American States Water Co (AWR) 2005 Q4 法說會逐字稿

At this time I would like to welcome everyone to American States Water Company year end and fourth quarter 2005 results conference call. [OPERATOR INSTRUCTIONS] Now I will turn today's call over to Robert J. Sprowls, Chief Financial Officer for American States Water Company. Please go ahead, sir.

Good morning, or afternoon, ladies and gentlemen, and welcome to this presentation on American States Water Company's fourth quarter and year end 2005 results. I am Bob Sprowls, Chief Financial Officer of American States; and Floyd Wicks, President and CEO of the Company is also with me today. As usual, following the conclusions 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 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-Ks, 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 primary subsidiary, Golden State Water Company, which is our former Southern California Water Company subsidiary as GSWC. Having said that, let's begin with the 2005 full year results.

Basic and fully diluted earnings were $1.58 and $1.57 per share respectively for the 12-months ended December 31, 2005 as compared to basic and fully diluted earnings of $1.19 and $1.18 per share respectively reported for the same period ended December 31, 2004. Significant items that impacted the increase in earnings for 2005 in comparison to the prior year were -- a favorable decision issued by the California Public Utilities Commission, CPUC, on July 21, 2005, regarding the Aerojet memorandum account, that increased net income by about $4.3 million or approximately $0.25 per share. A significant increase in the unrealized gain on purchased power contracts due to increased energy prices that added approximately $5.4 million to pre-tax income in 2005 or $0.19 per share compared to a pre-tax unrealized loss of $136,000 or less than $0.01 per share for the same period of 2004. A favorable decision issued by the CPUC in 2004 that resulted in a net pre-tax gain of $5.2 million, or approximately $0.20 per share on the sale of water rights during the second quarter of 2004. There was no comparable gain in 2005.

A 4% decrease in billed water consumption in 2005 impacted earnings by approximately $0.12 per share, offset by rate increases. A higher effective income tax rate in 2005 reduced earnings by $0.08 per share. And a decrease in the provision for the supply cost balancing account. During the year ended December 31, 2005, Golden State Water Company's region three recorded a reduction to its supply cost balancing account provision of approximately $4.3 million pursuant to approvals in 2005 by the CPUC, for recovery of increased supply costs of $1.3 million incurred in 2004 and $3 million incurred in 2001 through 2003. Furthermore, a cumulative $2.7 million over collection and supply costs was recorded in May, 2004 covering mostly years 2001 to 2003, as a result of the device letter filings pursuant to a new procedure established by the CPUC. These overall changes to the supply cost balancing provision added about $0.29 per share in 2005 as compared to 2004.

Total operating revenues of $236.2 million for the 12 months ended December 31, 2005, increased by $8.2 million, compared to operating revenues of $228 million recorded for the 12 months ended December 31, 2004. Of the total increase in revenues, water revenues increased by 2.4% primarily due to rate increases in 2004 and 2005 at Golden State Water, which contributed approximately $8.8 million to the increase in 2005 revenues. As previously mentioned, a 4% decrease in billed water consumptions resulting from near record rainfall in southern California in 2005 partially offset the effect of the higher 2005 billed revenues. Electric revenues increased by 6.4% in 2005 primarily due to a rate increase related to cost recovery of our 8.4 megawatt natural gas fuel generation facility.

Other revenues increased by $1.7 million reflecting a full year of operation of the water and wastewater system at Fort Bliss, Texas. Total operating expenses increased by 2% to $195.8 million for the 12 months ended December 31, 2005, as compared to the $191.9 million recorded for the same period in 2004 reflecting an increase in ground water production assessments due primarily to increases in pump assessment rates partially offset by a decrease in well production due to a decline in 2005 consumption. A $5.2 million net pre-tax gain on the sale of water rights during the second quarter of 2004 with no corresponding gain in 2005. Higher other operating expenses due to higher wages, staffing levels, and chemicals and treatment costs, higher depreciation resulting from increased utility plant balances, higher administrative and general expenses due to increases in pension and benefit costs, bonus accruals, and wages. Increased expenses associated with a full year of operating the facilities at Fort Bliss. And higher taxes on income due to an increase in pre-tax operating income and a higher effective tax rate resulting from differences between book and taxable income that are treated as flow through adjustments in accordance with regulatory requirements and the recognition in 2005 of the partial deferral of the federal benefits of state taxes to conform to the flow-through method required for rate making purposes.

These increases in operating expenses were partially offset by a decrease in power purchased for resale resulting primarily from accounting adjustments based on orders from the Federal Energy Regulatory Commission associated with Golden State Water Company's contract with Mirant marketing. A decrease in the provision for supply cost balancing accounts previously discussed. The increase in the unrealized gain on purchased power contracts previously discussed. And a net pre-tax gain of $760,000 recorded in the first quarter of 2005 on a settlement reach for the removal of wells at the Chapparral City Water Company subsidiary. Interest charges decreased by 23.8% to $13.6 million in 2005 compared to $17.9 million for the year ended December 31, 2004. Primarily due to the CPUCs approval to include in rates, previously incurred in expensed interest costs totaling $5.7 million in the Aerojet memorandum account. This was offset by increases in short-term borrowings, higher interest rates on short-term borrowings and additional long-term interest for a $40 million private placement note issued in October 2005.

Now, I will discuss the fourth quarter results. Basic and fully diluted earnings were both $0.30 per share for the three months ended December 31, 2005 as compared to basic and fully diluted earnings of $0.16 per share reported for the same period ended December 31, 2004. Significantly impacting results for the fourth quarter were $5.4 million of reductions or $0.19 per share recorded to Golden State Water's supply cost balancing account during the fourth quarter of 2005. Associated with undercollections of supply costs were the original increase in supply expenses had been recorded in an earlier period. During the fourth quarter of 2005, Golden State Water Company recorded a $3 million reduction to its supply cost balancing account provision or increased supply cost incurred in 2001 to 2004 pursuant to 2005 CPUC orders. And a $2.4 million reduction for increased supply costs recorded during prior quarters of 2005.

Also during the fourth quarter of 2005, Golden State Water Company recorded a $2 million unrealized loss on purchased power contracts compared to an unrealized loss during the fourth quarter of 2004 of approximately $400,000. This difference resulted in a $0.06 per share reduction in fourth quarter 2005 results compared to the fourth quarter of 2004. Total operating revenues of $57.8 million for the fourth quarter of 2005 increased by $4.8 million compared to revenues of $53 million recorded in the fourth quarter of 2004. Of the total increase in revenues, water revenues increased by 8.8% due to rate increases implemented since the fourth quarter of 2004 and higher consumption in 2005 due to the extremely wet weather during the fourth quarter of 2004.

Electric revenues increased by 12.8% due primarily to a rate increase in April, 2005 discussed previously partially offset by a decrease in consumption. Total operating expenses increased by $2 million, a 4.3% increase to $47.7 million for the three months ended December 31, 2005. The increase in operating expenses reflect higher purchased water expenses due to increased customer usage over the fourth quarter, 2004 levels due to weather differences and increases in supplier rates. The increase in the unrealized loss on purchased power contracts previously described, higher other operating expenses due to higher wages in benefits, staffing levels, chemicals and treatment costs, higher administrative and general costs due to an increase in pension and benefit costs, higher wages and an increase in bonuses accrued. Higher depreciation resulting from increased utility plant balances and higher taxes on income due to an increase in pre-tax operating income and a higher effective tax rate resulting from differences between book and taxable income that are treated as flow through adjustments in accordance of regulatory requirements.

These increases were partially offset by a reduction in power purchased for pumping during the fourth quarter of 2005 due to certain wells being shut down. A reduction in power purchase for resale due primarily to a decrease in usage and an increase in income from the sale of surplus electricity into the spot market. A decrease in 2005 maintenance as a result of certain emergency work completed during the fourth quarter of 2004 and reductions to the supply cost balancing account discussed previously. Interest charges increased by $616,000 to $5.2 million for the quarter ended December, 2005 as compared to the quarter ended December, 2004. The increase is due primarily to an increase in long-term interest for a $40 million private placement note issued in October, 2005.

I would like to further discuss unrealized gains and losses on purchased power contracts that have been significantly impacting our recorded -- our earnings. I noted that increased energy prices resulted in a pre-tax unrealized gain of $5.4 million for the 2005 year. I also noted that lower energy prices resulted in a $2 million pre-tax unrealized loss for the fourth quarter of 2005. Unrealized gains and losses on power will continue to affect earnings until the expiration of the purchased power contracts in 2008 based on changing energy prices.

The impact of these unrealized gains and losses on earnings may continue to be material. For example, due to a decrease in energy prices, after December 31, 2005, the unrealized gain or loss on our balance sheet has changed from a cumulative unrealized gain of $3.4 million at December 31, 2005 to a cumulative unrealized loss of 500,000 at the end of February, 2006. This change has resulted in a pre-tax loss of $3.9 million a negative impact of about $0.14 on earnings per share for the two months ended February 28, 2006. We anticipate that changes in energy prices will continue to have an unpredictable impact on earnings until the expiration of these contracts.

The Company's earnings are driven by our ability to control and recover operating expenses and by earning a return on invested capital. Over the past three years, AWR primarily through Golden State Water Company, has invested over $200 million into construction programs for new improvements and replacement of aging infrastructure. Our projected construction expenditures for 2006 are approximately $72 million, for upgrades to our water supply and distribution facilities. Prudently and timely spent capital expenditures are truly reflective of the Company's aggressive efforts in improving its earnings. Golden State Water Company relies on external sources including short-term borrowings from American States Water Company, via AWRs credit facility, equity investments from AWR, 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 these construction expenditures.

As discussed in the third quarter of 2005, Golden State Water Company issued $40 million in long term private placement debt to pay down its short term borrowings from AWR and fund capital projects. It is our goal to maintain a capital structure in line with the approved capital structure for Golden State Water Company which is approximately a 50/50 debt equity ratio. Now, I will turn the call over to Floyd.

Thank you Bob. Good morning, everyone. I will now describe some of the important regulatory matters which have occurred since the beginning of the fourth quarter of 2005. The region three general rate case was approved by the CPUC on January 12, 2006. It will provide Golden State Water Company with additional annual revenues of approximately $5.4 million in 2006 based on a return on equity of 9.8%. For the second and third year of this three-year general rate case, the authorized increases are 1.9 million and $2.3 million respectively subject to future earnings tests. Also an annual increase of $5.2 million was approved by the CPUC and became effective on January 1, 2006. For the third year of the three-year general rate case for region two.

In region one, they also received a $600,000 increase for the second year of its general rate case cycle. In October of 2005, the CPUC approved the recovery of $3 million for increased supply costs previously incurred in 2001 to 2003. This is in addition to the $1.3 million authorized in June of last year for supply costs incurred in 2004. Both amounts were recorded as increases to pretax income in the quarters mentioned. Chapparral City Water Company also implemented a new rate effective in October of last year, it is expected to generate additional annual revenues of 1.1 million.

In February of 2006, Golden State Water Company filed an application with the CPUC for rate increases in region two and to cover general office expenses. If approved as filed, the rate increases are expected to generate approximately $14.9 million in increased revenues starting in 2007. 4.7 million in '08 and 6.9 million in 2009. The decision on this application is expected in late 2006. We are unable to predict the ultimate outcome of this general rate case.

I would also like to discuss the revenues from leasing our water rights to the city of Fulsome. As we discussed previously in our 10-K and news releases the CPUC ordered the Company in June of '04 to refund 70% of leased revenues to our customers which amounted to $5.2 million covering revenues received from Fulsome since our agreement was signed with the city in 1994. Even though management disagreed with this CPUC decision, the Company has exhausted its appellate processes. Further pursuant to the order, the apportionment of any leased revenues at Golden State Water Company -- excuse me, may collect, since the order, since January of '04, the apportionment was to be determined by a later decision. Ending that later decision, the Company has recorded the leased revenues into a regulatory liability account totaling $2.3 million at December 31, '05, rather than recognizing any revenues in income. The CPUC recently issued two competing proposed decisions on this matter.

The first decision would require that all leased revenues be refunded to customers which, if approved, will not impact income because all the revenues since January of '04 have been placed in a liability account as discussed previously. The alternate decision would require that all leased revenues inclusive of the balances in the regulatory liability accounts be reinvested in water system infrastructure. And included in the rate base for earning a rate of return. At this time, we cannot predict which of the two competing decisions will be approved by the commission.

I'd also like to now update you on our American States Utility Services efforts, ASUS, on military privatization, which is one of our strategic growth initiatives. In September of 2005, ASUS, entered into agreements to operate and maintain the water and wastewater systems at Andrews Air Force base in Maryland, and Fort Story, Fort Eustis, and Fort Monroe and the wastewater system at Fort Lee in Virginia. 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 in circumstances. The Company formed Terrapin Utility Services in Maryland, and Old Dominion Utility Services in Virginia. Wholly owned subsidiaries of ASUS, we furnish all necessary labor, management, and any other incidentals for the complete operation, maintenance, repair, upgrades, and improvements to the water and wastewater systems. Terrapin assumed control of the operation and maintenance of the water and wastewater systems at Andrews Air Force base on February 1, 2006. It is expected that Old Dominion will fully take over the operations early next month on the four bases mentioned earlier.

ASUS also has a number of currently outstanding bids for similar contracts across the country. And we look forward to providing other installations of the United States military with premiere water and wastewater services. I'm also very pleased to report to you that ASUS has reached an agreement to provide retail water services within the service area of the Natomas Central Mutual Water Company. Natomas is a California mutual water company which currently provides water service to its shareholders primarily for agricultural irrigation and habitat maintenance in portions of Sacramento and Sutter counties in northern California. In August of '04, Natomas granted ASUS the exclusive right to market temporarily surplus water that may arise under water rights permits and contracts owned or controlled by it

to third parties outside the Natomas service area. On January 31, of '06, ASUS also entered into a water purchase agreement to acquire 5,000 acre feed of permanent Sacramento River water diversion rights from Natomas. Pursuant to the terms of the recent agreement, Natomas will sell, transfer, and convey to ASUS in perpetuity water rights and entitlements to divert from the Sacramento river up to 5,000 acre feet of water per year subject to certain regulatory approvals. Terms of the acquisition among other things include a base price of $2,500 per acre foot of water. Payable in payments contingent on meeting specific milestones and events over a ten-year period. Natomas will pay to ASUS a commission of 16% of the sale price over the same ten-year period under an existing agreement between the two companies. At the same time that the water sale agreement was completed, Natomas at ASUS also entered into a settlement agreement that released Natomas from previously established reimbursement obligations under existing agreements. This water acquisition provides ASUS and American States Water with a water rights platform that offers options for ASUS to engage in transactional opportunities with residential and commercial developers and/or to initiate a California Public Utilities Commission regulated franchise in Sutter county.

Finally, as we bring the 2005 year to a close, I want to thank each of you for your support. This was a good year for us. We are glad that you were here to share it with us. Again, as always, I want to take this moment to remind you that our total return prospects are reflected in our financials. Our growth opportunities are coming to fruition. And our management team is meeting today's challenges and is prepared to meet tomorrow's. Three outstanding reasons we ask for your continued support in spreading the word to your clients why American States Water Company belongs in their investment portfolio. American States shareholder should be pleased to know that using SEC guidelines for reporting financial performance, $100 invested in shares of American States Water at December of 2000 would be worth $149.81 at December 31, of '05. By contrast that same $100 invested in the S&P 500 would be worth only $102.75. As always I want to thank you for your time and attention. I'll now turn the conference back to the operator to entertain any questions you may have. Thank you very much.

[OPERATOR INSTRUCTIONS] Your first question comes from Steve Gambuzza with Longbow Capital.

Good afternoon gentlemen. Just a quick question on the contract services business. During 2005 was Fort Bliss the majority -- did that account for the majority of the revenues and the financial contribution from that business?

Yes.

And what was the net income contribution of the Fort Bliss contract during 2005?

We have not at this point have made a habit of disclosing that yet.

Okay. Will that be -- that will though -- you do disclose in your segment break-out ASUS as a reportable segment though, correct?

We do combine ASUS with the parent in our business segment.

Okay. So it's not solely -- you can't break that contract out?

That's right.

And you said that the -- my understanding is the Fort Bliss that you have disclosed is going to be about $196 million over 50 years, is that correct?

Yes.

And so the aggregate of all of the other contracts that you signed is about $238 million over 50 years?

That's right.

Is it fair to say they will have similar cost structures and net income contribution as Fort Bliss?

Each contract is a little different. You do have this ability to go in every three years for price redetermination.

So it will be based on the facts and circumstances of each contract, how the prices adjust.

That's right. And it's somewhat a function of what kind of shape the system is in when we take over and that sort of approach.

Okay. But you expect each of these contracts to be net become positive during the first year of operation?

I would say that's our expectation. We don't have it listed by contract as far as what that will be.

Okay. Will there be any capital expenditures required for these contracts in 2006?

Yes, there will be. And that is not part of the aggregate dollar amount that we mentioned earlier. And it varies by base.

In terms of the aggregate expectation?

I'm sorry.

What should we expect in terms of aggregate unregulated CapEx?

It varies by base. And there -- we'd have to -- we'd have to compile that separately. Bob, do you have a number that--?

Just order of magnitude, five or ten approximately?

Yes. I don't -- we previously haven't disclosed that. Our 10-K will be filed I think by tomorrow.

Okay.

And that should give you additional detail on your question.

Finally, just on the regulated CapEx, just given your overall capital structure objective, how do you plan on financing that $72 million of CapEx during 2005, well, during 2006. Will that be with internal cash flow and debt or will there be equity involved?

What typically happens is with that 72 million that we talked about, we do get advances for and contributions in aid of construction from developers. So that helps to fund that 72 million as well as we do get a depreciation recovery through our rates. But typically what we do see, is we kind of alternate debt and equity issuances so that we can take advantage of sort of issuing large blocks. For instance two years ago, we issued about 35 million of stock at the AWR level, in 2005 we issued $40 million of debt at the Golden State Water Company level. It's sort of this alternating debt equity to allow us to achieve our 50/50 debt equity ratio.

Great. Thanks you very much for your time.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from Ajay Jain with UBS.

Hey. Good morning. It looks like after September of last year, it seemed like record wet weather was kind of a persistent factor behind the weaker consumption of trends. It seems like weather was also an issue over the corresponding fourth quarter of '04, if I'm not mistaken. I'm just wondering if you can comment on the actual trends for water consumption in the most recent quarter and what you're seeing in terms of demand through the first six weeks of the current quarter?

Just as a general statement, it's been fairly wet again in California, primarily and we're seeing some fairly record snowfalls in the northern part of the state or northeastern, I should say. And I'm glad to see that some of that is also happening in the Colorado River Basin. But it's hard to say exactly how that compares to last year, 2005's first quarter. So we'll have a definite update on that as the quarter progresses, dancing around your question. But we don't have the answer yet in terms of reporting for the first quarter yet.

Okay. But I guess the fact that you're starting to cycle into some -- is it fair to say that you'll be cycling into some more favorable comparisons? Over the balance of '06.

I guess given that 2005 was a near record year. One would, I guess, from an investor standpoint -- one would hope that we don't have sort of the precipitation we had during 2005, no promises there though I guess?

Okay. And then there was just one additional question I had on the military privatization initiatives. I know that Floyd already discussed the new government contracts in Maryland and Virginia that were announced in September of last year. I think Floyd you mentioned that you're seeing continued momentum or you hoped for continued progress with the procurement process this year. Can you comment on whether the contracts hitting at [Rosero] Air Force base and the other military bases are likely to have a positive impact on earnings? Will they be accretive? Or is it just still too early in the process.

You mean the current contracts that we're just starting on you mean?

Yes.

Well, we're hopeful that that's the case. It's hard to say exactly what -- when you're first starting up the business, of course, our new contract, there may be unforeseen circumstances that come up. But if there are significant dollars expended on those kinds of issues, contracts usually are spelled out extras and things like that. So we're hopeful that that does not impact our earnings as we progress on these contracts.

We go into these contracts expecting to make money. It's just how good our forecasts are of what needs to be done there.

That's correct. And I want to emphasize the other part of that is that these contracts are all long-term contracts, 50 years. And so the government certainly wants us to stay in business during that period of time and has allowed for these redetermination of price time frames I believe it's every two or three years that we would go back in and say we need more money here, or those kinds of issues will be addressed on a go-forward basis.

So the government wants the vendor to absolutely stay in these contracts for the long-term. And as it turns out, the contract terms are such that we actually own the assets during this period of time. I think that's another key factor. When you own the asset, you're going to make sure you're there to maintain it and make money in the meantime as well. It's absolutely number one in our forecast.

Okay. And then I know you haven't disclosed anything in this regard, but if you were to use like Fort Bliss as a basis of comparison to the new contracts in Maryland and Virginia, have you kind of assigned the same hurdle rates as far as return on capital on the newer contracts? Or is there--?

Yes.

Any more granularity you can provide as far as what the long term returns on this new business are?

We've been very hesitant to provide sort of the expected hurdle rates on that because it's a pretty competitive bidding process. We don't want to lose any edge in the market. I believe though that the rates of return on the new basis are sort of comparable per dollar of capital to Fort Bliss.

Okay, great.

The other thing to consider is, there's a lot of activity going on in certain of these bases and Fort Bliss, all of this is public information. But Fort Bliss is expected to see a fairly significant growth over the next few years. And I believe they are also currently trying to get it about 15 to 20,000 additional troops in there by the end of this year. That in and of itself increases the scope of this contract. So we'll have more to report as time goes on. We're hoping we can do more in terms of giving better information as these contracts develop over time.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS] At this time there are no further questions. Management are there any closing remarks?

Yes. I would like to thank everyone again for their participation today. Also for your continued interest and investment in our company. America States Water Company is a good investment and we look forward to our next report to you. Thank you.

Ladies and gentlemen, this concludes today's American States Water Company year end and fourth quarter 2005 conference call. You may now disconnect.