美國水務 (AWK) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to American Water's 2008 first quarter earnings conference call. (OPERATOR INSTRUCTIONS.) I would now like to introduce your host for today's call, Ed Vallejo, Vice President of Investor Relations. Mr. Vallejo, you may begin.

Thank you. Good morning and welcome to American Water's 2008 first quarter earnings conference call. I'm Ed Vallejo, American Water's Vice President of Investor Relations. If, for some reason, you did not receive the earnings release, you can find it by visiting the Investor Relations section of our website at www.amwater.com. The slides used in this morning's conference call will also be available for download at 10:30 a.m. following the call.

Before we begin, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company knows certain numbers to be discussed by members of management during this call may constitute forward-looking statements. Such statements are subject to numerous risks, uncertainties, and other factors that may cause the actual performance of American Water to be materially different from the performance indicated or implied by such statements. Such risk factors are set forth in the Company's SEC filings.

During the course of this call, we may refer to certain non-GAAP financial measures. Reconciliation of these non-GAAP to GAAP financial measures are posted in the Investor Relations section of the Company's website. Today, American Water's President and Chief Executive Officer, Don Correll, and Ellen Wolf, American Water's Senior Vice President and Chief Financial Officer, will be discussing our first quarter results.

Due to the fact that American Water is still within the post-initial public offering quiet period, we are unfortunately unable to have a question and answer session following today's presentation. We do, however, anticipate having question and answer sessions on future earnings conference calls.

Now I'd like to turn the call over to Don Correll.

Thank you, Ed, and good morning, ladies and gentlemen. Today we're going to be commenting on our first quarter results, review some of the highlights of the quarter, as well as discuss our business strategies. I'd like to begin this call, however, by thanking and congratulating the many individuals, especially our nearly 7,000 employees, who made American Water's IPO a reality this past April. It was a significant milestone in American Water's long history and would not have been possible without the support of these employees, as well as our regulators, state and local elected officials, the communities that we serve, our new shareholders, business partners, and of course, our customers, the almost 16 million people that we serve around the United States and in Canada.

For those of you who were unable to listen or attend our IPO road show, I'd like to give a brief overview of what we believe are American Water's key competitive strengths. As the largest and most geographically diversified investor-owned water and wastewater utility company in the U.S., our scale allows us to capitalize effectively on growth opportunities across our service areas while helping to insulate us from adverse conditions in any one geographic area.

We also have a competitive advantage in procuring goods and services, which enables us to provide high-quality, cost-effective service to our customers. Our regulated businesses provide a high degree of financial stability because of high barriers to entry, which insulate us from competitive pressures and economic regulation also promotes predictability in financial planning and long-term performance through the rate setting process. And lastly, our largely residential customer base promotes consistent operating results.

As I'll comment on further in our presentation, we seek appropriate rates of return on our investments and because American Water has a strong track record of providing reliable service at cost-effective rates, we generally have been granted rate relief in a timely manner after application.

We believe we are well positioned to benefit from favorable industry dynamics in the water and wastewater sectors, which provide opportunities for future growth in both our regulated and non-regulated businesses, and our experienced management team and expertise in water quality, testing, and research will enable us to continue to be an industry leader in the U.S. water industry. We believe the U.S. water industry is poised for growth and American Water is well positioned to lead that growth.

Another exciting aspect to becoming a public company is the opportunity we have to retell the American Water story to the public. We've introduced a new look for American Water that embodies our strength and stability combined with our energy and dedication. You can see the brand on our website, also launched in conjunction with the IPO. It is a more user-friendly website with a robust selection dedicated to investor relations.

While Ellen Wolf, our CFO, will go into further detail regarding our first quarter, I'd like to comment on some of the key results. Operating revenues increased 8.2% to approximately $506.8 million due primarily to rate increases, which is a critical competency of a regulated utility. For the quarter, which includes a non-recurring, non-cash impairment charge, the Company reported a net loss of $732.5 million.

In April 2008, as a result of the IPO and subsequent trading in the stock price, the Company recorded an event-driven impairment charge to goodwill related to its regulated businesses in the amount of $750 million. Net income excluding an impairment charge, a non-GAAP financial measure, rose to approximately $6 million compared with earnings of $2.7 million in the first quarter of 2007.

With the IPO now behind us, we continue to focus on our strategy to prudently invest in our regulated water and wastewater infrastructure projects to ensure reliability. Related to our infrastructure investment, on April 25, the Kentucky Public Service Commission approved Kentucky American Water's application for a certificate of convenience and necessity to construct a 20 million to 25 million gallon a day water treatment plant on the Kentucky River and a 31-mile water transmission line. The approval will allow us to provide central Kentucky with a reliable drinking water supply for years to come. The PSC's approval and our subsequent investment is just one example of American Water's commitment to providing essential services to our customers in the water and wastewater utility industry.

Company-wide in the first quarter, American Water invested $188.4 million on infrastructure improvements. Our capital investment includes both infrastructure renewal programs and construction to meet new customer growth. Considering the US EPA's estimate that it will cost upwards to $1 trillion in the United States over the next 20 years to replace aging infrastructure, American Water's size and geographic diversity positions us to assist municipalities as they face these huge challenges.

Our national footprint, as well as our industry experience, increases our ability to make appropriate investments in the non-regulated business, as well as public/private partnerships. We have been nationally recognized in our efforts in this area. This quarter we received the 2008 Excellence in Public/Private Partnership Award from the U.S. Conference of Mayors. American Water and the City of Buffalo were honored with this award for the positive results of their public/private partnership and significant improvements to the city's water systems.

After just the first six years of working with American Water, the City of Buffalo recognized $21 million in savings through operational and financial improvements. Our position as an industry leader in water quality, testing, and research was also reflected by a recent honor we received at the annual Global Water Awards ceremony hosted by Global Water Intelligence, one of the most prestigious European publications in the water sector.

This past April the Tampa Bay Seawater Desalination plant was named as the desalination plant of the year. At 25 million gallons per day, the Tampa plant is the largest desal plant in the United States and provides about 10% of the Tampa Bay region's drinking water supply and is operated by American Water and ACCIONA Agua through their joint venture subsidiary. The success of this project exemplifies the role American Water will continue to play in developing and delivering innovative solutions for our country's water resource challenges.

With that, I'll turn the call over to Ellen Wolf to discuss the first quarter financial results in more detail.

Thank you, Don, and good morning, everyone. For the first quarter of 2008, American Water reported a net loss of $732.5 million or $4.58 per diluted share. The net loss is driven primarily by an impairment charge to goodwill, which I will be discussing in more detail shortly. Excluding this non-cash impairment charge, net income for the first quarter 2008 rose to approximately $6 million, an increase of 123% compared to net income of $2.7 million for the first quarter of 2007.

A key driver in the increase in net income was the increase in our revenue. Operating revenues for our first quarter of 2008 increased 8.2% to $507 million compared to $469 million in the prior year period. The increase was largely attributable to rate increases in the regulated businesses of $30 million and higher revenues in the non-regulated businesses of approximately $8 million.

Revenue from residential customers increased by $16.6 million, while the volume sold decreased by 2.3% largely as a result of wetter weather conditions in California, as well as warmer weather in the Mid Atlantic region of the country in 2008.

For the Company's commercial customers, revenue increased $4.2 million while the volume of water sold decreased by 3.1%. And for our industrial customers, revenue increased $1.5 million while the volume of water sold totaled 9.9 billion gallons in the three months ended March 31, 2008, an increase of 1%.

Offsetting the increased revenues were approximately $32 million of higher operating expenses excluding the impairment charge for the three months ended March 31, 2008. This increase resulted primarily from increased expenses in our regulated businesses of $27 million mainly associated with one, an increase in staffing throughout 2007 as we continue to enhance our services to meet customer expectations, and two, an increase in ongoing costs related to benefits.

During the quarter, the Company continued to work on ensuring that we will be compliant with Sarbanes-Oxley Section 404, which is effective for American Water for the fiscal year ended 2009. Over the past two years, the Company has made significant progress in remedying its material weaknesses and expects by the latest to be in compliance by the end of 2009. Also included in operating expenses are those costs related to SOX 404 compliance. These costs decreased from $7.8 million for the quarter ended March 31, 2007 to $5.9 million for the quarter ended March 31, 2008 demonstrating the Company's continued focus on remedying its weaknesses.

Other items affecting net income for the three months ended March 31, 2008 as compared to the same period for the prior year include lower interest expense of $2.2 million as a result of cash infusions received from RWE during 2007, which were used to reduce our debt.

The first quarter of 2008 also saw an increase in our provision for income taxes by $3.5 million before the affect of the impairment charge. The increase is a result of higher taxable income in the first quarter of 2008 versus the same period in 2007 before the affect of the impairment charge and certain other discreet tax expenses. We expect after excluding the affect of the impairment charge to have an overall effective tax rate for 2008 of approximately 36%.

In the first three months of 2008, we received authorizations for additional annualized revenues from general rate cases equating to $26 million assuming constant sales volumes. As of March 31, 2008, we are awaiting final orders for one general rate case that was filed in 2006 requesting $7 million in total additional revenues and five general rate cases that were filed in 2007 requesting approximately $58 million in total additional annual revenues.

We have also filed general rate cases in five additional states in the first quarter of 2008 that would provide approximately $231 million of additional revenues if approved as filed. We can provide no assurance that the filed amount or any portion thereof of any requested increases will be granted.

During the three months ended March 31, 2008, net cash providing by operating activities increased from $54 million in the prior year to $85.4 million for the current quarter. This cash was used to meet a portion of our capital expenditure needs, which increased from $166 million in the first quarter of 2007 to $188 million in the first quarter of 2008. The remaining cash requirements were met through the issuance of commercial paper.

Subsequent to this quarter end, the Company placed $200 million of private placement debt. The cash from this private placement debt will be received during the month of May. Also, RWE infused approximately $245 million to meet regulatory requirements connected with the IPO and RWE's divestiture of American Water. The cash received from both the private placement debt and from RWE will be used generally to reduce our commercial paper outstanding and to meet other cash needs.

As you are aware, subsequent to the first quarter of 2008, on April 23, RWE began to divest its interest in American Water through an initial public offering. RWE sold 58 million shares of its interest in the Company's common stock at a price of $21.50 per share. The Company did not receive any proceeds from the sale of these shares. Prior to the IPO, the Company was wholly owned by RWE. Currently, RWE owns approximately 64% of the Company's common stock.

As many of you have noted and was mentioned during this call, the Company took an impairment charge during the first quarter of 2008 for $750 million or approximately $739 million after taxes. The impairment charge is primarily associated with the goodwill on American Water's books, which was the result of the premium paid by RWE when it acquired American Water.

The first quarter 2008 impairment charge was mainly attributable to the market price of our common stock being less than that which was anticipated when we had conducted our normal yearly test in November of 2007. With American Water becoming a public company, calculation of the value of the goodwill was mainly done by utilizing the stock price of the Company with some weighting being put on market multiples for the industry.

Prior to becoming a public company, more emphasis was placed upon market multiples and discounted cash flow analysis. It is our normal policy unless there is some form of a triggering event as there was with the IPO to review the value of our goodwill in the fourth quarter of every year. As of the end of the first quarter 2008, there remains $1.7 billion of goodwill as an asset on the Company's balance sheet.

As we have just become a public company, the Company has not yet declared a dividend. It is our policy subject to approval by our board of directors to declare and pay a dividend on a quarterly basis. Therefore, we would expect to declare and pay a partial dividend relating to the time we have been a public company in the second quarter during the third quarter, based upon financial results of that second quarter. It is our intent to begin with a dividend of $0.80 per share per year.

I want to thank you for your continued interest in American Water, and we look forward to answering your questions once we are no longer in this quiet period. For your information, we will be filing shortly our 10-Q. That concludes my statements on American Water's first quarter financial results, and I will now turn the call back over to Don.

Thank you, Ellen, and I'd like to close by thanking, once again, all of our new shareholders. We welcome you to American Water, and we're delighted to have you associated with us. We're glad you were able to join us today and look forward to future earnings conference calls with all of you at which time we will be able to answer your questions. This concludes today's call.

Thank you. This does conclude today's conference call and webcast.