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American States Water Company (NYSE:AWR)

Q3 2009 Earnings Call

November 4, 2009 2:00 pm ET

Executives

Eva Tang - Chief Financial Officer

Bob Sprowls - President & Chief Executive Officer

Analysts

Nancy Doyle - MetLife

Debra Coy - Janney Montgomery

Garik Shmois - Longbow Research

Operator

Welcome to the American States Water Company conference call discussing third quarter 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 fax or e-mail to you.

If you would like to listen to the replay of this call, it will begin this afternoon at approximately 2:00 pm Pacific Time and run through Wednesday, November 11, 2009. The toll-free number for the replay is 800-642-1687 and the conference ID is 36158753. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

At this time, I would like to turn the call over to Eva Tang, Chief Financial Officer of American States Water Company.

Eva Tang

Thank you. Good morning or good afternoon. I’m Eva Tang; Chief Financial Officer of the company, Bob Sprowls, President and CEO is also with me. I want to thank you for joining us today and for your continued interest in American States Water Company. Following the conclusion of our prepared remarks the call will be opened up for questions.

I will like to remind you that certain matters discussed during this conference call are maybe 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.

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 as GSWC and Chaparral City Water Company as CCWC and American States Utility Services as ASUS. I will begin with the results for the third quarter of 2009.

Basic and fully diluted earnings as reported for the quarter ended September 30, 2009 were $0.52 per share as compared to basic and fully diluted earnings of $0.26 per share for the third quarter of 2008. Removing the effects of unrealized loss on purchase of water, contracts of $0.13 per share from the 2008 results, diluted EPS as suggested would have been $0.09 per share for third quarter of 2008. In comparison the $0.52 per share for the third quarter of 2009 is $0.13 per share higher than the same period of 2008 as suggested.

As discussed in previous quarters even though we do have unrealized losses and/or gains on the purchase power contract effective January 1, 2009, we have recorded them as regulatory assets or liability, therefore not affecting our earnings. The $0.13 per share increase as adjusted in earnings for the third quarter of 2009 is due to the following significant items: First, the water margin increased by 4.7 million or $0.15 per share.

Even though revenues were impacted by lower water consumption of approximately 9% or $4.4 million when compared to the same period of 2008, the implementation of the water revenue adjustment mechanism and the modified supply cost balancing accounts for reaching two or three in late November 2008 and September 2009 for Region I, added a net increase of $7 million to pre-tax income for the quarter.

Higher water rates approved by the CTUC effective January 1, 2009, also added approximately $2.9 million revenue for the quarter. Another item that positively impacts the third quarter results was the improvement in the financial performance of our contracted services business.

Operating under American States Utility Services, Inc. or ASUS; free cash operating income through ASUS increased by $3.9 million or $0.12 per share as compared to the same period in 2008. This was due to increases in special construction projects at Fort Bliss and the military bases in Virginia and improved the performances at Fort Jackson and Fort Bragg as compared to the same period in 2008.

In addition, the U.S. government approved a request for equitable adjustment of $1.1 million at Fort Jackson for emergency construction costs previously incurred. This equitable adjustment increased construction revenues and pre-tax operating income by $1.1 million. The above increases were partially offset by the following items.

First, operating expenses other than supply cost increased as the company’s water and electric utilities by $2.2 million or $0.07 per share. The increase is primarily due to an increase in pension costs of $829,000, an increase of $721,000 in water treatment costs and an increase in depreciation expenses of $514,000.

A second item that negatively impacted 2009 third quarter’s earnings is the recording of a loss on settlement for removal of wells of $760,000 or $0.02 per share by Chaparral City Water Company. In 2005 Chaparral reached a $1.5 million settlement agreement with a local Senator’s district to permanently seize using one of Chaparral wells.

Based on previous decision enrolled by the Arizona Corporation Commission of similar gains, Chaparral recognized net gain of $750,000, which was 50% of the proceeds in 2005, related to the settlement agreement and established regulatory liability for the remaining $760,000.

Despite its previous rulings on October 8, 2009, the Arizona Commission ordered Chaparral to treat entire 1.5 settlement agreement with a Senate District as a reduction to rate base. As a result Chaparral recognized a loss of $760,000 during the third quarter of 2009, which effectively reversed Region I gain recorded in 2005.

The third item that partially offset increase in earnings for the third quarter of ‘09 is higher interest expense. Interest expense, net of interest income increased by $553,000 or $0.02 per share due to the issuance of $40 million in March of 2009 and the recording of $159,000 in interest rate balancing account.

The interest rate balancing account was ordered in July 2009 by CPUC in the cause of capital decision to try the difference between actual interest rate for any new debt issued after January 1, 2009 and the rate authorized in the decision. Finally the issuance of 1.1 million shares of AWR’s common stock completed in May of 2009, diluted earnings by roughly $0.03 per share.

Now, onto a summary of the year-to-date 2009 results, diluted earnings per share for the first nine months of ‘09 were $1.45 compared to $1.10 for 2008. Included in 2008’s diluted EPS was an unrealized gain of $0.03 per share on purchase power contracts. Excluding the effect of this unrealized gain, diluted EPS is suggested in a way that would have been a $1.07 as compared to $1.45 recorded in 2009. That’s an increase of $0.38 per share. Contributing to this $0.38 per share increased in diluted earnings as adjusted were the following items.

Increase in water margin of $11.2 million or $0.37 per share primarily due to higher water revenues. The recording of $1 million in settlement proceeds of $0.03 per share resulting from a settlement agreement reached with year end trading. The improved the financial performance of contracted services at the military bases resulting in an increase in SUS pre-tax operating income of $7.1 million or $0.20 per share.

A tax benefit of $918,000 or $0.05 per share recorded in the first quarter of ‘09 due to changes in the state a portion in laws and decrease in the effective tax rate during the nine months ended September 30, 2009, favorable impacting earnings by another $0.02 per share. The increases in diluted EPS as mentioned above were partially offset by an increase in operating expenses other than supply costs of $6.3 million or $0.21 per share at the company’s utility businesses, including higher labor, pension after service and depreciation expenses.

The recording of $760,000 loss on settlement for removal of wells as a result of the ACC decision as previous mentioned in the quarterly result. The increase in interest expense net of interest income of $1.5 million or $0.05 per share due to an increase in long term debt and interest rate balancing as discussed above in quarterly presentation as well and a decrease of $0.04 per share due to the issuance of $1.1 million shares in May of 2009.

This concludes my report on the year-to-date result. I also want to report that for the nine months ended September 30, 2009, capital expenditures were approximately $55.6 million as compared to $59 million for the same period in 2008. We expect our capital expenditure in 2009 to be approximately $75 million which is on target with our estimate for the year.

At the end of the third quarter we still have a balance of $83 million available under our syndicated credit facility to continue to fund our ongoing capital expenditures. We expect capital expenditures in 2010 for Golden State Water Company to be in the $85 million to $90 million range.

I will now turn the call over to Bob.

Bob Sprowls

Thank you, Eva and once again good morning or good afternoon, ladies and gentlemen. 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. Golden State Water Company’s Bear Valley Electric Services Division received a final decision on October 15, 2009, regarding its general rate case filed last year.

The decision approves a comprehensive settlement agreement between the division of rate fair advocates DRA and Bear Valley Electric. The decision authorizes a return on equity of 10.5% with a corresponding return on rate base of 9.15%. The annual increases approved in the decision are $4.8 million for 2009, $1.2 million for 2010, $209,000 for 2011 and $168,000 for 2012.

Since the new rates went into effect on November 1, 2009, the revenue increase for 2009 would be approximately $800,000. Among other things, the decision allows for an update to Bear Valley Electric’s rates into 2010 for the corporate headquarters cost based on the California Public Utility Commissions adoption by the end of 2009 of new rates for Golden State Water’s current general rate case.

Including the recovery of expenses associated with its corporate headquarters. Based on the decision Bear Valley Electric is also allowed to establish a base revenue requirement adjustment mechanism to decouple usage from revenue. In June 2009 the CPUC had authorized the electric division to track the difference between the 2007 adopted general office cost allocation to Bear Valley Electric and the 1996 adopted general office allocation to Bear Valley Electric.

In a memorandum account effective and retroactive to June 4, 2009. The amount in the memorandum account was about $761,000 at the end of September. However, the decision issued in October did not address the disposition of the memorandum account. We intend to see clarification from the California Public Utility Commission on the treatment of the memorandum account.

Also in October 2009 Chaparral City Water Company received a decision from the Arizona Corporation Commission approving rate increase of approximately $1.7 million or 23% over current annual revenues. As mentioned by Eva, this decision also ordered Chaparral to return to customers 100% of a settlement reached in 2005 with the Fountain Hills Sanitary District resulting in the recording of a $760,000 loss in the third quarter of 2009.

Now I will discuss the status of pending general rate case proceedings for the company. For the Region II and III and the general office general rate case that we filed in July of 2008, Golden State Water has agreed to reduce or eliminate certain requests. As a result our revised request would generate annual increases of $42.2 million in 2010, $3.5 million in 2011 and $5.8 million in 2012, for both regions. The DRA still has a different position on the rate increases.

For instance, as compared to the company’s revised request of $42.2 million in 2010, the DRA is recommending an increase of $31.7 million in annual revenues. At this time we cannot predict what the results will be, but we expect a final decision from the California Public Utility Commission by the end of 2009. One other thing I’d like to mention regarding this current general rate case is that the DRA is challenging Golden State Water’s historical practice of deferring direct rate case costs recorded as regulatory assets with subsequent recovery upon the effective date of the new rates.

These costs consist primarily of outside consulting services which are incurred in connection with the preparation and processing of a general rate case. This practice has not been challenged by the CPUC in prior rate cases and is permissible under the PUCs uniform system of accounts. Instead, the DRA believes that rate case costs should be projected for future periods and recovered prospectively. We will vigorously depend our position.

However, if DRA prevails, we maybe required to write off approximately $2.3 million of regulatory assets during the fourth quarter of 2009 related to the costs incurred in the current water rate case. At this time we’re unable to predict the outcome of this matter. We are currently preparing the Region I general rate case filing. The rate case for golden state’s Region I will be filed in January 2010 for a two year rate cycle with rates effective 2011 and 2012. A general rate case for all three water regions will then be filed in July of 2011 with rates effective January 2013.

Now, I wanted to briefly talk about our contracted services business at American States Utility Services, also known as ASUS. I am pleased to report that ASUS has reported four consecutive quarters of positive earnings. The improvement in profitability during the nine months of 2009 is primarily due to increases in operation in maintenance revenues at Fort Bliss and new construction projects at military bases in Texas and Virginia, coupled with controlled spending and operating expenses.

As Eva mentioned before, on September 30, 2009, the U.S. government approved $1.1 million in revenues for a request for equitable adjustment also known as an REA, filed by Fort Jackson for emergency construction costs mostly incurred in 2008. In addition to the $1.1 million equitable adjustment for Fort Jackson, ASUS received various contract modifications from the U.S. government in September of 2009.

The modifications provide funding for $7.3 million in new construction projects at various ASUS subsidiaries. The majority of this work is expected to be performed during calendar year 2010. We are still working to finalize price redeterminations and requests for equitable adjustments at various bases, which include adjustments to reflect changes in operating conditions and infrastructure levels, from that assumed at the time of the execution of the contracts, as well as inflation and costs.

Successful price redetermination and REA filings should provide added revenues respectively 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’ll quickly talk about the status of each of our price redeterminations. First, price redeterminations for the four Virginia bases have been submitted and are under review by the U.S. government. The review is expected to be completed by November 2009, followed by negotiations with the government, which are projected to be completed by the end of 2009. We have received interim management fee increases at the four Virginia bases.

Second, the price redetermination for Andrews Air Force Base is subject to government audit, which is expected to commence during the fourth quarter of 2009, and is estimated to be completed in the second or third quarter of 2010. This will be followed by negotiations with the government.

Third, we filed a request for equitable adjustment at Fort Bliss in connection with ASUS, assuming more infrastructure than was included in the original contract. Action by the government on this matter is not anticipated until the first quarter of 2010 at the earliest. The first and second price redeterminations are expected to be filed in December 2009.

Action by the government on the price redeterminations is not anticipated until late 2010 at the earliest. The government is preparing contract modifications for interim management fee increases, which had previously expired in September of 2009. We anticipate approval of these interim increases by the end of November 2009.

Fourth, in addition to the $1.1 million contract modification we received in September 2009, we have two more REAs outstanding at Fort Jackson. One has been filed for construction costs incurred in 2008, related to emergency work for a sanitary sewer overflow. A resolution of this REA is expected by the end of 2009. The other REA related to infrastructure levels.

While the actual amount of infrastructure at Fort Jackson is very similar to what was presented by the government during the bidding process, the condition of the infrastructure is worse than anticipated. Resolution is not expected until the first quarter of 2010 at the earliest. The first price bridge termination for Fort Jackson is scheduled to be filed by December 2009.

Finally, a request for equitable adjustment has been filed at Fort Bragg to reflect that ASUS has taken over more infrastructure than was included in the original contract. The REA reflects that Fort Bragg infrastructure is 40% greater than what was included in that original contract. The REA is expected to be resolved by the end of 2009. The first price redetermination at Fort Bragg is scheduled to be filed in December of 2009.

Let’s now 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 of Southern California, or MWD, implemented its water supply action plan to effectively reduce water deliveries across the region by 10% beginning July 1, 2009. The MWD, through its member agencies plans to achieve the reduction by imposing significant penalty charges.

MWD has also announced an 8.8% basic rate increase as well as a $69 per acre foot delta surcharge. These two elements result in a combined average increase of 19.7% effective September 1, 2009. To ensure commensurate conservation levels Golden State Water has implemented mandatory water conservation and allocations in certain service areas. Consumption was down approximately 9% for the third quarter of 2009 and by approximately 8% year-to-date as compared to the same periods last year.

Fortunately we have implemented water revenue adjustment mechanisms and modified cost balancing accounts in late November of 2008 for Regions II and III, and in September of 2009 for Region 1 and therefore have recorded a cumulative $12.6 million benefit at September 30, 2009 that would have previously been lost due to lower consumption. The net of these two mechanisms resulted to an increase to the dollar water margin of $7.0 million or $0.22 per share for the third quarter and $11.8 million or $0.39 per share year-to-date.

As you maybe aware, an extraordinary session of the legislature has been underway in Sacramento. In order to agree on a comprehensive legislative water package to address the issues with the Sacramento-San Joaquin Delta. After of this morning, five bills have been passed out of both houses of the legislature and will be sent to the governor for his signature.

The bills deal with the following subject matters: Delta policy and governance, a water bond, ground water monitoring, water conservation and specified appropriations. The bills were just passed this morning and we’re still analyzing their full impact. Golden State Water purchases water from six different member agencies of the Metropolitan Water District of Southern California, which in turn get a portion of their supply from the delta.

While Golden State Water and its customers will be impacted by the final delta bill package, we have a significant portfolio of judicator water rights and other sources of supply to rely upon. Finally, as reported in our recent news release the Board of Directors of American States Water Company approved a $0.01 per share increase in our quarterly dividend to $0.26 per share on the common shares of the company.

This represents a 4% increase in the quarterly dividend. Even with this increase we think we can still maintain a dividend payout ratio on average of approximately 60%. For more than 55 consecutive years, American States Water Company shareholders have received an aggregate annual increase in their dividends and this action marks 294 consecutive dividend payments by the company.

The company presently intends to continue pay quarterly dividends in the future subject to earnings and financial conditions and such other factors that the Board of Directors may deem relevant. American States shareholders should know that using the SEC guidelines for reporting performing financial performance, $10,000 invested in the shares of American States Water at December 31, 2004, would be worth $15,870 at September 30th 2009. This amounts to an annual compound growth in shareholder value of 10.2%.

Before I turn the conference over to the operator to entertain questions, I would like to thank you, again, for your continued support and interest in the company. I turn it over to the operator at this point.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Nancy Doyle - MetLife.

Nancy Doyle - MetLife

I just wanted to know what method you’re going to be using for financing your CapEx of next year. Do you plan on doing any debt issuance?

Bob Sprowls

Eva, let you answer that one.

Eva Tang

I don’t think we are going to financing the debt equity probably for next year unless there’s some unexpected capital expenditure comes up. We do have a syndicated facility that expires June 2010. We’re considering up that facility a little bit, currently the facility is at $115 million. So we think we’ll have enough funding next year to support our capital expenditures, but things could change during the year if something happens respectively.

Bob Sprowls

So Eva, we have significant cushion in our revolver to cover our CapEx.

Eva Tang

Right now as of end of September 30, we have $83 million on the line.

Operator

Your next question comes from Debra Coy - Janney Montgomery.

Debra Coy - Janney Montgomery

Couple of follow-up questions; one, to go back to the beginning of your presentation, Bob, on Bear Valley, the $4.8 million that you received, you’re only getting $800,000 of it since it was not effective until November. Is that how it works for the electric sides? On the water side, you’re getting retroactive to the beginning of the period rate increases, but essentially you just forego $4 million of the $4.8 million of the ‘09 decision?

Bob Sprowls

Yes, that’s right. That’s how it works. Now, we do have this potential retroactive recovery associated with the general office clause, but really the only piece that would be retroactive.

Debra Coy - Janney Montgomery

That would be relatively small, any adjustments there?

Bob Sprowls

Yes, that’s roughly about $800,000 at the amount in that account is $761,000 at the end of September.

Debra Coy - Janney Montgomery

There could be a decision to either give you the whole, since they haven’t made a decision, you get the whole $760,000, you would get some portion of that or get none?

Bob Sprowls

I think it would either be, you either get it all or you get none.

Debra Coy - Janney Montgomery

When would you expect to hear on that?

Eva Tang

Should be shortly, Debra, we’re trying to file an amended application to have the commission taking care of this item. So that’s in the process. I don’t know when the final order will be on this one, but we’re working on that. Hopefully we can resolve the issue in the fourth quarter.

Debra Coy - Janney Montgomery

Then if you got a favorable resolution, you would take a onetime benefit?.

Bob Sprowls

Yes, that’s right.

Debra Coy - Janney Montgomery

So that’s what happened in the fourth quarter. Then looking ahead onto the Virginia bases and the others that you outlined under ASUS, I’m trying to get a sense of how to calibrate the amounts this. You walked us on the timing and the various actions that you’re filing, but you didn’t give us any numbers.

Is that because those are not public filings, like when you filed rate cases, obviously we have the amounts and something to think about going forward? I don’t have a good sense of what’s the aggregate or the individual amounts of these various REA and price redetermination filings. Can you give us any help on that?

Eva Tang

I think we have some numbers, Debra, in our 10-Q that will be issued tomorrow afternoon. So look through the MD&A session, of the overview session, that we talk about our REAs and dollar amounts, and I’ll be happy to walk you through once the 10-Q is issued tomorrow.

Debra Coy - Janney Montgomery

Just from a policy standpoint in terms of how you’re handling these. So your intent would be that you’ll disclose the amounts of the REA filings, and then a number of price re-determinations you mentioned, but which haven’t actually been filed, when you do file those at the end of this year, would you disclose the amounts of those, as well like a normal rate case?

Bob Sprowls

I think that’s something we would consider. I don’t believe at this point, we have those in the Q, do we, Eva?

Eva Tang

I think they will need a certain basis and we are turning in those dollar amount put in the Q.

Debra Coy - Janney Montgomery

Some of them you don’t know, yet.

Eva Tang

Right.

Debra Coy - Janney Montgomery

Just from a broader standpoint, do we have a number of bases to track, and this will be kind of like tracking individual rate cases, but even from an aggregate amount in terms of forward modeling, and I presume that similar to public utility rate cases, you don’t necessarily get the full amount of what you file, but it would certainly be helpful to us to in terms of trying to understand what the potential improvements might be over the next one, two, three, years to have some sense of what the amounts of filings are?

Bob Sprowls

It will be a negotiated process after you do your filings, and there is a certain amount of negotiations that do take place.

Debra Coy - Janney Montgomery

So whatever information we can get on that will be helpful and then finally you did mention that you got the contract modifications that outline about $7 million in construction projects for calendar ‘10. I believe that was all at Fort Jackson. Correct?

Bob Sprowls

No, it’s really spread across several bases. The Fort Jackson piece was $1.1 million and the rest of them are at several different bases.

Debra Coy - Janney Montgomery

So that’s an additional $7 million in construction projects that you have outlying now, but that doesn’t mean there couldn’t still be other additional ones that could arise over the course of the year.

Bob Sprowls

That’s right. These sort of special projects. The fiscal year for the government ends September 30, so it was kind of a rush to get these dollars appropriated, in effect, and so contract modification then follow it. So to the degree, there are special projects then we would get contract modifications for those and we have had, I think, at least one special project every year since we’ve been in, I think, well, ‘06, ‘07, ‘08 and ‘09, last four years.

Debra Coy - Janney Montgomery

We still have ongoing R&R projects every year.

Bob Sprowls

That’s right. That’s right, because when you do put these contracts there’s at least two different revenue streams, there’s the renewal and replacement, which is just the ordinary replacement of the system through CapEx and so those are going to be some, we will have construction expenditures associated with those projects, as well.

Debra Coy - Janney Montgomery

As I recollect, you had the O&M expenses, you have the and R&R expenses later on top of that, but those are built in for quicker pass through or recovery, if you will, as opposed to the special projects.

Bob Sprowls

Yes, they’re sort of already included in the cash flow stream. When you establish a contract with a particular base, there’s two revenue streams you get and it’s sort of a fixed amount. Those are probably revenue isn’t the right term, cash flow streams. I guess it’s revenue on the O&M side, but cash flow on the renewal and replacement side, because you’re really not allowed to book.

I’m not sure actually doing the construction work that some cases we’re getting the cash ahead of when we do the work in other cases, where doing the work ahead of when we get the cash. I know if that confused the issue, or not, but there’s also something called initial capital upgrades where some of these bases are in need of initial upgrades to the system, and so those are identified and you get a separate revenue stream for that, as well.

Debra Coy - Janney Montgomery

They are built in, right and I understand that your cash outlays for the actual work may not match precisely, but those are built in initially and then it’s the special projects or any of the other adjustments and in the amount of infrastructure or whatever, that all gets rolled into either the REAs and then also the inflation gets rolled into the price re-determinations.

Bob Sprowls

That’s right.

Debra Coy - Janney Montgomery

I think I understand that and then my final question is coming back to the California legislation that passed early this morning, we’ve had a number of conversations over the past two or three years, with you guys, about this whole issue of water rights and the value of the water rights portfolio and certainly Golden State has done a lot to perfect its portfolio of water rights and storage capabilities.

It sounds like that may begin to be put more to the test. Can you talk a little bit more about how you envision that playing out or is it simply that all of your customers are going to see the same level of water cut backs that everyone else is at 10% already, and another 20% that they’re calling for in this legislation. How do you envision that at this point base on what you know so far?

Bob Sprowls

Both currently we purchased roughly 45% of our supply and so that’s the piece that’s really most impacted by what is going on with the delta and what is done with the particular legislation. However, the legislation could have impacted to a certain degree some of our supply as well, when it comes to water rights, we work very hard to include a certain amount of water right protection in the bills that were being passed and I think we were successful in getting some coverage there for that. Now, of course, these bills haven’t been signed by the governor, yet, but I believe the view is that the bills will get signed by the governor.

So, sort of getting back to protecting our customers, as I said 55% of our supply is owned supply and 45% is purchased. It is really the purchase component that kind of gives us the difficult management process, and we’re having mandatory conservation in many of our particular districts, because they do rely a portion of their supply, is a function of what is coming from the Metropolitan Water District, and what’s coming from the State Water project.

So, I mean, we’re going to continue to work very closely with our customers to inform them on what the rules and requirements are we have been doing that already through public participation hearings, unfortunately the cost of our supply is going up because of these delta issues and as I mentioned, the increase from the Metropolitan Water District.

Debra Coy - Janney Montgomery

Is it possible that your mix could change? Do you have room on the 55% side where that could increase and the purchase water percentage could go down or is that pretty much set?

Bob Sprowls

I think if you just looked at the mix to date you will see that we were using a little more of our supply to serve our customers to try to get them water. That’s not sustainable long term, though. I mean it is basically a 55, 45 mix. However, we are looking at and this is a little more long term, but we are looking at adding various other pieces to our water supply portfolio, you’ve probably read that we’ve been interested in this continues project that’s being done.

We’ve also looked at desalination and possibly getting involved in one of the new plants that’s going up, but nothing definitive there. We also would like to get regulatory approval before we change our supply mix, because, you don’t want to go there and commit and then have the commission not approve that as being an additional component in your supply, because then you don’t get recovery.

So, we’re very much aware of what’s going on around us and we’re very much in the middle of the process. Even the delta package that looks like it’s going to get approved, I mean, it isn’t going to fix things overnight. It is going to take 10 to 15 years to resolve some of the issues. So, we’re going to stay focused on getting water to our customers, but right now we don’t have enough water to give them.

Operator

Your final question comes from Garik Shmois - Longbow Research.

Garik Shmois - Longbow Research

On the 9% lower consumption, I know it’s offset by the [Ramnium] CBA, but is it possible to perhaps parcel out how much of that was actually conservation lower organic consumption versus if there’s any weather impact or any impact from the decline in the construction activity?

Bob Sprowls

It will be difficult, I guess. One thing we’ve seen is our number of customers has not gone down. So that’s the drop in number of customers isn’t contributing to the drop in terms of weather. I think this year was pretty normal year in terms of weather, if I’m not mistaken.

Eva Tang

We implemented mandatory rationing in a lot of our service area and that has probably contributed to somehow this consumption decline, too.

Bob Sprowls

I mean, if I had to take an educated guess here, I would say nearly all of it is conservation driven.

Garik Shmois - Longbow Research

Given what you’re seeing in the legislative environment, this high single digit low teen run rate going forward is to be expected, I guess?

Bob Sprowls

I think for the near term that 9% reduction is, we’re going to see that going forward. I don’t think it will be a one year phenomenon. Now, if we get a good year from a precipitation standpoint and then we can relax some of these things, but some of these mandatory conservation efforts, but we’re going to obviously sort of take our lead from member agencies of Metropolitan Water District, because that’s our key supplier for nearly all of the 45% that we purchase.

Garik Shmois - Longbow Research

Just lastly real quick on interest expense, Eva, do you have an estimate for 2010, what that might look like?

Eva Tang

It should be pretty inline with these quarterly expenses, if we don’t have new debt issuance: If you take the quarter and maybe just come forward pretty much it will give you a pretty good number. One more warnings that we going to do our credit facility in June of 2010, we expect a spread it will be much larger than we have right now, because the facility we have now is a five year facility. So I think back in 2005, which is the spread, was very low. So we expect the spread will be around 180 basis points range. So short term interest rate will go up for next year.

Bob Sprowls

I mean we’ve been paying interest rates on the short term borrowings in the 1% range, and it was LIBOR plus 62.5 and because of our people in the financial markets, and the fact that the LIBOR rate has gone down. The spread to LIBOR, I mean, even good, strong credits like our company are going to have to pay more, a greater spread to LIBOR. So we’re going to negotiate the best deal we can with the banks and try to get as many bitters in the mix, but other folks who have done this are seeing their increases in their short term borrowing costs.

Garik Shmois - Longbow Research

Actually one more question, if you could talk a little bit about status of any bids that you might have for any new military base contracts, if there’s anything in the pipeline there that you’re close to?

Bob Sprowls

It’s difficult to predict what bases we’re going to win. We have been on some other bases. What generally as happened has been the military has been slower to grant bases to various companies and so though we think we’ve got a couple of good bids out there, it’s not clear that we’re going to win those, but it’s very difficult for us to give anything to help you predict what bases we’re going to get.

Operator

There are no further questions at this time. I would like to turn the conference over to Mr. Sprowls, for any closing remarks.

Bob Sprowls

Well, again thank you all for your participation today and for your continued interest in investment in American States Water Company. We really appreciate that interest and that’s it.

Operator

This concludes today’s American States Water Company conference call. As a reminder, the call will be available for replay beginning at approximately 2:00 pm Pacific Time. The number for the replay is 800-642-1687 and the conference ID number is 36158753. You may also access the replay at www.aswater.com. Thank you for your participation. You may now disconnect.

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Source: American States Water Company Q3 2009 Earnings Call Transcript
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