American States Water Co (AWR) 2005 Q2 法說會逐字稿

Good day and welcome to this 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 today, through August 11th at midnight. You may access the replay by dialing 719-457-0820, or 888-203-1112 and entering the passcode 4662163. Again, 719-457-0820, or 888-203-1112 and passcode 4662163.

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

Thank you. Good morning, or afternoon, ladies and gentlemen, and welcome to this morning's presentation on American States Water Company's second quarter 2005 results.

I am Bob Sprowls, Chief Financial Officer, and Floyd Wicks, President and CEO of the Company is also 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 that certain matters discussed during this conference call are forward-looking statements intended to qualify for the Safe Harbor 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.

During our presentation today, Floyd and I may refer to American States Water Company as AWR, and our flagship subsidiary, Southern California Water Company, as SWC. Having said that, let's begin with the second quarter results.

Basic and fully diluted earnings for the second quarter of 2005 were $0.34 per share, as compared to $0.44 per share on a basic and fully diluted basis for the second quarter of 2004. Impacting the comparability in the results of the two periods is a $5.7 million pretax gain, or $0.20 per share on the sale of water rights during the second quarter of 2004 resulting from a favorable decision issued by the California Public Utilities Commission, also referred to as the CPUC.

Additionally, rate increases in most of the service areas of Southern California Water Company were offset by decreases in water consumption due to wet weather in the winter and spring of 2005, and timing differences in recording the memorandum supply cost accounts, as will be discussed later, contributed to the variances.

During the second quarter of this year, total operating revenues increased by $1.2 million to $60.5 million as compared to the same period of 2004.

Water revenues reflect rate increases effective in 2004 and 2005, which contributed $2.7 million of additional revenues in this past quarter, covering almost all of SCW's water customers. The rate increases are partially offset by a decrease of 12.2% in billed water consumption, resulting from changes in weather conditions.

The lower than last year water consumption negatively impacted earnings for the quarter by approximately $0.07 per share.

Electric revenues increased 11.8% to $6.1 million, due to rate increases related to the 8.4-megawatt generation facility at Southern California Water's Bear Valley Electric division, and a 3.2% increase in consumption.

Other operating revenues increased from $319,000 for the quarter ended June 30, 2004 to $854,000 for the quarter just completed. The increase in other operating revenues is a result of activities associated with the operation of the water and wastewater systems at Fort Bliss that commenced on October 1, 2004.

Total operating expenses for the quarter ended June 30, 2005 increased slightly to $50.0 million compared to $48.7 million in the same quarter of 2004, due to a $5.7 million pretax gain on the sale of water rights to the City of Santa Monica during the second quarter of 2004, as previously mentioned, with no corresponding gain in 2005, increased groundwater assessments due to increased rates, increases in administrative and general expenses reflecting pension and benefits increases, increased labor costs and various miscellaneous expenses, all offset by a sizable decrease in outside services costs related to new business, and higher depreciation expense.

These increases were partially offset by a decrease in purchased water and power purchase for pumping due to reduced consumption, a decrease in the provision for the supply cost balancing account, as a result of the initial recording of a cumulative $2.7 million in the supply cost memorandum account for SCW's Region 1 and Region 2 in May of 2004, the recording of recently authorized undercollections in the supply cost balancing account of $1.3 million for Southern California Water's Region 3 in June of 2005, and an unrealized gain of $459,000 on purchased power contracts.

For the quarter ended June 30, 2005, other net income or loss was a loss of $52,000 as compared to income of $538,000 for the three months ended June 30, 2004. The higher income for this period in 2004 was mainly due to a reduction in SCW's estimate of customer refunds associated with lease revenues from the City of Folsom adjusted in June 2004.

Interest charges increased by 7.2% to $4.7 million for the quarter ended June 30, 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, resulting from SCW's construction program.

I would like to now turn to our six-month year-to-date reported results.

Basic and fully diluted earnings were $0.57and $0.56 per share respectively for the first six months of 2005 compared to basic and fully diluted earnings of $0.52 and $0.51 per share respectively for the same period of 2004. Included in the six months ended 2005 results was a $3.5 million unrealized gain on purchase power contracts due to increasing energy prices as compared to a $481,000 unrealized gain during the same period of last year, an increase of $0.10 in earnings per share.

Also impacting the comparability and the results of the two periods is a $5.7 million pretax gain, or $0.20 per share on the sale of water rights during the second quarter of 2004, as previously discussed in the quarterly results. In addition, decreases in consumption, rate increases, and recording of the memorandum supply cost accounts all contributed to changes in results between the two periods.

Total operating revenues were $110.3 million for the six months ended June 30, 2005 increased by $4.3 million compared to operating revenues of $106.0 million recorded for the six months ended June 30, 2004.

Of the total increase in revenues, water revenues increased by 3% to $95.0 million compared to $92.3 million as of June 30, 2004, due to rate increases in most of Southern California Water Company's service areas. Offset by a 10% decrease in billed water consumption, resulting from considerably more rainfall experienced during the first half of 2005 as compared to the same period of 2004.

Lower water consumption due to more precipitation than last year negatively impacted earnings by approximately $0.12 per share for the first six months of 2005.

Electric revenues increased by 3.7% due to a slight increase in consumption and a rate increase related to the 8.4-megawatt natural gas fuel generator facility.

Other operating revenues increased by $1.1 million due primarily to the additional revenues associated with the operation of the water and wastewater systems at Fort Bliss located near El Paso, Texas that commenced October 1, 2004.

Total operating expenses increased to $91.3 million for the six months ended June 30, 2005, as compared to the $89.8 million recorded for the same period in 2004, reflecting the $5.7 million pretax gain on sale of water rights during the second quarter of 2004, with no corresponding gain in 2005, as discussed previously, an increase in administrative and general expenses resulting from increased outside services, primarily related to Sarbanes-Oxley compliance requirements and increased labor, pension and benefit costs, higher depreciation costs, higher taxes on income, and an increase in the groundwater production assessments.

These increases were partially offset by a decrease in purchased water supply costs and the costs of power for pumping, both reflecting a reduction in consumption, a $3.3 million decrease in the provision for supply cost balancing accounts, as discussed previously in the quarterly result, an increase of approximately $3 million in the unrealized gain on purchased power contracts discussed earlier, and a net gain of $760,000 recorded in the first quarter of 2005 on a settlement reached for the removal of wells at the Chaparral City Water Company subsidiary.

Other income was a loss of $101,000 as compared to income of $455,000 for the six months ended June 30, 2004. This variance was primarily due to a reduction to SCW's estimate of customer refunds associated with lease revenues from the City of Folsom in June 2004.

Interest charges increased to $9.4 million for the six months ended June 30, 2005, as compared to $8.7 million for the six months ended June 30, 2004. The increase is due primarily to increases in short-term borrowings and interest rate increases.

In addition, during the first quarter of 2004, SCW recorded the recovery of carrying costs of approximately $168,000 on the costs incurred in the Water Quality Order Instituting Investigation Matter, authorized by the CPUC in March 2004. There was no corresponding recovery in 2005.

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.

SCW's approved capital expenditures for 2005 in the works, as we speak, total $58 million. We have incurred construction expenditures of $33.4 million for the six months ended June 30, 2005, as compared to $29.3 million during the same period of 2004.

SCW relies on external sources, including long-term debt, short-term borrowings from AWR via its credit facility, equity investments, contributions in aid of construction, advances for construction, and installing convey advances to fund the majority of its construction expenditures.

In June 2005, we completed the renewal of the syndicated credit facility at the AWR level. The facility has a five-year duration expiring June 5, 2010 with a capacity of $85 million.

We will issue additional long-term debt in the near future to provide external funding for these capital projects. $50 million remains available for issuance of debt under Southern California Water Company's registration statement.

Now I'll turn the call over to Floyd for some of the best news we have received to date from the CPUC.

Thank you, Bob, and good morning, everybody.

As discussed in our previous 10-Qs and 10-Ks, as well our most recent 10-Q, actually will be filed tomorrow, as well as previous teleconferences, SCW has recorded a deferred charge as a regulatory asset on its balance sheets, primarily representing the legal costs incurred to date in connection with the prosecution of a lawsuit against Aerojet-General Corporation for causing the contamination of the Sacramento County groundwater basin, which effected certain SCW wells.

At June 30, 2005, $15.1 million is the balance for this regulatory asset pursuant to a CPUC decision authorizing the establishment of this memorandum account for recovery. I'm very pleased to report to you today that on July 21, just two weeks ago, the PUC authorized SCW to collect the balance of the Aerojet litigation memorandum account of approximately $21.3 million through a rate surcharge, which will continue for no longer than 20 years.

The difference between the $21.3 million as authorized and the $15.1 million as recorded, is primarily related to previously incurred capital carrying costs pertaining to certain investments made by the Company required to restore the water supply. As a result of this PUC decision, SCW, among other things, will reflect an increase of approximately $6.2 million in its regulatory assets to include previously expensed carrying costs and record a corresponding gain in its results of operations during the third quarter of 2005.

We will also restore the appropriate plant accounts by approximately $1.1 million with a corresponding decrease in the depreciation expense during the third quarter of '05 due to the full reimbursement from Aerojet on these capital expenditures I mentioned earlier. And we also will keep the memorandum account open until it is fully amortized.

In addition to the guaranteed payments to fully reimburse SCW's capital investments required to restore the water supply, Aerojet has also agreed to reimburse SCW $17.5 million plus interest accruing from January 1 of '04 for its past legal and expert costs. The payment of the $17.5 million is contingent upon the issuance of land use approvals for development in a defined area within the Aerojet property in Eastern Sacramento County, and the receipt of certain fees in connection with such development.

It is our intention to offset any proceeds from this development against the balance in the memorandum account. We believe this is a fair and equitable decision for both shareholders and customers.

The first phase of Aerojet's development has been submitted to the City of Rancho Cordova and is awaiting approval of nearly 10,000 equivalent dwelling units, which will ultimately become part of SCW's service area in Rancho Cordova. This is truly a victory to celebrate with all stakeholders of American States Water Company.

The significance of this decision for us is also reflective of a victory for the entire water industry. The future of water quality and supply in the United States is reliant upon the integrity of businesses in stepping up to the plate when pollution resulting from their operations threatens to cause devastating results to the groundwater supply and innocent citizens' daily lives.

Unfortunately, as we move into the next 75 years of operation, the challenges of water quality and supply will increase and we need to be diligent in carrying, I'm sorry, in identifying the causes and be tenacious in lobbying for the cures. These challenges can be seen right here in the San Gabriel Valley in California where the Company withstood the onslaught of 23 separate water quality lawsuits over the past six to seven years, resulting in the court's order to dismiss the Company entirely.

The Company was successful in not having to settle any of those lawsuits. We prevailed and we're out of court. There have been appeals filed, but we believe we'll prevail there as well.

During the second quarter of 2005, the PUC has approved the following: first, increased rates effective in April of '05, which will increase revenues annually by $2.7 million for our 8.4-megawatt natural gas fuel generation facility for the Bear Valley Electric Division in Big Bear Lake, California; an approximate $1.3 million of undercollection in Region 3's 2004 memorandum supply cost account, which has been recorded as a decrease in the water supply balancing account provision in the second quarter of '05; the $1.4 million overcollection in Regions 1 and 3, I'm sorry, Regions 1 and 2, memorandum supply cost accounts related to '01, '02 and '03 years.

This order does not result in any impact to earnings because the Company had recorded the cumulative overcollection during the second quarter of '04. There are an additional $2.9 million of undercollections in regions, Region 3's memorandum account for years '01, '02 and 03 still pending before the PUC's review.

Also still pending are rate increases included in a general case per SCW's Region 3, which if approved as filed, will generate annual revenues approximating $15.6 million starting in '06. In addition, rates are expected to increase by $1 million in '07 and '08 respectively. A decision on this application is expected late this year.

Also, still pending is our Chaparral City Water Company rate case filed with the Arizona Corporation Commission in '04, and our first rate case since we purchased the company in 2000. If approved, it would generate additional annual revenues of approximately $1.8 million, representing a 29% increase in water rates.

Our future growth activities include our intent to expand the military base privatization contracts through American States Utility Services, also known as ASUS. Also continuing development of additional contracted services through SCW or ASUS, and earn the authorized rate of return on the Company's increasing capital investments in our regulated businesses.

We're also going to examine additional beyond the meter services, and be on the right side of the discussions and decisions regarding the future opportunities and potential investment 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 our customers, shareholders, and investors.

Finally, as redundant as this may seem, it is still valid. The Company provides solid total return prospects, growth opportunities, and a management team prepared to meet the challenges of the future.

These are three outstanding reasons I ask for your continuing support in reminding your clients why American States Water Company belongs in their investment portfolio.

American States shareholders should be pleased to know that using SEC guidelines for reporting financial performance, $100 invested in shares of American States Water Company at December 31, 2000 would be worth $140.70 at June 30, '05. By contrast, that same $100 invested in the S&P 500 would be worth only $97.15.

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

Thank you, sir. [Operator instructions] Our first question comes from David Schanzer, Janney Montgomery Scott.

Yeah, hi, good morning.

Good morning.

Hi, David.

A couple of questions. First of all, you did allude very briefly to wastewater. We're seeing a lot of the water companies moving in that direction. Do you have any initiatives that are specifically wastewater focused and can you give us an idea, if so, what kind of growth you think you're going have in that part of business?

It appears that these military base privatizations, not all, but most of them, do include the wastewater aspects as well, and our first entry into that is the Fort Bliss operation in Texas, where wastewater is included in that, and we have about 23, 24 outstanding bids for other bases and I would say probably just a ball park would be at least 80% of those bids include the wastewater side as well.

What percentage of, let's say, the total expected revenue from those contracts would be associated with wastewater, assuming you'd win, you know, on average, a number of them?

Oh, boy. I'd be guessing too much, unless Bob has a good answer. I'd rather look that one up for you, Dave, and be glad to talk to you about that off line.

Off line, yeah, that's fine.

I think it's in the 30% range, Floyd.

Okay.

Okay.

Okay. And, you know, you talked about the Aerojet situation. Could you also update us on arsenic remediation? Is that something that has changed over the quarter?

There, we don't have too much concern about that. We do have some arsenic in certain areas of our wells in California. We have some as well in the handful of wells we have in Arizona, but not, not a great big problem area for us.

So that hasn't changed at all from the last quarter?

No.

Okay.

No, the only thing that would change it is if the state regulators decide to go down below what the federal standard is for arsenic, but so far, that hasn't happened.

I thought that was a given.

You never know in California, so we're not holding our breath. That's for sure.

And lastly, while it's not a question, I thought it might be helpful, I mean given the fact that you have a lot of, you know, regular, not necessarily large regulatory interactions, but a number of them, if it would be possible maybe for you to send out to us kind of an anticipated schedule of when some of these things are going to happen?

Yes, that, I'm not sure, Bob, if you can remind me, if we've identified any of the forecasted end points in our 10-Q for the regulatory. I know the rate case, the major rate cases are usually at year-end.

Right. We generally try to give a, an estimate of when those will be available. There is a little bit of a wide range that we use because it's a pretty unpredictable situation, but we do plan to file our 10-Q tomorrow.

All right. Well, to the extent that it's in there, that's fine.

Okay.

And if not I can get in touch with you guys off line.

Okay.

Okay.

Thanks, Dave.

Our next question comes from Ajay Jain, UBS.

Hi, good morning.

Good morning.

Hi, Ajay.

I just had a quick question just related to weather. Since weather was really kind of one of the defining issues during the first half of the year, can you comment on what you're seeing this quarter in terms of the weather impact on water consumption?

Well, it's hard to predict what the outcome is. With regard to the first six months, as I recall seeing some of the statistics that came in, in Southern California, the rainfall has been recorded since 1882 and from the numbers I've seen, this past year, the first six months, has been the wettest timeframe ever recorded in Southern California. It's not the same case in the Northern part of the state, but most, about 75% of our customer base is in the Southern part of the state.

So it's, it's been a pretty significant impact on revenues, and I believe the numbers Bob quoted earlier impacted earnings for the first six months by about $0.12 a share. It's been extremely hot during the past month. I'd say more than average, but we don't know what the outcome is going to be on our sales yet.

We, a lot of our customers are monthly customers, but some are also bimonthly. So we'll see some trailing effects of the weather as well, but it's been fairly hot, I'd say, the last month. So that will have a good impact on sales, we believe.

Okay, great. And I know you just, you talked about the further progress on the military privatization initiatives. Is it fair to say overall that that process is still kind of going slowly, to the extent that you can tell us?

Yes, you have hit it on the head. It's been slow. As you know, we did get Fort Bliss last October, but we had expected to be operating as early as last April of '04, so it took a few extra months to iron out all the details and it looks as though some of the other bases are falling in lock step with that.

Okay, great. Thank you very much.

Thank you.

Once again, for questions, it's star-one on your touch-tone phone. We'll go next to Steve Gambuzza, Longbow Capital.

Thank you. My question was asked and answered.

Great. Thank you.

And again, that's star one for any questions. And, gentlemen, it appears we have no further questions. Mr. Wicks, I'd like to turn the call back over to you for any closing remarks.

Thank you. American States Water Company, its entire management team and employees are prepared for the future. We do have the strength and intelligence to see solutions and negotiate positive results.

We're not just here to serve water. We're here to serve quality, and also to preserve our most precious resource, which is water.

Again, we thank you all for your participation today and your continued interest in American States Water Company as an investment. Thank you, all.

Once again, I would like to remind everyone that you may listen to a rebroadcast of this conference at 4:00 p.m. Eastern time today through August 11th at midnight by dialing 719-457-0820, or 888-203-1112, and enter the pass code 4662163. Again, ladies and gentlemen, that does conclude today's conference. You may now disconnect.