missed it during the prepared remarks, but could you discuss a little bit about, I guess, the equity offering timing and how it kind of stands there? I know you guys just got the senior notes issued, which I guess probably buys a little more time. I guess where the credit line, the $115 million credit line, what the capacity is left on that?

I think we are still position ourselves to issue equity in 2009. Depends on the market situation. It's very volatile there. But that's still our timeline to issue that (inaudible) in 2009.

Eva, at 12/31/08 our borrowings under our revolver were -- we still had some $25 million to $30 million worth of room under our revolver. That's right. Then we just brought an additional $40 million in through the private loans. One of the things we, when we talked to the rating agencies in December, one of the things they wanted us to do or what they want companies to do is prove up their liquidity in terms of their ability to finance the business going forward. We are very focused on not having to cut back our CapEx program because our systems need it and it's a, I guess, a good way to grow the Company.

And so we went out and got this loan to prove up our liquidity and we have done that and now we have a little bit of breathing room. So we do need to issue some equity just from a CapEx, or I'm sorry, from a capital structure standpoint. And so we'll look for an opportune time to do that, but we consider things like where the stock price is and how much of a hit we take with doing an equity offering. Some companies have gotten -- they saw their stock price go down a bit when they have got a -- because of a equity offering over hang and we are trying to avoid that, to be honest.

Right. Where is the consolidated equity ratio at the end of 2008? And I guess if you could just discuss, I guess, what your target is. I don't think that you are in the same situation as maybe some other companies. It is not necessarily in the water industry, but where they have to issue equity almost regardless. I believe you guys can be pretty patient, but if you could just discuss, I guess, the equity ratio year-end and where you want it to be.

Jonathan, I think the equity ratio at Golden State Water was target at 50%/50%, 50% debt, 50% equity, and that's how we aim for. For American States Water Company it depends on the situation. I think it's a little bit toward more of the debt then equity. We will issue the K tomorrow and that will have more detailed information and maybe we can, if you have question, then give us a call after you receive the 10-K tomorrow.

So I figured the end of the third quarter year round 49% consolidated equity ratio, it's not materially different from there. Is that fair to say?

Yes.

Okay. And then that would be well within your range.

Jonathan, I think it's a little bit of a function of, I think, our cap ratio expectations are a function of what we get recovery of through the commission and that is where this cost of capital hearing impacts this. I think what we filed for, Eva, under our cost of capital hearing was 53% equity at Golden State, if I'm not mistaken.

But the PD is a little bit different.

Right. The PD came back with 51%

51%

So if our regulators are saying 51% is what we have to live with, that's what we will live with. And then from an AWR standpoint I think we could be in that 49%, 50% equity ratio. I think -- we are focused on doing an equity offering in 2009. It's just -- we are not going to do it at all cost, I can tell you that.

Right. Okay, it makes sense. Just a clarification on the $77 million or so in CapEx that you did in '08. Was that all Company funded or what was the Company funded portion?

That's not all Company funded. A portion of this from developers.

But it is -- I mean it's what, $5 million roughly was provided by developers.

And the cash flow of the 10-K will have that information, I guess.

Okay. And then last question. Is there any update or have you received any feedback on the $50 million consolidated rate case application you have with the CPUC or is that essentially taking a back seat while the cost of capital is being worked through?

We are just kind of getting started on that, to be honest, meeting with staff on issues, et cetera. And that has to -- we have to have a decision there really by 12/31/09. So we are just going through that process now.

Okay.

Not much we can share there. Eva, unless you know of anything?

Yes, that is pretty much the case. And I think we are doing the negotiation process with the Department of Ratepayer Advocate. We talking about few issues and we'll have meeting with them to the extent there are resolve the issue we take onto hearing.

You understand the process there. Meet with DRA, see what issues you can reach agreement on and then basically go to hearing on the rest.

Right. Can you remind me your last few rate cases, they have all gone to a full commission decision. They haven't been settled, have they?

Certain issues go to hearing pretty much every time for us. And I would guess that's the case here. Well, I would guess we are going to go to hearings on certain issues. I can't say which ones. We don't generally agree with them on a lot of things, to be honest. It's just what you can live with, that sort of thing.

Right. And then on the cost to capital, I guess the one region where you have the 9.8%, I don't remember if the commission specifically gave you a 20 basis points penalty or whatever it was, but that essentially will be -- will wipe the slate clean on that cost of capital?

Yes, I think it was a 10 basis points penalty.

Sorry about that.

Yes. That should be behind us. If this proposed decision is approved at 10.2, we'll just move forward.

Okay. I appreciate the follow up information.

Thank you, Jon.

Thank you.

(Operator Instructions). Our next question will come from the line of Debra Coy with Janney.

Just one very quick follow-up question. I know it's been a long call, but on the memorandum account for conservation, the $1.9 million that you mentioned that you've accrued there waiting for approval, if you receive approval for that, well, I guess number one if you have any idea when there might be a decision on that and number two, if it was approved, would that be recognized all at one time or how would you recognize that?

The timeline we are not sure. Your first question, Debra. If it got approved, we will record $1.9 million at the time, i In its entirety. So we will, I guess, debit a regulatory asset and book this income at the point.

Unless the decision on this has got something that we are not sure of that where we'd have to spread it out. But usually you can book these things when you get approval.

It become a reg assets.

It would be similar to the nine months retroactive that you booked in the fourth quarter of 2007?

Yes.

Okay. All right. Just something to watch out for. That was all I had. Thanks.

Thank you.

And we have no further questions at this time. Do you have any closing remarks?

I do. I just want to thank you all for your participation today and for your continued interest and investment in American States Water Company.

Ladies and gentlemen, this concludes today's American States Water Company conference call. As a reminder, this call will be available for replay beginning at approximately 1:00 p.m. Pacific Time. The number to dial for the replay is 1-800-642-1687 and the conference ID number is 87921415. You may also access the replay at www.aswater.com. Thank you for your participation. You may now disconnect.