美國水務 (AWK) 2010 Q4 法說會逐字稿

Good morning and welcome to the American Water fourth-quarter and year-end 2010 earnings conference call. As a reminder, this call is being recorded and also being webcast with an accompanying slide presentation (technical difficulty) to the Company's website www.AMWater.com.

Following the earnings conference call, an audio archive of the call will be available through March 7, 2011 by dialing 303-590-3030 for US and international callers. The access code for replay is for 4405035. The online archive of the webcast will be available through March 30, 2011 by accessing the investor relations page of the Company's website located at www.AMWater.com.

At this time, all participants have been placed in a listen-only mode. Following Management's prepared remarks, we will then open the call for questions. (Operator Instructions). Today's call is scheduled for one hour including questions and answers. I would now like to introduce your host for today's call, Ed Vallejo, the Vice President of Investor Relations. You may begin.

Thank you. Good morning everyone and welcome to American Water's fourth-quarter and 2010 year-end earnings call. As you know, we announced our preliminary earnings for the fourth quarter and year-end 2010 two weeks ago, so our formal presentation for this call will be very brief.

If anyone listening today missed the investor conference, you are invited to listen to the webcast replay of management's presentation of American Water's strategy and (inaudible) guidance, which will be archived for a brief time on the investor relations Web pages at www.AMWater.com.

Before we begin I would like to remind everyone that during the course of this conference call, both in our prepared remarks and answers to your questions, we may make statements related to future performance. Our statements represent our most reasonable estimate. However, since these estimates deal with future events, they 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.

Now I would like to turn the call over to American Water's President and CEO, at Jeff Sterba.

Thanks, Ed, and thank you all for joining us today. As Ed mentioned, about two weeks ago at our investor day we went through our strategic direction, our preliminary 2010 earnings as well as our guidance for 2011.

And so I think what -- the primary message is that now our audited financials for 2010 match up with what we provided as projected or as our preliminary earnings. And I'm going to turn it over to Ellen to go through few details. As Ed said, we're going to keep this short and go to your questions.

But just let me just in summary say that we're very pleased with the financial results we generated for 2010. But I'm probably more pleased with the groundwork that we're laying for the continued growth and success of the business, through a number of efforts and actions that we have started to take that we discussed in a fair amount of detail in the strategic discussion. And this will lay the groundwork for good growth and solid financial performance for a number of years to come.

So Ellen, with that, let me turn it over to you.

Thank you very much Jeff and good morning everyone. As Jeff mentioned, I'm only going to touch briefly on our results for the year ended 2010, as most of that was covered at our investor conference and there have been no changes since that time.

I would also like to mention that our 2010 K has been filed and is available for your review.

As you can see, 2010 was a solid year of performance. We saw increases in revenues, cash flow, net income and earnings per share. Operating revenues were $2.7 billion, an approximate 11% increase over the same period in 2009.

Cash flow increased 30% from 2009 to 2010. And net income of approximately $268 million and earnings per share of $1.53 represented over 20% increase over adjusted net income and EPS from 2009.

Our revenue growth from 2009 to 2010 is in three areas. Almost 60% of our revenue increase is due to rate awards granted in the latter half of 2009 and in the first half of 2010. These awards continue to recognize that our prudent investment and water and wastewater infrastructure.

Less than 20% of the increase is due to an increase in customer demand over the prior year, which was a very wet year. As mentioned at investor day, overall consumption is up 2.4% -- really driven mainly by the increased usage by our customers in our commercial, industrial and public and other sectors.

And finally, approximately one-quarter of the revenue increase was due to our market-based business and its entry into the industrial O&M market through an acquisition at the end of 2009. In addition, we continued to see increases in revenue from our contracts with the military to manage water and wastewater operations at several of their bases.

Expenses increased overall by 8%, with a little over one-third of that increase relating to expenses incurred to generate the incremental revenue that I just mentioned relating to our market-based operation. One-quarter of our increase in expenses is really driven by depreciation and general taxes. And the remaining increases in expenses are a direct result of increases in production costs relating to the increase in usage.

We also had increases in employee costs mainly around wages, cost of healthcare and retirement benefits.

Expense control continues to be a focus for us. Looking at the O&M efficiency ratio for the regulated business, you can see our improvement in this area. Over the past three years this O&M efficiency ratio has improved by over 300 basis points.

The work we're doing to contain costs and drive efficiencies will continue, as well as our sharpened focus on building value to ensure we are operating, investing and strategically growing in areas where we can best serve our customers.

And finally, as a reminder, we have issued EPS guidance for 2011 of $1.65 to $1.75 which is a reflection of our commitment to enhancing the value of this business for our employees, customers and shareholders.

And with that I would like to turn the call back to Jeff for any final comments, and then we will open the lines for any of your questions.

Thanks Ellen. If you look at page 10, this is the slide we closed our presentation on at the investor day. And it will be a slide that you will see in each of our quarterly presentations as you go through the year, to be able to communicate with you how we're doing on the things that we have said you can hold us accountable for.

I won't go through that at this stage as we did that in the call -- or in our presentation two weeks ago. But I look forward to being able, by the end of the year, to show a lot more green checks in the boxes than exist at this stage.

So, with that, operator, if you will, we're ready to move into questions.

(Operator Instructions) Dan Eggers, Credit Suisse.

I guess just kind of thinking back from the analyst day, a couple of follow-ons -- number one on the non-rate business. I think you said there was something in the neighborhood of $11 billion of revenue opportunities over the next five years through business opportunities there.

Could you just share a little more thinking on how we should approach margins for that business or margins for that revenue opportunity as we kind of pace out the timing of contribution from growth in that business?

Yes. The $11 billion, five years is just associated with the military line -- military services line. That is what we think with about 50 bases that are likely to be put up for privatization over the five years.

We won't give specific margin information on those lines of businesses, but they are quite reasonable. They're good margins. Remember that the capital that we deploy in that business is really just working capital.

It is not much permanent capital. As soon as a project is completed we're fully reimbursed, so it is really working capital that we put into place. The margins are -- both on a net and a gross side -- attractive margins. They're certainly higher than we see in the municipal con-ops business lines and they provide an attractive basis for us to expand in that business. But beyond that, I'm really not going to give a percentage.

Jeff, should we think about it being the historic margins for the non-rate business view it as -- is it fair to assume that this contribution would have a better earnings profile than what you guys have on average [as to work where] you are just given the mix with more muni ops in there?

If you are talking about total contract operations inclusive of military, absolutely. We're doing things to help improve the performance of those areas where I would say they're underperforming today.

Military operations, frankly, it has really hit its stride. We have very good management on the ground and that is a real critical component. That is an increasingly larger portion of our contract ops and it has what I would categorize as good margin potential within that business.

But it's not extravagant margin potential by any means. So we would expect to see overall margins within our contract operations to increase over time.

You guys have had good marketshare so far in the military base privatizations. Should we assume kind of given the revenue opportunity, the base opportunities, that this business grows kind of in line with your long-term 7% to 10% targeted growth rate? Or do you think you would grow this piece of the business faster given kind of the addressable market opportunity you see?

Well, obviously it depends on what actually comes forward from the military.

The Army has recently reconfirmed its commitment to the privatization effort. The Air Force is looking at putting a growing number of bases through this process. They have been lagging behind the Army for their own security and other reasons. And so a lot of it will depend on how fast the deployment comes out.

But on average I believe we can grow that business at slightly higher than the growth rate we would expect for the overall business. It is one of the things that that will help push that growth rate up.

Okay, great. Thank you guys.

(Operator Instructions) David Paz, BofA Merrill Lynch.

My question is regarding slide eight with regulated O&M efficiency. I just want to make sure I'm doing -- I'm looking at this correctly. So the data here, we have the regulated revenue you have given us in the 10-K. I believe it's $2.4 million in the K. So O&M, less the purchased water, was that about $1.1 billion? Does that sound about right?

David, thank you for the question. The way we calculate the O&M efficiency ratios, we do take the regulated revenue and the regulated O&M expense and we adjust both of those numbers for purchased water because that is really a pass-through. So you would reduce -- and purchased water is -- the expense of purchased water is highlighted in the 10-K under Production Costs, so you would deduct that same amount from both revenue and expenses.

Got it, okay. (multiple speakers) So just looking from -- in 2008, 2009, 2010 looking at those three data points just doing some quick math, it kind of looks like your trend somewhere 4% to 5% growth, less purchased water. Should we kind of look going forward as that -- with all of the -- you know, everything you guys plan to put into place, I mean that will probably trend downward going forward a little bit more than 4% to 5% (multiple speakers)

Sure. One of the key drivers of that will be usage and production. So it will vary up or down with the number of gallons that we sell. So that will be the main thing. And on the salary side, most of that is tied into inflation or existing union contracts.

Great, okay, thank you.

(Operator Instructions). This concludes the question and answer portion of the call. I will now turn the call back over to Jeff Sterba for closing remarks.

Well, thanks again very much for joining us briefly this morning and particularly for joining us at the investor day that we had two weeks ago. We look forward to seeing you down the road. Please don't hesitate to call Ed or Muriel if you have any follow-up questions. Thank you all very much.

And ladies and gentlemen, this concludes American Water's fourth-quarter and year-end 2010 earnings conference call. Thank you for your participation. You may now disconnect.