American States Water Co (AWR) 2009 Q1 法說會逐字稿

Welcome to the American States Water Company conference call discussing first quarter 2009 results. (Operator Instructions) At this time I would like to turn the call over to Eva Tang, Chief Financial Officer of American States Water Company.

Thank you Cara. Good afternoon everyone. I'm Eva Tang, Chief Financial Officer of the Company and Bob Sprowls, President and CEO is also with me today. I want to thank each of you for joining us today and for your continued interest in American States Water Company. 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 may be forward-looking statements intended to qualify for the Safe Harbor (inaudible) liability established by the Private Securities Litigation Reform Act of 1995. Please review a description of the company's risk and uncertainties in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission. All forward-looking statements are made as of today. The Company is under no obligation to update such statements. 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 now begin with the results for the first quarter of 2009. Basic and fully-diluted earnings as reported for the quarter ended March 31, 2009, were $0.28 per share, as compared to basic and fully-diluted earnings of $0.31 and $0.30 per share respectively for the same period ending March 31st, 2008. Effecting the comparability of the two periods was a unrealized gain of $0.10 per share on our purchase power contracts for the first quarter of 2008. These purchased power contracts expired on December 31, 2008. And effective January 1st, 2009, the Company began taking delivery of power under a new contract. The California Public Utilities Commission, also known as the CPUC, issued a proposed decision in 2009, approving the new purchase power contracts. The proposed decision permits the Company to establish a regulatory assets and liability memoranda account to offset the derivative gains and losses on the purchase power contract. Accordingly, the Company would defer all unrealized gains and losses generated from the new purchase power contract on a monthly basis into a non-interest bearing, regulatory memoranda account that would track the changes in fair value of the derivatives throughout the terms of the contract.

As of March 31st, 2009, $8.4 million of an unrealized loss has been included in this memoranda account. As a result, this unrealized loss did not impact earnings during the three months ended March 31, 2009. We are relieved that the unrealized gain/losses from the new contract are not expected to impact Golden State Water's earnings over the life of the contract.

Removing the effect of the unrealized gain from the 2008 result, adjusted EPS was $0.20 per share for the first quarter of 2008, as compared to the $0.28 per share for the first quarter 2009.

Impacting the comparability and the result of the two periods are the following significant items. First, the water margins, which is the net of revenue and supply cost, increased by $800,000 or $0.03 per share during the first quarter of 2009. The increase is due to higher water rates approved by the CPUC effective January 1st, 2009, partially offset by a 3.5% decrease in actual consumption when compared to the first quarter of 2008, mostly due to the continued efforts of state-wide customer conservation efforts.

However, as a result of the implementation of a water revenue adjustment mechanism for Region Two and Region Three, in late November 2008, we recorded $3.7 million in additional revenues to adjust the first quarter 2009 revenues to consumption levels approved by the CPUC. Although the recording of the [WRAM] added about $3.7 million of water revenues, this favorable impact to earnings was partially reduced by $1.1 million of water supply over-collection cost, tracking the modified cost-balancing account, also implemented in late November 2008.

The establishment of the WRAM and the modified cost-balancing account allowed the Company to mitigate the volatility in our future earnings due to consumption efforts and supply cost changes as a result of conservation and continued drought conditions in California.

Second item impacted the comparability of the quarter is other operating expenses. Other operating expenses including amortization and general expenses and depreciation expenses increased at Golden State Water Company by $2.5 million or about $0.08 per share for the first quarter of 2009. Administrative and general expenses were higher due to an increasing outside service cost associated with Golden State Water's current rate cases and increase in pension expenses. I'll discuss the impact from pension expenses later on in this call.

Third, I'm pleased to report that ASUS, our contractor service business recorded pre-tax operating income of $1.1 million before interest and income tax expense during the first quarter of 2009. That is an increase of $1.6 million or $0.05 per share as compared to the first quarter of 2008. This is due to an increase in special construction projects at Fort Bliss and military bases in Virginia.

Finally, a decrease in the effective income tax rate from 44.5% in the first quarter of 2008 to 21.7% in the first quarter of 2009. Favorable impact earnings by $0.08 per share when compared to the same period of 2008. The significant decrease in effective tax rate was mainly due to, one, changes between book and taxable income that are treated as close to adjustments in accordance with regulatory requirements. And, second, a tax benefit of $918,000 or $0.05 per share resulting from a new California apportionment tax law and refining sources related estimate during the first quarter of 2009.

Before I conclude the quarterly results, I would like to briefly discuss the 2009 pension expenses. Like most companies, we have a significant increase in the unfunded status of pension plans due to a decrease in the fair value of pension assets in 2008. The increase in the unfunded status of the pension plan resulted in an increase of $870,000 in pension costs during the three months ended March 31, 2009, compared to the same period in 2008. We will continue to experience higher costs than estimated for (inaudible) and customer rates in 2009.

If the performance does not improve or applicable discount rates do not change in the future, we may experience such shortfall in future years as well, unless we receive a recovery mechanism from the CPUC. In March of 2009, we filed an advised letter with the CPUC, requesting authorization to establish a pension cost memoranda account. If this account is approved, we will track the difference between the pension cost authorized by the CPUC and the actual pension cost. In April, the PUC's water division rejected our request. We have since filed an appeal, but at this point we cannot predict the outcome. We will not record amounts in this account as a regulatory asset until they are reviewed and improved by the CPUC. If approved as filed, Golden State will then establish a regulatory asset with a corresponding increase in earnings. Until then, we expect the earnings will be negatively affected by increasing pension cost in 2009.

As for subsequent years, we also amended our current rate case application for region two, region three and the general office to request a two-way balancing account to tax fluctuation in the forecasted pension expense adopted effective January 2010 and actual annual expenses incurred in those years. If approved as filed, we'll establish a regulatory asset with a corresponding increase to earnings for any shortfall going forward.

I would like it take some time to discuss the Company's liquidity and capital resources. On March 10, 2009, Golden State Water successfully completed an issuance of a 10-year, senior note for $40 million at a coupon rate of 6.7%. This note also provides for patronage where Golden State shares in profits of the bank. If the current amount of patronage continues to be paid, the annual cost of the note is at or below 6%. The proceeds have been used for paying down short-term borrowing and to fund capital expenditures. As of March 31, 2009, the Company has approximately $49 million available to borrow under a $115 million credit facility.

The Company's earnings are driven by our ability to control and recover operating expenses and by earning a return on invested capital. We continue our efforts in infrastructure investment. For the three months ended March 31st, 2009, capital expenditures were approximately $18 million. That is an increase of 3% as compared to the same period in 2008. We expect our capital expenditures to be maintained at the same level as 2008. Total capital expenditures for 2008 were at $77 million.

I will now turn the call over to Bob.

Thank you, Eva. Once again, good afternoon ladies and gentlemen. Now I'll discuss the status of key regulatory filings and matters for the Company. First of all, on May 7th, 2009, the California Public Utility Commission approved a long awaited decision on Phase I of the cost-to-capital application for the three largest private water companies in California, including Golden State Water Company, adopting a return on equity of 10.2%. In Phase II of the proceeding, the PUC expects to implement an automatic mechanism to adjust return-on-equity and return-on-rate base between the three-year cost-to-capital proceedings and to address the effects of the current financial crisis on the utility's ability to track capital. The final decision on Phase II of the proceeding is expected in the second or third quarter of 2009.

Secondly, as Eva mentioned earlier, earnings were positively impacted in the first three months of 2009, due to the implementation of a PUC approved WRAM at Regions Two and Three, to decouple revenues from sales and a modified supply cost-balancing account that allows recovery of supply costs that deviate from those costs incurred in rates authorized by the PUC.

As of March 31st, 2009, we have recorded a net aggregate regulatory asset of $3.4 million in the associated memoranda account that is comprised of $5 million under collection in the WRAM and a $1.6 million overcollection in the modified cost-balancing account. This reflects implementation of the WRAM and modified cost-balancing account since November 25th, 2008.

On May 7th, 2009, the PUC also authorized Golden State Water to implement an increasing block rate design in Golden State Water's Region One to encourage water conservation and to establish a WRAM and modified cost balancing account for Region One once the block rates are implemented. Golden State Water will implement the new tiered rates in 90 days as indicated in the PUC decision. This will allow us time to properly inform our region one customers of the change to increasing block rates.

Third, you may recall that in August 2008, the PUC approved an advice letter filing to allow Golden State Water to create and implement a water conservation memorandum account to track the extraordinary expenses and revenue shortfall associated with conservation measures in conjunction with the declared route in California. The water conservation memorandum account was effective August 18th, 2008, and was used to track the revenue shortfall until the WRAM was implemented on November 25th, 2008, for Regions Two and Three and it continues to track conservation related expenses.

At November 24th, 2008, approximately $1.9 million of net-under collections were included in the water conservation memorandum account for Regions Two and Three prior to the implementation of the WRAM. Unlike the WRAM, which is probable for recovery, according to the PUC decision, the recovery of the water conservation memorandum account was less certain and therefore, Golden State water did not record the undercollection until March 31st, 2009. On April 16th, 2009, the PUC approved the advice letter filed by Golden State Water to recover the $1.9 million included in the water conservation memorandum account and authorized Golden State Water to establish a 12-month surcharge to customers bills. The surcharge went into effect on April 21st, 2009.

Accordingly, Golden State Water established a $1.9 million regulatory asset in April 2009, which will result in a corresponding increase to income for the second quarter of 2009 of $0.07 per share. The water conservation memorandum account continues to track extraordinary expenses associated with conservation efforts.

After the Region One WRAM is in place, Golden State will also file for the memorandum account in Region One from August 18th, 2008, forward until the Region One WRAM is in place.

The fourth regulatory item is we're pleased that the PUC issued a proposed decision on our new purchase power contract that approved the contract and also allowed for the establishment of a memorandum account to track derivative gains and losses throughout the term of the contract. We worked hard to get this memorandum account approved, which will remove the requirement to recognize the income statement impact of these unrealized gains and losses that we have been recognizing on Golden State income statements since 2002 under previous power contracts.

Lastly, we have general rate case proceedings in process for all of AWR's regulated utilities and utility regions except for Golden State Water's Region One, which will be filed in 2009 for a two-year rate cycle starting in 2011. Here is a brief update of the rate cases still in proceeding: Golden State Water filed its general rate case for Regions Two and Three and the general office in July 2008 for rates effective 2010-2012. If approved as filed, the revenue increases approximately $20.3 million in 2010, $20.6 million in 2011, and $4.2 million in 2012. We're expecting a proposed decision during the third quarter in 2009 in this case.

Golden State Water's Bear Valley Electric Service division filed its general rate case with the PUC's electric division in June of 2008, requesting an annualized revenue increase of $6.8 million in 2009, in incremental increases of $3.7 million over the three-year period 2010-2012. We expect the decision to be issued in June or July of this year.

Chaparral City Water Company is expecting a decision from the Arizona Corporation Commission in the second quarter of 2009 on its requested annual increase of $3.1 million.

Before I turn to water supply issues, I wanted to briefly talk about our contracted services business. As Eva mentioned, I'm also pleased to say that ASUS had a second strong quarter in a row. You may remember that the fourth quarter of 2008 was also profitable. The improvement in profitability during the first quarter of 2009 is 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. We are working to finalize price redeterminations and request for equitable adjustments at various bases, which include adjustments to reflect changes in operating conditions and infrastructure levels from that assumed at the time of the execution of the contract, as well as inflation and cost. Some of these were submitted in 2008.

Successful price redetermination and requests for equitable adjustment filings should provide added revenues respectively to help offset increased costs and provide ASUS the opportunity to continue generating positive operating income at its military subsidiaries. The timing of the conclusion of such filings is somewhat unpredictable.

Last year we had mentioned that we had incurred higher than anticipated costs and unexpected emergency construction costs at the Carolina military bases that we began operating in the first quarter of 2008 due to the age and preexisting condition of the infrastructure. During the first quarter of 2009, despite the overall profit for ASUS, we still incurred losses at these two bases due to higher maintenance expenses. We are very focused in making these bases profitable by aggressively pursuing requests for equitable adjustments and price redeterminations.

Let's now turn our attention to water supply issues. State-wide water supply conditions have improved in recent months, but they remain below average for the third consecutive year. Total water storage in the Colorado River Basin is slightly better than last year, but average water storage is at 54% of overall capacity as a result of a persistent drought in the basin. Lake Mead, which supplies southern California, is at 46% of its full capacity, although it may receive more water from upstream Lake Powell as the season progresses.

In addition to pumped water from its wells, which accounts for more than 55% of Golden State Water's water supply, we have contracts with various government entities, principally member agencies of the Metropolitan Water District of Southern California, to purchase water for distribution to the Company's retail customers. Due to a third consecutive year of drought and court-ordered pumping restrictions that limit the flow of water through the Sacramento-San Joaquin Delta, in an effort to protect the environment, the Board of the Metropolitan Water District voted on April 14th, 2009, to implement its water supply allocation plan to effectively reduce water deliveries across the Southern California region by 10% beginning July 1st, 2009.

The Metropolitan Water District plans to achieve the reduction by imposing significant penalty charges to its member agencies who do not achieve stated reductions. We expect the member agencies to implement similar penalty structures to Golden State Water to ensure commensurate conservation levels. As a result, those Golden State Water may implement water rationing, restrictions and excess usage charges to its customers as needed.

In May, 2009, Golden State Water filed an advice letter with the California Public Utility Commission to implement water conservation and rationing in it's Bay Point customer service area, as the Company received a request from it's wholesale water supplier for that area, the Contra Costa Water District, to reduce demand by 15% beginning May 1st until the water shortage ends. Customers in it's Bay Point service area are expected to begin reducing their water usage in May by 15% compared to their historical average. The Contra Costa Water District will charge Golden State Water extra if we exceed our allocation. The penalties Golden State Water may issue to customers are designed to be revenue neutral and only cover additional cost Golden State Water incurs from the Contra Costa Water District.

We have filed a separate advice letter seeking authorization to establish a mandatory conservation and rationing memorandum account to track the additional administrative costs, operating costs and revenue shortfall, not otherwise recoverable through any other mechanism recognized by the California Public Utility Commission. The PUC approved Golden State Water's request to implement Rule 14.1 effective May 1st, 2009. The advice letter requesting the mandatory conservation and rationing memorandum account is currently under review by the PUC. Golden State Water will consider similar actions in other customer service areas as needed.

We are closely monitoring developments and working with our water suppliers to safeguard the supply and evaluate potential emergency responses to a prolonged reduction in imported supplies. In addition, the Company has begun to aggressively pursue voluntary conservation measures among our customers and implement customer education initiatives to help them deal with supply variability and the general scarcity of water supplies.

Now turning our attention to the dividend, as reported in our recent news release, the Board of Directors of American States Water approved a quarterly dividend of $0.25 a share. This action represents the 292nd 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 paying 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 State's shareholders should know that despite the difficult stock market conditions, the American States Water share price continue to outperform both the Dow Jones and S&P 500 indices. Using the SEC guidelines for reporting financial performance, $10,000 invested in the shares of American States Water at December 31st, 2003, would be worth $16,945 at March 31st, 2009. This amounts to an annual compound growth in shareholder value of 10.6%.

Before I turn the conference over to the operator to entertain questions, I would like to thank you, again, for your continued support and interest in the Company. I'll turn this back to Cara.

We will now entertain any questions you may have about the information presented today. (Operator Instructions) Your first question comes from the line of Michael Gaugler with Brean Murray, Carret.

Good morning, everyone.

Hi, Michael.

Good morning, Michael.

I would kind of like to start off with taking a look at your debt structure. I'm wondering if you're seeing any opportunities to potentially refinance to lower rates?

Well, at this point our highest cost debt that we have has a market make hole on it, so that's something that wouldn't allow us to do some refinancing. Beyond that, there's potentially some opportunities, but they're not tremendously significant.

Okay. And next, I was wondering if you could provide a little bit of color in terms of the electric business? What you're seeing out there in the market in terms of opportunities.

Are you talking about opportunities to buy power or strategic alternatives or -- ?

All of the above. Just your feel on what the strategic direction is in terms of the electrical business.

Okay. Well, I think the most important part of our strategy right now is to complete a good solid rate case. We've been working with the Commission over the last years to try to get the rates increased there. It's been quite some time since the Company has had a general rate increase there. We have had where we put the generator plan in, we did get an increase there, but that wouldn't be characterized as a full-blown general rate case. We've spent a great deal of time trying to get this rate increase. And we've got our fingers crossed that it will be a good one. At that point, I think what we'll do is take a step back and take a look at the business, as we do all of our businesses, and see how well they fit with the overall Company's portfolio.

Some folks don't understand this, but I think back to the early 1990s we owned both the water and the electric business up at Big Bear and the city of Big Bear through eminent domain took over the water business. Because I know some folks struggle with why do we have an electric business with overall water company. And it used to be both a water and an electric business at that time.

One of the things we like about the business is that it is under the same regulators that regulate the rest of our -- a good part of the rest of our water business. On the other hand, we do recognize that the electric business is a completely different business in terms of what's required and it is a business that requires increasing amount of sophistication going forward. So, it is a business that like all of our businesses we annually take a look at it to see whether it still makes sense to be part of the portfolio.

And, Michael, one of the important parts of the strategic of the Company is to make sure we file it timely going forward. We haven't filed a full-blown case, as Bob mentioned, since 1996. And this rate case is a four-year rate case cycle so, from around from 2009 to 2012. So, we're make sure we're on time for rate case filing timely going forward.

And the point should be made, that I believe in the late 1990s, the electric business was our best performing asset. Now, the energy crisis in the early part of the new millennium created some difficulties there and, but in any event, we have this rate case pending and depending upon the outcome, this could be a very solid performing business for us going forward.

All right. That's helpful. Thanks.

Thank you.

Your next question comes from the line of Debra Coy with Janney.

Yes. Thanks. Good morning Bob and Eva .

Hi, Debra.

To move next to the other part of your business that's not the core water company, ASUS, as you both say it's great to see that contributing. I think you had said in the prior quarter that you thought the construction projects that you were working on would be wrapped up early this year. So, can you give us a sense of where we are? Now you mentioned that the Carolina bases are still running at an operating loss. A sense of how we should look at that business over the next couple of quarters as you're still looking price redeterminations?

Sure. Obviously, the price redeterminations and the request for equitable adjustments are key drivers to that business. Particularly, given that we haven't been through a successful price redetermination at this point. I do think 2009 will be a very important year for that business in terms of these price redeterminations and requests for equitable adjustments. And we get the sense that even on the government side, they sort of struggle with this redetermination process. And we're hoping that when we get through a series of -- kind of the first go round here that it will be a lot cleaner process going forward.

You are correct in that we did mention that we were expecting stronger construction in the first quarter and that that would be kind of winding down. And it has. There is a lot of work to be done at Fort Bragg, though. We're not entirely certain when that work is going to start. We don't believe it's going to be in the second quarter, though, but we're hoping that that business, in terms of the Fort Bragg activity, starts in the third quarter, but it may not. To be fair, everything has sort of taken longer than what we originally expected.

We still like the business. We like the fact that these are long-term contracts. Very similar to our utility business in terms of getting price increases as we move through time. Our focus on that business is we would like to make the O&M side of that business profitable. The construction side of that business profitable. Both of which profitable on their own. And so that's the focus .

We do recognize that that business hasn't met expectations. Except for the last two quarters and admittedly the first quarter of this year was bolstered by the fact that we had some significant construction. So, I wouldn't characterize it as something where we're out of the woods yet, but it really is a function of how successful we are in these price redeterminations and requests for equitable adjustment activities and we are very focused on getting these two bases profitable. At Bragg, we've taken over more inventory than what we were led to believe that we were going to be getting, but we're getting through

So, my take away from those comments, Bob, is that there would be a good chance that we would slip into a modest operating loss for that business in Q2 and then hopefully for the second half of the year be back in the black? Is that a fair assessment?

Well, all I can tell you is it's been very difficult to predict the performance of that business because it is subject to the activities that the military bases and them sort of getting on with us putting in some capital work. But I wouldn't expect the second quarter to be as profitable as the first quarter has been. I'm not sure it's going -- whether it's going to be profitable or a modest operating loss. And then the third quarter if things get going at Bragg , it's just very difficult, Debra, to predict when things are going to start

Sure. I think I get the sense of the general timeline. I guess one remaining question, which I know is tough too, but what is your best estimate at this point of when you might get resolution on the outstanding filing for equitable adjustments and redeterminations? Do you expect those to all come at once or do you expect to kind of roll through the bases one by one and they would come in in dribs and drabs.

To answer that question, you have to look through to who's on the other side there in terms of what part of the governments working on this. For our Virginia and Maryland base, the price redeterminations there have been filed with the Defense Energy Support Center.

Right.

And it seems like there's a sort of mutual education process going through there. Additionally, you have to have the audit agency of the government come in and review everything, and they are reviewing things at various bases. So, that's an important piece of the project. So in terms of price redeterminations, which is where you get your price increase for cost increases, I think the hope is that the East Coast bases -- that will be done this year. No guarantees there, though. At Fort Bliss at this point we have a support for equitable adjustment filed, which basicly is us saying we have a lot more inventory of assets here to manage than what we were lead to believe in the bidding process. And the plan is to first get that resolved before heading down the price redetermination process, but it's at this point that it's time to do our second price redetermination. So, the plan would be to combine the first and the second price redetermination at Fort Bliss.

Has Fort Bliss been moved over to DESC or are they still doing it directly with the base commander?

Still doing it with the base commander.

Okay.

The relationship there has improved, but we're nowhere close on putting out guarantees on when these things are going to get done, because it's a very slow moving process. And once we get through the price redeterminations and the request for equitable adjustments, I think we can have a better handle there on what this business can do going forward.

And obviously Fort Bragg and Fort Jackson are new, so those are equitable adjustments related to inventory. Obviously, you're not into price redeterminations there yet?

That's right. At Fort Jackson we do have this request for equitable adjustment on this $1.6 million that we spent on emergency repairs associated with the sewer system or waste water system there. Now, we would hope we would get that in 2009. And then Bragg, it's just a matter of significantly more inventory than what we were led to believe when we got into that business. Which, admittedly this whole business is -- there is just inaccuracies involved in the whole process. And, on the other hand , we are developing skills every day to deal with that business. And we feel that those -- that skill, those skills we're picking up can be viewed as sort of competitive assets going forward. But, that's not to say that if things don't -- if that business doesn't perform, we're not going to keep a business that doesn't

You're not bidding on any other new bases then right now?

You know, we have submitted bids because of the long lead time. So, it's one of these things if you get out of the queue, it will take you a few years to get back in the queue.

Right.

But, I think we've learned a lot in terms of how to negotiate contracts, et cetera, going in. And we would apply those skills to any new bases that we then would get a chance to negotiate on.

Okay. So, we'll have to be patient there a little while longer.

Uh-huh.

Moving over to the regulated side, you have a few moving parts there, too. Can you just help me understand how we should think about some of the pending adjustments, the cost-of-capital preceding Phase I finally in at 10.2%. As I recollect, you have one region earning less than that. Region Three, I believe. Is that an adjustment that's coming soon or will the adjustment to get everybody on to 10.2% come as part of Phase II? How is that going to work? And I guess the second question is, is it significant enough in terms of adjustment that we'll notice the difference going forward?

Deborah, I'll answer that question. Region Three, as you mentioned did have 9.8% ROE from their last case. However, because they are out of this rate case plan cycle to file in Region Two, Region Three and GO as (inaudible) rate cases. So, Region Two kind of left (inaudible) they only have two years before they can catch up to the next rate case, which begins in 2013. So, as work out with the Commission, we agree that we'll file an interim increase for the two years in between just for Region Three -- I guess for Region One. So, let's see, so the rate for Region One was still 10.2%. That didn't change. For Region Three, we actually catch up with the 10.2% when we file the increase for this one year. I have to correct that a little bit. Region Three case was actually from 2006, 2007 and 2008. So Region Three case has one year vacant before the new case started from 2010. So, for this one year, we work on an interim increase settlement with the DRA agreeing to adjust the ROE to 10.2% for Region Three. So, Region Three really didn't have this big gap between 10.2% and their old case anymore. That was effective January 1st, 2009.

So, there is no shortfall In Region Three. No shortfall in Region One. So, I guess, Region Two --

It's very close, Region (inaudible) if 10.1% versus 10.2%. So, the adjustment going forward is the result of this constant capital proceeding is very small.

Is very small for you?

Yes.

Okay. So, that's the bottom line is that it doesn't really make a difference, you're pretty much already there?

Pretty much.

Okay. And then, Bob, it was helpful listening to you talk through the supply issues. We shouldn't see any impact on earnings in the regions where you have the WRAM and the modified cost-balancing account. It sounds like essentially, your customers will simply be paying more for less water as everybody, in my view, should be, but you do still have on region where you don't have the WRAM. How are you thinking about that as we go into this summer season? I'm not terribly familiar with what locations are in what regions, unless I went to try and look it up. Would we see any negative impact in the region that's not covered by the WRAM this summer.

Well,yes, Region One is the region you're referring to and it's the smaller of the three regions up in northern California. We do have the water conservation memoranda account that we've been accumulating cost in. Now that's not to say we're -- we've got guaranteed recovery of that. We did get recovery in Regions Two and Three of the water conservation memoranda account.

Right.

Basically we're putting in that account the cost of sort of dealing with water conservation. In terms of supply cost, we don't have the modified cost-balancing account for Region One at this point. However, we historically have been allowed to pass on increases in prices from our suppliers. The one thing that the modified cost-balancing account gave us that we didn't have before is to the degree we have a change in mix, then previously we would have -- if we had to buy more purchased water than we had historically, then the Company and the shareholders would take that hit. That's been eliminated in Regions Two and Three by implementation of the modified cost-balancing account. This has not been eliminated in Region One at this point.

Well, there could be some movements which you would then hope to recover afterwards?

Yes. That would be the goal. Yes. We're not sitting here ringing our hands over the fact that we may have a different mix up there. We're glad we've got the ability still in Region One to pass on our higher cost of supply.

Okay. All right. I think that's --

That's sort of a -- in 90 days, we'll have the WRAM in place and the modified cost-balancing account there for Region One.

Yes. For July 1st?

Yes.

All right. Got it. And then just finally, Eva, on the tax rate, I think this is the second quarter in a row that we've had some flow through adjustments and then you had an additional adjustment this quarter as well. How should we think about the tax rate going forward for the rest of the year?

Well, that's a hard question. I mean, we are one of the companies that have a lot of flow through items with the conditions to the extent that there is a difference between book and tax differences. Certain items we are required to flow through the effective tax rate. So, it's really hard to predict and it could be going up and down at this point.

Yes.

So we could have -- it happened to work out particularly to your favor in this quarter and in the fourth quarter of 2008, but it could kind of adjust back the other way as you go through the accounting over the next couple of quarters?

I think so.

It's unlikely, though, Eva, that we're going to see such a significant change in the other direction because in the first quarter, we implemented this new apportion net approach, which it picked up some, I guess, extra benefit. But we're not going to be seeing EPR of 60% down the road, are we?

No. It won't be that.

The regular flow through, as you know, Debra, our EPR seldom is at the statutory rate of 40.75% It's either a few percentage points higher or a few percentage points lower, depending upon the flow through items for that particular quarter.

If you look at our history, Debra, for Golden State, in 2007 we have 42.7% of effective tax rate and in 2008 we have 38.3% of EPR. So, it's really hard to -- the statutory tax rate for most of the companies filed 40.75% in California, so it really depends on how everything goes going forward.

Okay. I guess that's the reason to come back and look at EBITDA instead of the bottom line, because it moves around.

Right.

But that's helpful. I appreciate it.

No problem.

Okay.

(Operator Instructions) Your next question comes from the line of Jonathan Reeder with Wachovia.

I think most of my questions have been answered, but if I can get maybe a clarification on I guess what's going on with the ROE in the wake of the cost of capital. The 9.8% for Region Three, that effectively got bumped up to 10.2% with that January attrition increase, is that correct?

Right. And, Jonathan, Region Three is actually outside the three-year cycle.

Right.

The 2009, the only vacant year before they can get into 2010 with all of the big cases going on. So, they have a vacant year in 2009. We work on the deal with the Commission to have an interim rate adjustment, which included adjusting the ROE to the most recent ROE, which is Region One's case 10.2%. So, that's where we bring up Region Two just for this year for 10.2% already starting January 2009.

Right, so that $4 million, fourth year increase, that was reflective of the 10.2%?

Right.

Okay. Does that then effect the overall increase -- the z$30 million odd increase in the consolidated filing for Region Three, does that lower it by that $4 million amount?

No, it doesn't. Because when we filed the case, we're using 10.2% back in 2008. When we filed the case in July 2008, the case was filed at 10.2% assumption.

Okay.

Pending for the cost-of-capital proceeding.

You recall that was the first time that they had bifurcated cost-to-capital from the general rate case process.

Right.

Now that it is bifurcated, your expectations going in and your negotiations with the DRA, I guess we would expect you to get a higher percentage of your requested amount. Is that fair to say since it is, I guess, your filing is based on the 10.2% and it separates that out? There should be less contention, I guess, on the other amounts and less levers, I guess, to reduce it away the actual from what you requested?

I think that's a fair statement.

Yes.

We would go in and ask for 11.5% or 12% and then the rate increase that would come out would be in the 9.8% to 10.2% range. So, here we file with this 10.2% and it reduces some of the -- I guess some of the things to argue over.

Right.

You can argue over that in a separate proceeding basically.

Yes. And then the Phase II of this cost-to-capital where there's going to be the adjustment mechanism, I guess how often will you test the mechanism or is it theoretically tested on a daily basis and as soon as you might trigger the adjustment does it become effective or is it a quarterly test?

Yes, I believe what's being proposed is a rolling 12-month average. And then to the degree the market rates have changed by, let's say, I think it's 100 bases points. That's what it sort of takes to trigger the -- to trigger an adjustment. So, it would have to be 100 bases points over a rolling 12-month period to make the -- to require you to then go in and change your ROEs. So, it's it isn't going to be changing often, if at all. So, this allows an automatic adjustment mechanism.

Right. And do we know what the kind of formula is if it was implemented today, would it produce an ROE higher than the 10.2% that was just approved or is it right in that ballpark? How does that work?

I can't say off the top of my head. But I think it -- was it single A bond?

I think it was single A.

Single A bond.

Yes. I think single A bond.

That bond would have to move 100 bases points in effect over a sustained period.

Up and down. Yes.

Yes. But, we'll have to get back to you on that, John. I'm a little bit distant what's happening.

As I am. That would be helpful.

Electric companies already have this thing, they call it a [my cam].

Yes.

So, I don't know how much triggering has gone on in their proceedings, but I don't think it's happened very often.

No. I talked to them before and they didn't go in that often as a result.

Okay.

But, if you look at the current financial markets and you've got a high -- I'm sorry. A low 30-year treasury, but you have a significant credit spread on top of that. So, when interest rates move for a single A company, there's two pieces that move. It's either the underlying treasury or its the credit spread associated with -- reflecting the credit quality of the single A. And last year even though the treasury rates had gone down, the credit spreads (inaudible) which kept the overall interest rates not going down as significantly as the treasury rate. In any event, more than you asked for, I guess.

Okay. Now, I guess the last clarification I think you kind of already answered on Debra's, the apportionment part of the tax rate adjustment, that is something that's going to be an ongoing item for comparison purposes over all of 2009, is that kind of accurate?

The apportionment item, Jonathan, we book into one, really, cumulative effect as effect of law changes. So, going forward quarter-to-quarter we'll look at the impact of it, but it won't be at the magnitude we're seeing for first quarter.

Okay. So, the first quarter is more of a lump sum type of thing?

Yes.

Okay. That's helpful. Thank you, Eva.

Okay. You're welcome.

There are no further questions in the queue at this time.

Okay. Well, again, thank you all for your participation today and for your continued interest and investment in American States Water Company. Have a good day, everyone.

This concludes today's American States Water Company conference call. (Operator Instructions)