American States Water Co (AWR) 2003 Q2 法說會逐字稿

Welcome to the Americans States Water 2003 second quarter results call. If anyone should require assistance, please press the star and zero and an operator will return to assist you. As a reminder to all participants on-line, this call is being recorded for replay, and you may dial 1-800-934-7884 to listen to it again. At this time I'll turn the call over to Bud Harris, VP of Finance and Chief Financial Officer.

Thank you. Good morning, ladies and gentlemen and welcome to to this morning's call. I'm Bud Harris, and Floyd Wicks our President and CEO of the company, is also with me today. As usual, we will be speaking from prepared comments initially. At the end of prepared remarks the call will be opened up for questions. I would, however, like to remind you that certain matters discussed during this conference call are forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. I ask that you review the forward-looking information disclosure in our form 10-K and 10-Q on file with the Securities and Exchange Commission. The factors underlying the company's forward-looking statements are therefore, subject to change. These forward-looking statements speak only as of the date they are given. The company is under no obligation to update them. However, we may choose from time to time to update them, and if we do, we will disseminate the updates to the investing public. At this time I'd like to turn this call over to Mr. Wicks.

Thank you, Bud. And good morning, everybody. At least if you're in the West Coast, good morning. During the second quarter of 2003, total operating revenues decreased by 1.9% or by about $1 million from the second quarter of last year. Revenues from water operations decreased by 5.2%, which reflects a 10.6% decrease in water consumption for the second quarter due to wetter and cooler temperatures in most of Southern California water company service areas. Again, that was during the second quarter of 2003 as compared to the same quarter from last year partially offsetting the decline in sales were rate increases in our region 2, Southern California water company's region 2, effective in early 2003. By contrast, revenues from the company's electric operations increased by 39.4% or about 1.5 million dollars over the same quarter last year. This increase in electric revenues reflects new rates implemented during July of last year authorized by the California Public Utilities Commission to cover purchase power costs under various power supply agreements. In addition, kilowatt hour sales increased by 1.1% between the two periods.

On the expense side, total operating expenses for the quarter ended June 30th increased by 3.5% compared to the same quarter from last year due primarily to increased administrative and general expenses, higher legal and outside service costs, increased pension and benefit expenses and an increase in supply-related costs. Offsetting these increases are decreased taxes on income and an unrealized pretax gain of approximately $1.6 million related to our purchase power contracts at the company's Bare Valley electric division. Pursuant to the statement of financial accounting standards, FAS 133, accounting for derivative instruments and hedging activities, as we have previously explained, FAS 133 requires the company to compare its currents long-term energy costs with the actual contract prices negotiating last year. Inasmuch as current market energy prices have increased since last year the company has recorded the unrealized gain in accordance with FAS 133 accounting rules. These unrealized gains and losses are expected to net to zero over the life of the contracts. Interest charges this quarter increased by 4% over the same quarter last year due primarily to higher short-term bank borrowings incurred to finance capital expenditures. This quarter's net result is a decrease of 47.2% in basic and fully diluted earnings per common share to 19 cents per share compared to the 36 cents per share reported in the second quarter of last year.

I'd like now to turn to our 12-month reported results. Reported results for the 12 months ended June 30th indicate a decrease in basic and fully diluted earnings per share of 21% $1.12 per share compared to $1.43 per share recorded for the 12 months ended June of last year. Total operating revenues for the year-ended June 30th increased by 12.8% or about 5.8 million dollars. Rove news from water operations decreased by 1% zoo to a slight decrease in water consumption as well as the termination of the surcharge which is authorized by the P.U.C. to collect previously incurred supply increases in southern Cal water's region 2. Our Chaparral City Water Company unit in Arizona contributed $5.9 million in water revenues for the 12-month periods, although that amount was 6.4% less than the prior year due to a 6.6% decrease in water consumption in that service area. Revenues from electric operations increased by 43.4% or about 7.4 million. As I previously mentioned, the higher revenues reflect rate increased authorized by the CPUC to recover purchased power costs.

As compared to the 12 months ended June 30th, total operating expense for the 12 months ended June this year increased by 5.7%, driving this change are a number of items including a 10.6% increase in purchased water costs due to wells being out of service for various reasons combined with higher electric supply cost balancing and 189.7% increase in maintenance expense and an unrealized pretax loss of about 1.3 million dollars related to purchased power contracts at the Bear Valley electric division of our southern California water company unit. These unrealized losses and gains are expected to impact earnings during the life of the contract with Pinnacle West, both negatively and positively. The end result is projected to be a net zero impact on Bear Valley Electric earnings at the entrance of the contract periods in 2008. Offsetting these increased expenses and unrealized losses on power purchase contracts is a 38.1% decrease in income tax expense and an 8.5% decrease in administrative and general expense.

The latter decrease is it a function of our returning to income in December of last year, approximately $6.8 million of reserves booked against non-recovery of purchased power expense. You will recall that we originally booked the reserves since our contractual price was $95 per Meg what the hour and we were unsure that we would be able to fully recover that amount. However, the restructuring of the contracts avoided that scenario and resulted in a cost lower than the $777 what the hour, which is approved in rates. The unfortunate side effect is having to mark these contracts to markets. Interest charges peaked by the additional placed in December of 2001 at our SCW unit increased by approximately 9.1% for the 12 months ended June 30th this year over the same period from last year. Now I would like to turn the call back to Bud.

Thank you, Floyd. As we've discussed in past teleconferences, our financial results for the last 12 months were significantly impacted by delays in the CPUC approval of water and electric rate increases and the CPUC's final decision to eliminate the water supply cost balancing accounts. Recall that in June of this year the CPUC approved our recovery of the pre-November 29th2001 under collected balance of 2.1 million. Also in June of this year the CPUC issued procedures for recovering the memorandum supply cost accounts for balances accumulated after November 29th of 2001. Pursuant to this new procedure, recovery of the memorial I am water supply cost will be reduced if we are earning more than our authorized rate of return. We have until September 19th, 2003 to file advice letters for the undercollected balance of approximately 2.9 million as of December 31st, 2002. Again, subject to earnings test and the CPUC's review. We intends to make that filing more than likely in September. Although increased water rates totaling $6.2 million annually were approved bit CPUC early this year, 2003 will continue to carry the volatile effects of the CPU's decision with regard to the water supply cost balancing accounts.

On a 12-month basis due to the elimination of the water supply cost balancing accounts, the company has incurred additional what tore supply cost increases amounting to about 20 cents per share after tax. In addition, the wetter and cooler weather conditions experienced during the first two quarters of 2003 resulted in a significant decrease in water sales volumes that decreased both the three-month and 12-month earnings by about 11 cents per share after tax. We are continuing to pursue additional generate applications and advice letters as allowed under the new regulation. In October of last year we filed for an increase in water revenues in the customer service areas that region 3 of our Southern California water company unit as well as for recovery of costs associated with general office functions. If approved as filed, these requests would increase revenues by approximately $25.8 million on an annual basis. We are hopeful that a decision will be out before year ends with rates effective soon thereafter. In addition, we have also filed notices of intent, a precure soar to filing the actual generate case to increase water rates in regions 1 and 2 of Southern California water company. The filing in region 1 also includes a request to amortize deferred costs incurred in litigation against Air Jet Corporation in Sacramento County. We currently have approximately $15 million net in such deferred cost. All of these filings will bring current our supply cost and resource mix that will help stem the negative impacts of elimination of the balancing account. On July 10th of 2003 the CPUC approved the certificate of public convenience and necessity, or CPCN, filed in March of 2002 seeking authorization to construct an 8.4 Meg what the natural gas fuel generation facility at the Big Bear electric division of Southern California water company.

The capital costs of the generating facility is estimated to be approximately $13 million. The CPUC's order authorizes construction and enables SCW to file a rate application to generate an annual increase in revenues of approximately 2.4 million. The rate application will of course be subject to additional review by the CPUC. As Floyd mentioned today, our second quarter earnings are positively impacted by about 6 cents per share after tax due to an unrealized gain on the contracts providing power to our Bear Valley electric division. These contracts qualified as derivative instruments under financial accounting board statement number 133. The unrealized gain resulting from increases in currents forward market prices since our December 31st, 2002 year ends that resulted in a decrease in the cumulative unrealized loss for these contracts.

However, given this current state of the forward curve, unrealized losses are expected to continue based on forward marked pricing and the discount rate as of June 30th, 2003, we anticipate recording an additional unrealized loss of approximately $950,000 pretax for the remainder of this year. Under SFAS number 133 accounting, the impacts of these contracts are variable. Thus, the losses in the earlier years are offset by gains in later years. While there is no cash impact, we are evaluating alternatives to minimum future unrealized losses or gains from these contracts. We also anticipate based on conditions existing as of June that we will incur additional unrealized losses of approximately $2 million pretax in each successive year through 2006. However, beginning in 2007 and concluding in 2008, the term nation period of the contracts, we will experience a reverse of those unrealized losses. We entered into the contracts for the express economic purpose of log supply cost toss our customers and from an economic perspective we have been quite successful. However, application of SFAS 133 accounting treatment will continue to affect both negatively and positively the company's true earnings picture for several years. It is in our opinion, therefore, important for you to realize that the unrealized losses or gains will not impact the company's abilities to pay dividends nor, we hope, should it in the final analysis materially affect the market's estimate of the company's value. American States Water Company is not the energy trading business. We are primarily a public utility company providing water services, and as such our earnings are impacted by weather and the amount and timeliness of rate increases favorable to both capital and operating costs and not unfavorable or favorable price swings in the energy futures market. We ask that you factor into your recommendations and and sees the underlying utility value of the company. The company continues with its construction program primarily for replacement and new infrastructure at its Southern California water company unit.

Budgeted capital projects for 2003 have been approved at $80 million. It will therefore be necessary for us to issue approximately $30 million in additional equity within the next 120 days, assuming favor al-Qaeda market conditions, to provide external fund being for these projects. Given that we anticipate a significant rate increase from the CPUC next year, we believe the additional equity, which will be initially utilized to pay down outstanding bank debt borrowings at the subsidiaries will be accretive. The CPUC rate case process allows a water utility to forecast its needs for additional equity over the three-year cycle. We teal this is a very positive feature of regulation in California. Turning for a moment to water supply, water supply for both California and Arizona has a positive outlook the two primary components of interest, precipitation levels and water allocations, are at the very minimum better than they have been in years. As of June 2003, the current water year in California that began in 2002 and ends in September of 2003, precipitation has been record-making. Arizona levels have come up considerably to about 70% of normal, a marked improvement over the prior year when precipitation was almost non-existent. These favorable conditions, although a little less than the earlier months of the year, have continued into July, providing an optimistic view for the water year and a decrease in the threat of drought. As far as imported water, California has been involved in negotiations with the federal government for years regarding allocations of the Colorado River rights. Unfortunately, the state missed a federal deadline on December 31st, 2002 to demonstrate how it will reduce the Colorado River water that it takes beyond its current legal entitlement, and in January the federal government began to cut water supplies to Southern California.

The metropolitan water district of Southern California, the primary distributor of Colorado River what tore to us and several other agencies, continues to assure its member agencies that it is preached to help the region through any reductions in allocations or dry years by stepping up a number of efforts, including desalination, conservation, recycling, transfer and storage. Arizona, on the other hand, shares the benefits of the Arizona water banking authority that successfully banked Arizona's full allocation of Colorado river water entitlement in 2002 and anticipates doing the same in 2003. This hedge against drought conditions is further enhanced by the fact that the [inaudible] begins with the agricultural users and creates an additional buffer for the company's Chaparral City Water Company domestic water supply. The possibility of a mild El Nino condition continues to be forecast at the national on or about universic and atmospheric association bringing normal precipitation levels to California and Arizona for July through September. It is anticipated that the El Nino condition may eliminate the drought threat in California and greatly reduce the threat to Arizona. I'd like to turn back to Floyd now for some concluding comments.

Thank you, Bud. One of the challenges we've had as a company is that water quality-related litigation that has been ongoing for several years. You may recall in October of '99 SCW filed a lawsuit against the State of California and its state water resources control board and the central valley regional water quality board and the department 6 toxic substances control, collectively, the state, alleging that the state had substantially participated in a project to inject chemical pollution into portions of the Sacramento County ground water basin and that pollution is progressively destroying the ground water supply in SCW's Rancho Cordova water -- I'm please today report that SCW and the state have entered into a comprehensive 2.475 million dollar settlement of all of SCW's claims against the state, of which we received already $2.397 million on July 3rd of this year with the small remaining amount to be received in the third quarter of this year. We would appreciate your support in reminding your clients why American States Water Company belongs in their investment portfolio.

Solid total return prospects, growth opportunities and top management today indicated to meeting the needs of shareholders and customers. In that regard I am pleased to inform you that using the S.E.C. guidelines for reporting financial performance, $100 invested in American States at December 31 of 1998 would be worth $179.24 at June po of this year. By contrast, that same $100 invested in the S&P 500 500 would be worth only $84.40. Looking at the past couple of years, I recall a number of significant issues which have affected many of us in various areas of our lives and at times have caused us to reach deep into our collective resources forethoughtful responses, which helps us to recognize our strengths and our ability to succeed and achieve. Despite the unusually difficult regulatory environments during this time, I am particularly proud of the collective efforts of my 520 dedicated co-workers who every day continue to provide service excellence to our entire customer base.

And I want to thank each of you for taking your time and attention. And I'll now turn the q-and-a

If at this time you do have a question you may press the star 1 on your touch-tone phone. To withdraw, you may press the pound sign. We'll take our first question from the line of Mike Warner of Kennedy Capital. Go ahead, please.

Hi. Good afternoon.

Hi, Mike.

Just had a couple of questions for you. Did you provide any outlook for the remainder of the year?

No, we have not. That's something we normally do not do.

Okay. Fine. And do you expect to issue roughly 30 million of new equity in the next 120 days?

That's the current plans, correct.

Okay. And that's to fund again what?

We normally, Mike, at the subsidiary levels, particularly at Southern California Water, use short-term bank borrowings to finance capital construction, and then we eventually take that out with east long-term debt or equity. So, that equity will be pushed down to the utility and they will use it to pay off their short-term bank borrowings.

Okay. And looking out a bit farther, there was a mention of good long term growth prospects. Could you maybe elaborate on that point a little bit further.

Well, I think we have said that we do have a number of rate increases currently before the California public utility commission. Now, the truth of the matter is one never gets what they file for.

Right.

But we do anticipate a fairly significant increase in revenues from about 40% of our company early next year with sometime mid-year next year probably another 30 or 35% of the company receiving a fairly significant increase. And if patterns hold true, about that same time we should receive an increase that would cover the remaining 30% of the company. We then will go back into a more normal cycle where we have new rates every year covering at least a third of the company. We're also, as we have said on prior calls, we are looking at certain opportunities outside of our regulated operations. Most significantly right now looking at the privatization of military bases we believe it gets gives us a great opportunity for not only geographic expansion but also an opportunity to increase earnings with minimal capital exposures sure. So, that's what we see in the long-term, Mike.

I think the key, if I could add a comment on that, is that it does not take us out of our core business.

Right.

It simply removes the regulatory oversight of those kinds of operations, but primarily still keeps us within the core business of providing service in the water arena.

So, you would provide what tore services to whatever would be on the prior military base property?

Correct.

Okay. That's it for me. Thanks very much.

Thank you. And once again, if you do have a question, you may press the star 1 on your touch tone phone. We'll take our next question from the site of Debra Company of Schwab Capital. Go ahead, please.

Yes. Good morning. Can you talk a little bit more about your cap ex budget and the timing for recovery? What I'm looking at is, as I can best recall, this $80 million you're looking at is certainly higher than your usual annual average as best I can remember. And what I'm wondering is what you are kind of looking at in terms of a lag in recovery. I know you'd said you'd gotten approval to file for the right cases. But whether you expect to see some separate from these other rate cases that are coming through for past expenses, whether there will be some lag effect, some further pressure on your rates of return in '04 as a result of the cap ex.

Sure. The good news is that California is one of the states in the nation that allows you to forecast your test jeers. And included in that is obviously the forecast of operating costs, but also capital expenses. So, the rates that we would anticipate receiving during 2004 kind of scattered through the year---

Right.

-- really do reflect the additional capital expenditures that we're now beginning to put into the grounds. So, while I can't tell you there will not be any lag, the ability to forecast those costs really helps us minimize that unfortunate lag had we used a historic test year and now are putting in $80 million. Some of the stuff that's driving that 80 million, too, Debra, is the construction. Generating project, which is a $13 million cost by itself.

Right, right. But that's not all water.

So, that's kind of a little odd. That brings it roughly down, if you will, to the 65 million. That's still a little bit more. But the kinds of expenditures that we are incurring are for additional water supply arrangements, new wells particularly, the treatment associated with those wells, new supply and, of course, the ongoing water main replacement, that kind of thing that's just normally part of our business.

Is arsenic hitting you there? Is that partly it on the treatment side?

Do you want to talk about that, Floyd?

I was just gonna adjust one more comments on the water main that Bud made reference to. A portion of the 80 million, roughly 15 million of the 80 is in our region 2 and it's under the umbrella of a -- what's called an accelerated infrastructure replacement plan. And the P.U.C. has already preapproved that 15 million and we're currently have the rates in effect as of, I believe, the ends of January or early February this year. So, that 15 million is already in rates. If that makes sense you to.

Yes, it does.

As far as arsenic goes, a lot depends on if the standard stays at the currents 10 parts per billion, which as you know just was recently lowered from 50 parts per billion down to 10. California is currently looking at lowers lowering it even further. We hope they don't at this point you but if they do a number of our wells will be affected. At the 10 parts per billion, we're probably looking at about 5% of our wells, which is not a significant number, but we're moving ahead with treatment processes on those wells.

Okay. I understand. So, what I'm hearing, then, is that the 25.8 million that you have out in filings now is partly recovering cap ex in addition to recovering some of this supply cost stuff that used to go back and forth through the balancing accounts?

That's correct.

Exactly.

And then do you expect to be -- did I understand that as you move through that process, that you expect by the end of next year to be caught up, if you will, on the supply cost side, as well?

Yes, we believe that what we have filed in these cases is a supply mix between purchased and pumped water as well as the appropriate costing levels for purchase water and what it now costs to pump will be in rates. And that is something that historically price changes have been deferred in the balancing accounts. So, now -- that's part of what really drives up the significant increase in costs is bringing those water supply costs current.

And again, you'll ends up having to do some forecasting there on future pricing for water in addition to what you've had to do on the electric side?

That is correct.

Okay. All right. Thanks.

Okay.

Thank you. Once again, if you have a question, please press the star 1 at this time. We'll take our next question from the site of Stewart Schwarf with Standard & Poor's.

Yes. Hi. It's Standard & Poor's. I'd like to know what the effective tax rate you'd be using for the unrealized losses [inaudible] 50,000 and if it's around the 6 cents gain is around 41.5%, what you'll be using?

That's about what we expect for the year.

Okay. And do you expect that to stay pretty much in the same range or it might come down a little?

I think it's gone that stay in roughly that same range, Stewart.

Okay. Thank you.

Okay.

Thank you. It appears you have no further questions. I'll turn it back over to management for any closing comments.

Okay. Well, thank you again for participating this morning, and it's been a pleasure spending time with you. See you in another three months. Thanks very much.

All right. Thanks, everyone.

Thank you for today's participating, you may now disconnect.