American States Water Co (AWR) 2004 Q3 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone. Welcome to the American States Water quarterly conference call. Today's call has been recorded. Today's presentation will be available for replay at 5:00 P.M. eastern time through November 4 at midnight. You may access the replay by dialing 719-457-0820 or 888-203-1112 and entering the pass code 895551. Again, 719-457-0820 or 888-203-1112 and pass code 895551

Now, at this time, for opening remarks and introductions, I would I like to turn the call over to Mr. Floyd Wicks, President and CEO. Please go ahead, sir.

Thank you very much. Good morning, ladies and gentlemen. Welcome to this morning's presentation on the results of the American States Water Company's 2004 third quarter. My name is Floyd Wicks, President and CEO of the Company. Also, with me today is Robert Sprowls, our Chief Financial Officer of American States Water Company. As usual, following the conclusion of our prepared remarks, the call will be open for questions. I would like to remind you that certain matters discussed during this conference 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 form 10-Q on file with the SEC. The factors underlying the Company's forward-looking statements are dynamic and subject to change. Therefore, 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 to do so from time to time and if we do, we will disseminate the updates to the investing public.

Having said that, let's hear from Bob Sprowls about the third quarter results. Bob?

Thank you, Floyd. Good morning, everyone. Without further delay, let's discuss the third quarter results. Basic and fully diluted earnings for the third quarter of 2004 were 50 cents -- 52 cents per share as compared to 51 cents per share for the same period in 2003. The higher earnings this quarter are primarily the results of increases in water rates in Southern California Water Company's region three service area, effective March 22, 2004. Additionally, in August 2004, the California Public Utility Commission approved increases in Southern California's region one and regions two, which were retroactive to January 1, 2004 and February 14, 2004, respectively. Total retroeffective revenues recorded in the third quarter are approximately $2.2 million.

During the third quarter of 2004, total operating revenues increased by 8.2% when compared with the third quarter of 2003. Water revenues and electric revenues increased by 8.5% and 5.1%, respectively. The increase in water revenues reflects a 1.7% increase in water consumption, due to changes in weather conditions and the higher water rates discussed previously. The higher electric revenues reflect an increase in demand in the Company's Bear Valley electric service area.

Total operating expenses for the quarter ended September 30, 2004, increased by 9.3%, compared to the quarter ended September 30 of 2003, due to higher purchase water costs resulting from increased consumption, as mentioned, additional water needed to replace pumped water supply lost do to wells being removed from service, because of water quality and mechanical issues, and the trucking of water in one customer service area, due to a drought-related decline in ground water levels.

In addition, higher operating expenses also reflect increases in administrative and general expenses resulting from increases in outside legal and consulting services and pension and benefit costs, increased depreciation and maintenance expenses and taxes on income. Interest charges this quarter increased slightly by 1.2% over this same quarter last year, due primarily to an increase in short-term borrowings partially offset by the effect of repayment of $12.5 million worth of long-term debt in October of 2003.

I would like to turn now to our nine-month year-to-date reported results. Basic and fully diluted earnings were $1.04 per share for the nine months of 2004, comparative basic and fully diluted earnings of 90 cents per share for the same period of 2003. Results reported for the nine months ended September 30, 2004 are consistent with a quarter results discussed previously. Total operating revenues of $175 million for the nine months ended September 30, 2004, increased by $12.8 million, compared to $162.2 million for the same period in 2003. The higher revenues are due to rate increases and higher consumption.

Total operating expenses increased by 8.1% for the nine months ended September 30, 2004, and reflect higher purchase water costs, as previously discussed in the third quarter results. And a recording of $2.3 million of net over collections in the memorandum supply costs balancing account in Southern California Water's region one and two. The increases in operating expenses are also due to higher administrative and general expenses, resulting from increased outside legal and consulting services, an increased pension and benefit costs, a decrease in the unrealized gain on purchase power contracts, increases in depreciation and maintenance expenses, and an increase in taxes on income. These increases were offset by a $5.2 million net pretax increase in operating income, resulting from the favorable California public utility commission decision ruling on the settlement with the city of Santa Monica in July of 2004.

Southern California Water received $5.7 million in May of 2004 from the city of Santa Monica, pursuant to a settlement agreement in which Southern California Water sold its water rights in the Charnock ground water basin to the city, and assigned to the city, its rights against all potentially responsible parties who contaminated the basin. The total proceeds of $5.7 million in the sale and the assignment of the rights, were offset by an impairment loss of $482,000, associated with assets removed from rate based, pursuant to the decision. Resulting in a $5.2 million net pretax increase in operating income.

Interest charges for the nine months ended September 30, 2004 decreased by 2.2% over the same period last year, due primarily to the repayment of $12.5 million of long-term debt in October of 2003, and the recovery of carrying costs on expenses incurred in the water quality order institution investigation mater that was authorized by the public utility commission in March 2004 partially offset by increases in short-term borrowing. The Company's earnings are driven by our ability to control and recover operating expense and by earning a return on invested capital. The Company, primarily Southern California Water, continues with its construction program for improvement, renewal, and replacement of infrastructure.

Capital expenditures for 2004 are estimated at approximately $65 million. To fund capital expenditures of Southern California Water, we issued additional equity in September 2004 totaling 1million 400,000 shares at $25 and 26 cents per share, with a partial over allotment exercise of 50,000 additional shares by the underwriters coming in October. The net proceeds, approximately $35.1 million, were infused into Southern California Water, and utilized to pay down Southern California Water's intercompany short-term loan, which was borrowed to temporarily fund its capital needs from the $75 million credit facility at the parent level. American States Water used the repayment funds from Southern California Water to pay down on the credit facility. The equity infusion to Southern California Water, of course, also results in an improved capitalization level at Southern California Water.

Before I turn the call over to Floyd, I'd like to discuss briefly the legal and consulting costs related to the Arrow Jet litigation which have been recorded as deferred charges and included in regulatory assets on the balance sheets. As discussed in our 10-Qs and 10-Ks, Southern California Water sued Arrow Jet General Corporation for causing the contamination of the Sacramento County ground water basin which affected certain Southern California Water wells. On a related matter, Southern California Water also filed a lawsuit against the State of California. The California Public Utility Commission has authorized memorandum accounts to allow for recovery from customers of costs incurred by Southern California Water in prosecuting the suits filed against the State and Arrow Jet, less any recovery from the defendants or others. As of September 30, 2004, approximately $15.7 million had been recorded as a regulatory asset representing primary legal and expert costs incurred to date in connection with prosecuting the cases.

The California Public Utility Commission has previously authorized Southern California Water to increase rates, effective April 28, 2001, for recovery over a six-year period of approximately $1.8 million in expenses that were incurred on or before August 2000 in this matter. The unamortized portion of the $1.8 million is also recorded as a regulatory asset. As part of an abbreviate application for an increase in rates, in Southern California Water's region one filed in 2003, the Company requested a long-term amortization of the current balance of costs incurred in the Arrow Jet litigation memorandum account net of any reimbursement amounts. Due to a delay in considering this issue in this case, Southern California Water is in the process of filing for interim rate relief.

This interim rate relief application is designed to provide for an increase in rates of approximately $6 million over a ten-year period, subject to refund, and allow the Company to continue categorizing these costs as regulatory assets. Management believes the recovery of these costs through rates is probable, however, we cannot give assurance that at the California Public Utility Commission will ultimately allow recovery of all or any of these costs. As announced by a press release yesterday, the Company has reached a favorable settlement agreement with Arrow Jet, in which Arrow Jet has agreed to reimburse Southern California Water $17.5 million plus interest accruing from January 1, 2004 for it's past legal and expert costs.

The recovery of $17.5 million is contingent upon the issuance of land use approvals in a defined area in Eastern Sacramento County, and the receipt of connection fees in connection with such development. It is management's intention to offset these settlement proceeds from Arrow Jet against the balance and the memorandum accounts at the time of receipt of the settlement payments.

With that, I will turn the call back over to Floyd.

Thank you, Bob. It is with great pleasure that we present favorable quarterly results again this year. As mentioned last quarter, it was our hope that the Company's efforts at the PUC would bear fruit with favorable regulatory decisions. I have the following good news to report. As discussed in our press release issued in late August this year, and earlier by Bob in this call, the PUC approved rate increases for Southern California's water's regions one and two. The rate increases in three customer service areas of region one will generate annual revenues of $382,100 in 2004, and will be retroactive to January 1 of this year. The rate increases in region two customer service area will provide for increased revenues of approximately $5 million in 2004. Additional revenue increases in 2005 and 2006, respectively, subject to an earnings test. The retroactive revenues resulted in approximately $2.2 million of additional revenues recorded in the third quarter of this year. We are very pleased with the PUC's actions in approving these increases.

As mentioned in our August press release, it is especially gratifying that the new rates are retroactive to earlier this year, reflecting the hard work of many water industry professionals in effecting change in California law to mitigate the unfair regulatory lag in the ratemaking process. A fair and equitable regulatory process is good for customers and shareholders alike. The previous uncertainty in obtaining fair rates through the regulatory process has caused the debt rating agencies to take a negative outlook toward California utilities in general, which only hurts customers of the utility in the form of higher interest rates. We believe these PUC decisions will send a positive signal to the rating agencies.

Also, the PUC issued a favorable decision on July 8 of this year regarding the settlement agreement between our company and the city of Santa Monica. Southern California Water Company is directed to track the net settlement proceeds of $5.2 million in an interest bearing memorandum account to fund capital for infrastructure improvements in future years. As a result of this decision, earnings per share have been positively impacted by 20 cents per share. The same decision also instructs the Company to refund to customers the net proceeds of $3.5 million received from the potentially responsible parties, which was recorded in 2003 as a regulatory liability. Thus, having no impact on earnings during 2004. It should be noted that the PUC has recently opened a rulemaking investigation into the matter of gain on sale of utility property for all utilities in California.

On March 22 of this year, the PUC approved a general rate case for Southern California Water Company's region three customer service area, which was filed with the PUC in late 2002. New water rates will generate an initial annual increase in revenues of approximately $8.1 million. Despite the regulatory delay, we do, however, believe it is important to note that we have rate increases approved that will continue to provide additional revenues for the remainder of this year, with increases expected in 2005 as well in region three. Based on the PUC's approval in July of 2003, Southern California Water Company has constructed an 8.4 megawatt natural gas fueled generation facility for its Big Bear electric division in Big Bear Lake in San Bernardino county. The capital costs of the generating facility, which has been in operation since last -- since September this year, came in slightly less than the estimated $13 million.

Pursuant to the same PUC order, the Company has filed for increased rates of approximately $2.7 million annually using a special filing called a major additions adjustment clause during the third quarter this year. In August of 2004, Chaparral City Water Company in Arizona also filed its rate case with the Arizona Corporation Commission. If approved, it would generate additional annual rate increases of approximately $1.8 million or equal to a 29% increase in current rates.

I would now like to briefly update you on the water supply situation. Southern California Water Company's water supply and revenues are significantly affected both in the short and long runs by changes in meteorological conditions. Current water supplies in California are adequate, however, the past water year from October through September this year has been a dry year according to the California Department of Water Resources. Total precipitation in California was 85% of normal during this period, off only 15% and this, following a year of 112% of normal precipitation. Recent storms in October of this year dropped 1 to 3 feet of snow on the high Sierra mountains, and brought record high precipitation to California, and will provide an optimistic weather and water supply outlook for the state.

With the exception of the Rightwood area, previously mentioned by Bob, overall, ground water conditions remain at adequate levels. However, certain of California Water Company's ground water supplies have an affected by various forms of contamination, which in some cases, has caused our company to increase its reliance on purchased water in a supply mix. As a result of below normal precipitation, and faster than normal melting of the winter's snow pack last spring, coupled with an increase in customer demands in our Rightwood customer service area, during this same period, the Rightwood ground water supply again began to be severely impacted in June of this year.

In response to this situation, Southern California Water Company undertook a number of steps to continue to provide sufficient water service including trucking water into the area from nearby sources, beginning June 29 of this year reinforming customers with respect to more stringent conservation measures, and expediting the drilling and equipping of a new well. I'm pleased to report that we experienced -- we have now ceased the trucking, although it did cost the Company $525,000 this year in connection with the Rightwood customer service area. The Company intends to seek recovery of these costs through the regulatory process.

In Arizona, the state continues to experience drought conditions with warm temperatures and reduced precipitation levels. During this water year, precipitation has been well below normal except for the southeastern portion of the state. According to the Arizona water banking authority, Arizona reservoirs are well below capacity at the 48% level, which is actually improved from the 31% level recorded during the same period last year. The Colorado river area continues to experience severe drought conditions as river flow into Lake Powell is at 5.2 million acre feet, or 45% of normal, compared to 6.3 million acre feet, or 48% of normal last year.

Notwithstanding, having an assured water supply designation by a decision in order of the Arizona Department of Water Resources, Chaparral City Water Company's water supply may be subject to interruption or reduction, in particular owing to interruption or reduction of the central Arizona project water. In the event of interruption or reduction of cap water, Chaparral City Water Company can rely on its ground water supplies for short-term periods, however, in any event, the quantity of water Chaparral City Water Company supplies to some or all of it's customers may be interrupted or curtailed, pursuant to the provisions of its tariffs. CCWC also has the physical capability to deliver water far in excess of that which is currently accounted for in CCWC's assured water supply account.

I would also like to brief you on American State's Utility Services efforts, ASUS, on military privatization. We are pleased to announce that full operations by the Fort Bliss Water Service Company, a subsidiary of ASUS, started on October 1, 2004. Fort Bliss Water Services Company was formed to furnish all necessary labor, management, supervision, permits, equipment, supplies, materials, transportation and any other incidentals for the complete ownership, operation, maintenance, repair, upgrades and improvements to the water and waste water systems at the Fort Bliss Military Base. The Company expects to remain very active in government-based privatization. We have a number of bids currently being considered by various organizations within The Department of Defense. The Company continues to analyze additional opportunities, as the government's request for proposal are issued for competitive bid.

Before concluding our prepared remarks today, I ask for your support in reminding your clients why American States Water Company belongs in their investment portfolio. That is, solid total return prospects, growth opportunities, and a management dedicated to meeting the needs of shareholders and customers. As announced earlier this week, the board of directors of American States Water Company approved an increase in the amount of the quarterly dividend from .221 cents per share to .225 cents per share on the common shares of the Company.

This action marks the 274th consecutive dividend payment, and I'm pleased to announce that this is the 50th consecutive year that American States Water Company shareholders have received an aggregate increase in their annual dividends. In that regard, I am pleased to inform you that using SEC guidelines for reporting financial performance, $100 invested in shares of American States Water Company in December of 1999 would be worth $124.27 at September 30, 2004. By contrast, that same $100 invested in the S&P 500 would be worth only $81.50.

As always, I want to thank you all for your time and attention, I will now turn the conference over to the operator to entertain any questions you may have, and, thank you.

Thank you. The question and answer session will be conducted electronically today. If you would like to ask a question, simply press the star key followed by the digit one on your touchtone telephone. Also, if you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that's star one if you would like to ask a question. And we'll pause for just a moment. And, we'll first hear from Heike Doerr of Janney Montgomery Scott.

Hi, actually it's Dave Schanzer. I came on a tad late on the call. I don't believe you covered these things. I'll ask them anyway. The Arrow Jet settlement, do you guys, can you give us a little more color as to what the longer term effect of that is? Is this a one-time thing or are you going to have an additional supply on an ongoing basis from the settlement?

That's a very good question, because we were very concerned, as you know, about the number of wells that we were experiencing going down. 12 in total. The longer term look is that we, actually the settlement provides for a guaranteed supply for our present service territory in the Rancho Cordova area to complete buildout in that service area. In other words, we are assured that there's sufficient supply available through the settlement process. Effectively, the water pumped from the ground by Arrow Jet is being treated for perchloride and other contaminants. That treated water then is routed to the American river and then taken out at a different location. We are taking a portion of that water back from the river, treating it through a process and upgraded our treatment plant, paid for 100% by Arrow Jet. So, that effectively is the way the physical solution takes place. If additional wells go down, there's other water that Arrow Jet has transferred to the county of Sacramento, which is planning to build a very large surface water treatment plant to take additional water from Arrow Jet and bring it back into our system on an as-needed basis, even if we lose 100% of our remaining wells, the agreement we have with the county and Arrow Jet, two separate agreements, provide for 100% replacement water if needed. So, it's an excellent solution on the long-term water supply look. In addition to that, there are about 7,000 acres of land owned by Arrow Jet, which is immediately adjacent to our Rancho Cordova service territory, as that land develops, which is part of Arrow Jet's plan, we will be the service provider by agreement with Arrow Jet. They will provide additional water for that service territory as well. So, it's a very comprehensive agreement, very complicated, but that's why it took us so long to get to the final solution. We believe it's now in the hands of the PUC, the entire settlement agreement for their look as well. But, it's a very comprehensive, very positive agreement.

Out of curiosity, who's responsible for the cleanup and who monitors it?

That's a good question as well. The state of California and EPA are both monitoring this cleanup process, which frankly is one of the reasons the Company, as Bob mentioned earlier, the Company sued the state of California because it was not doing, in our opinion, not doing its job of monitoring. And through our own efforts of doing a ground water model of that entire ground water area, we were able to prove that the direction of flow, and the contamination itself was, in fact, coming from Arrow Jet's property. So, the state effectively settled with the Company. They paid us a sum of money, and also, in that agreement with the state, there's very, very strong language, the state agreed to do its job of monitoring going forward.

Okay. I'm not quite sure where Rightwood is exactly, I don't have a map in front of me. My question is, where you've run into a problem with the wells not functioning properly and drought. Is there brackish(ph) water nearby that could be cleaned up? Is there opportunity for decell(ph)?

Those are excellent questions, Dave. The only unfortunate part is Rightwood is in -- near a ski resort area in the San Bernardino mountains. I'm going to say, if you know where our corporate headquarters is located.

Right.

It's almost due north, but over on the other side of the mountains going out toward the Mojave desert area.

Okay.

So, it's at an elevation roughly 6 to 8,000 feet above sea level, and very, of course, obviously, in very hilly areas, the slope of the land, if there is an unusual warm period, which happened last spring, it doesn't take long for that snow to melt and run off down into the desert and doesn't replenish the ground water. So, that's our problem. It's just the elevation is so high, and it's been so dry in Southern California the last few years, that we're hoping for a very dry or very wet winter, which is starting out terrificly, the October precipitation was an all-time record for the state of California.

Last question. The kind of a follow-up to the last quarter question that I asked. The strategy that you might have, with regard to the two new commissioners coming on, is there any, you know, attempt or plan on your part to, maybe test out the way they think with some regulatory request or action to see, you know, how the new commission's going to look and respond?

We wish we knew who was on the governor's short list, but one thing we can say with assurance is that the governor's very focused on getting business-friendly people in there. The two that are going off the commission are not business friendly. I don't think anybody would agree that they would be. So, we're looking very much to the first of the year.

But you don't have an early plan to test these folks and see, you know, how they think or how they respond?

No, we really don't. It's really up to the governor, but his movements and activities so far have been very positive to our business. And they're actually even about the current PUC commission, the President of the commission Michael Peavy has met with the governor on a number of occasions. Has actually begun a business kind of coalition within the commission to send that signal, especially, to the large electric utilities in the state.

That's where he came from.

Absolutely. And that's been his charter to turn that around.

Right.

Because, as you know, we've had for a long, long time the largest electric utility in the country on its financial knees.

Right.

And I believe he's turned that around. I see the governor's actions are extremely behind that kind of thinking in terms of business, the business environment in California will improve. I believe that.

Okay, thanks.

Thank you, Dave.

As a reminder, if you would like to ask a question, press star one at this time. We'll pause for just a moment. And, Mr. Wicks, it appears there are no further questions at this time. I'll turn the call back over to you for any additional or closing comments.

Okay. Well, thank you very much, everybody. It's been a pleasure meeting with you again. I hope you keep us in mind when you discuss your -- with your clients American States Water Company. Thank you very much.

That does conclude today's teleconference. Thank you all for your participation. You may now disconnect.