American States Water Co (AWR) 2004 Q4 法說會逐字稿

Thank you for standing by and welcome to the American States Water Company quarterly conference call.

This call is being recorded. Today's presentation will be available for replay at 4:00 p.m. eastern time through March 24th at midnight. You may access the replay by dialing 719-457-0820 or 888-203-1112, passcode 4689624. Again, 719-457-0820, or 888-203-1112, passcode 4689624.

Now at this time I'd like to turn the conference over to Robert Sprowls, Chief Financial Officer. Please go ahead.

Good morning, ladies and gentlemen, and welcome to this morning's presentation on the financial results of American States Water Company's 2004 fourth quarter and year. I am Bob Sprowls, Chief Financial Officer, and Floyd Wicks, President and CEO of the Company, is also on the call with me today. As usual, following the conclusion of our prepared remarks, the call will be opened up for questions.

I would like to remind you certain matters discussed during the 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 Form 10-Qs on file with the Securities and Exchange Commission. 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 from time to time to update them, if we do so we will disseminate the updates to the investing public.

Having said that let's begin with the fourth quarter results. Basic and fully diluted earnings for the fourth quarter of 2004 were $0.16 per share, as compared to a $0.12 per share loss on a basic and fully diluted basis for the fourth quarter of 2003. Total operating revenues increased by $2.5 million to $53 million as compared to the same period of 2003, despite the record-breaking wet weather in the fourth quarter of 2004. Of the total increase in revenues, water revenues increased by $1.9 million, a 4.3 percent increase due to rate increases in Southern California Water company, SCW, effective in early 2004, covering nearly all of Southern California Water company's water customers. The increased revenues from the rate increases were partially offset by an 8.6 percent decrease in water consumption. Electric revenues increased by 1.3 percent due to a slight increase in consumption in 2004.

Total operating expenses for the quarter ended December 31st, 2004 increased by 4.1 percent, compared to the same quarter of 2003. Due to higher purchase water costs, offset by lower consumption and decreased power purchase for pumping. The higher purchase water costs were the result of a need to replace groundwater supply lost, due to wells being removed from service for water quality and mechanical issues.

In addition, higher total operating expenses also reflect increases in administrative and general expenses resulting from higher outside legal and consulting services and pension and benefits costs, increases in other operating and maintenance expenses, and higher taxes on income. These increases were partially offset by a decrease in the supply cost balancing account, primarily as a result of recording a probable refund of $3.5 million at the end of 2003 pursuant to a proposed California Public Utility Commission CPUC order. There was no similar refund recorded during the fourth quarter of 2004.

Other loss, net of taxes, for the three months ended December 31st, 2004, decreased to $70,000, from a loss of $3.8 million for the same period in 2003. This variance is a result of a CPUC decision on March 16th 2004, that ordered Southern California Water to refund 70 percent of the total amount of lease revenues received from the City of Folsom since 1994, plus interest, to customers. Pursuant to the order, in the fourth quarter of 2003, Southern California Water recorded a charge of $6.2 million against non-operating income, less $2.5 million of income taxes.

Interest charges increased slightly by $83,000 to $4.5 million for the quarter ended December 31st, 2004, as compared to the same quarter in 2003. The increase is due primarily to an increase in short-term borrowings, partially offset by the effect of the repayment of $12.5 million of long-term debt in October of 2003.

I would like to now turn to our full-year 2004 reported results. Basic and fully diluted earnings were $1.19 and $1.18 per share respectively for the 12 months ended December 31st 2004, as compared to basic and fully diluted earnings of $0.78 per share reported for 2003. Total operating revenues were $228 million for the 12 months ended December 31st '04, an increase of $15.3 million from 2003. Water revenues increased by $13.5 million in 2004, due to rate increases and a 1 percent increase in consumption resulting from changes in weather conditions. In 2004, water revenues increased approximately $400,000, $4.5 million, and $6.1 million in Southern California Water's regions 1, 2, and 3 customer service areas respectively, due to rate increases granted during 2004. The annual effect of these rate increases is approximately $13.7 million. Electric revenues increased by 4.5 percent over 2003 levels due to increased customer usage.

Total operating expenses increased by $12.8 million, or 7.1 percent for the 2 months ended December 31st, 2004, as compared to the same period in 2003, reflecting increased supply costs due to higher purchased water, partially offset by decreased power purchased for pumping, as talked about in the quarterly results, and the trucking of water in 2004 in one of southern California water's customer service areas, due to a continued decline in water levels and production capacity in SCW's existing wells, and the delay in completion of a new well, offset by a decrease in the supply-cost balancing accounts.

The decrease in the balancing accounts was principally the result of recording a probable refund of $3.5 million at the end of 2003, pursuant to a proposed California Public Utility Commission order, offset by $1.8 million of net over collections recorded in 2004 in the memorandum supply cost accounts.

The increases in operating expenses are also due to hire administrative and general expenses resulting from increased outside legal and consulting services, as well as increased pension and benefit costs, a decrease in the unrealized gain on purchase power contracts, increases in other operating and maintenance expenses, an increase in depreciation expense, and an increase in taxes on income, due to increased pretax income and a higher effective income tax rate.

These increases in operating expenses were partially offset by a favorable decision issued by the California Public Utility Commission on July 8th 2004, that resulted in a $5.2 million pretax increase to operating income during the 12 months ended December 31st, 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 SCW sold its water rights in the Charnock groundwater basin to the city, and assigned to the city its rights against all potentially responsible parties who contaminated the basin. The total proceeds of $5.7million from the sale and the assignment of rights were offset by an impairment loss of $482,000, associated with assets removed from rate base pursuant to the decision. Resulting in a $5.2 million net pretax increase in operating income.

Other income net of taxes increased to $301,000 for the 12 months ended December 31st '04, as compared to a net loss of $3.6 million for 2003. This is largely due to the recording of the probable refunds net of income taxes at the end of 2003, as a result of an unfavorable CPUC decision on income from leased water rights to the City of Folsom, as discussed previously in the fourth quarter results. Interest charges decreased by 1.1 percent to $17.9 million for the 12 months ended 2004, as compared to $18.1 million for 2003. The decrease is due primarily to the repayment of $12.5 million of long-term debt in October of 2003, and recovery of carrying costs on the expenses incurred in the water quality order instituting investigation matter, that was authorized by the CPUC in March 2004, partially offset by the increases in short-term borrowings.

The Company's earnings are driven by our ability to control and recover operating expenses, 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. Southern California Water's capital expenditures for 2004 were $79.9 million, as compared to 53.6 million in 2003.

Southern California Water's Board of Directors has approved anticipated net capital expenditures of $58 million for 2005, principally reflecting water supply related projects, such as drilling and equipping of new wells, building a new reservoir, and distribution and street improvement projects. It will, therefore, be necessary to issue additional debt in the near future to provide external funding for these projects. $50 million remained available for issuance of debt under a Southern California Water registration statement.

Before I turn the call over to Floyd, I'd like to update an issue we discussed with you in our third quarter conference. As discussed in our 10-Qs and 10-Ks, Southern California Water has recorded a deferred charge as a regulatory asset on our balance sheet, representing primarily the legal costs incurred to date in connection with prosecuting Aerojet General Corporation for causing the contamination of the Sacramento County groundwater basin, which affected certain Southern California Water wells. At December 31st 2004, $15.3 million was the balance for the regulatory asset pursuant to a California Public Utility Commission decision authorizing the establishment of this memorandum account for recovery.

In a proceeding currently pending at the California Commission, Southern California Water has requested a 20-year amortization of the remaining balance of the cost recorded in the memorandum account, net of any reimbursement amounts received from defendants, insurers, and others. In an effort to confirm the recoverability of the regulatory asset for the 2004 financial statements, Southern California Water filed a motion seeking another interim amortization in December 2004. In this motion, Southern California Water proposed to amortize $6 million of the $15.3 million in the memorandum account balance, over a ten-year period, and to increase rates accordingly subject to refund.

In January 2005, a joint ruling of the assigned commissioner and the administrative law judge, denied Southern California Water's request for an interim authorization. The motion was denied primarily because the hearing on the merits was only weeks away. In fact, it was held earlier this week, and an expected proposed decision and California Public Utility Commission action on it, may be soon there after in the second or third quarter of 2005.

We remain of the opinion that the recovery of these costs through rates is probable, and we will continue to monitor the rate making process for this matter, and assess the probability of recovery of these costs on a quarterly basis. Furthermore, it is our intention to offset any settlement proceeds from Aerojet against the balance in the memorandum account, at the time of receipt of the settlement payments.

Now I would like to turn the call over to Floyd.

Thank you, Bob, and good morning, everyone. The 2004, the Company's 75th year of operations, and also the 50th consecutive year of increasing common dividend payouts, was a year where persistent work efforts began to bear fruit in a number of different areas. The receipt of long-awaited rate relief, the dismissal of 22 water quality related lawsuits that were filed 7 years ago, a comprehensive settlement agreement with Aerojet, of a contamination related lawsuit filed by the company in 1999, and winning the bid to be the water and waste water facility operator of the company's first military base in Texas, should all contribute positively in the future.

In addition, as we have discussed before, the change at the Public Utility Commission in California,should provide a more positive regulatory climate in the future, than what we have experienced in the recent past. As discussed earlier by Bob in this call, the Public Utilities Commission approved rate increases for nearly all of Southern California Water's water customers in 2004. The annual rate increases amounted to $13.7 million. We've also received step increases for about $5.2 million for SCW's regions 2 and 3 effective in January of this year.

In addition, SCW and the office of rate payer advocates have mutually agreed to file a rate adjustment plan for region 1 for 2005 to 2007. If finalized, the new rates are expected to generate an additional $2.7 million in annual revenues for 2005. In February of 2005, we filed a generate rate case for SCW's region 3, and the general office. Rate increases, if approved as filed, will generate approximately an additional sum of $19 million in annual revenues beginning in 2006, or reflecting a 24.2 percent increase for region 3.

In addition, we are anticipating increased rates of approximately $2.7 million annually for the construction of an 8.4-megawatt natural gas fueled generation facility for the Bear Valley Electric division in Big Bear Lake. In August 2004, Chaparral City Water company in Arizona also filed its rate case with the Arizona Corporation Commission. If approved as filed, it would generate additional annual revenues of approximately $1.8 million, or equal to a 29 percent increase in rates.

I would now like to briefly update you on the water supply situation. During 2004 SCW supplied approximately 175 million gallons of water per day on average. Of this amount, approximately 51.2 percent came from our own pumped sources of groundwater, and 45.4 percent was purchased from others, principally the Metropolitan Water district of Southern California. The remaining was surface water principally supplied by the Bureau of Reclamation under a no-cost contract, and by the Sacramento Municipal Utility district, the cost of which is being reimbursed by Aerojet, pursuant to the October 2004 settlement agreement.

Significant storms in late December of 2004 and early January of this year provide a positive water supply outlook for California in 2005. Most of California has received over 150 percent of average levels with some parts of southern California receiving over 300 percent of average. snow pack levels in California are currently at about 165 percent of average. Likewise, reservoir levels have improved with increased precipitation, and statewide reservoirs are generally at 100 percent of average for early in the year.

Overall groundwater conditions at SCW remain at adequate levels. However, certain of SCW's groundwater supplies have been impacted by various forms of contamination, which in some cases has caused SCW to increase its reliance upon purchased water in its supply mix.

Similar to California, the water supply outlook for Arizona is optimistic. Precipitation has been over 300 percent of normal in some parts of northern Arizona. In Arizona the snowpack level at the Salt River basin is at 118 percent of average, and Verde River basin at 165 percent of average. The Colorado River basin has received almost 20 inches of rain, which translates to 325 percent of average at this time. Based on information publicly available from the Arizona Department of Water Resources, statewide Arizona reservoir levels are at 84 percent of normal for this time of year. The Colorado River basin lake such as Lake Powell, Mead, Mohave and Havasu are at 25.8 million acre feet, or approximately 60 percent of average. The spring and summer runoff for the Salt River basin and Verde River basin in Arizona are expected to be over 160 percent of average.

For this water year so far, 1.35 million acre-feet of water has flowed into Lake Powell which is 104 percent of average. The April to July inflow to Lake Powell is expected to be 9 million acre-feet, or 115 percent of average.

Notwithstanding having a short water supply designation by decision and 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 central Arizona project water. Known as CAP water. In the event of interruption or reduction of CAP water, CCWC can rely on its groundwater supplies for short periods. However, in any event the quantity of water CCWC delivers, to some or all of its customers, may be interrupted or curtailed pursuant to provisions of its tariffs. CCWC also has the physical capability to deliver water far in excess, of that which is accounted for in CCWC's assured water supply account.

Before concluding our prepared remarks today, I do continue to 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. In that regard I am pleased to inform that you using SEC guidelines for reporting financial performance, $100 invested in shares of American States Water at December 31, 1999, would be worth $130.95 at December 31, 2004. By contrast, that same $100 invested in the S&P 500, would be worth only $89.02.

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

Very good. [OPERATOR INSTRUCTIONS] We'll pause to assemble the question roster. It's a quiet group so far. Broken the ice here. We'll first go to Tim Winter with A. G. Edwards.

I was wondering if could you walk through again, items that would be considered by most to be nonrecurring for the year, including the water rights sale, and any other types of things that are of that nature.

Sure, I could do that. First of all, the gain on the Charnock properties, gain on the sale, that was $5.2 million. That would be considered a one-time amount. So that would need to be backed out. The -- in 2004, as I spoke, we had in 2003, set up a liability for the refund on Folsom lease revenues. We booked 6.2 million in 2003. In 2004, we had a better estimate of that number, and that was 5.2 million. So we brought a million dollars into income on a pretax basis in 2004 related to that item.

We additionally had charges to expense for overcollections related to 2002 and 2003, which was about 800,000 on an after-tax basis, so that was an additional charge to expense that would need to be removed. Then we had a, in terms of an unrealized gain on purchase power contracts, we actually had a loss. So that would be, of about $80,000 on an after-tax basis, that needed to be added back. So all told, the adjusted 2004 would be about $1.01 per share.

Great. Thank you. That's what I needed. And also I was wondering if you could talk a little bit more about your pursuit of military contracts, and maybe how the one that you've won is perform so far?

I'll go with that Bob. Good morning, Tim, by the way. We're pursuing about 22 other bids currently throughout the United States at various locations, and we really can't say exactly how long these are going to take. We had expected to get the one in Texas six months before we actually finally got it, which was in the fall of last year. So there is a delay in the Federal Government's processing these bids, primarily because of the war effort.

But we're very pleased with the current project we have going on in Texas. It's doing quite well. The local people at the base are responding very well to our people. The service is excellent. And it transitioned into our Company, I think, without any problems whatsoever. So I don't know if I'm getting all your answers properly here or not, but if you have any more specificity I would be happy to try to address those.

Thank you. That was helpful.

Okay.

And again, a reminder, star 1. We'll next go to Heike Doerr, Janney Montgomery Scott.

Gentlemen, quick question. I understand the two new commissioners in California haven't been in place very long, but have you had any interaction with them, and what kind of feeling are you getting from them, as far as how receptive they will be to water industry issues?

There are two, as you know, appointed by Governor Schwarzenegger. Diane Greenwich, I'm not sure I'm pronouncing her name properly yet, but she is very business oriented, has a consumer orientation, which we don't look at that as a negative in any way, because we're consumer oriented as well.

The other fellow, Steve Poysner, has not yet been confirmed in Sacramento, so we're not sure what his status is, but they both have a very solid business background, and governor Schwarzenegger has mentioned several times, that he wants to provide a more business friendly environment at the Utilities Commission, and the current President, Michael Peavey, is still President. He has not been taken out of that position, just because of a change at that time governor's office, and Mr. Peavey has a tremendous background in business, and is very business friendly as well.

So I think the theme in that regard is changing much more positively, at least have a much greater understanding of business in California, and wanting to make sure that businesses don't leave the state, and that they thrive as well financially.

Great. Now, is Steve Poysner allowed to operate with full commissioner responsibilities between the time he was appointed, and the time that he is approved by the Senate?

We haven't seen him yet in any --.

capacity?

In any capacity, so I think they're waiting to see what happens here with the appointment.

Thank you for your help.

Sure thing.

With that, there are no further questions. I'd like to turn the conference back to the speakers for additional or closing remarks.

Well, again, we really appreciate the time and effort that all of you spend in following our Company, and thank you again for participation today, and we look forward to the next time. Thank you very much.

This does conclude today's conference call. We'd like to wish everyone a good day.