American States Water Co (AWR) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing the Company's second-quarter 2014 results. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 5 PM Eastern Time and run through August 13, 2014 on the Company's website, www.aswater.com.

(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 Mr. Eva Tang, Chief Financial Officer of American States Water Company. Please go ahead.

Thank you, Gary. Welcome, everyone, and thank you for joining us today. On the call with me is our President and CEO, Bob Sprowls.

As a reminder, certain matters discussed during this call may be forward-looking statements intended to qualify for the Safe Harbor from 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 10-Qs on file with the securities and exchange commission.

With that I will now discuss the second quarter financial results.

Diluted earnings for the second quarter of 2014 were $0.39 per share compared to $0.43 per share for the same period in 2013. Net income for the quarter was $15.4 million compared to $16.6 million for the same period last year.

The decrease our consolidated earnings was primarily driven by lower construction activity at our Contracted Services segment. Earnings at our Water segment remained flat compared to the same period last year, while our earnings at the Electric segment decreased slightly due to the approval in 2013 for recovery of previously incurred costs that did not recur in 2014.

So for the quarter Water revenues at Golden State Water increased by $2.2 million to $86.2 million as compared to the same period in 2013. $1.2 million of the revenue increase represented surcharges billed to customers during the second quarter of 2014 with a corresponding increase in operating expenses to recover previously incurred costs.

These surcharges had no impact to net earnings. They were also second-year rate increases for 2014 approved by the California Public Utilities Commission. The impact to operating revenue associated with the rate increases is anticipated to be about $1.6 million for the full year 2014.

Electric revenues at Golden State Water remained relatively unchanged at approximately $8.3 million as compared to the same period in 2013. Pending a final decision on the electric generate case, electric revenue has been recorded using 2012 adopted levels authorized by the CPUC.

Revenues for our Contracted Services business, American States Utility Services, decreased $7.1 million to $21.1 million for the second quarter of 2014, primarily driven by an anticipated reduction in construction activities at the Fort Bliss and Fort Bragg military bases where several large projects with significant activities due in 2013 were either completed or near completion in 2014.

The decrease in capital upgrade projects was partially offset by an increase in renewal and replacement capital work during the quarter. As we have stated in previous calls, renewal and replacement construction will continue to vary from year to year over the remaining terms of the 50-year contract with the government. Overall construction activity is expected to increase during the remainder of 2014 as compared to the first half of this year.

Our water and electric supply costs were $25.6 million for the second quarter. Any changes in supply cost for both the Water and Electric segments, as compared to the adopted supply costs, were tracked in balancing accounts which will be recovered from or refunded to our customer in the future.

Other operation expenses increased by $556,000 for the second quarter of 2014 as compared to the same period in 2013. There was a $209,000 increase in surcharges for recovery of costs previously incurred. This amount was part of the $1.2 million surcharges recorded in revenue as I discussed earlier.

As these costs were recovered in revenues through surcharges, a corresponding dollar amount was recorded to other operation expenses having no impact on pretax operating income. The remaining increase as compared to the second quarter of last year was due to higher operation related labor costs and bad debt expense in the Water segment.

Administrative and general expenses for the second quarter of 2014 were $19.4 million as compared to $18.1 million for the same period in 2013. During the second quarter of 2014 there was a $685,000 increase in surcharges billed at our Water segment for recovery of previously incurred A&G costs as compared to the same period in 2013. Again, surcharges have no impact on pretax operating income.

Additionally, in May 2013 the CPUC approved the recovery of $834,000 in legal and outside services costs at our Electric segment in connection with CPUC's renewable portfolio extender. There was no similar reduction in 2014. Excluding these two items overall A&G expenses actually decreased by $225,000 during the second quarter of 2014, as compared to the same period last year as we continue our cost control efforts.

Maintenance expense decreased by $586,000 driven by a higher level of planned maintenance performed in 2013 at our Water segment. We expect maintenance expense for the Water segment to be lower in 2014 as compared to 2013.

Depreciation and amortization expense increased by $757,000 to $10.5 million for the second quarter of 2014 as compared to the same quarter last year, driven mostly by approximately $93 million of capital additions to utility plants last year.

Property and other taxes increased by $217,000 compared to the same quarter in 2013 due to increases in property taxes, franchise fees and payroll taxes. ASUS's construction expenses decreased by $5.3 million to $13.8 million during the second quarter as compared to the same period in 2013, primarily due to several major projects either completed in 2013 or near completion during 2014 as previously discussed. These projects had much more activities in 2013.

Other income and expenses including interest expense decreased slightly to $5.4 million for the second quarter of 2014 as compared to the same period last year. Income tax expense decreased by $886,000 to $10.3 million as compared to the same period in 2013 driven by lower pretax income partially offset by a higher effective tax rate for the quarter due to changes between book and taxable income from compensation-related items that are treated as flow-through adjustments.

Moving on to liquidity and capital resources. Net cash provided by operating activities increased by $57.3 million to $90.9 million for the six months ended June 30, 2014 as compared to $33.6 million for the same period last year. This increase was primarily due to an increase in cash generated by contracted services driven by the timing of billing and cash receipts for construction work at military bases.

In addition, they were water way increases in May 2013 and January 2014 and the collection of various surcharges implemented in mid-2013 in connection with the CPUC's final decision on the water rate case. These increases in cash flow for operating activities were partially offset by tax refunds received during the first quarter of last year for which no similar refund amounts were received in 2014.

The timing of cash receipts and disbursements related to other working capital items also affected the changes and net cash provided by operating activities.

In regards to Golden State Water's capital expenditures, we incurred about $27 million excluding work funded by others during the six months ended June 30, 2014. We expect to invest approximately $80 million to $85 million in capital project during 2014.

Finally, I'm pleased to note that last month Standard & Poor's revised its rating outlook on American States Water Company and Golden State Water from stable to positive. S&P also affirmed A Plus corporate credit rating on both companies.

For additional details on our second-quarter and year-to-date information, please refer to our earnings release and Form 10-Q issued yesterday. With that I will turn the call over to Bob.

Thank you, Eva. And I appreciate everyone joining us today. I'd like to begin by providing an update on significant regulatory matters.

Our largest subsidiary, Golden State Water Company, filed a general rate case last month for all of our water regions and the general office. The application will determine the water rates for the years 2016, 2017 and 2018. Golden State Water's requested overall capital budgets in the application average approximately $90 million a year for the three-year period.

The 2016 adopted water gross margin is expected to decrease by approximately $700,000 as compared to the currently adopted levels due in part to decreases in annual depreciation expenses resulting from an updated depreciation study. The new water rates will allow Golden State Water to earn its 8.34% authorized return on rate base and are expected to become effective in January 2016.

With regard to our Electric division, Golden State Water filed a settlement agreement with the California Public Utilities Commission, or CPUC, in May 2014 that had been reached with all parties involved in the electric general rate case on the revenue requirement.

The settlement agreement, if approved, would resolve all matters in the pending electric rate case for rates in years 2013 through 2016. A final decision from the CPUC is expected in late 2014. Pending a final decision on this rate case, Electric revenues have been recorded using 2012 adopted levels authorized by the PUC.

I'm also pleased to discuss that in June Golden State Water received approval from the PUC to provide water services for a new development in Northern California in an area near Sacramento in Sutter County called Sutter Point. With the PUC's approval Golden State Water will create a water service district to supply the Sutter Point development with groundwater and surface water from the Sacramento River.

The project will involve the construction of underground infrastructure and groundwater wells with a treatment plant and storage facility to serve retail, industrial and approximately 17,000 residential customers at final build-out, which will take a number of years. We were very pleased to received approval to serve this new development as we look for ways to expand our customer base.

On a smaller scale, in July Golden State Water filed a motion to adopt the settlement resolving all issues in Golden State's application to acquire the assets of Rural Water Company which serves approximately 900 customers.

Before I move on to discussing our contracted services business at ASUS, I'd like to talk a bit about our water supply and the drought situation in California.

In April of this year the governor of California signed an executive order to address continuing drought conditions by directing urban water suppliers to implement plans to limit outdoor irrigation and wasteful water activities.

In July the State Water Resources Control Board approved emergency regulations that implement mandatory restrictions on certain outdoor urban water use to further reduce water use throughout the state. The regulations call for mandatory water use restrictions such as eliminating hosing of driveways and prohibiting irrigation runoff, etc. We are regulated by the CPUC on such matters.

As part of the PUC's rules, Golden State Water as file documents in order to implement mandatory water use restrictions and will comply with PUC directives to implement the emergency regulations. If dry conditions continue in our service areas Golden State Water may also need to implement mandatory water rationing to its customers.

Also in the event of water supply shortages, Golden State Water would need to transport additional water from other areas increasing the cost of water supply. Since water supply cost is a pass-through expense to our customers these additional costs would result in higher costs to customers, which, taken together with mandatory water rationing, may lead to customer criticism.

Now let's turn our attention to the Company's contracted services business at ASUS. For the second quarter of 2014 earnings from ASUS decreased as compared to the same period in 2013 primarily due to lower construction activities related to capital upgrade projects at Fort Bliss and Fort Bragg.

Major capital upgrade projects including the $58 million water and wastewater pipeline replacement project and the $23 million backflow preventer and meter project at Fort Bragg are nearing completion and work on several other projects was completed in 2013. This has resulted in expected lower revenue during the first half of 2014 as compared to the same period in 2013.

While renewal and replacement work increased during the second quarter of 2014 compared to 2013, it was overall lower for the first six months of 2014 compared to 2013. However, we expect that overall construction activity will increase for the remainder of 2014 as compared to the first half of this year.

ASUS continues to work closely with the government on the various price redeterminations for each of the military bases. We expect the second price redetermination at Fort Bragg in North Carolina, the first price redetermination for Fort Jackson in South Carolina, the second and third price redeterminations for Andrews Air Force base in Maryland and the second price redeterminations for the military bases in Virginia to all be completed during the third quarter of 2014.

Filings for these price redeterminations, requests for equitable adjustment and contract modifications awarded for new projects provide ASUS with additional revenues and margin and the opportunity to consistently generate positive earnings. We also continue to work closely with the US government for contract modifications relating to potential capital upgrade work as being necessary for improvement of the water and wastewater infrastructure at the military bases.

In addition, we are actively engaged in new proposals and expect the US government to release additional bases for bidding over the next several years.

In regard to ASUS's outlook for the remainder of 2014, there are several variables that impact this business which makes it difficult to predict its earnings with much certainty. With that said, we still think earnings per share for the full year 2014 could come out to close to ASUS's 2013 results. Excluding a one-time tax benefit of $0.03 per share earnings from ASUS were $0.27 for the full year 2013.

While we have a few large projects winding down in 2014, we anticipate renewal and replacement activity to increase throughout the remainder of 2014 as previously discussed. In addition, we expect to have a number of new construction projects for 2014 though individually probably not as large in size as the ones rolling off.

ASUS is also expecting various price redeterminations to be finalized in 2014, as I just mentioned, which could result in retroactive revenues included in our estimates for 2014.

Assuming successful resolution of these redeterminations, including anticipated retroactive revenues and the anticipated increase in overall construction activity during the second half of 2014, continue to believe full-year 2014 earnings should look a lot like 2013 after removal of the one-time tax benefit from 2013's earnings.

Turning our attention to dividends, on May 19, 2014, the Board of Directors approved a 5.2% increase in the corporation's quarterly cash dividend from $0.2025 per share to $0.213 per share. This quarterly dividend will be payable on September 2 to shareholders of record at the close of business on August 15, 2014.

American States Water Company has paid dividends every year since 1931, increasing the dividend received by shareholders each calendar year since 1954. Given American States' current low payout ratio compared to its peers, there is room to grow the dividend in the future.

Before I close with my prepared remarks I would like to thank you for your interest in American States Water and will now turn the call over to the operator for questions.

(Operator Instructions). Ryan Connors, Janney Montgomery Scott.

I had a question, your prepared remarks were very comprehensive, so thanks for that. I had kind of a more philosophical question for you, Bob, about kind of the drought.

I know you touched on this when you talked about the usage restrictions and so forth. But when it comes to the decoupling system and the way that it is constructed today, and you look at a drought of this kind of severity which doesn't look like it is getting better any time soon, can the system still function effectively in your view if this severity of drought continues over an extended period?

I know that there is always concern about consumers being asked to conserve and therefore pay more for less water. And I think you kind of mentioned that that sometimes creates some pushback. So can you just kind of give us your expanded thoughts on this particular acute drought situation and how it impacts the decoupling system?

Sure. Well, first of all, the whole decoupling was tied into, as you know, Ryan, the tiered rates. The tiered rates have worked to reduce consumption, which have helped the situation. In fact, our demand I think is down. I want to save roughly 15% since we put the tiered rates in place. So all of a sudden we have a pretty good reduction in demand.

You are correct in that customers have given pushback because of surcharges with the view that, hey, I have used less and then I get these surcharges. I do think they are starting to understand though that while they conserve and let's say their neighbor does not, they are ultimately still paying less than their neighbor. The neighbor gets the same surcharges as they got and so their original bill is actually -- a conserving customer is actually less than the neighbor.

So I don't think the decoupling will hamper or has hampered the situation in terms of the drought. I mean I think it is a good system and it works for the Company and it works for sort of reducing demand. Because conservation really is the least cost way of sort of solving some of the water supply issues we have. It doesn't completely solve the issue, there is a number of other things the state is doing and the Company is doing.

And then -- and you feel pretty good about where you are in terms of your demand forecast and those not creating excessive [RAM] balances and that sort of thing -- how do you feel about that side of the ledger?

Yes, it is some top sledding early on here because there was initially the water consumption went down more quickly than what we had anticipated because of the tiered rates. As a result our RAM balances had been built up to the tune of almost $60 million to $65 million. We are kind of now on the collecting side of that and our RAM balances have come down considerably.

In the most recent rate case that we filed we've been able to adjust our sales forecast to take into account all of that. So, we don't feel like we're going to have the kinds of surcharges we had in the past. And so, we think that's the customer -- we won't have sort of the same kind of customer pushback we've had in the past.

And, Ryan, for the rate case cycle 2013 through 2015, the consumption we projected in the rate case is pretty close to our actual consumption. So --.

That's right, this is --.

So our accrual RAM Balance has been much lower than the last rate case cycle. Going through the next GRC filing I think our consumption level will adjust a little bit but not so far off from our current consumption level.

Okay. Got it.

So I think that is a good sign.

Yes and maybe that a lot of the low hanging fruit has been gotten at this point and we are not predicting substantial reductions in sales going forward.

Got it. I will have to borrow that forecasting model and try to predict the stock price, Eva.

(Laugher). We can talk later.

Then one last question. Just inverting the discussion on the drought in terms of going from risk to opportunity, does the drought -- is the drought sort of pushing some privately held and/or municipal systems to the brink in terms of their own ability to meet their supply and so forth? And is that creating any needle moving opportunities for you in terms of acquisitions?

We haven't seen a lot of that to be honest, Ryan. The municipality's own water systems tend to really like to keep their water systems. And the difficulty is when you have rates that are somewhat subject to political pressures it is difficult to keep systems reliable.

And I think the investor owned -- we don't have those political issues and because we invest to sort of have modest rate increases periodically that our systems -- we're able to attract capital and be able to make timely infrastructure change outs.

Great. Well, thanks for your time.

Jonathan Reeder, Wells Fargo.

I was hoping you could discuss in further detail the components of your recently filed GRC, in particular when you kind of discussed the gross margin, I thought that was typically just revenues less supply costs or in other words kind of prior to the depreciation.

Right, yes. And generally your margin is supposed to kind of cover your increases and expenses as well as growth in rate base. And so, the comment in the materials about depreciation was that this sort of let folks know that we did have this depreciation study that was completed and they have lengthened the lives of the assets and --.

Now this has to all be approved by the PUC, but as a result our depreciation expense is going to be lower in 2016 than what we currently are seeing in our financials, which allows us to sort of get by with a gross margin that maybe isn't growing as much as some might expect. So that was sort of the kind of the tie in there between depreciation expense and the gross margin change.

So when you talk about gross margin, I mean are we talking revenues less all operating expenses then, not just supply cost?

No, no, no -- yes, just supply cost. So it is revenues less supply costs.

And we thought that was more meaningful information because supply cost is a kind of pass-through item for us. And we should update that even before the decision is issued, so --.

So, I mean in the rate case are you still filing for I guess a rate increase to cover the operating expenses ex-supply costs? Or are you saying depreciation -- that the decrease is offsetting the increase in other accounts?

Yes, the decrease in depreciation is offsetting increases in other accounts. And in terms of the overall revenue increase, I mean the -- in some areas it is not an increase, in other areas it is. It depends on what rate making area we are looking at.

But in total is there a revenue increase that you are requesting?

Well, and again --.

If you added all of your jurisdictions together?

From a -- I guess from a revenue requirement standpoint it is a -- that is a small decrease.

Yes. The main reason, Jonathan, is the supply cost in this filing is about $2.7 million lower in the last adopted number because we have improved our supply mix, that is the main reason. We will be able to pump more from our own water source. So since supply cost is a pass-through, so you're kind of adding back to your revenues, actually lower revenue than the currently adopted rate.

And this is why we focus -- try to get the market to focus on the gross margin rather than on revenue. Because when you do have sort of sales that are declining that is going to bring in some cases your supply cost down absent inflation. So that is why we sort of started the gross margin line.

Right, I am just trying to fully understand I guess how that accounts for the growth in rate base over that time.

Yes. So, we're going to sort of manage the operating expenses, we have this sort of reduction in depreciation expense and then we have got to cover the increase in rate base as part of the plan.

Okay. And then you all talked about the Sutter Point development. When will we start to see some of the growth from the new service area kind flowing through the financials? What is kind of the CapEx expected to build out this new system? And would that be embedded in the CapEx projections for the new rate case?

No, it is not -- we don't expect the CapEx to start within that period, so -- in terms of us, the Company, having to spend money. So it is several years out, it is just --. We talk about it now because it is something that is going to happen we believe eventually, it is just -- it is a bit of a function of how quickly the real estate market moves.

Okay. And then my last question is on ASUS. How many I guess open bids on bases does ASUS have? And are these all water or have you made some electric (technical difficulty) at this point? And then the last part of the question would just be when might we see the next contract awarded by the government? Do you have any ideas or any clarity there?

Yes. I guess the official bids we have outstanding are all for water and wastewater. We bid on -- actually I don't think we have shared with the market how many bases we bid on and there is a reason for that -- highly competitive.

So I mean we are gearing up to bid on the electric, we have not submitted a bid there but, water and wastewater, there is a number of bases we are bidding on. We take it very seriously, we've in sourced sort of whole bidding process, that is how important this is to us. See, was there another piece to your question, Jonathan?

Yes. Just if you have any clarity as to when they might act on some of these open bids.

Yes, to be honest, Jonathan, it is going more slowly than what we thought. Personal view is that the whole DOD budget issues we think are having an impact a bit on the privatization of some of the bases. So it is more -- it is slower than what we thought it would be at this point and makes it more difficult to predict when. But we have been in there bidding and bidding hard to get new bases, it is just -- the government is going to move at the pace that the government wants to move.

And they have been delayed again and again on certain RFPs that they said they going to issue. So each RFP issued they will evaluate to see whether it is a valuable base for us to go in or not.

Yes, we found that the length of time from when you start bidding to when a base is awarded is lengthening as well. So it is a little frustrating, I mean it is a very good business, we like it, we think we do a great job. The government is a very good payer of their bills and there is a lot of good things to like about the business.

The only frustrating part is it's always slower than what you think it should be. And this is no criticism to the government, I mean they've got a lot of things to manage. But -- so it makes it very hard for us to predict when these new bases are going to sort of cross the finish line.

Okay, I appreciate the response. Yes, I understand the difficulty there too. So, thanks a lot.

(Operator Instructions). Richard Verdi, Ladenburg.

My questions have pretty much been answered, but I wanted to follow up on the last caller's question. There are approximately 20 or so bases that are expecting to be auctioned in the next let's say 12 to 24 months. Could you just give us a little color on maybe how many bids you have outstanding right now?

Yes. When Jonathan sort of asked that same question we kind of said that it is -- because of the highly competitive nature of this business we are really trying to avoid putting out there sort of what our strategy is and how many bases we've bid on. So we have not published that.

Okay.

What I can tell you, Richard, is we view this as a pretty good growth vehicle for the Company and we are spending the time and the money to put forth a number of bids on substantial bases.

Okay. And I know when we were on the road you gave a number a while back. Could you just share with us what you think the market share might be right now between yourselves as well as America Water Works?

Yes, I think I have done this in previous conference calls. But I have always caveated it as being a very loose estimation, a very rough estimation. And this is really in terms of sort of size of the business, etc. My personal view is we have about 40% of the market in the water and wastewater space and American has about 40% of the market. And that the other 20% is made up of by regional players, so --.

Okay, that is helpful. And what about the electricity side, exploring the military bases that have not only water but electric and you have the electric side of your business, could that be a possibility for American States?

Right. We are -- in some select areas we are looking to bid on the electric operation.

And can you give us any sort of color on when that we might see a first type of contract materialize?

Yes, it is going to be -- it won't be within the next are in terms of getting a contract I don't think. Because the lead-time on these things are -- they are beyond a year and we really haven't submitted a bid on the electric at this point. So -- but we are gearing up to submit one.

So, now I don't want you to think the electric component is going to be for us as substantial as the water wastewater. I mean we are focused on water and wastewater and the electric allows us the opportunity to possibly provide the electric service on the basis we serve or on other bases. But one of these things we want to get our sort of feet wet first on the electric before we decide to go sort of full force into that.

Okay. That is about it. Thanks, Bob, thanks, Eva, good quarter.

Tim Winter, Gabelli & Company.

Hey on the subject of the military bases and as this business grows, the price redeterminations, if I can try to understand those a little better. What prompts a filing? Who makes the decision? Are these becoming more standardized? Is each base different? Can you maybe just sort of provide some color there how that works?

Sure. Well, generally under the way the contract works is you bid a levelized payment stream for let's call it operations and maintenance and renewal and replacement. And renewal and replacement is generally replacing the system over 50 years, if you will. So you bid a levelized payment stream.

And then two years after you take over a base and every three years thereafter you can get a price increase on both of those revenue streams. And so, it is incumbent upon you then to make your price redetermination filings and then work through the Defense Logistics Agency Energy, which is DLA-E. That is the group of contracting officers, that is where the contracting officers are housed that sort of handle all of the bases that we manage on the East Coast.

Fort Bliss has separate contracting officer that is not part of the DLA-E. So we make our filing at each of the six contracts that we have and then let's just say the DLA-E is handling it and they will review our filing, there will be a lot of back and forth on what the cost increases are.

But the point is the first price redetermination under each contract has been very difficult. It seems like the second redetermination goes more smoothly and then -- so sort of getting that first redetermination done is really key.

Now you are allowed to get retroactive adjustments back to the time when the price redetermination was supposed to be done. So, for instance, the first price redetermination, if you started your base on January 1 of 2008, you manage it 2008 and 2009, your re-determination would be effective January 1 of 2010. And then you would do another one three years later and so that is sort of how it works.

And, Tim, to Bob's point, fortunately we have done all the -- gone through all of the first price redetermination approval, except for Fort Jackson which we expect to receive the end of next quarter. So once the first redetermination is done the second, the third become more routinely processed. So that is a [positive sign] for the government process there.

Yes, and both our Company and the government, the DLA-E, have been trying to work at an approach to try to streamline the process going forward. Possibly considering putting an index or something like that in to sort of help streamline the process.

Okay. And then if I could ask a more conceptual question on the same topic. If you were to take your bases that you operate and exclude construction projects, would you say that they are earning near the returns that you had forecast when you entered these or that you need further price redeterminations?

Well, okay, so that is a bit of a difficult question because I mean we are talking about three years of delays here in prices. So my view is once we get the redetermination's done I mean we are already very pleased with the business, once we get the redeterminations done we will even be happier with it, because it is a business that is sort of pulled our overall return up, return on capital. And the retroactive revenues for price redeterminations will help.

And so we like it, we like the business. I also think this whole redetermination process is a bit of a barrier to entry for other folks that come and want to be in this business. Because it is a different animal than the utility business, I can tell you that. And learning how to interface with the government on a variety of fronts -- I mean it is a government contracting business, it is not a utility business.

I mean the management is utilities, but in terms of pricing and dealing with the government, I mean we are a government contractor and we are required to abide by all government contracting requirements.

Okay, great. Thanks, Bob. Thanks, Eva.

Jonathan Reeder, Wells Fargo.

Hey, Bob, if I could just go back to the GRC. If depreciation rates weren't revised, if you just kept them at your normal level, how much of a difference would that have made? I mean what is the absolute dollar impact from the extended depreciation [live]?

Well, okay, so your gross plant is growing all the time. Because our CapEx is higher than our accumulated depreciation our net utility plant is growing. So absent the depreciation change we probably would be looking at, what, Eva, a $7 million or $8 million increase in depreciation expense?

Yes.

Is that a fair statement? Because I mean depreciation expense absent changing your composite rate is going to grow over time. Because what you are depreciating is growing over time.

Right. So a $7 million to $8 million increase over the depreciation that you filed for, is that what you are implying?

Yes, I think that's -- call it -- maybe $7 million to $8 million is too tight a range, maybe $5 million to $8 million --.

Okay, but it is over the amount that you requested in the filing I guess?

Oh, yes. Because we have reduced the -- we have reduced the composite rates, we have extended the lives because of the depreciation study.

Okay. All right, that is very helpful.

Yes, the depreciation expense, the decrease in that expense in our application for 2016 compared to the current depreciation expense level is about $1.4 million lower. So imagine we are having changed the composite rate or do the study, that dollar amount would be a much higher positive number, Jonathan.

Right, right. Okay, all right, that is very helpful. Thank you.

(Operator Instructions). As there are no further questions this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Bob Sprowls for any closing remarks.

Thank you, Gary. Again, I just want to thank everyone for your participation today and your continued interest in the Company. And appreciate talking to everyone going forward. So, thank you very much.

This concludes today's American States Water Company conference call. As a reminder, the call will be archived on our website and can be replayed beginning Wednesday, August 6, 2014 at 5 PM Eastern Time, 2 PM Pacific time and will run through Wednesday, August 13, 2014. Thank you for your participation. You may now disconnect.