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American States Water Company (NYSE:AWR)

Q3 2008 Earnings Call

November 6, 2008 2:00 pm ET

Executives

Floyd Wicks - President and CEO

Eva Tang - CFO

Bob Sprowls - EVP

Analysts

Jonathan Witter - Wachovia

Heike Doerr - Janney Montgomery Scott

Operator

Welcome to the American States Water Company conference call discussing third quarter 2008 results.

If you have not received a copy of this morning's new release announcing earnings for the quarter, please call 909-394-3600, extension 710 and one will be faxed or e-mailed to you. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 3:00 PM Pacific Time and run through Thursday, November 13, 2008. The toll free number for the replay is 800-642-1687 or local number 706-645-9291 and the conference ID number is 69552863. (Operator Instructions).

I would now like to turn the call over to Mr. Floyd Wicks. Please go ahead.

Floyd Wicks

Good morning, ladies and gentlemen. Before we begin our discussion today, I want to introduce and welcome Ms. Eva Tang, the company's new Chief Financial Officer as of November 1, 2008.

In case any of you missed the announcement in our press release on Monday, November 3, Ms. Tang has succeeded Bob Sprowls as Chief Financial Officer, Senior VP, Corporate Secretary and Treasury of American States Water Company to allow Bob time to focus on his transition to CEO on January 1, 2009. Bob will retain his position as Executive Vice President of American States Water Company and Eva will continue to report to him during this transition. Eva welcome and I’ll now turn it over to her for presentation of our financial third quarter.

Eva Tang

Thank you, Floyd. Good morning, ladies and gentlemen, and welcome to the presentation of American States Water Company's third quarter 2008 results. Today I have Floyd Wicks, President and CEO and Bob Sprowls, Executive Vice President of the company with me.

As usual, following the conclusion of our prepared remark, the call will be opened up for questions. I would like to remind you that certain matters expressed during this conference call are forward-looking statements, intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. I ask that you review the forward-looking information disclosure in our Form 10-K and 10-Q on file with the Securities and Exchange Commission.

The factors that underlying the company's forward-looking statements are dynamic and subject to change. Therefore, these forward-looking statements speak only as of the date they are given. The company is under no obligation to update them. However, we may choose from time to time to update them, and if we do so, we will disseminate the updates to the investing public.

During our presentation today Floyd, 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.

Having said that, let's begin with the results for the quarter. Basic and fully diluted earnings for the quarter ended September 30, 2008 were $0.26 per share, as compared to basic and fully diluted earnings of $0.44 per share for the same period ended September 30, 2007.

Excluding the unrealized losses on our purchased power contract of $0.13 per share for the third quarter of 2008 and $0.03 per share for 2007, earnings for the 2008 third quarter would be $0.39 per share compared to $0.47 per share for the same period in 2007; that is $0.08 per share decrease. The $0.08 per share decrease in adjusted earnings for the third quarter of 2008 is primarily due to the following item.

First, a 6.8% decrease in water usage during the three months ended September 30, 2008 resulted in a $2.9 million decrease in water revenue or $0.07 per share. Although precipitation was overall lower in the three months ended September 30, 2008, the 2008 water revenue appear to have been impacted by the effects of state-wide customer conservation efforts.

Second, American States Utility Services reported a pre-tax operating loss of $1.4 million for contracted services for the third quarter of 2008, declining by $1.4 million or $0.05 per share, as compared to the third quarter of 2007, due primarily to losses incurred at two new bases we added earlier this year.

ASUS commenced the operation of water and wastewater systems at military bases in North Carolina and South Carolina during the first quarter of 2008, and had incurred higher than anticipated transitions and emergency construction costs to address preexisting conditions, which were not anticipated in the original 50-year contract.

In addition, current estimates of construction costs compared to contract revenue indicate losses on certain initial capital upgrade projects. In September 2008, ASUS submitted a request for equitable adjustments for the water and wastewater systems at Fort Jackson that is in South Carolina. In which, we requested revenue increases for modification to recover all of the costs and profit margin on these initial capital upgrades and emergency construction costs.

We will record additional revenues upon approval of the request for equitable adjustments by the government. Increases in gross receipts, tax assessment and other operating expenses also contributed to the loss at ASUS.

The third item is a increased water rates approved by California Public Utilities Commission partially offset by higher supply costs contributed $0.15 per share to earnings.

Lastly, higher other operating expenses at Golden State Water in 2008 and the higher consolidated effect to the income tax rate resulted in an overall decrease of $0.11 per share, largely offsetting the rates increases as discussed above. As you recall, we mentioned $0.15 that was a result from rate increases.

The $0.11 per share decrease in expenses is a result of three items. The first item is an increase in administrative and general expenses due to higher labor, employee benefit costs and an increase in outside services, related to tax, legal and consulting services. The second item is an increase in depreciation and amortization expenses, reflecting among other things the effect of closing approximately $55.2 million of additional utility plant during 2007. And the third item is the change in the effective income tax rate.

Effective tax rate for the third quarter of 2008 increased by 2.2% to 42.9%, as compared to 40.7% for same period of 2007. The increase in effective tax rate is principally due to changes between book and taxable income that are treated as flow-through adjustments based on regulatory requirements. Flow-through adjustments are mostly compensatory-related in nature.

Now briefly onto the year-to-date 2008 results; net income for the nine months ended September 30, 2008 was $19.1 million, equivalent to $1.10 per common share, compared to $21.9 million or $1.26 per share for the nine months ended September30, 2007.

Excluding the effect of unrealized gains on power purchased contracts, basic and fully diluted earnings would be $1.07 per share for the nine months ended September 2008 and $1.21 per share for same period of 2007.

Among other things, a decrease of 6% water consumption during the first nine months of 2008 resulted in $6.5 million decrease in water revenue which is equivalent to $0.16 per share. In addition, a significant wastewater expansion project, which contributed $0.17 per share in 2007 from our contracted service business also impacted comparability of two periods. There was no similar significant construction project in 2008.

Before I turn the call over to Floyd, I would like to take some time to discuss the company's liquidity and capital resources. Although we believe the economic downturn that has surfaced in the past month will not have a major impact on our financial performance for material diminishing our ability to access the cap to market. We may impact the timing of when to access the cap to market.

We are still planning to issue common stock over the next 12 months, which, of course, depending our market conditions. In August 2008, the company amended its $85 million syndicated credit facility to increase the aggregated banks commitments by $30 million to a total of $150 million.

The credit facility is currently utilized to support ongoing operations and capital needs. As of September 30, 2008, AWR has $38 million available to borrow under its credit facility. The expansion of this line allows us time to explore other opportunity in the debt and equity markets. We believe our sound capital structure and AAA credit rating combined with our financial discipline will enable us to access debt or equity markets.

However, unpredictable financial market condition in the future may limit our access or perhaps impact the timing of when to access the market. In which case, we may choose to temporarily reduce our capital spending.

Our capital expenditures were approximately $59 million during the nine months ended September 30, 2008 which is an increase of $26 million over the same period last year. This resulted from the company's increased efforts in area of asset management, which included a more focused infrastructure replacement program. Capital expenditures during the nine months ended September 2008 were funded primarily by internally generated cash, short-term borrowings, and advances and contributions from developers.

I will now turn the call over to Floyd. Floyd?

Floyd Wicks

Thank you, Eva, and once again good morning ladies and gentlemen. As discussed by Eva, the company's third quarter results have been negatively affected by the financial performance of ASUS, due to increases in operating expenses incurred at Fort Bragg in North Carolina and Fort Jackson in South Carolina. These are the two new military bases where ASUS began its contracted services in 2008.

As previously mentioned, we have been incurring higher than anticipated operating costs and emergency construction costs not anticipated in the contracts. We also incurred more costs on certain capital upgrade projects than originally estimated in the fixed price contracts, due to the age and preexisting conditions of the infrastructure.

ASUS has filed a request for equitable adjustments with the government to recover these higher costs. If the scope of the contracted services changes in the future, ASUS will seek contract modification approval from the government before any work begins in order to minimize loss on these firm-fixed price contracts, unless it is emergency-related work.

In addition, the fact that ASUS has not received timely approval from the US government to-date on other similar contracts also negatively impacted the profitability of the contracted service business.

We intend to continue to vigorously seek resolution of the price redeterminations, request for equitable adjustments and modifications to the contracts for recovery of unexpected emergency construction costs. We are still optimistic for this segment of the business to succeed because in many ways it is similar to our regulated business.

Once ASUS has successfully negotiated the initial price adjustments with the government for each of the bases, the price redetermination process will be very similar to a general rate case cycle every three years. I will now discuss the status of key regulatory filings and important actions in those still pending.

As Eva mentioned earlier, earnings continue to be impacted by state-wide customer conservations efforts. On August 21, 2008, the PUC in California issued a final decision, which approved a settlement agreement between Golden State Water Company and the Division of Ratepayer Advocates regarding conservation rate design, the implementation of a Water Revenue Adjustment Mechanism to decouple sales from revenues and the establishment of a modified cost balancing account that allows recovery of supply costs for changes in water supply mix.

In accordance with the PUC's administrative processing rules, GSWC will implement two tiered increasing block rates 90 days after the August 21 approval of the settlement agreement or around the 21st of this month. During the interim, Golden State Water Company has begun to implement customer education initiatives, which will provide customers with conservation rate notices in bill inserts and will explain the impact of conservation rates on customers' bills.

Furthermore, in the separate proceeding, the PSU also approved an advice letter filing to allow Golden State Water Company to create and implement a Water Conservation Memorandum Account to track the extraordinary expenses and revenue shortfall associated with conservation measures in conjunction with the declared drought in California.

The Water Conservation Memorandum Account was effective and approved by the PUC on August 18, 2008, and will be used to track the revenue shortfall until the WRAM, that's a revenue adjustment mechanism and modified supply cost balancing account are implemented later this month.

As of September 30th, approximately $2.2 million of net undercollection has been tracked in the Water Conservation Memorandum Account. While the Water Conservation Memorandum Account to track revenue shortfall will ultimately be replaced by the WRAM after November 20, 2008, the Water Conservation Memorandum Account will still be tracking extraordinary expenses associated with drought in California.

However, unlike the WRAM, which is probable for recovery, according to the August 21st PSU decision, the recovery of the Water Conservation Memorandum Account is not certain and will not be recorded until approved by the PUC. This is why the decrease in consumption during the third quarter still negatively impacted earnings by $0.07 per share.

We will file an advice letter seeking recovery of this amount tracked in the memorandum account, and if approved by the PUC, Golden State Water Company will then record a regulatory asset and an increase to income. For 2009, the following regulatory proceedings at Golden State Water Company are expected to impact earnings.

First, revenues will be adjusted for all regions, based on the result from the cost of capital proceeding. By the end of this month, we will be filing the request of second year rate increase for region one, our third year rate increase for region two and then interim increase for region three. All to be effective January 2009. We do not have these amounts finalized as of this date.

Now onto Golden State Water Company's electric business. Golden State's Bear Valley Electric Service Division filed its general rate case with the PUC's Electric Division in June of this year. Additionally, Golden State Water executed new purchased power contracts in October of this year. They will provide power to Bear Valley Electric effective January 1, 2009 at a fixed cost over a five-year term. The new contract is subject to PUC approval. Once the contract is approved, Bear Valley Electric will file a separate application to incorporate the new costs into rates, including energy purchases and delivery costs. The new contract will also be subject to derivative accounting.

Bear Valley Electric expects to make another separate filing, requesting the PUC to authorize all unrealized gains and losses generated from the new purchased power contracts be deferred on a monthly basis into a non-interest-bearing regulatory asset or liability account that would track the changes in fair value of the derivative throughout the term of the contract.

Upon approval of the new contract by the PUC, changes in the fair value of the derivative throughout the term of the new contract will be included in the regulatory account, thereby offsetting the entries required by the derivative accounting. By allowing for such regulatory accounting treatment of the derivative, fair value changes of the purchased power contract will no longer affect the Golden State Water Company's earnings.

Water supply issues in California are tightening up in order to help ensure the reliability, quality and affordability of water. Golden State Water Company manages a portfolio of water supplies including ground water production, use of treated water, treated surface water and arrangements with water wholesalers. For example, Golden State Water has contracts with various governmental entities, principally the Metropolitan Water District's member agencies, MWD, and other parties to purchase water for distribution to the company's retail customers. MWD's principal sources of water are the Colorado River and the State Water Project in California which conveys water from the northern part of the state.

Water supply is available to MWD through the State Water Project have historically varied from year-to-year based on weather, although MWD has generally been able to provide sufficient quantities of water to satisfy the needs of its constituents. However, a key link in the State Water Project is the Sacramento-San Joaquin River Delta system, which exits to the San Francisco Bay.

Due to the recent Federal Court ordered pumping restrictions from the Delta, the current outlook for deliveries from the State Water Project has not improved. Allocations during 2008 have been dramatically diminished to approximately 35% due to these restrictions. Without the court ordered Delta restrictions, the state's Department of Water Resources, DWR, has indicated the allocation would have been approximately 50%.

Due to declining storage levels in the state's reservoirs, the DWR in late October announced an initial allocation of only 15% for 2009 water deliveries, which is the second lowest in the history of the State Water Project.

In February 2008, MWD approved the Water Supply Allocation Plan. And under this plan, the MWD Board can declare a water supply shortage and allocate water to the MWD member agencies. Depending on weather conditions, during the pending winter of 2008 and 2009, such a declaration could occur as early as January of '09. MWD has indicated that a regional shortage of 10% to 25% or more is possible for 2009.

Approximately 55% of Golden State Water Company's supply comes from our own groundwater production wells situated throughout our services areas. Golden State Water Company owns a total of approximately 118,000 acres feet of water rights, mostly groundwater, to help meet our supply requirements. The company purchases from the MWD and its member agencies about 45% of our total demand.

In light of restrictions on imported water supplies and drought conditions in southern California, Golden State Water has been engaging in the comprehensive and ongoing assessments of its water rights and groundwater storage assets.

In addition, the company has begun to aggressively pursue voluntary conservation measures among its customers and implement customer education initiatives to help the deal with supply variability and the general scarcity of water supplies.

As reported, in our recent new release, the board of directors of American States Water approved quarterly dividend of $0.25 per share. This action represents the 290th consecutive dividend payment by the company. For more than 54 consecutive years, American States Water 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 in financial conditions and such other factors as the board may deem relevant.

American States shareholders should know that using SEC guidelines for reporting financial performance, $10,000 invested in the shares of American States Water Company at December 31, 2003, would be worth $17,712 at September 30, 2008. This amounts to an annual compound growth rate in shareholder value of 12.8%.

And now, I'll turn it back over to Eva to review further information.

Eva Tang

Now I would like to turn our discussion over to Bob Sprowls, Executive Vice President and soon to be President of AWR, who has a few words he would like to add today. Bob?

Bob Sprowls

Thank you, Eva, and good morning, everyone. I would like to take this moment to make a few comments about Floyd, given that this will be our last Earnings Call with Floyd as President and CEO.

Floyd is a person we've all learned from and respected for many years here at the company, both as a leader and as a person. He is a dedicated, compassionate, knowledgeable and respected member of the water industry, as a whole, and his contributions and passion for water and water issues is both contagious and exhaustive.

As President and CEO of the company, Floyd has led the company's growth in revenues from $100 million in 1992 to over $300 million in 2007, and growth in assets from $312 million in 1992 to over $1 billion to-date. His day-to-day leadership will be missed by all here at the company after 21 years of service. He will continue to serve our shareholders and the industry as Vice Chairman of our Board of Directors beginning January 1, 2009.

Floyd, on behalf of the men and women here at the company, our shareholders and customers, and the communities we serve I thank you for the leadership you've given our company.

Floyd Wicks

Well, thank you very much, Bob, for your kind words. And I must say in my 41 years in this industry, I have always found the industry itself would be an extremely valuable experience. I will continue seeking ways and wish to improve the presence of the private sector in the water space. I will now turn the conference back over to the operator to entertain any questions you may have. Thank you again.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Jonathan Witter with Wachovia.

Jonathan Witter - Wachovia

Good morning, I guess your time. Good afternoon morning mine. First off, Floyd we are going to miss you, but enjoy the well deserved time off and Eva welcome to the team. We look forward to working with you and congratulation to you Bob. I wanted to get in a little more clarity on I guess the 2008 CapEx plans. What's the full year looking like? I thought before you were talking $55 million to $60 million range. Clearly, we are already in that. What's full year going to come in at?

Floyd Wicks

This is I think what happened here, we had got a little bit behind in prior years and some of the catch up you are seeing now in the current year-to-date numbers, we believe we will probably add about another $15 million or so by year-end. Is that the number you have come up with Bob?

Bob Sprowls

Well, we are $59 million I guess through nine months ended, so that's roughly $20 million a quarter cliff and it's really hard to be any more specific than that. I mean, as Eva talked about in her prepared remarks, we are talking to the markets as to funding sources, it's one of these things where our Asset Management Group has done almost too good of a job at this point.

But I think CapEx going forward is going to be a function of to the degree we can fund it, and we are talking to various groups as to access to the capital markets, but at this point we really haven't cut back our CapEx budget, and so I think the $15 million number Floyd drilled out is probably pretty reasonable at this point.

Jonathan Witter - Wachovia

Okay. Have you indicated anything for 2009, provided the fundings there, expect similar levels or to be even see an increase from 2008?

Bob Sprowls

I think similar levels is probably where we are at for 2009, with the caveat that providing there is funding sources out there. But it's just such a difficult time in the financial markets and though we are utility company which should have probably more access than any of the other companies, still not clear how much access we have. Everyday is sort of a new experience I guess for these financial markets.

Jonathan Witter - Wachovia

Okay. It sounds like we are talking about then $75 million to $80 million full year, is that just a company funded portion or does that include developer advances and contributions?

Bob Sprowls

That's actually total. So some of that is being funded by our developers. But as you know Jonathan from if you look at the companies cash flow statement, you will see down in the bottom third, the amount it's funded by others. At the same time, we also have refunds due to these providers, and historically there has been a little bit of cash flow that's come out of that, a little bit of net cash flow, net positive cash flow

Jonathan Witter - Wachovia

Okay. And I believe if I understood correctly in the prepared remarks. Right now you have $38 million available under the $115 million total credit facility, is that correct?

Eva Tang

It's correct.

Jonathan Witter - Wachovia

Okay. And then, what is the current common equity ratio? How far out can you kind of delay your equity issuance plans?

Bob Sprowls

Well, we should probably make this point here. And is your sort of rating agency type question Jonathan or a commission question, I guess it really doesn't matter. But in any event during the third quarter when we increased the revolving credit facility, we did borrow at the parent and pushed $30 million, is that right Eva, into Golden State Water as equity.

Eva Tang

Yes.

Bob Sprowls

So the equity ratio at Golden State Water is very solid at this point. The plan is to then go out and do a stock offering eventually, but two things the PSU like to see us with a strong equity position at Golden State Water, rating agencies do as well. And there is a third reason for doing what we did there and that was to get us out of short-term debt once a year at Golden State Water.

So we basically borrowed money at the parent, moved in, in as equity into Golden State Water, Golden State Water took the cash and paid down short-term inter-company loan between the parent and the subsidiary. The plan ultimately is though to do an equity offering, but I think what we’ve done at this point is has improved Golden State Water’s equity ratio which the PSU likes to see and the bond rating agencies like to see as well. We are going to need to do some equity eventually though.

Jonathan Witter - Wachovia

Okay. And then I guess the last question just dealing with I guess what you are seeing in the credit market. Is it just your wait for prices to rationalize a little more before trying to float debt out there or is it just completely inaccessible?

Bob Sprowls

I believe it's accessible, what happens though to companies that are out there issuing equity today is they are taking I think in terms of like 10% hair cut off their market price to issue equity. So it's pretty brutal out there, and typically we don't see that kind of discount that has to be provided to do the equity offering.

Jonathan Witter - Wachovia

Right. On the debt side, is it just the interest rate that the market is requiring right now is more than what you guys would like to typically finance that?

Bob Sprowls

Well, yes, I mean we are looking into the debt side of things, equity was our preference, but at this point debt is something we could do, though the treasury rates are pretty low right now. The actual credit spreads for corporate these days is probably in the 300 basis points greater than what we are use to pay.

So the credit spread has pushed up interest rates to corporates right now despite the fact that the treasury rates are pretty reasonable. So I mean we are still talking to folks, we haven't completed our due diligence, so we are really kind of at the early stages and we are looking at both debt and equity.

Jonathan Witter - Wachovia

Okay. Thanks. I'll let someone else pop on some questions.

Bob Sprowls

Thanks Jonathan.

Operator

(Operator Instructions). Your next question comes from the Heike Doerr with Janney Montgomery Scott.

Heike Doerr - Janney Montgomery Scott

Hello, congratulations Eva.

Eva Tang

Thank you, Heike.

Heike Doerr - Janney Montgomery Scott

I wanted to start with some regulator items. Floyd, it wasn't clear to me, are you saying that for the WRAM you are going to file an advice letter and that would in effect retroactive the benefit back to August, is that what the plan is?

Floyd Wicks

It’s a little confusing, the WRAM is a result of the long investigation on conservation conducted by the commission. Other companies already have that in place. We were not in the first round of companies that went through that process in order to at least grab some piece of time where we could at least record lost revenues and to what I am going to call a secondary regulatory process known as memorandum account.

We did file for a company-wide memorandum account prior to putting the WRAM in to place because we knew we had this window of time where we were losing revenue because of conservation and weren’t able to capture it. We hope the memorandum account process allows us to capture some of that lost revenue, there is no guarantee of it, but the commission did approve the memorandum account over and above the WRAM if that makes any sense. I hope I am not confusing it further.

But as of August 18th, I believe that the memorandum account was approved. And if everything goes as planned, some of the loss for the third quarter that we announced, I believe was $0.07 per share loss, we think some of that will be recovered in the future through this memorandum account process, because as of August 18th which is halfway into the quarter, from that day forward we are able to at least tract lost revenues and place those dollars in this memo account for future recovery.

And we won’t know for sure until we file to get that recovered, and it is really only going to cover the point in time from August 18th to November 20th when the WRAM takes over regions two and three, but it will continue to track for region one which is not under the WRAM yet which probably confused you even more.

Heike Doerr - Janney Montgomery Scott

Yes, I guess. So why is it that all three regions aren’t being implemented at the same time?

Floyd Wicks

Well, we are into a transition period where two of our three regions will now be on track for filing along with the general office. That rate case is actually in process now. Region I was out of sink by I believe two years. But by the time, I think 2012 or 2013 is the first date where all three regions will actually be filed at the same time along with the general office.

So it will be a company-wide filing at that time, with Regions II and III and the GO this year, we are almost there because Region I is our smallest region, that has I believe around 50,000 customers compared to our total company-wide of about 250,000.

Heike Doerr - Janney Montgomery Scott

So just to clarify, when is that you will be filing for Region II, Region III and the general office?

Floyd Wicks

That's already been filed.

Eva Tang

It's already been filed.

Floyd Wicks

July 1st, but Bob do you have a better date than that or?

Bob Sprowls

Yes, July 3rd is effective, January 1 in 2010. And then we plan to bring all three back together through a filing in mid-year 2011 effective January 1 in 2013.

Heike Doerr - Janney Montgomery Scott

Got it. And on the electric side, has the purchased power contract and the refilling are going to need to do on that side throwing off the timing of implementing that rate increase?

Floyd Wicks

No, we've actually filed a full blown general rate case for Bear Valley Electric. This year also, we've got a lot of regulatory activity at the PUC here in California. That filing though, I would think the decision is expected around the middle of the third quarter of '09 as I recall and I'll ask Bob and Eva to correct me if I am wrong on that.

Eva Tang

That’s right, Floyd.

Bob Sprowls

Yes, that’s right.

Heike Doerr - Janney Montgomery Scott

Okay. And if we could switch gears to ASUS, can you disclose how much you filed for at Fort Jackson and what the timing is of that being implemented?

Eva Tang

Heike, the things we would file is enough to cover all the costs we lost and as well as the emergency costs and on top of that the profit margin. And we have that number in the 10-Q that we will release tomorrow, but it is safe to say we cover the costs plus profit margin on whatever we lost in this quarter.

Floyd Wicks

The other things, it’s little confusing with my engineering background. I have never thought of a capital project that we incurred cost on the capital project, yet we have to expense them if we don’t have the full government approval for that extra cost we incurred on the capital project. So even thought it’s capital, it becomes an expense during the third quarter of this year until such time as the military base approves our request for funding for that extra we paid for the project.

So it become a temporary, I’ll call it temporary expense because we are hoping to get approval in near-term time. But when we get that approval, it will allow us to book a revenue increase because we now have more of a regulatory asset in hand as opposed to no approval by the government yet. I hope I didn’t confuse you more, I don’t want to.

Heike Doerr - Janney Montgomery Scott

No, that makes sense. I guess what I am trying to understand is how much of these transition costs or initial capital costs are we talking about? How much of these are we going to see in the coming quarters or is this isolated to the third quarter event?

Floyd Wicks

Go ahead, Bob.

Bob Sprowls

Heike, as you know we are moving up the learning curves somewhat in this business. Some of these cost were cost that we had to do because of emergency situations. Some of the other costs or things that maybe we could have waited to spend the money until we got a contract modification. So I guess the expectation is we'll see less of these going forward, because it really is one of these things you got to get approval from the government before you spend the dollars, and then once you do that then you can spend them without concern about recovery.

So somewhat of it is moving up the curve, others of it is emergency repairs that it's very difficult for us to avoid spending those dollars when you got a situation that require the emergency dollars to be spent.

Eva Tang

And for the transition cost Heike that is a fixed dollar amount usually for any new military bases. So in the sense that we spend under that, we get to take it into income. In this case, we did spend more than what we were optimizing the contract. So we are asking for additional dollar recovery for that additional cost.

Heike Doerr - Janney Montgomery Scott

Okay. That was helpful. Thank you.

Eva Tang

Okay.

Operator

(Operator Instructions). At this time, there are no further questions. At this time, I will turn the conference back over to Mr. Floyd Wicks for any further remarks. Please go ahead.

Floyd Wicks

Thank you, Casey. Again thank you all for your participation today and for your continued interest and investment in American States Water Company. Have a good day.

Operator

Thank you for your participation. As a reminder if you would like to listen to the replay of this call, it will begin this afternoon at approximately 3:00 PM Pacific Time and run through Thursday, November 13, 2008. The toll free number for the replay is 800-642-1687 or local number 706-645-9291, with conference ID number 69552863. This does conclude today's conference. Thank you for your participation. You may now disconnect.

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