American States Water Co (AWR) 2005 Q3 法說會逐字稿

Good afternoon, my name is Cynthia and I'll be your conference facilitator. At this time, I would like to welcome everyone to the American States Water Company third quarter 2005 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two on your telephone keypad. At this time I would like to turn the conference over to Mr. Robert Sprowls, CFO of American States Water Company. Mr. Sprowls, you may begin your conference, sir.

Okay, thank you. Good morning, or afternoon, ladies and gentlemen, and welcome to this morning's presentation on American States Water Company's third quarter 2005 results. I'm Bob Sprowls, Chief Financial Officer of American States Water Company 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 -- 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 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.

During our presentation today, Floyd and I may refer to American States Water Company as AWR, and our flagship subsidiary Golden State Water Company, is also known as GSWC. For those of you that did not receive a previous notice from us as of Octo -- October 1st, 2005, Golden State Water Company is the new name of Southern California Water Company. This name change helps us to unite our various service areas in both northern and southern California, under one very descriptive name. Having said that, let's begin with our third quarter results.

Basic and fully diluted earnings for the third quarter of 2005 were $0.72 per share, as compared to $0.52 per share on a basic and fully diluted basis for the third quarter of 2004. Significantly impacting the third quarter results was a favorable decision by the California Public Utilities Commission, also known as the CPUC, as our news release announced on July 22nd, 2005, Golden State Water Company received the CPUC's approval to collect the balance of a litigation memorandum account totaling approximately $21.3 million through a rate surcharge, which will continue for up to 20 years if necessary. The memorandum account was authorized and established in 2000 to allow GSWC to track costs it incurred in prosecuting the lawsuits filed against Aerojet General Corporation for causing the contamination of the Sacramento county groundwater basin and the state of California which had regulatory oversight of the clean-up process. As a result of this decision, GSWC reported an increase of approximately $6.2 million in its regulatory assets to include previously expensed carrying and other costs and record a cor -- and recorded a corresponding pretax gain in its results of operations during the third quarter of 2005.

In addition, GSWC was ordered to restore to the appropriate plan accounts those amounts that have been reimbursed by Aerojet pursuant to this settlement. This resulted in GSWC recording an approximate $1 million decrease to depreciation expense during the third quarter of 2005. This favorable added about $0.25 per share in total to earnings for the quarter.

Also impacting the results for this quarter is a significant increase in the unrealized gain on purchase power contracts due to an increase in forward energy prices. This unrealized gain added approximately $0.14 per share to the financial results for the three months ended September 30th, 2005, as compared to an unrealized loss of $0.01 per share the same period of 2004. The Company's purchase power contracts are deemed to be derivative instruments under SFAS number 133, accounting for derivative instruments and hedging activities. The reporting of unrealized gains and losses will continue through the expiration of the Company's current purchase power contracts in 2008.

Total operating revenues of $68.1 million for the third quarter of 2005 decreased by approximately $900,000, compared to revenues of $69 million recorded in the third quarter of 2004. The decrease reflects first a favorable CPUC decision in August of 2004, resulting in the recording of approximately $2 million in the third quarter of 2004 related to retroactive water revenues associated with a GSWC's region two rate increase. There were no corresponding retroactive revenues recorded in 2005. Second, decreases in water consumption of approximately 2.7%, an impact of approximately $0.03 per share due to changes in weather conditions, which were partially offset by increases in water rates in 2005. Third, electric rate increases at Bear Valley Electric related to the 8.4-megawatt generation facilities offsetting a 3% decrease in electric usage. And fourth, additional revenues at American States Utility Services, ASUS, associated with the operation of the water and wastewater systems at Fort Bliss located near El Paso, Texas, that commenced on October 1st, 2004.

Total operating expenses increased by 0.8%, to $56.7 million for the quarter ended September 30th 2005, as compared to the same period in 2004. The increase in operating expense reflects one, an overall increase in supply costs due to supplier rate increases, offset partially by a decline in consumption; two, increased maintenance expenses due to increases in scheduled maintenance at emergency repairs at GSWC, and higher maintenance expenses at ASUS due to the commencement of operations of the water and wastewater system at Fort Bliss. Three, higher taxes on income due to an increase in pretax operating income, and a higher effective tax rate which reduced earnings by about $0.07 per share, resulting from differences between book and taxable income that are treated as flow through adjustments in accordance with regulatory requirements. And four, an increase in other taxes reflecting additional property taxes, resulting from higher assessed values and increases in payroll taxes.

These increases in operating expenses were offset by a significant increase in the unrealized gain on purchase power contracts, mentioned earlier, a decrease in the provision for supply cost balancing accounts, a decrease in administrative and general expenses, and decreases in depreciation and amortization expense resulting from the favorable CPUC decision on the Aerojet matter discussed previously. Interest charges for the quarter decreased by 121%, resulting in net interest income of $959,000 compared to $4.6 million of interest expense for the quarter ended September 30th, 2004 primarily due to the CPUC's approval of previously incurred and expensed interest costs totaling $5.7 million in the Aerojet memorandum account. This was offset by increases in short-term borrowings and higher interest rates on short-term borrowings.

I would like to now turn to our nine-month year-to-date reported results. Basic and fully diluted earnings were $1.29 per share for the first nine months of 2005 compared to basic and fully diluted earnings of $1.04 per share for the same period of 2004. Significant items that impacted the increase in earnings for the nine months of 2005, in comparison to the prior year are, one, a favorable decision issued by the CPUC in 2004 that resulted in a $5.2 million net pretax gain, or approximately $0.20 per share on the sale of water rights during the second quarter of 2004. Two, an increase in the unrealized gain on purchase power contracts due to increasing energy prices that added approximately $7.5 million or $0.26 per share to the nine months ended September 30th, 2005, compared to an unrealized gain of $300,000 or $0.01 per share for the same period of 2004. Three, the favorable decision by the CPUC on July 21st, 2005, previously discussed regarding the Aerojet memorandum account that increased net income by about $4.2 million in July of 2005, or approximately $0.25 per share. Four, a 6.9% decrease in water consumption in 2005, which reduced earnings by approximately $0.15 per share, offsetting almost all of the rate increases, and, five a decrease in provision -- in the provision for the supply cost aco -- account.

Regarding the supply cost balancing account, GSWC recorded a cumulative $2.7 million regulatory liability in May 2004, with a corresponding charge booked to the provision for supply cost balancing account for GSWC's regions one and two. During the nine months ended September 30th, 2005, there was no similar charge for over. -- collection. In addition, an approximate $1.3 million under collection in GSWC's region three mender -- memorandum supply cost account was approved by the CPUC and recorded during this period as a reduction to the supply cost balancing expense provision.

Total operating revenues of $178.4 million for the nine months ended September 30th, two fi -- 2005, increased by $3.4 million, compared to operating revenues of $175 million recorded for the nine months ended September 30th, 2004. Of the total increase in revenues, water revenues increased slightly for the nine months ended September 30th, 2005, reflecting rate increases, offset by a 6.9% decrease in billed water consumption due to near record rainfall in southern California. Electric revenues increased by 4.3% due to a rate increase related to the 8.4 megawatt natural gas fuel generator facility offset by a slight decrease in electric usage. Other operating revenues increased by $1.8 million, due primarily to additional revenues associated with the operation of the water and wastewater systems at Fort Bliss.

Total operating expenses increased to $148.0 million, for the nine months ended September 30th, 2005, as compared to the $146.1 million recorded for the same period in 2004, reflecting, one, an increase in the groundwater production assessments due primarily to increases in pump assessment rates, offsi -- offset by a decrease in well production, due to a decline in consumption. Two a net pretax gain of $5.2 million on sale of water rights during the second quarter of 2004 with no corresponding gain in 2005. Three, higher maintenance costs due to expenses for ASUS's Fort Bliss operations and increased scheduled maintenance in one of GSWC's regions. And four, higher taxes on income due to hi -- a higher effective tax rate, which impacted earnings by approximately $0.07 per share, reflecting flow through adjustments, as discussed in the quarterly results, and an increase in pretax income.

These increases were partially offset by a decrease in purchased water supply costs, and the cost of power for pumping both reflecting a reduction in consumption, a decrease in the provision for supply cost balancing accounts, an increase in the unrealized gain on purchase power contracts, and a net gain of $760,000 recorded in the first quarter of 2005, on a settlement reached for the removal and the sale of wells at the Chapparel City Water Company's subsidiary. Other income was a loss of $165,000 as compared to income of $371,000 for the nine months ended September 30th, 2004. This was primarily due to a reduction in GSWC's estimate of customer refunds associated with lease revenues from the city of Folsom in June of 2004. Interest charges decreased to $8.5 million for the nine months ended September 30th, 2005, as compared to $13.3 million for the nine months ended September 30th, of 2004. The decrease reflects the CPUC's approval of previously incurred and expensed carrying costs totaling $5.7 million in the Aerojet memorandum account, offset by increases in short-term bar -- borrowings and higher rates.

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 GSWC, continues with its construction program for improvement renewal and replacement of infrastructure. We have incurred construction expenditures of $51.9 million for the nine months ended September 30th, 2005, as compared to $57.5 million during the same period of 2004. GSWC relies on external sources including short-term borrowings from American States Water Company, via AWR's credit facility, equity investments from AWR, and issuance of its own long-term debt contributions in aid of construction, advances for construction, and install and convey advances to fund the majority of its construction expenditures. On October 11th, 2005, GSWC issued $40 million in long-term private placement debt to pay down its short-term borrowings from AWR and fund capital projects. Now, I will turn the call over to Floyd.

Thank you, Bob and good morning, everyone. As discussed by Bob and reported on various other occasions, we are very pleased with the CPUC's decision in authorizing GSWC to collect the balance of the Aerojet litigation memorandum account of approximately $21.3 million, through a rate surcharge, which will continue for up to 20 years, if necessary. This favorable decision added about $0.25 per share to earnings for the third quarter this year. I'll now describe some other rate orders during 2005.

In October of this year, the CPUC approved our advice letter in an amount of $2.9 million filed for previously incurred supply costs for years 2001, '02, and '03 in the Company's region three customer service area. We will record this as a pretax income -- as pretax income in the fourth quarter. Chaparral City Water Company, in Arizona, filed its first case with the Arizona Corporation Commission late in 2004, which was the first rate case filed since the Company purchased Chaparral City Water in the year 2000. In September of this year, the ACC, Arizona's Corporation Commission, approved the application. The rate increase is effective October 1 of this year, are expected to generate additional revenues of about $1.1 million, reflecting an 18% increase over current revenues.

Still pending are the rate increases included in the general rate case for Golden State Water Company's region three, which if approved as filed will generate annual revenues approximating $15.6 million, starting in 2006. In addition, rates are expected to increase by $1 million in 2007 and 2008 respectively. A decision on this application is anticipated later this year.

Regarding growth, I would also like to brief you on American States Utility Services, ASUS, efforts on military privatization, which is one of our growth initiatives on which we have focused. As announced in our recent news release, ASUS entered into agreements to operate and maintain the water and wastewater systems at Andrews Air Force Base in Maryland dated September 30 of this year and Forts Story, Eustiss, Monroe and the wastewater system at Fort Lee in Virginia dated September 28th of this year. According to the agreements the aggregate award of these contracts is estimated at more than $238 million over a 50-year period and is subject to periodic price redetermination adjustments and modifications for changes and circumstances. Terrapin Utility Services Inc. in Maryland and Old Dominion Utility services Inc. in Virginia, wholly owned subsidiaries of ASUS, will furnish all necessary labor, management and any other incidentals for the complete operation and maintenance, repair, upgrades and improvements to the water and wastewater systems. The agreements are subject to a 90-day due diligence period during which time the transition will be undertaken.

Signing of these agreements is a continuing part of the American States Water Company growth strategy. ASUS has a number of currently outstanding bids for similar contracts across the country and we look forward to providing other installations of the U.S. military with premier water and wastewater services.

Finally, as redundant as -- as it may to be hear, it is still valid to say that American States Water Company represents all of total return prospects, growth opportunities, and a management team prepared to meet the challenges of the future. Three outstanding reasons we ask for your support in reminding your clients where American States Water Company belongs in their investment portfolio. American States' shareholders should be pleased to know that using the SEC guidelines for reporting finance performance $100 invested in shares of American States Water at December 31, year 2000, would be worth $161.56 at September 30, 2005. By contrast that same $100 invested in the S&P 500 would be worth only $100.65. 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 very much.

Thank you. [OPERATOR INSTRUCTIONS] Your first question comes from Steve Gambuzza of Longbow Capital.

Good afternoon, gentlemen.

Afternoon.

Actually a couple of quick questions. First, I was wondering if you could comment a little bit more on the tax rate you experienced for the first nine months. I know you did make some comments on it during the call, but I didn't quite understand everything you said. The way I calculate it, your -- your effective tax rate for the first nine months was something like around 46%, versus 7% for the nine months -- first nine months 2004. I was wondering if you could explain the -- the -- the difference and then what we should expect for kind of a normalized effective tax rate going forward?

Sure. Steve, did you say 7% for 2004?

Yes, I just -- I'm just looking on your -- your -- your earnings release, and for the -- if I just take taxes on income for 2004 of $11.7 million, which is what you reported for the first nine months of 2004, 18.6 million for the first months of 2005. If I add the $11.7 million to the -- the net income that you reported, which was, I suppose, 15.874? Actually, I'm sorry. I'm sorry. I had a change in my calculation. So it was -- it was I was writing the wrong number, but it did look like it -- at least for the third quarter there was a significant change in the effective tax rate. If you could comment on that.

I think the 46% for the -- I don't know whether that was a nine month number or a three month number, but that's probably a pretty good number to use there. The way the taxes worked for a regulated company in -- in California is certain items you have to flow back through to customers for various benefits and as a result, the effective tax rate jumps around a little bit.

Mm-hmm.

So the 46% is high. You know, I'm not sure now is probably the best time to talk about -- Okay. the taxes and -- and how they -- the various things that contribute to that 's pretty complicated subject. But --

Perhaps I could follow up with you offline.

Yes, that would be fine.

And then secondly, on -- on just looking at kind of your year-over-year results, for the -- for the nine months so far, on kind of a normalized basis, excluding some of the one-time, you know, gains you've had and losses from mark-to-market and other things is there kind of a -- do you guys break out, you know, your earnings on kind of a normalized basis for the first nine months excluding one-time items?

We try to, yes. And I would say that the year -- the nine months -- first nine months we're probably looking at 90 -- approximately $0.92 for -- for the nine months ended 2005, versus $0.89 for 2004.

Great.

But there's a number of items you've got to back out to get to that.

Okay.

And, you know, we believe in the future. We won't have as many of these one-time things but --

The mark-to-markets go away after 2006; is that right?

2008. Now that is dependent upon what additional purchase power contracts we sign up and whether those -- whether those qualify for derivative treatment under FAS 133.

Okay. And then finally just on the regulatory front, I was wondering if -- if there's been any initiatives or changes with respect to how you account for your purchased water costs in California, if there's -- if you think there might be any progressive movements with the commission on that front? Or if it's -- or if it's just kind of -- or if you expect the existing balancing account memorandum system to remain in effect?

Well, we're hopeful that we can -- we can get some -- a -- a relook at that very issue on a go-forward basis. We -- we believe that the regulation in California has been improving and that very issue will be brought back to the commission for -- for a second look.

But is -- is that -- is there anything -- do you have any proceedings in front of the commission currently that -- that are asking for a relook at that feature? Or is that --

Not -- not our Company. I believe there may be one or two others that do. And as well, the -- the PUC itself is going to announce soon, I believe, some new policies that they intend to -- to follow regarding the water industry. And we look at that as a favorable move.

Great. Thank you very much for your time.

You bet.

Again, to ask a question, please press star one on your telephone keypad. Your next question comes from Francesca McCain with Sanford Firs -- Stanford Financial.

Hi there. Congratulations. In just -- a quick question. I wanted to understand a little bit better the accounting for the Aerojet. So that 6.2, you know, I guess partly why wasn't it accounted for as a one-time gamin and instead hitting interest expense, just if you can go through that a little -- in a little more detail, that would be great.

Sure. And just to let everybody on the call know, we will be filing our 10-Q here this afternoon. We do have a fairly descriptive table in the 10-Q that describes that.

Perfect. Okay.

And Francesca, I mean I'm happy to talk now about it -- or

I'll go with to not waste -- to waste everybody's time, I can take a look at that and then any follow-up, I have on that I'll -- I'll go through -- through with you after. That's fine.

Okay. All right.

And then just one other question, and you may have gone through this. You went through a lot of details, but in terms of on Emery (ph) show very strong in the quarter and certainly lower than the last several. Can you just repeat the key components of that?

And -- and you're asking about the quarter or the nine months?

The quarter, please.

Yes, I can walk you through, I guess the -- the operating expenses is that --

Yes, and -- and pre -- precisely. That would be great.

Okay.

Or just -- yes, that's fine.

Okay I'm just going to go sort of back to what I said and that way we won't confuse anything here. Operating expenses increased by 0.8% to $56.7 million for the quarter, and the increase in operating expenses reflects, one, an increase in supply costs due to suppliers rate increases offset by a decline in consumption, increased maintenance expenses due to increases in scheduled maintenance at -- and emergency repairs at GSWC and higher maintenance expenses at ASUS due to the commencement of the operations of the water and wastewater at Fort Bliss.

At Fort Bliss. Okay.

Okay?

Okay. That's -- that -- I can actually look back in my notes for that. That's-- that's fine.

Okay. And, you know, we do have a press release. I'm sure you have it. You might want to go through there. The script here is not much different from that. At least not my part of it.

Perfect. That's fine. Thank you.

And feel free to give me a call.

All right. Thanks.

I'd like to actually add on to what Bob indicated regarding the Aerojet matter, just as a -- a matter of information for everybody. The Company had expensed a lot of dollars on capital-related work during the roughly five-year period in -- in which we were embroiled in this pending lawsuit, and what effectively we did was drill new wells and put in new transmission mains further from the contamination so that we could keep the customers in water with -- with good quality water. Those dollars accrued to about 20 million plus, and to date we've received reimbursement from Aerojet to tune of about 12 to 13 million of the total and they're paying us back the balance on a -- a prescribed payback schedule. During that time, we did -- we expensed the return on those invest -- invested dollars and the PUC decision just announced in July of this year, allowed return on that investment to flow back to the benefit of the Company shareholders. So that hopefully helps a little bit in terms of why we booked it all at one time. We -- we couldn't book it because we weren't sure of getting the approval for those -- for the return on those invested dollars.

Okay. Thank you.

Thank you.

At this time, there are no further questions. Are there any closing remarks?

Well, again, thank you all for taking time to -- to hear our story. We're proud of what our Company's people are doing on behalf of the shareholders and we thank you also for your continued interest in investment in American States Water Company.

This concludes today's American States Water Company third quarter 2005 earnings conference call. You may now disconnect.