American States Water Co (AWR) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company's first quarter results conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder, this conference call is being recorded, Tuesday May 7, 2002. A replay of this conference will be available from 2 p.m. time today, May 7 through 2.00 p.m. on May 14. To access the replay, you will dial 1800-633-8284 and enter reservation #20550829. I would now like to turn the conference over to McClellan Harris III, Vice President of Finance, Chief Financial Officer, Treasurer, and Secretary of American States Water Co. Please go ahead.

Thank you Kelly. Good morning everyone. Welcome to our first quarter results in 2002 this morning. As is usual, I will be speaking from some prepared comments and then we will ready to address any question you may have. Prior to beginning, as usual, I would like to remind you that certain statements and certain matters discussed during this conference call are forward-looking, intended to qualify for the Safe Harbor for liabilities established by the Private Securities Litigation Act of 1995. We have reviewed the forward-looking information in our Form 10-K, and Form 10-Q on file with the SEC. Factors underlying the company's forward-looking statements are dynamic and are subject to change. Therefore these forward-looking statements be only as of the date they are given. We are under no obligation to update them, however, we may choose from time to time to update them, and if we do so, we will the updates to the investing public. Now, after that, we should get started.

During the first quarter, of 2002, total operating revenues increased by 10.4 percent to about 4.2 million dollar from the first quarter of 2001. Of this amount, revenues from water operations increased by about 3 million or 8.2 percent due to a 3.7 percent increase in sales volumes at our Southern California Water unit. In addition, rate increases implemented at Southern California Water during 2001 had the full impact on our first quarter results of this year. Despite continued customer growth, revenues from water operations in our Chaparral City Water Company unit in Arizona, this quarter were flat with those from last year, due to slightly cooler temperatures and reduced winter travel to the area most significantly.

During the first quarter of 2002, use from electric operations at our Southern California Water increased by 31.6 percent or about 1.2 million over the same quarter ended last year. This increase in revenues reflects the full impact of rate increases approved by the California Public Utilities Commission during 2001 for recovery of the electric power costs at their electric. The increase this quarter also includes a 4.2 percent increase in kilowatt/hour sales, mostly due to the use by ski resorts of snowmaking and snow machines in the area.

On the expense side, our total operating expense for the quarter ended March 31, increased 10.6 percent compared to the same quarter ended March 31, of last year. This change was impacted most significantly by increased supply costs as well as increased administrative and general expense.

Other income for the quarter increased due to the opportunistic sale of a parcel of non-operating property. Interest charges, this quarter increased by 11.4 percent over the same quarter of last year due most significantly to the issuance of 50 million dollars and an additional long-term debt by our Southern California Water Company in very late December of last year.

The net result of all this is that we are very pleased to report that basic earrings per common share for the first quarter of 2002 increased by 22.6 percent to 38 cents per share as compared to the 31 cents per share reported last year. Fully diluted earnings were 30 cents per share for the quarter ended March of last year.

I would now like to turn to the results for the twelve months ended comparison. For the twelve months ended March 31, 2002, I am also pleased to report that basic earnings increased by 10.6 percent to 2 dollars and 9 cents per share as compared to the dollar 89 recorded for the twelve months of last year, ended March 31.

Fully diluted earnings for the same comparison period were 2 dollars and 7 cents per share versus a dollar 88 of last year. Total operating revenues for the year ended March 31, 2002 grew by 8.7 percent or about 16.2 million.

Revenue from water operations increased by about 14.1 million or 8.3 percent due to annualized rate increases implemented at our Southern California Water Company unit, the effects of which were partially offset by about 1.8 percent decline in water sales during that same period.

Chaparral City Water Company unit acquired in October of 2000 contributed an additional 3.7 million dollars in water revenues. Revenues from electric operations increased by 15.3 percent or about 2.2 million dollars. This increase really reflects the 2.2 million dollars in annualized rate increases authorized by the to recover previously incurred purchased power cost. During this period however, kilowatt/hour sales decreased by 3.8 percent. Probably most likely due to conservation, I would guess.

As compared to the year ended March 31 of 2001, total operating expense for the year ended March 31, 2002 increased by 8 percent. Driving is a 34.7 percent increase in administrative and general cost, most of which is related to the accrual last year of about 8.3 million dollars in reserves against potential non-recovery of electric power costs.

Depreciation and other operating expense increased by about 2.3 million reflecting really the acquisition of Chaparral City Water Company. Interest charges increased by 9.9 percent reflecting additional debt placed by Water Company as well as the debt assumed in the Chaparral acquisition. Because we are obviously are regulated entity, I would like to spend a few minutes just discussing some regulatory matters, particularly further developments and our continuing efforts to recover purchase power costs at the electric division of water.

On March 31of this year, we had approximately 24.8 million dollars of electric power cost included in the electric cost balancing account. Of this amount, the CPUC has authorized us to implement surcharges designed to recover about 11.1 million over a total of 5 years. In addition, as we have previously reported, we have worked out an all party settlement that would allow for recovery of 77 dollars per megawatt/hour of electric power costs from customers and we would extend the previously authorized surcharge for an additional 5 year period, thereby allowing us, I think ample opportunity to recover fully all of our cost included in the balance sheet account.

We are pleased to learn that the administrative law has drafted as proposed decision on this settlement, and while frankly we have not seen the proposed decision and do not know its contents, we believe that it does support the settlement agreement. We anticipated final order from the PUC to implement new rates by late July of this year and this is step 1. Step 2, in dealing with this matter is also presently underway. As you may be aware, we filed the complaint with the Federal Regulatory Commission, seeking to reduce the 95 dollars per megawatt/hour price in our 5 year contract with Energy Marketing on the ground that at the time the contact was signed, the California power market was dysfunctional. On April 11 of this year, issued an order requiring both Merrant and ourselves to enter into mediation regarding this matter. I again, I am presently unable to predict what results these mediation process would produce. We remain hopeful however that in ability to restructure the contract with Merriant that we will still be successful in dealing with other energy proprietors to achieve the price target set in rates, that being the 77 dollars. In any event, I do believe we have established reserves sufficient to offset any earnings impact.

Turning to the water business of Southern California Water Co., in July of this year we anticipate filing an application with the CPUC to increase water rates in rating 3 of waters as well as for recovery of costs associated with the administrative functions of the company's general office. This latter filing will obviously impact region 3, but it will also impact customers throughout water. In addition, late in the third quarter of this year, we also are planning to file an application with the Arizona Corporation Commission to increase water rates to the customers of Chaparral City Water Company. Unfortunately at this point because we are still in the preparatory processes, I cannot really at what rate of return we will be seeking, or an estimate of the dollar amount of this filings.

In addition to filing rate cases, we are also vigorously opposing the revised procedures for recovery of costs included in the water balancing accounts. This change was implemented by the PUC, if you recall at the end of November of last year. At March 31 of this year we had about 3.3 million of deferred supply cost included in the water balancing account. Of this amount, about 1 million dollar is currently approved for recovery through rates. Recovery of this remaining amount and then the ongoing under collected amounts are subject to these revised procedures that specifically require that the utility cannot be earning in excess of its authorized rate of return and that the utility must be within its 3-year rate case cycle. I should let you that in region to , one, of water, we are within our rate case cycle, however we are earning in both of those areas, areas in amount in excess of the rate of return, mostly due to the fact that we have had a cash preservation plan in effect for sometime to effectively deal with the power supply problems at their valley and that has kept us from billing rate base at the rate that we would otherwise do. PUC has implemented an order instituting investigation in the change of this balancing account procedure, so that all parties can be heard. We are very active in pursuing, frankly the fact that we do not believe the process should be changed, but these costs are outside of any really direct impact that we may have and that we think that the change in procedures is really unfair, absent in any counter changes as far as increase in rates of return or a hold-off until a company does in fact file its next rate case.

Just before wrapping this morning, I would like to briefly address the water supply situation in California. The outlook for 2002 remains adequate, frankly with the snow at 95 percent of average, as of April 2002 and statewide rainfall is about 75 percent of average. Rainfall in the northern part of the state of California is at 100 percent better than average, but frankly in the southern part of the state, it is only about 30 percent of normal. As I have said here, I noticed it is drizzling outside. For some reason it started this morning. Water storage, statewide also appears quite adequate for 2002. The Metropolitan water district of southern California continues to assure consumes that they are well prepared to help the region through one or more dry years. The water outlook for the Colorado river also looks good with inflows to Lake at about 90 percent of average. The situation well for Chaparral City Water Company, since it and as well as Sokia water obtains water from Colorado river through the central Arizona project or through the state water project in California.

I guess, in conclusion, frankly I am very pleased with the continued performance of American States Water Company. The results reported there demonstrated commitment of management. Management commitment had stated strategic objectives focused on core operations to earn a, at least a minimum the authorized rates of return authorized by regulatory bodies and make acquisitions that are prudent with increase in future earnings, such as the case with our Chaparral City acquisition.

The outlook for the company remains stable . The several small acquisition opportunities and other gross initiatives presently underway. I again very much appreciate this opportunity to review the results but now Kelly, I would now like to turn this conference over to you to entertain any questions that might be out there.

Thank you.

Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your request, you may do so by pressing the 1 followed by the 3. If you are on a speakerphone, please pick up your handset before entering request.

One moment please for the first question. Kim WInter with AG Edwards, please proceed with your questions.

Hello Bud and congratulations on the good earnings during this tough time.

Thank you.

I was wondering if you could clarify for me a little bit, this, the relationship between the deferred electric costs and the reserve. Am I to understand that the gain of 24.8 million on the books deferred, but over the next 10 years you are going to collect 22 million of that 24.8, and if that is the case, what is the reserve related ?

We booked the reserve last year for the really the difference between the 95 dollar at megawatt/hour contract that we had with and what frankly we believed would probably be the best we could do at the should it find that the market was dysfunctional, and that was, I think at 75 dollar price. So, we booked about 8.3 million dollars in the event that, frankly that we were not successful and the PUC would only allow 75 dollars. In working through the settlement, it became clear that seemed to be, that 75 dollar was kind of a boogey target, and what we ended up with obviously was the 77. But as part of that, we did among all parties agree that there will be by the time this settlement is implemented, a larger amount of deferred power costs included in the balancing account. So, you are right. That surcharge will be extended an additional 5 years that at adopted sales volumes should allow us to recover us to recover 22.2 million. Now, I made kind of a subtle point there that was at the adopted sales levels. Those were amounts that were actually determined for the last rate case at electric, which was based on 95 numbers. There has been significant growth in that area. The sales are running 10-15 percent higher than that. so, doing the math, there is really probably about 26 million dollars that could be collected over that 10-year period.

If we are successful at re-negotiating either with or with a third party, a price that will come down to 77 dollars, then we really do not need the reserve, and we will turn that back in to income. It is not a general reserve for any kind of thing that would wrong. It was specifically set up for this. So, after the order, after we have gone through the re-negotiations with the either or third party, we will see what the reserve if any is needed, whatever is left turns back into income.

Okay, and I have two questions follow-up. The difference between the 95 and the 77 going forward does that result in a negative margin for that business, and then the second question would be that the 8.3 million taken in 01, should we consider that, you know, operating income that was back into 01 numbers and used that as a base going forward?

Those are both good questions.

I guess with respect to the latter, I guess the quick answer is that that would produce a negative margin because there would not be sufficient revenues to recover all costs, and the 95 dollar, at 77 dollars and with rates restructured obviously, it becomes, it is good, no more margin business.

With respect to your enquiry about the 8.3 million, I will tell you that we benefited during 2001 by few events that helped us, not impact earnings, as much as we otherwise would have. We received, I guess about a million dollar, more or less in refund from water suppliers as well as some sales and some water in combination gave us about 2 million dollars. We also had a fairly warm weather relative to at least a year prior, so, we probably had another, I am going to say 2 million dollars, maybe as much as 3 million in revenues that add some warmer weather would not have occurred. So, that gave us a kind of buffer of about, let's say 4-5 million dollars that would have otherwise not been there. So, it allowed us to book full 8.3 during that year. I also can tell you that, my numbers are off a little bit, part of that, we also implemented in that cash reservation program and deferred costs, with of probably around million dollars, maintenance of

around 2.5 million. When you go through all of it, we were able to take advantage of some very opportunistic events that happened, but we also put a lot of breaks on the company's growth. We did not grow rate base as much. We probably right now from our regulatory authorized rate base at water, we are probably 15 million dollars behind. Maintenance expenditures, we do anticipate, once we have received some indication from the to when we ordered their valley would be implemented, we probably would significantly increase maintenance expenditures this year and we will begin to put a lot of additional capital back in there. So, I guess it is a kind of long winded answer to get to the point that, off that amount, I am going to say the full 8.3 million is not something that, if I were you I would add back in, but maybe half of it, maybe a third of it, just probably a reasonable addition back end.

Our next question comes from Deborah Koi with Schwab Capital Market. Please proceed.

Yeah, good morning.

Bud, you probably answered my question my answering Kim, but I came in a little late. I wanted to just follow up on the cost side, that in the quarter your operating expenses were up a bit. I assume that is primarily related to electricity and that maintenance was down, which I think you just explained, and then my question was, what is your kind of general CAPEX plan for the rest of the year both for maintenance CAPEX still ahead of you and whether if you have any significant CAPEX plans for the year?

Well, let's see. You are right. Maintenance is still being kept a minimum levels. Certainly anything that is required for safety and to make sure that customers have safe water and employees have safe conditions, those mean that expenditures would continue on. But we do have some anticipated, what you are calling maintenance CAPEX that will pick up significantly, probably 2-3 million dollars after we get, what we hope would be a favorable decision from the PUC. Our capital budget this year was 56 million dollars. I think that we would probably do somewhere in the range of 45 to 50, again, a lot of that deferred till the latter part of the year. So, from our cash condition, I think there would be sufficient cash to cover that. We may end up frankly very late in the year, or very early next year, after you go through the capital markets again. My guess is, it would probably be a common equity issue, in order to finance it.

To your last point, Operating expenses are up this year and you are right that a lot of that is due to supply cost going up but remember those are also most of our costs but they are also in the revenue side. So, we have that kind of hidden cost with the balancing account offsetting them. So, that is what is causing a as well as some administrative in general expenses that we have had. We have had higher some kind of pension cost this year. We booked some additional deferrals of salaries for this year, and it had appeared and we think that we will just have to defer them till we get a PUC order of those costs.

So, the stuff will be in the rate case you are going to file later this year?

Yeah, absolutely.

Okay. All right, understood.

On the expansion, you just mentioned that the small acquisition and growth opportunities, anything of note, say you ?

Nothing of note on the acquisition side at this point, there is some small, kind of what I think it's become term of to tuck in, thanks to things near some of our systems. We are also very, very involved in pursuit of privatization opportunities on military basis. We are very much aware that the Government is becoming increasingly concerned that their targets for privatization of utility services of military basis is way behind schedule. We have several bids out, probably as many as 9, out right now for places in areas where we consider to be, those areas into which we would like to expand and believe that we need some kind of a presence to do so. We have been selected for second round negotiations in 3 of those, and that is all about I can say on that right now.

Okay. Can you tell us just roughly what size, I mean some sort of a size range .

You know the economy, the interesting process there, the fundamental the to work is that the Federal Government is dealing over this system, for, most of them are dealing are referring to 0 or 1 dollar. We think that marine core wants fair value for it, and for some reason they are different than so far we have seen with the army, navy, and air force. That is an issue that I have to address these open up, but net marine are 15 percent, they could add, you know they could add significantly.

They would go straight into your rate base than if you would actually own them. They would on operating contracts, and then these are actually asset take overs?

They are and we are not anything for them so, you know, where we may have assets, we would have a counter billing, I guess acquisition adjustment to reflect our purchase price. Though what is really what is happening is ....

So, your returns on those sources should be pretty good.

It has to be fairly good, yeah. Like I said, they give us a presence in areas that we have previously discussed Mississippi, we think we will be better served by having a presence in the state than being the other coming in.

Are they, I mean just again in terms of scope, I mean, are they something that they would be long-term revenues and earnings?

Yeah, yes.

Okay. Then maybe one more just follow up question, then, who is bidding against you? What sort of companies is bidding against you, and do we expect to get any word on whether you won or not?

Yes. You know it is very interesting. We shouldn't single out of competition. .

The fact that there are asset transfers, you know, takes out probably some of the operating guys that don't like to own assets.

I think that is probably true. So, we have not seen a lot of competition in the water, in the waterside.

From other IOUs?

From other IOUs, right. We do know there has been a lot of competition from IOUs in , and everything like from the electric sides, but we are not participating in that, but we, we could. We have seen some ONM guys looking at the water, frankly I think our reputation in business are obviously better because we are the ones so far that have been invited back.

Three, you said?

Three. Frankly there are, by sort of mandate, I think there is 250 some military bases that was supposed to have undergone this process by the end of 2003. There have been 19 issued to date. So, they are very well behind the . So, you know, I think, I think, this process probably some of the first ones that could, we guess, it could probably be awarded by the, certainly before the end of this year. Once those start coming out there will be a lot more interest. I also think once the bases in California open up, you may see a lot more competition from those of us out here.

None of these are in California?

No. There has been one I guess, the 29 but they have not gone with anybody.

But if we take a, I mean just again for the sake of scope, if we take a 200 million dollar revenue base, where you are now, can you give us a theoretical number of this and what that would mean or you do not want to?

I do not think I am comfortable doing that right now. We are still in kind of in this negotiation process and I do not really want to jeopardize it.

Very well. Okay, sure enough. Thank you.

Our next question comes from Neo Kelton with AG Edwards. Please proceed.

Hi Bud. Just a quick question on the purchased water. Under the new procedures for the under purchased water, are you permitted to carry that balance over it to future years and recover it at that point in time?

Well, I am going to give you our answer and that is yes. But that amount is no longer going to be carried on the corporation's books. So, as cost in excess of what we are recovering in rates is incurred, they are going to flow through the income statement. In past years obviously, the difference in unit cost between what was allowed in rates and what we are actually being charged would have been deferred and the balancing account. There is now a kind of off-balance sheet amounts or I guess, bookkeeping mechanism really, because of corporation's books reflects the expense in revenue side. It is a memorandum account procedure that will operate just like balancing account, and at any point in time, subject right now to those two conditions that may not be earning in excess of our rate of return and we are in our normal three year rate making cycle. If both of those are true, we do believe there is an opportunity established by the revised rules for us to go in and attempt to reap and collect those deferred costs. Again, those costs not being on corporations books. We also think that in these rate case filing that we are going to be making, and most of the 3.3 that is now on the books, that is not subject to recovery is related to our region three. We will be filing for recovery of those. It should not be any problem in my mind with collections of those because we will be established with a new rate of return and then we will then start the new three-year rate case cycle. So, I think, that my best belief that the cost that we do have on the books, that 2.3 million as well as future costs that are book kept in this off balance sheet memorandum account will ultimately be subject to recovery.

Okay, thanks.

Ladies and gentlemen, if there are any additional questions, please press the 1 followed by the 4 at this time.

Mr. Harris, there are no further questions at this time. Please continue with your presentation or any closing remarks you may have.

I guess, as we always like to do, we want to thank each of you for your participation. We very much appreciate your efforts in reminding your clients both existing and potential American States Water Company belongs in their investment portfolio. A solid total return prospects, growth opportunities, and management dedicated to meeting the needs of those shareholders and our customers. I would also like to remind you that our shareholders have continued to receive benefits of our solid efforts, using the SEC guidelines for reporting financial performance. A 100 dollars invested in shares of American States Water Company at December 31,1997 would be 168 dollars and 64 cents in March 31 of 2002. By contrast, that is saying 100 dollars invested in SNP 500 would be worth only a 125 dollars.

We thank you very much and look forward in speaking with you next quarter. Kelly, I think we are done.

Thank you. A replay of this conference will be available at time today, May 7 to 2.00 p.m. mountain time on May 14. To access the post replay, you will dial 1800-633-8284 and enter reservation #20550829.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.