American States Water Co (AWR) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Today is March 11th, 2010. Welcome to the American States Water Company conference call, discussing fourth quarter and year end 2009 results. If you have not received a copy of this morning's news release, announcing earnings for the quarter, please call 909-394-3600. Extension 651. 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 P.M., Pacific time and run through Thursday, March 18th, 2010. The toll free number for the replay is 800-642-1687, and the conference ID number is 58910587.

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.

Thank you, Valerie. Good afternoon. I'm Eva Tang, Chief Financial Officer of the Company. Bob Sprowls, President and CEO, is also with me here today. We want to thank you for joining us today 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 from the liability established by the Private Securities Litigation Reform Act of 1995. Please review a description of the Company's risks and uncertainties in our most recent Form 10-K and Form 10-Qs on file with the Securities and Exchange Commission. All forward-looking statements are made as of today. The Company's 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 at GSWC, Chaparral City Water Company as CCWC, and American States Utility Services as ASUS.

First, I would like to focus on our financial results for the fourth quarter of 2009. I will then briefly discuss our results for the full year. Basic and fully diluted earnings as reported for the quarter ended December 31st, 2009 were $0.18 per share, as compared to basic and fully diluted earnings of $0.16 per share for the fourth quarter of 2008. The $0.02 per share increase in reported earnings for the fourth quarter of 2009 is due to a few significant items. First of all, a goodwill impairment charge of $7.7 million or $0.27 per share was recorded in 2008 to reflect the impairment of goodwill at Chaparral City Water Company, which is our regulated utility in Arizona, in accordance with accounting guidance for goodwill. No impairment charges were recorded for 2009.

Another item that impacted 2008 but no longer impacts our earnings going forward is the unrealized gains and losses on purchased water contracts at the Golden State Water Company's electric division. The Company recorded an unrealized gain on purchased power contract of $788,000, or $0.03 per share in the fourth quarter of 2008. All unrealized gains and losses resulting from a new purchase contract effective January 1st, 2009, are deferred into a regulatory memorandum account, as authorized by the California Public Utilities Commission, therefore, no longer impacting our earnings.

Now on to water and electric gross margins. Gross margin is defined as the difference between operating revenues and supply cost. The fourth quarter 2009 gross margin increased by $2.3 million or $0.07 per share, primarily due to higher water rates approved by the CPUC effective January 1st, 2009, which added approximately $1.4 million revenue for the quarter. The Water Revenue Adjustment Mechanism, also referred to as the WRAM added $6.1 million in revenue for the quarter, as compared to the same period last year. These increases were partially offset by lower water consumption of approximately 8%.

Our electric revenues also increased by $1.2 million, as compared to the fourth of 2008, due to increases in rates approved by the CPUC in October 2009, coupled with higher demand in the fourth quarter of 2009, resulting from an increase in skiing and other winter recreational activities. Operating expenses other than supply costs increased by $5.9 million, or $0.19 per share during the 2009 fourth quarter at the Company's water and electric utilities. Part of this increase was due to a $3.8 million or $0.12 per share pretax charge related to legal and settlement costs in connection with the settlement agreement reached between the Company and two former officers. The remaining increase was driven by a $1.9 million increase in maintenance expenses, an increase in pension cost of $838,000, and higher depreciation expenses.

We have mentioned during the year that our pension costs increased from 2008 due to a significant decrease in the fair value of our pension assets, as a result of market conditions in late 2008. In the current rate case proceeding with the Public Utilities Commission, we requested a two-way balancing account to track fluctuation in the pension expense. We will not know whether we have a balance income until the case is finalized, which is expected to be in the third quarter of 2010. Absent the balancing account, we expect our pension cost to decrease by $1.4 million in 2010, as compared to 2009, primarily due to improved pension plan asset performance in 2009.

Interest expense net of our interest income increased by $394,000, or $0.01 per share, due to issuance of $40 million ten-year notes in March 2009, and the recording of $159,000 in interest rate balancing account. This balancing account was ordered in July of 2009 by the CPUC in the cost of capital decision to track the difference between actual interest rates for any new debt issued after January 1st, 2009, and the rate authorized by the decision. These increases were partially offset by lower short-term borrowings and short-term interest rates.

An increase in income tax expense during the fourth quarter of 2009, as compared to the same period of 2008, also negatively impacted earnings by $0.08 per share due to increase in the effective tax rate. The effective tax rate for the fourth quarter was 43.5%, compared to a small tax benefit for the same period in 2008. You should know that it's quite unusual to have a tax benefit when we had pretax income in 2008.

The increase in the effective income tax rate was due to changes between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements, mostly related to pension costs. In May of 2009, we issued 1.1 million shares of AWR's common stock in a public offering. The increase in shares also diluted fourth quarter earnings by $0.01 per share.

Now, on to a summary of the 2009 results. Diluted earnings per share for the year 2009 was $1.62 compared to $1.26 for 2008. Removing the goodwill impairment charge and unrealized gain on purchased power contract from 2008, diluted earnings per share for 2008 would have been $1.48 per share.

I would like to take a few minutes to discuss the items impacting the $0.14 per share increase in 2009, as compared to the adjusted 2008 earnings. The higher consolidated earnings were in large part, the result of much improved operating income at ASUS, which were $0.24 per share higher in 2009 than in 2008. The improved performance at ASUS was primarily due to significant construction work at Fort Bliss in Texas, and four military bases that ASUS serves in Virginia, and cost control initiatives. Excluding the goodwill write-off of $7.7 million, and a $1.6 million unrealized gain on purchase power contracts from 2008, the Company's water and electric utilities operating income increased by $1.1 million, or $0.04 per share in 2009 as compared to 2008. This was due to increase in revenues, which resulted in a $13.1 million increase in the gross margin. The higher gross margin was largely offset by increases in operating expenses due to higher pension expense, labor and other related benefits, outside service costs, maintenance expenses, depreciation and amortization expense, and the legal and settlement charge as discussed in the quarterly results.

Interest expense was also higher than 2008 by approximately $1.7 million, or $0.04 per share, primarily due to the issuance of $40 million of notes in March 2009. Excluding a tax benefit of $918,000, or $0.05 per share, recorded in the first quarter of 2009 resulting from changes in the state apportionment laws, the effective tax rate for 2009 increased to 40.8% as compared to 37.8% in 2008 due to changes between book and taxable income that are treated as flow-through adjustments. The flow-through adjustments negatively impacted our earnings by $0.07 per share for 2009 as compared to 2008. Lastly, an increase in AWR's common shares further diluted 2009's earnings by $0.06 per share. A more detailed discussion of our results for the year is in our earnings release this morning and will be provided in our Form 10-K which will be filed tomorrow.

I would like to discuss certain items that are known to impact our 2010 results.Our pension cost is expected to be approximately $6.9 million in 2010 which is a $1.7 million decrease as compared to 2009. This will result in lower pension expense of approximately $1.4 million in 2010. The remaining $300,000 difference will be included in rate base since a portion of the pension costs are capitalized, similar to capitalized labor costs.In March 2009, ASUS filed a request for equitable adjustment related to a joint inventory report for Fort Bragg in North Carolina. The report indicated the size of Fort Bragg's infrastructure to be greater than what was assumed under the original 50-year contract. In January 2010, the U.S. government issued a contract modification approving the request for equitable adjustment. As a result of this contract modification, ASUS will record $3.1 million of revenues and pretax operating income during the first quarter of 2010.

The US government is also expected to issue a further contract modification in 2010 to continue the payment of this increased amount prospectively. In 2008, we also filed a request for equitable adjustment as a claim with the US government to adequately reflect the amount of assets included in the infrastructure at Fort Bliss in Texas, which is substantially more than originally estimated by the U.S. government as part of its solicitation for this contract. Based on a settlement agreement with the U.S. government in January 2010, the US government will pay ASUS retroactive operation and maintenance management fees and retroactive renewal and replacement fees from the contract commencement date of October 1, 2004. However, the payment is subject to availability of funding by the U.S. government. As such, no amounts will be recorded until an executed contract modification has been received from the U.S. government, which is expected in the second quarter of 2010.

Moving on to our capital project investment - We continue to focus on our core strategies of prudently investing in our infrastructure and controlling our costs. Capital expenditures were approximately $77.5 million in 2009 as compared to $77.0 million for the same period in 2008. At the end of the year, we have a balance of $86.5 million available under our syndicated credit facility to continue to fund our on-going capital expenditures. We will be renegotiating our credit facility, which expires in June of this year.

Separately, we have been awarded $9 million of funding from the safe drinking water resulting from under the American Recovery and Reinvestment Act. The money will be used to install meters in one of Golden State Water's flat rate service areas. Historical data shows that converting from flat rate to metered services result in a reduction of approximately 13% in water usage. This was just one example of our efforts to benefit the customers in our service area. We anticipate capital expenditures in 2010 for Golden State Water Company to be in the $80 million to $85 million range, and we do not expect to raise cash by issuing long-term debt or equity in 2010 at this point.

I will now turn the call over to Bob.

Thank you, Eva and good afternoon, everyone. Just recently, the Company celebrated its 80th year in business, and we are proud of our history. 2009 has been a year that included some significant challenges. Along with normal challenges associated with operating two water utilities, an electric division, and a contracted services provider, we also faced difficult capital markets during the first six months of the year, and unprecedented water supply shortages in California, due to the third year of a drought and cutbacks in water allocations from the state water project.

We met these challenges head-on. During 2009, we successfully completed a $34 million equity offering, and a $40 million debt issuance. With this financing in place, we were able to stick to our capital expenditure plan and invested $77.5 million in infrastructure to meet the needs of our customers, while other companies were cutting back their capital expenditure plans.

In dealing with the water supply issue, we were very focused on taking actions and promoting conservation in order to meet the 10% allocation reductions imposed by our most significant water supplier, the member agencies of the Metropolitan Water District of Southern California. In the midst of these challenges, we managed to increase our quarterly dividend to $0.26 per share in October 2009. The increase marks the 55th consecutive year the Company has increased the dividend on an annual aggregate basis. Better yet, as Eva discussed earlier, I'm pleased to report significant improvement in ASUS's financial performance during the year.

Now I will discuss the status of key regulatory filings and other matters for the Company. Recently we were pleased to receive final decisions on some long-awaited general rate case proceedings. First, Golden State Water's Bear Valley Electric Service division received a final decision on October 15th, 2009, regarding its general rate case filed in 2008. The decision authorizes a return on equity of 10.5%, with a corresponding return on rate base of 9.15%. The annual increase is approved and the decision are $4.8 million for 2009, $1.2 million for 2010, $209,000 for 2011, and $168,000 for 2012.

Based on the decision, Bear Valley Electric is also allowed to establish a base revenue requirement adjustment mechanism, to decouple usage from revenue. In November 2009, we implemented the base revenue requirement adjustment mechanism, though it did not have a significant impact on 2009 earnings because of the late adoption. In June 2009, the California Public Utility Commission authorized Golden State Water to track the difference between the 2007 adopted Golden State Water general office cost allocation to Bear Valley Electric, and the 1996 adopted Golden State Water general office allocation to Bear Valley. In a memorandum account effective and retroactive to June 4th, 2009.

The 1996 general office allocation was included in Bear Valley Electric's rates at the time the most recent rate case was filed. In that rate case filing, the 2007 general office allocation was proposed to be included in Bear Valley Electric's rates in 2009 as part of the rate case. The amount in the memorandum account was about $958,000, as of December 31st, 2009. However, the decision issued in October did not address the disposition of the memorandum account. In November 2009, Golden State Water filed a petition for modification to seek clarification from the PUC on the treatment and recovery of this memorandum account.

The item is actually on the PUC's agenda for today. We will update our 10-K to be filed tomorrow to reflect the decision. If approved for recovery, Golden State Water will record a regulatory asset and a corresponding increase in earnings in the quarter in which Golden State Water received the approval for amounts included in the memorandum account.

Bear Valley Electric does not currently have a rate case plan in effect with the PUC. We have requested the PUC to establish a four year rate case cycle for Bear Valley Electric, and proposed its next general rate case application be filed by January 31st, 2012, with rates effective January 1st, 2013. Also in October 2009, Chaparral City Water Company received a decision from the Arizona Corporation Commission approving a rate increase of approximately $1.7 million or 23% over current annual revenues. This decision also ordered Chaparral to return to customers 100% of a settlement reached in 2005, with a local sanitary district, resulting in the recording of a $760,000 loss in the third quarter of 2009. A rehearing with the Arizona Corporation Commission on this matter is scheduled for April 2010.

Now I'd like to take a moment to discuss the status of the pending general rate case proceedings and other recent filings for the Company. As you will recall, we filed a general rate case for region two, region three and the general office in July 2008 for rates effective for 2010, 2011, and 2012. The California Public Utility Commission issued a proposed decision in November 2009, which it subsequently withdrew in December due to the complexities of certain issues. The PUC has reopened the general rate case proceeding to receive supplemental information from the Company on a number of items in the rate case. Depending upon how the commission ultimately rules, two of the issues could result in a write-off.

The first issue had to do with a review of the dollars Golden State Water spent on a plant improvement project. The debate is whether the costs incurred were necessary to serve incumbent customers, new customers, or both. The Division of Rate Pair Advocates or DRA is arguing that the costs were incurred to expand the system to serve new customers and cost recovery for the improvements, therefore, should have been received from the developer that brought these new customers online. We believe the dollars had to be spent anyway to properly serve the current customers. If DRA is successful in arguing this point, Golden State Water could be forced to write off up to $3.5 million from rate base and provide a credit back to customers of up to approximately $600,000 of revenues that Golden State Water has received to date on the improvements. Taken together, these two could result in a pretax charge to earnings of $4.1 million.

The second issue concerns Golden State Water's approach to recovering rate case costs. Golden State Water has incurred $2.4 million of rate case related expenses during the preparation and processing of this rate case. These are direct costs consisting primarily of outside consulting and legal costs. The Company and DRA are essentially in agreement about the amount of rate case costs to be recovered in rates. Historically, we have deferred rate case costs as a regulatory asset, which are then recovered in rates and amortized over the term of the rate cycle, once the new rates go into effect.

In this case, the DRA has challenged this historical practice and believes that rate case cost should be projected for future years and recovered perspectively. We believed that DRA's rationale is inconsistent with our historical practices, and that the CPUC has authorized our historical practice in prior rate proceedings. If DRA prevails and the PUC determines that the costs represent future costs and not deferred costs, Golden State Water will have to write off the $2.4 million of deferred rate case cost that are included in our regulatory assets at December 31st, 2009, plus the additional costs incurred processing the remainder of this case.

In January 2010, the PUC approved interim rates for Golden State Water's region two and region three rate making areas, pending a final decision on the general rate case. While the increase for interim rates was zero, it is important to establish the effective date so that the rates, once approved by the PUC, will be retroactive to January 1st, 2010. Evidentiary hearings are scheduled for April, with a final decision expected in September 2010. At this time, we cannot predict the outcome of the final decision.

We filed a general rate case for region one on January 4th, 2010 for a two-year rate cycle with rates effective 2011 and 2012. If approved as filed, region one is expected to generate approximately $57.1 million in annual revenues in 2011, and $58.3 million in 2012. The requested increases are approximately $11.4 million for 2011, and $1.2 million for 2012. A general rate case will be filed for all three water regions in July 2011, with rates effective January 2013.

In March 2010, Golden State Water will file for recovery of its region two and region three Water Revenue Adjustment Mechanism, WRAM, balances, net of amounts in the modified cost balancing account, MCBA, and the supply cost balancing account. In the filing, Golden State Water will request recovery of approximately $18.3 million. We believe this amount is probable of recovery. At December 31st, 2009, the total WRAM balance, net of the MCBA for all Golden State Water water regions was $21.2 million.

As Eva and I discussed earlier in this call, ASUS has continued to record positive earnings, improving by $0.24 per diluted share and pretax operating income for fiscal 2009 as compared to fiscal 2008. In addition to the retroactive revenues that Eva discussed earlier, we are still working to finalize prospective price redetermination and request for equitable adjustments at. Changes in operating conditions and infrastructure levels from that assumed at the time of the execution of the contracts as well as inflation and costs. Successful price redeterminations and requests for equitable adjustment or REA filings should provide added revenues prospectively to help offset increased costs and provide ASUS the opportunity to continue to generate positive operating income at its military subsidiaries. The timing of the conclusion of such filings is somewhat unpredictable.

To summarize, I will quickly talk about the status of each of our price redeterminations and requests for equitable adjustment. First, price redeterminations for the four Virginia bases have been submitted and are under review by the US government. The price redeterminations are expected to be completed in 2010. We have received interim management fee increases at the four Virginia bases. Second, the first price redetermination for Andrews Air Force Base is under discussion with the government regarding the status of the redetermination filing as well as an interim inflame adjust plant to the manage. We are unable to predict the outcome of these discussions with the US government or the timing of the finalization of the price redetermination at Andrews Air Force Base.

Third, in January 2010, in addition to the retroactive revenues that Eva mentioned earlier, the settlement a subsidiary of ASUS reached with the US government regarding the Fort Bliss contract sets guidelines for revised O&M revenues in 2010, which are expected to be higher than the original contracted revenues but lower by approximately $400,000 as compared to 2009, when the interim rate increase was in place. Interim rates expired in February 2010. Executed contract modification to fund the increases stipulated in the settlement is expected in the second quarter of 2010.

Fourth, in addition to the $1.1 million additional construction revenue that we recognized in the third quarter of 2009, as a result of the approval of an REA, we have two other REAs outstanding at Fort Jackson for emergency construction costs, mostly incurred in 2008, and for infrastructure at Fort Jackson, which is in poorer condition than originally presented under the 50 year contract. The first price redetermination for Fort Jackson is scheduled to be filed in the first quarter of 2010.

Finally, as Eva mentioned, the US government improved an REA for Fort Bragg in January 2010, reflecting the fact that the size of the infrastructure managed there was greater than what was included in the original contract. As a result of the modification, ASUS will record $3.1 million in additional revenues and operating income during the first quarter of 2010. The US government is also expected to issue a further contract modification in 2010 to continue the payment of the increased monthly amounts prospectively.

Let's briefly turn our attention to water supply issues. As you all know, due to the reduced state water project deliveries and reduced local storage levels, the Metropolitan Water District implemented its water supply allocation plan to effectively reduce water deliveries across the region by 10% beginning July 1st, 2009. MWD, through its member agencies plans to achieve the reduction by imposing significant penalty charges. MWD has also implemented a 20% rate increase effective September 1st, 2009. To avoid these supply allocation penalties imposed by MWD, Golden State Water has implemented mandatory water conservation and allocations in certain service areas.

Consumption was down approximately 8% in 2009 when compared to the same period in 2008. Fortunately, we have implemented the WRAM and MCBAs in all of Golden State Water's water regions and, therefore, have recorded a cumulative $21.2 million benefit at December 31st, 2009, that would have previously been lost due to lower consumption. The net of these two mechanisms contributed to an increase to the dollar water margin of $12.6 million or $0.41 per share year-to-date. Though we have received some welcome rain in California, and large amounts of snow in the Sierras this winter, the state's major reservoir levels are still below normal as of March 1st.

Finally, American States shareholders should know that using the SEC guidelines for reporting financial performance, $10,000 invested in the shares of American States Water at December 31st, 2004 would be worth $15,649 at December 31st, 2009. This amounts to an annual compound growth in shareholder value of 9.4%.

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.

It is our understanding that due to technical issues, some of you may have been disconnected during a portion of Eva's speech. The full call will be available for replay beginning at approximately 2 P.M Pacific time. The number for the replay is 800-642-1687. The conference ID number is 58910587. You may also access the replay at www.ASWater.com. We apologize for any inconvenience.

We will now entertain any questions you may have about the information provided today. (Operator Instructions). Please state your name and your Company name prior to asking your question. We will begin with Garik Shmois.

Hi, Garik Shmois, Longbow Research. Thanks for taking my question.

Sure.

First off, we were bounced off for a little bit so I'm sorry if I'm repeating something that might have been addressed, but on the operating expenses, just wondering if you could talk about just your outlook here, as we move into 2010, if you can walk us through maybe a little bit some of the potential headwinds that you think that you might be facing on that line.

Well, we typically haven't given a lot of guidance in the past here. Obviously, we're going to continue to need to maintain our system up to the standards that we have set. Additionally, I think Eva has spoken a little bit about where the pension expense is coming out. If you look at our income statement, you understand that of course the supply costs are -- we're pretty well covered there, so it's really those items beyond the supply costs which would be -- well, one item, depreciation, amortization, that of course is going to grow just because of the capital we've been putting into the ground. We then have our other operating expenses, including administrative and general expenses. So beyond what may be a little additional maintenance this year, I'm not sure the for format for operating expenses has changed drastically from prior years.

Just to add on that, Garik, in 2009 we do have a one time item, about $0.12 per share that related to a settlement cost, legal cost associated with a settlement agreement reached between us and the two officers of the Company previously. So that probably is not a recurring cost in 2010.

Okay. Thanks for that. And just moving on, as far as the retroactive award at Fort Bliss, did you mention how much you expect to come out of that?

We did not. We're actually waiting for the contract modification to come through and so we're really hesitant to mention the dollar amount until that does come through.

Okay. And moving on to Fort Bragg, are there any management fees that you're going to receive in association with the contract modification award that came through there?

I don't think we received a final modification on the prospective revenue yet, but the $3.1 million we talk about retroactive to the contract started until now is a pretty good indicator for how much we're asking for, I think.

Yes, that's over approximately two years I guess, the $3.1 million.

Right.

Okay. That's helpful. And just lastly, if you look out back to 2009, given the timing of when you implemented WRAM, was there any material weather impact maybe in the first half of the year that may roll off for 2010 that we should be thinking about?

Well, the WRAM was implemented in November of 2008 for regions two and three, which are our largest two regions. The WRAM was implemented in region one in September of 2009. Additionally, we had been capturing lost sales in a memorandum account called the Water Conservation Memorandum Account beginning in August of 2008. So we've really been insulated, the financial statements have really been insulated from weather impacts. I don't know if that speaks to your question, but --

No, it does. I just wanted to see if there was any gap particularly with the September implementation of the WRAM. So, no, that's helpful. Thank you very much. That's all I had.

Yes, now, just one comment is we have received approval of the Water Conservation Memorandum Account in regions two and three. We have not officially received approval in region one but because we received approval in regions two and three, we have assumed we're going to get that recovery and booked it accordingly.

Okay.

Your next question comes from the line of [Christopher Patel] with Janney.

Hello, Bob. Hello, Eva.

Hello, how are you?

Good, good. Just wanted to start on the WRAM that you expect to file in March. Can you tell us how long the typical lag is for that to be approved and maybe give us some guidance as we look to layer that revenue in. Is it kind of just a linear application over the next 12 months or is it associated with usage patterns?

I'll let Eva speak to this in a second. But just so you understand, this is really more cash flow than it is revenue.

That's right.

It's really us going back and collecting the undercollections we've had from customers. Eva, do you have anything to add?

Right, and we're fighting I think this week, I believe, if not by end of March for sure. It's about $20 million it's going to be recovered over an 18 to 24 month period of time. We don't think there's much lag, but this is the first time we filed it so it's hard to say at this point.

Those amounts have already been reflected in our revenues to date.

That's right.

We just haven't -- it's a cash flow item.

It is a cash flow. So when you see our 10-K disclosure coming up tomorrow, you will see from the cash flow statement that we have a huge receivable from our customer that's recorded as a asset. When we receive this surcharge that will decrease that receivable.

So there's no additional revenue of that $18.3 million that you're going to file, nothing additional to layer in looking into 2010?

No.

No, just going forward, to the extent that there's a consumption shortfall, we're still record to that, between our actual consumption.

Generally you get back in total to your adopted level.

That's right.

Okay. Eva, I'm sorry if you've already said this. What was the full year pension expense for 2009?

It was $8.6 million, I think 80% of which hit our P&L because about 20% of those expenses were capitalized in rate base.

Okay. So $8.6 million in 2009, and you said that that number would come down.

I believe $6.9 million. So the impact to 2009 is 80% of that dollar amount.

Got it. And then you would bring that down additionally in 2010. That excludes the recovery that you may get in the rate case?

Say that again. I'm sorry.

That number that you gave on the decrease in pension, that doesn't take into account any recovery that you may get in the rate case in September?

That's right, that doesn't take into consideration of the balance, that's what you meant.

Right. Okay.

So we won't know that until third quarter of 2010 whether we have a balance or not.

Eva, currently in rates, we have a number like --

$5.1 million.

$5.1 million for recovering pension costs. Now, as we go through the region two, region three general office case, there's a couple of different outcomes that could occur there. Three outcomes, I guess. We could stick at the 5.1. We could get the recognition of our current pension costs which were, what did we say, roughly $7 million.

Yes, 6.9.

$6.9 million. Or we can get this regulatory balancing account which in effect makes us completely whole. And so we'll know in September, I guess.

And then just lastly, as you look at the water margin through 2010, is it fair to say that that number at least for the first three quarters is going to come in in the mid-60s area as I look at revenues, less purchased water and purchased power and ground water assessment as a percentage of revenue, is that about 60%?

I think in our 10-K that we're going to file tomorrow, you will see a margin disclosure in our MD&A that will give you a pretty good indicator how the margin will be in 2010, because most of our water has WRAM impairment and that pretty much get our margin very close to the adoptive level. But please know that in 2009 we do have about $3 million Water Conservation Memorandum Account, it's a one-time revenue that we booked in 2009. That won't happen in 2010.

Right.

So when you calculate that, you have to exclude that amount.

Okay. That was in the second quarter, that's the reason for the second quarter margin a bit higher?

Yes. We book it in second quarter.

Second quarter, yes.

Just so everyone's clear here, when we talk about margin, I just want to be sure, we're talking about the dollar margin, using that, right, Eva?

That's right.

Not the percent margin. Because sometimes that can be tricky. But we're really trying to get back to an adopted margin, dollar amount.

Okay. So fair to think of it as a dollars instead of percentage of revenue?

Yes, because I guess in theory if your revenues -- you go up significantly because of supply costs, and you have the same margin, you know, your margin percentage is going to go down. But the dollar margins, you're going to capture that.

Okay.

And of course, we're going to go that route for the first three quarters and then we get a decision in the rate case that hopefully will suggest some retroactive revenue and retroactive margin.

Okay. Great. Thank you.

(Operator Instructions). For the record, please state your name and your Company name prior to asking your question. Your next question comes from the line of Michael Gallagher with Brean Murray.

Hi, Bob, hi, Eva.

Hi.

Hi, Michael.

Just one question. A lot of my questions have already been answered. I saw in the administrative and general expenses, the $3.8 million pretax charge for legal and settlement costs, and was wondering if you could give us a little more color around that particular expense.

Well, are you looking for color on sort of what we settled or what the dollar amount was or -- ?

A little of both. I mean, it's a rather large charge.

Yes.

Given -- if I convert that to EPS, that's pretty good chunk of your quarter there.

It is. Yes, I mean, this was a case that we settled with two former officers that left the Company who had filed a wrongful termination suit and then you sit there and debate the costs of going to trial versus the cost of settling, and so then it just kind of became a numbers game. But yes, we took a charge of $3.8 million that represents a combination of settlement charge, legal expenses from prosecuting the case, or responding to the case and also insurance proceeds that we would have received to help cover such expenses.

And Michael, the detail is in our 10-K tomorrow and probably can refer to that.

Okay. I take it, does this stem from something that happened several years ago or was more recent?

Yes, the suit was filed in November of 2007.

Okay. All right. That's all I had. Thank you.

Thank you.

Your next question comes from the line of Tim Winter with Gabelli & Company.

Good afternoon. Tim Winter, Gabelli & Company. I had a couple of questions, one of ASUS. I believe you mentioned that pretax operating income was up $0.24 a share year-over-year and the business is producing positive earnings. Can you maybe give us a little more detail? What was the positive earnings impact in 2009? What was the earnings number?

Well, we historically haven't started going all the way to the bottom line with ASUS.

We talk about operating income level, Tim. It will be in the segment report, I guess, the 10-K note.

Yes, and we do show interest expense in that footnote of the 10-K. But generally the impact's going to be near where the operating income effect is because interest expenses aren't all that significant.

Okay. And then just maybe a little more information on the general rate cases that have been delayed. It seems to me like the commission had been fairly constructive for a while and the long delay is somewhat of a surprise. Is there any more color other than those two issues? Is there a a reason why that couldn't have been resolved quicker? And then as far as the decision being retroactive, how will that be taken care of accounting-wise? Will there be like a two-year period that you surcharge rates or how will that work?

Okay. Well, I'll start with the first, and Eva you can --

Okay, the second one.

Yes. Well we got a proposed decision in November on this case. The proposed decision wasn't very favorable. And we were fortunate enough to get that withdrawn.

There were I guess a number of issues that still needed to be hashed out in the hearing process. I think there was six or seven different issues that were going to have additional supplemental information submitted. Some of these include cost allocation to ASUS, the pension and benefit balancing account, the plant improvement project I talked about, regulatory -- deferred regulatory expenses which I talked about, things like a 1% salary increase for the rank and file employees, rent expense at the general office, and that's really about it.

But the issue here was the feeling by the commission that this wasn't completely hashed out. A good example is on the regulatory expenses, other utilities have handled it the same way we had, where you accumulate your costs of putting a rate case together and then you get that prospectively in your rate case plan. So it's an issue that affects beyond just our Company, and I think they wanted to sort of take a step back and look at it in more detail and give themselves some time to assess that. Eva, you want to talk about -- ?

I'll take the second question you have, Tim. Depending on the timing of the final decision from the Commission, we will book a regulatory action which is a kind of receivable at a time the decision comes down, and we'll book a pretax income for the retroactive revenue. Say, for instance, if the decision comes on September 30th, all the retroactive pretax income would be booked in that third quarter. Then we have a receivable that depending on how big the dollar amount, will amortize or we'll receive a surcharge from customer over either two periods or 18 month period of time, so that's how we usually do.

Okay. Thank you.

You're welcome.

Thanks, Tim.

(Operator Instructions). For the record, please state your name and your Company prior to asking the question.

Sounds like there aren't any more questions. I'm going to go ahead and wrap up if that's okay with you.

Yes, sir.

Okay. Well, again, I want to thank you all for your participation today, and for your continued interest and investment in American States Water Company. 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 P.M. Pacific time. The number for if replay is 800-642-1687. And the conference ID is 58910587. You may also access the replay at www.ASWater.com. Thank you for your participation. You may now disconnect.