American States Water Co (AWR) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to this American States Water Company quarterly conference call. Today's call is being recorded.

Today's presentation will be available for replay at 4 p.m. Eastern Standard Time through May 17th at midnight. You may access the replay by dialing 719-457-0820 or 888-203-1112 and entering the pass code 2039242. Again, 719-457-0820 or 888-203-1112 and pass code 2039242.

And now at this time, I'd like to turn the conference over to Mr. Robert Sprowls, Chief Financial Officer and Corporate Secretary and Treasurer. Please go ahead, sir.

Okay. Thank you.

Good morning or afternoon, ladies and gentlemen, depending upon where you are. And welcome to this morning's presentation on American States Water Company's first quarter 2005 results.

I'm Bob Sprowls, Chief Financial Officer of American States Water and Floyd Wicks, President and CEO of the Company is also on the call today.

As usual, following the conclusion of our prepared remarks, the call will be open for questions.

I'd 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 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 and if we do so we will disseminate the updates to the investing public.

Having said that, let's begin with the first quarter results.

Basic and fully diluted earnings for the first quarter of 2005 were $0.22 per share, as compared to $0.08 per share for the first quarter of 2004. The increase in recorded results reflects water rate increases at our Southern California Water Company unit in 2004 and 2005, which generated additional revenues of approximately $4.1 million for the first quarter of 2005.

Also impacting the results favorably is a significant increase in the unrealized gain on Southern California Water Company's purchase power contracts due to increasing energy prices. This unrealized gain for the three months ended March 31, 2005 added approximately $0.10 per share to the first quarter of 2005, as compared to the unrealized gain of $0.02 per share for the same period of 2004.

Southern California Water Company's contract with Pinnacle West is a derivative under Generally Accepted Accounting Principles and as a result, we are required to mark these contracts to market.

During the first quarter of this year, total operating revenues increased by $3.1 million to $49.8 million, as compared to the same period of 2004, despite the extremely wet weather in the first quarter of 2005. Of the total increase in revenues, water revenues increased by $2.8 million, a 7.1% increase due to the rate increases discussed earlier, partially offset by a 6.7% decrease in water consumption due to significantly more rainfall in the first quarter of 2005 than for the same period in 2004.

Electric revenues decreased by 2.1%, due to a decrease in consumption in the first three months of the 2005 year.

Total operating expenses for the quarter ended March 31, 2005 increased slightly to $41.3 million, compared to $41.1 million in the same quarter of 2004, due to increases in administrative and general expenses resulting from higher outside legal and consulting services, primarily related to Sarbanes-Oxley compliance requirements, and increases in labor, pension and benefit costs, increases in depreciation and maintenance expenses, and increases in taxes on income.

The increases were partially offset by an increase of $2.5 million in the unrealized gain on purchase power contracts due to an increase in the current forward market prices since December 31, 2004, as discussed earlier, and overall decrease in water supply costs due to a decrease in customer demand during the first three wet months of 2005, and a favorable change in the supply mix, and a net gain of $760,000 on a settlement reached between our Chaparral City Water Company subsidiary and the Fountain Hills Sanitary District for the removal of two wells at Chaparral City Water.

The Fountain Hills Sanitary District is a political subdivision of the State of Arizona that provides sanitary sewer service to customers residing within Chaparral City's water service area.

In connection with its sanitary system, the Sanitary District constructed a recharge system whereby it recharges treated effluent through multiple aquifer storage and recovery wells. In order for the sanitary district to secure an aquifer protection permit for its recharge system, the district paid a settlement fee of $1.520 million to Chaparral City Water Company in February 2005.

Pursuant to the agreement, Chaparral City Water shall permanently remove from service and cap this well and cap another well which had never been used as a potable source of supply. Chaparral City must also relinquish any legal claim or interest that it may otherwise possess in the community center well and it must grant an option to the Sanitary District to acquire one of the wells at a future date at fair-market value.

The removal of these two wells from service did not have a significant impact on Chaparral City Water Company's water supply. We have recognized a net pre-tax gain of $760,000 related to this settlement agreement and have established a regulatory liability for the remaining $760,000 pending the Arizona Corporation Commission's review of this matter.

Interest charges increased slightly by 7.8% to $4.7 million for the quarter ended March 31, 2005, as compared to the same quarter in 2004. The increase is due primarily to an increase in interest rates and an increase in short-term borrowings.

Adjusting earnings per share for one-time events, including the removal of the effect of the unrealized gain on purchase power, for both the first quarter of 2004 and 2005, and removal of the settlement payment at Chaparral City for the first quarter of 2005, results in adjusted earnings per share of $0.09 for the first quarter of 2005 versus $0.05 per share for the first quarter of 2004. 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 Company, continues with its construction program for improvement, renewal and replacement of infrastructure. Southern California Water Company's approved capital expenditures in the works for 2005 is $58 million, following expenditures in 2004 of $80 million.

Southern California Water usually relies on external sources, including equity investments and short-term borrowings from American States Water Company, via its credit facility, long-term debt, contributions in aid of construction, advances for construction, and install and convey advances to fund the majority of its construction expenditures.

We are in the process of renewing and extending the syndicated credit facility at the American States Water Company level. It will be a five-year facility with a capacity of $85 million.

And as we have stated previously, we will issue additional long-term debt in the near future to provide additional external funding for these projects. $50 million remains available for issuance of debt under the Southern California Water Company Registration Statement.

Before I turn the call over to Floyd, I'd like to update an issue we discussed with you in our fourth quarter call.

As discussed in our 10-Qs and 10-Ks and previous teleconferences, Southern California Water Company has recorded a deferred charge as a regulatory asset on the 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 Company wells.

At March 31, 2005, $15.2 million is the balance for this regulatory asset pursuant to a California Public Utility Commission decision authorizing the establishment of this memorandum account for recovery.

In a proceeding still pending at the California Public Utility Commission, Southern California Water has requested a 20-year amortization of the remaining balance of the costs recorded in the memorandum account, net of any reimbursement amounts received from defendants, insurers, and others. Following a hearing on the case held before an administrative law judge at the California Public Utility Commission in March 2005, we filed an open-trial brief in April and a reply brief last week to the opening trial brief submitted by the office of rate payor advocates.

There have been no incidents during the quarter that would change our opinion that the recovery of these costs through rates is probable.

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. We are anticipating a decision by the California Public Utility Commission in the second or third quarter of 2005.

Now I'd like to turn the call over to Floyd.

Thank you, Bob, and good morning, everyone, or afternoon, as Bob said, as well.

Moving forward into the next 75 years of operation, this Company, its management team, and employees are bound to see some changes in the way we, as individuals and communities and as a nation relate to our most precious resource, which is water. The fact is, the world and the need for this valuable commodity throughout the world will dictate the future research, discussions, and strategies for all water purveyors.

Issues will be addressed and sides will be taken so that the water resources are distributed where they are needed, when they are needed, and at a cost that will represent the efforts necessary to provide this resource. And by example, we are all very blessed in this country to turn the tap on and understand that water and any quantity needed will come out and meeting all standards as dictated by the federal and state regulatory bodies.

And just by example in California, our average customers use about 550 gallons each day. And for that 550 gallons, the cost of that is a mere $1.50 per day for 550 gallons of water.

And if you look at it on the basis of tonnage received at these homes, 550 gallons of water weighs in excess of 2 tons, and that's delivered every day to their tap any time of day, and for $1.50 on average, it's less than the cost of cable TV, and it's literally cheaper than dirt. You can't get two tons of dirt delivered to anywhere in this nation for $1.50, that is for sure.

For American States Water Company, the primary issues for the near future are those of cost, supply, and growth.

First on the topic of cost, the California Public Utilities Commission approved rate increases for nearly all of our water customers in California in '04 and '05. The annual rate hikes received in '04 amount to $13.7 million.

Step increases for this year in regions two and three amount to $5.2 million and were effective in January '05. New rates for region one for '05 through '07, based on a proposed decision, are expected to generate an additional $2.3 million annually, and 1.1 million and 1.2 million in '06 and '07 respectively.

In February of this year, we filed a general rate case for our region three in Southern California Water Company and also for the general office. This rate increase, if approved as filed, will generate annual revenues of approximating $19 million starting in '06. This represents an increase of 24.2% for rates currently in effect in region three.

Additionally, we received approval in April of this year from the PUC for increased rates of approximately $2.7 million annually for recovery of the construction of our 8.4 megawatt natural gas fueled generation facility for the Company's Bear Valley Electric Division in Big Bear Lake. The rates were effective on April 15th of this year.

In 2004, Chaparral City Water Company also filed a rate increase, our first since we purchased the company in calendar year 2000, with the Arizona Corporation Commission being the body that will look over our application. When approved, if approved as filed, it would generate additional revenues of approximately $1.8 million annually, a 29% increase in current rates.

Moving on to the supply issue.

For the three months ended this year, March 31, Southern California Water Company supplied approximately 123 million gallons of water per day on average. Of this amount, approximately 57.3% came from the Company's pumped sources, namely groundwater, and 42.1% was purchased from others, principally the Metropolitan Water District of Southern California.

The remaining amount was surface water, principally supplied by the Bureau of Reclamation in Sacramento County under a no-cost contract, and by the Sacramento Municipal Utility District, the cost of which is reimbursed by Aerojet pursuant to our settlement agreement with that company.

In the same period of '04, approximately 45% of our water supply came from purchased sources. The favorable change in supply mix is due to wells that were removed from service last year that are now pumping again.

Significant storms in late December of '04 through March of this year project a positive water supply outlook for California in this year. Most of California has received between 110% and over 150% of average levels of precipitation with some parts of Southern California receiving over 300% of average.

Snowpack levels in California are at about 165% of average, likewise reservoir levels have improved with increased precipitation. State-wide, California reservoirs are generally 100% of average for early in the year.

Overall groundwater conditions at Southern California Water remain at adequate levels, however, certain of our wells have been affected by various forms of contamination, which in some cases has caused the Company to increase its reliance on purchased water in the supply mix. However, as mentioned earlier, we did see a favorable change in the mix in the first quarter of this year compared to the same period last year.

Similar to California, the water supply outlook for Arizona is also optimistic. Precipitation has been over 300% of normal in some parts of Northern Arizona.

In the state, the snowpack level at the Salt River basin is at 118% and the Verde River basin at 165% of average. The Colorado River basin has received almost 20 inches of rain, which represents 325% of average at this time of the year.

Based on information publicly available from the Arizona Department of Water Resources, state-wide Arizona reservoir levels are at 84% of normal for this time of the year. The Colorado River basin lakes such as Powell, Mead, Mohave, and Havasu, are at 25.8 acre million feet, or approximately 60% of average.

Notwithstanding having an assured 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, C-A-P.

In the event of interruption or reduction of CAP water, CCWC can rely on its groundwater supplies for short-term 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 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.

Yes, given all the previous supply discussions, which are mostly positive, supply for the future translates into the protection of our groundwater rights, water quality, and the continued replacement of infrastructure necessary to maintain the ability to deliver this resource to its necessary destinations.

And finally, the growth aspect of our future. First, military-based contracts, contracted services, achieving the Company's authorized rate of return on increased investments, and beyond the meter services, and simply being on the right side of the discussions and decisions regarding future opportunities and potential that will fuel the growth of your investment in American States. These issues provide the focus of our energies for the near future and support our commitment to customers, shareholders, and investors alike.

Again, as I do every quarter, 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 team prepared to meet the challenges of the future.

American States shareholders should be pleased to know that 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 March 31, '05. 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'll now turn the conference back to the Operator to entertain any questions you may have. Thank you.

Thank you. The question-and-answer session will be conducted electronically. [Operator instructions] And we'll pause for just a moment to assemble our roster. And we'll take our first question from Steve Gambuzza with Longbow Capital Partners.

Good morning. I was wondering if you could please comment on the non-utility operations, specifically what type of contribution Fort Bliss made during the first quarter, whether there were any expenses or revenues from that contract that were deferred and not run through the income statement during the quarter and just what other military privatization opportunities you're currently pursuing and how they might contribute to future results?

I'll kick it off with perhaps starting from the last part of your question. Currently, we have, while I'm going through this I'm hoping that Bob has access to some of the other numbers, at least for the quarter for Fort Bliss.

But the Company has invested a lot of time and attention to this part of our growth activities. We have outstanding approximately 25 bids on other various military bases throughout the country, and we look at it as a very positive source for our future growth.

And the concept being, once we get established in a certain state, for example, in Texas, that gives us a presence there and we can then from there jump out to reach for other possible acquisitions in the state and effectively grow the Company in the same manner that the Company's grown over the past 75 years in California. So we look at it as a very good possible growth avenue for the future as well as the reasoning to spread our regulatory risk into other states rather than have so much investment in one state, namely California. So that's at least a little more of the strategic reasoning behind what we're, or why we're doing this.

And Bob, did you have any numbers for the first quarter for Fort Bliss?

Yes, I do. Fort Bliss had a net income of about $50,000 for the first quarter.

Now did that, the second part of his question related to any expenses that we're holding back on or, could you restate that part of it?

Or revenues. I think my understanding is that certain, there's two types of fees under the contract, one is for maintenance and the other one is for capital improvements and certain, you may defer revenues to a future quarter if the Cap Ex isn't spent in the quarter.

Yes. I don't believe we had any deferred revenue for the first quarter.

Okay. And on the expense side, was there any deferred expenses?

I don't believe there is, no.

I think it's unlike our water utility business that's regulated. If we have excessive maintenance for one reason or another, the contract calls for a certain margin overtop of the costs that we incur.

And, for example, there was a major pipeline that I believe burst on the wastewater side at Fort Bliss, a 24-inch line, which required some excessive, or extensive maintenance and repair as well as new capital work. So all of that will result in additional earnings, frankly, for Fort Bliss Water Services is our local company name we go by.

Thank you very much.

You're welcome.

And once again, that is star one for questions and please make sure your mute function is turned off to allow your signal to reach our equipment. We'll take our next question from Heike Doerr with Janney Montgomery Scott.

Hello. Two quick questions. One, I know that Governor Schwarznegger made his nomination for the open commissioner position, John Bohn, I was wondering if you might speak on your thoughts? You probably haven't gotten a chance to speak with him yet. I'm wondering if you know anything about his background and how you feel he will be receptive to the water companies?

Also on an EPS basis, I was wondering what the weather impact was at the water utility?

I'm sorry, what was the last part of the question?

You had said that there was a 6.7% decrease in consumption that was weather related, and I'm wondering on an EPS basis what that translates to?

Okay. I'll ask Bob to check on that.

I'll go into a little bit of detail on Mr. Bohn, who is the newest commissioner at the PUC in California. He's got a very extensive business background. He was an international banker, for example, for Wells Fargo and practiced law in California, Guam, and the Trust Territory, the Pacific.

He's also Chairman of the Board of Directors of the Center for International Private Enterprise, a non-profit affiliate of the National Endowment of Democracy and the United States Chamber of Commerce. It funds and assists the development of market-based democratic institutions throughout the developing world.

He also actually was former CEO, I think, of Moody's. Let me see if I can find, yes, Bohn also served for over seven years as President and Chief Executive Officer of Moody's Investor Service beginning in 1989. Prior to that, he was appointed Special Assistant to the United States Treasury Secretary Don Regan in 1981, and subsequently made U.S. Ambassador and Executive Director of the Asian Development Bank.

So he's got an extensive business background. He's got a doctorate degree, juris doctorate degree from Harvard Law School and a Bachelor of Arts degree from Stanford University, and attended London School of Economics as a Fulbright Fellow.

So we're looking forward to meeting with him personally. I've been on the scene very long, but he, as the Governor has announced previously, his intention is to get people on that commission that understand the business. And so this looks very good as far as my reading on it.

Now, his knowledge of water companies is limited. Will you and the other California companies work to educate him or does the staff normally handle that kind of education?

We have an outreach in our private water utility association in California known as the California Water Association. And it's been active in legislative affairs, for example, for over 60 years, and we have already got our feelers out there and request to meet with him. We have a group that meets monthly. I'm part of that group, and we invite, have invited all the commissioners individually to attend our meeting and get to know our industry and ask any questions. It's a two-way street and very, very lively discussions take place.

Wonderful. Thank you.

Thank you.

I just wanted to follow up on Steve's question, first of all. He asked about the deferred revenue. We have, in looking in more detail, we have $440,000 of deferred revenue at this point for the quarter for Fort Bliss.

And then Heidi, I know you'd asked about the weather impact for the first quarter and we're going to have to get back to you on that number.

Thank you.

Okay.

And once again, that is star one for questions. And there appears to be no questions at this time. Before I turn the conference back over to our presenters, I would like to remind everyone that you may listen to a rebroadcast of this conference at 4 p.m. Eastern Standard Time today through May 17th at midnight by dialing 719-457-0820 or 888-203-1112 and enter the pass code 2039242. Again, I would like to turn the conference back over to our presenters for any additional or closing remarks.

Thank you very much. And thank you all again for your participation today and for your continued efforts in following our Company. We greatly appreciate it and thank you again for promoting our Company as an investment to your people. So have a great day, everyone.

And that does conclude today's teleconference. We do thank you for your participation. You may now disconnect