Military Base Water Supply Contracts a Focus for Expansion for this California Water Company

Wall Street Transcript

67 WALL STREET, New York - August 29, 2012 - The Wall Street Transcript has just published its Utilities, Alternative Energy and Water Services Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Outlook for Biofuels and Biochemicals - Asia Pacific Demand for Solar Energy - Grid Parity Timelines for Alternative Energy - Water Infrastructure Development - Irrigation and Metering Technology - Water Industry Consolidation

Companies include: American States Water Company (AWR) and many others.

In the following excerpt from the Utilities, Alternative Energy and Water Services Report, the CEO of American States Water Company (AWR) discusses the outlook for his company for investors:

TWST: Shortly after we spoke last year, you officially announced the sale of your Arizona subsidiary. Would you give us some insight on your decision to sell and tell us what the sale has meant for the company? Are there any other subsidiaries that could be candidates for sale going forward?

Mr. Sprowls: We completed the sale of Chaparral City Water Company in May of 2011. At that time, Chaparral City served approximately 13,000 customers, so it was a very small subsidiary. Because of its small size and the fact that the returns we had been earning on the business were below the returns we were earning on other businesses, we decided to sell the business and use the funds received from the sale to invest in our utility business in California and other opportunities that may be presented.

We received $29.6 million in cash on the sale and the purchaser assumed $5.6 million in debt, and we recognized a net gain of $2.2 million, or $0.12 per share on the sale during the second quarter of last year. We normally issue equity approximately every four years to fund our capital improvement program at Golden State Water. The receipt of the $30 million of proceeds from the sale will allow us to defer our next equity issuance. At this point, none of our subsidiaries are candidates for sale going forward. We're very pleased with the performance of both our first-tier subsidiaries, which are our utility subsidiary Golden State Water, including both water and electric, and our contracted services business, American States Utility Services.

TWST: In which geographic area are you most interested in expanding into and why?

Mr. Sprowls: We are interested in expanding both our water utility business under Golden State Water and our contracted services business under subsidiary American States Utility Services, or ASUS for short. Regarding the expansion of the water utility business under Golden State Water, we're interested in expanding that business in California, as well as other states in the United States that have a favorable utility regulatory environment. We're interested in tuck-in acquisitions and greenfield development in California.

Regarding greenfield development, we've signed an agreement to provide regulated water service to a new housing development in Sutter County, near Sacramento, Calif. Before we can do that, we have to get approval of an application for a Certificate of Public Convenience and Necessity that is currently before the CPUC to deem us the regulated supplier for the area. We're very excited about this project. When the development is completed, it could add as many as 17,000 customers to Golden State's service territory. Of course, given the slowdown in the economy, the buildout could take some time.

Our contracted services subsidiary, American States Utility Services, provides water and wastewater services to the U.S. government at nine military bases across the country under 50 year privatization contracts. We began managing the water and wastewater operation at our first military base in 2004, and we've learned a great deal over the last eight years in this business. We like the business, we think we provide great service, and we would like to expand as the government privatizes water and wastewater operations at other military bases.

TWST: Do you think the investment community has a good understanding of American State's and Golden State's story? What are one or two things that you'd like to take the opportunity to clarify or better explain to investors?

Mr. Sprowls: First of all, I think the investment community may be understating the favorability of California regulation on water utilities. With forward-looking test years for rate cases and a significant number of regulatory balancing account mechanisms, I believe it's a very productive regulatory environment. I think the investment community struggles a little bit in being able to evaluate where California regulation is headed, given that three of the five CPUC commissioners were newly appointed in 2011. Also, some of the investment communities have discounted California regulation because of the numerous regulatory balancing accounts, because they believe it complicates regulation.

Regarding where regulation is headed in California, I believe the CPUC understands that infrastructure replacement is needed in the water industry and that investors need a reasonable rate of return if they're going to invest in California. I think the cost of capital decision is indicative of this understanding. The cost of capital decision was a fair decision to both shareholders and customers. Regarding the numerous regulatory mechanisms, equity analysts need to understand that these are tools that are in place, for the most part, to assist utilities in earning their authorized rate of return. I don't believe they are nearly as complicated as some have made them out to be. I think the investment community also struggles with the unpredictability of the earnings from our contracted services business in the past, and that's under American State Utility Services. However, earnings from this business have grown significantly over the past three and a half years. I believe the earnings from our contracted services business are sustainable and will be a continued source of return to our shareholders.

For more from this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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