American States Water Co (AWR) 2006 Q1 法說會逐字稿

Good afternoon. My name is Kimberly and I will be your conference operator today. At this time I would like to welcome everyone to the American States Water Company first quarter 2006 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 session. [OPERATOR INSTRUCTIONS] Thank you. I would now like to turn the conference over to Robert Sprowls, Chief Financial Officer. Please go ahead, sir.

Good morning, or afternoon, ladies and gentlemen, and welcome to this presentation on American States Water Company's first quarter 2006 results. I'm 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 conclusion of our prepared remarks, the call will be opened up for questions.

I would like to remind that 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. 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, our primary subsidiary, Golden State Water Company as Golden State, or GSWC, and the California Public Utilities Commission as CPUC.

Having said that, let's begin with the first quarter 2006 results. Basic and fully diluted earnings were both $0.35 per share for the 3 months ended March 31st, 2006, as compared to basic and fully diluted earnings of $0.22 per share reported for the same period ended March 31st, 2005. Significantly impacting the results for the first quarter are a decision issued by the CPUC on April 13th, 2006, regarding the treatment of Golden State's water rights lease revenues, which added about $2.6 million to pre-tax income in March, 2006, or approximately $0.09 per share. Pursuant to a March, 2004, CPUC order, the apportionment between customers and shareholders of any lease revenues that Golden State may collect from the City of Folsom commencing in January, 2004, was to be determined by a later decision. Pending that later decision, and beginning in the first quarter of 2004, all amounts billed to the City of Folsom had been included in a regulatory liability account, and no amounts were recognized as revenue until uncertainties about this matter were resolved with the CPUC.

On April 13th, 2006, the CPUC, in effect, allowed the Company to retain the lease proceeds for 2004, 2005, and prospectively, as long as it reinvests the proceeds in water system infrastructure. These investments would be included in the rate base upon which Golden State earns a rate of return. In accordance with California law, Golden State would have 8 years in which to reinvest the proceeds. As a result, we transferred about $2.3 million of water rights lease revenues received from the City of Folsom in 2004 and 2005, from the regulatory liability account into other operating revenues during the first quarter of '06. We also recorded pre-tax income of $299,000, reflecting the first quarter of the 2006 water rights lease revenues.

Additional items impacting the results for the first quarter of 2006 in comparison to the same period last year include an unrealized loss of $2.2 million, or a negative $0.08 per share on purchase power contracts due to decreased energy prices during the first quarter of 2006, as compared to an unrealized gain on purchase power contracts of $3.0 million, or a positive $0.11 per share during the first quarter of 2005. Water rate increases contributed approximately $3.5 million to revenues, or $0.09 per share for the first quarter of 2006. A 13.6% increase in billed water consumption in the 3 months ended March, 2006, as compared to the same period last year, due to near record rainfall in southern California in early 2005. A higher consumption improved earnings by approximately $0.07 per share in 2006.

An increase in pre-tax operating income of $1.4 million, or $0.05 per share, at our American States Utility Services subsidiary, referred to as ASUS, as compared to the same period of 2005, to the operation and maintenance of the water and waste water systems for the U.S. government. The increases included in revenue -- included revenue recognized for certain special projects and reimbursement of various operating costs incurred during the transition period.

Total operating revenues of $60.6 million for the first quarter of 2006 increased by $10.8 million, compared to revenues of $49.8 million recorded in the first quarter of 2005. Of the total increase in revenues, water revenues increased by 16.0%, due to rate increases implemented since the second quarter of 2005, and higher consumption in 2006 due to weather changes. Electric revenues increased by 11.7%, due to a rate increase in April, 2005, and an increase in consumption due to snow-making activities in the ski resort town of Big Bear in the San Bernardino mountains. Other operating revenues increased from $851,000, during the first quarter of 2005, to $4.1 million during the first quarter of 2006, primarily due to the $2.6 million of water rights lease revenues from the City of Folsom previously described, and an increase in ASUS' revenues for special projects performed by its Fort Bliss Water Services Company subsidiary, and commencement of water and waste water system operations at the 2 newly established military subsidiaries of ASUS, that is Terrapin Utility Services and Old Dominion Utility Services, located in Maryland and Virginia respectively.

Total operating expenses increased by $8.3 million, a 21.8% increase, to $46.6 million for the 3 months ended March 31st, 2006. The increase in operating expenses reflect a higher purchase -- higher purchase water expenses, due to increased customer usage over the first quarter 2005, due to weather differences and increases in supplier rates, the increase in the unrealized loss on purchase power contracts previously described, higher administrative and general costs, due to an increase in pension and benefit costs, higher wages, and an increase in general liability-related costs, higher depreciation resulting from increased utility plant balances, higher maintenance expense due to increased well and other water supply source activities, and the recording of a gain on a settlement reached in February, 2005, for the removal of wells in the Company's Arizona operations. The increase in administrative and general expenses was partially offset by the recovery of transition period operating expenses incurred at various military bases, operating under Terrapin Utility Services, and Old Dominion Utility Services. These increases in expenses were partially offset by reductions to the supply cost balancing account, and a reduction in other operating expenses due to reimbursement from the U.S. government for special project costs at Fort Bliss Water Services Company.

Interest charges increased by $531,000 to $5.3 million for the quarter ended March 31st, 2006, as compared to the quarter ended March 31st, 2005. The increase is due primarily to an increase in long-term interest expense, due to a $40 million private placement note issued in October, 2005, and higher short-term interest rates, offset by a reduction in the amount of short-term borrowings when compared to the prior year period. Interest income of $899,000 for the 3 months ended March 31st, 2006, was primarily due to interest accrued on an $8 million receivable, from the Aerojet General Corporation and on the Aerojet litigation memorandum account balance. Now, I will turn the call over to Floyd.

Thank you, Bob. And good morning, everyone. I will now take time to describe some of the more important regulatory matters which have occurred during the first quarter of this year. First, the Region 3 general rate case was approved by the commission on January 12, 2006. This rate case will provide Golden State Water Company additional annual revenues of approximately $5.4 million in '06 based on a return on equity of 9.8%. For the second and third year of this 3 year general rate case, the authorized increases are $1.9 million, and $2.3 million respectively subject to future earnings tests. Secondly, an increase of $5.2 million was approved by the California Public Utilities Commission and became effective on January 1 of '06, for the third year of the 3 year general rate case cycle for Region 2. Region 1 also received a $600,000 increase for the second year of its 3 year general rate case cycle -- in '06, that is.

In February of '06, Golden State Water Company filed an application with the California PUC for rate increases in Region 2, and to cover increases in general office expenses. If approved as filed, the rate increases are expected to generate approximately $14.9 million in annual revenues, beginning in January of 2007, $4.7million in '08, and $6.9 million in '09. A decision on this application is expected in late 2006. At this point in time, we're not able to predict the ultimate outcome of this rate case.

As discussed earlier by Bob, a decision issued by the CPUC on April 13th of this year regarding the treatment of Golden State Water Company's water rights lease revenues, added about $2.6 million to pre-tax income in March of '06, or approximately $0.09 per share. Finally, I am pleased to announce that on April 13th of '06, the CPUC approved a decision eliminating the earnings test previously adopted in its June, 2003, decision. The April, 2006, decision also eliminated the need to make an annual filing. Pursuant to this order, Golden State Water Company will recognize approximately $714,000 in the second quarter of '06, for the under-collected balances not recognized at March 31 of '06. And from that point forward, we will begin recording under and over-collections in supply costs on a monthly basis thereafter.

Regarding growth in the Company, I'm very pleased that our American states Utility Services efforts have contributed an increase of $0.05 per share in the first quarter of this year, compared to the 3 months ended of March of '05. As discussed by Bob, the increases included revenue recognized for certain special projects constructed at Fort Bliss, Texas, and reimbursement of various operating costs incurred at military bases in Maryland and Virginia during the transition period. I want to make sure I'm clear on the $0.05 per share. I'm not saying that's what American States Utility Services earned for the first quarter. It is the difference in the earnings compared to the first quarter of '05.

Terrapin Utility Services in Maryland, and Old Dominion Utility Services in Virginia, wholly owned subsidiaries of ASUS, furnished all necessary labor, management, and any other incidentals for the complete operation, maintenance, repair, upgrades, and improvements to the water and waste water systems at their respective bases. Terrapin assumed control of the operation and maintenance of the water and waste water system at Andrews Air Force base on February 1 of this year. Old Dominion took over operations of Fort Lee on February 23rd of this year, and the remaining installations on April 6th of this year. ASUS also has a number of currently outstanding bids for similar contracts across the country, and we look to providing other installations of the United States military with premiere water and waste water services.

2006 is off to a great start, and we're glad you're able to share it with us. I would like to take this time to thank you all and remind you of 3 outstanding points about American States Water. Number 1, our total return prospects are reflected in our financials. Growth opportunities are coming to fruition. And last, but certainly not least, our management team is meeting today's challenges, and is prepared to meet tomorrow's. 3 main reasons your clients could benefit from holding American States Water Company in their investment portfolio. American States shareholders should be pleased to know that using the SEC guidelines for reporting financial performance, $100 invested in shares of American States at December 31 of 2001, would be worth $185.77 at March 31 of '06. By contrast, that same $100 invested in the S&P 500 would be worth $121.52. As always, I want to thank each of you for your time and attention. And I will now turn the conference back to the operator to entertain any questions you may have at this time. Thank you.

[OPERATOR INSTRUCTIONS] Ajay Jain, UBS.

I guess there were 2 things I wanted to clarify on the water rights lease revenues. I'm assuming that the REIT classification, or the transfer from liability into income, that was all front end loaded and purely a first quarter event, as far as the 2.3 million is concerned. Is that basically correct?

Yes, that's correct.

And so I guess -- .

There was this 300,000 though, that represents the lease revenues for the quarter.

Right. And that was my second question. As far as that recurring revenue stream, and leasing rights from the city, should we be modeling -- we're looking at 300,000 in revenue or $0.01 a quarter, in EPS going forward. Is that a correct assessment?

I think that's a fair assessment.

Just to add a little more light to that subject, the contract we entered into with the City of Folsom is tied directly on an annual basis, the cost per acre foot that we lease, that 5,000-acre feet per year to the city, is tied to the Engineering News Record index. So as an example, the current pricing is about $240 per acre foot for 2006. And it will adjust for 2007 as the ENR index goes up.

So there is some variability there?

I'm sorry?

There is some variability there?

There is. And by example, when we entered into the lease in 1994, the price at that time started out at $175 per acre foot. The current pricing is about $240. So the Engineering News Record is what we're basing our increases on.

Okay. All right. And then I guess, as it relates to the $0.05 contribution from your nonregulated business, I just want to, I guess, reconcile your comments, Floyd, with what was in the release. Is it just $0.03 incremental year-over-year? Or is the $0.05 entirely incremental? And then it is all coming from your military privatization initiatives?

Bob can maybe add some clarity to the quarter-to-quarter comparisons.

Okay.

Much of the dollar impact for the first quarter was due to what I would refer to as transition costs we incurred, and were fully reimbursed for per the contract. And just starting the contracts out on the bases that are in Maryland and Virginia, it will -- those costs were primarily transition costs. And Bob, do you want to add any more to the comparison issue?

Yes.

I'm talking year-over-year comparison.

Right. Right. In the news release, I believe we did say $0.05. This would be the 1, 2 -- .

$0.05 incremental?

Yes. So it is $0.05 incremental for the year-over-year.

Okay. That was my read through the release, but I thought maybe Floyd had inferred that it was $0.03 incremental.

No, I didn't mention $0.03.

Okay. Sorry about that. My bad -- .

To clarify the $0.05 figure, is not what the earnings are for ASUS for the 3 months ended this year. It was a year-over-year comparison.

Oh, got it. Got it. And so -- and I guess my last question, is that $0.05 incremental contribution, is that kind of a representative run rate over the rest of the year as far as the earnings impact from nonregulated? Is that a good read-through?

$0.05 improvement per quarter? Is that what you mean?

Yes.

No, I don't think you can necessarily draw that conclusion. We are going to have 5 additional bases that we didn't have last year at this time, so that is going to contribute, but -- .

But the comparisons in the back half of the year aren't as favorable? Is that correct?

You know, it is such a new business for us, that we're not -- I guess we're not comfortable saying that it is going to be that. But I think we can probably say we do expect improvement.

We were very, very delighted to say that this start-up part of our business is doing much better, and the prospects actually were very strong for this Company.

Okay. I guess now, I guess my last comment or question is that now that it is -- this is looking like a more material business for you, would you -- is there any kind of time frame where you would be prepared to give some more explicit earnings guidance from the military portion of your business?

I would say, like Bob said, we don't want to over-do, at least in our enthusiasm. We're just -- we're very pleased with the report for this quarter. A lot of other parallel issues are confronting us, with regard to -- there is always the question, for example, of allocated administrative costs, as we go through general rate cases in California, which really, this year, is a good test for this. How much allocated administrative costs would be going from regulated to nonregulated, for example. So there is is just a lot of moving parts right now. We don't want to mislead the analysts in any way, shape or form. But we do compare, in our 10-Qs, and 10-K, we do compare the other category. What was that footnote you made reference to earlier, Bob?

Right. Footnote 9 of -- -- we are going to be filing our 10-Q today. There is a footnote 9, the business segment footnote, which presents numbers sort of by segment, by definition. We do have a column called "other," and in that other category, we have both ASUS and costs associated with operating the holding company. So there is, I guess, a way at this point to compare year-to-year performance. But there is -- there are AWR-type expenses still in those numbers. And we are talking about the possibility of breaking ASUS out separately, at least on a historical basis.

Okay. Great. Yes, my question was more on a go forward basis.

Right.

And you answered that question, as well.

All right.

All right. Thank you.

Alan Seymour.

Yes, actually I would like to drill down a little bit more on that issue. The normal water business has a seasonality to it. In your contracts with the military, is there the same seasonality? Is it related to volume, or is it kind of a cost that is over the whole year?

Well, with regard to the military, the contract -- first, let me describe the contract, the contracts themselves. Our long-term, 50-year contracts, which we're very pleased with, because it fits our business. We really like to think long-term strategy-wise and so on. But it is not tied to sales, as our regulated business is. It is strictly based on our -- the service provided, and it's more of an even cash flow, if you will. Our billings are pretty much conducted that way on a month-to-month basis. And we're also, for example, if there is a lot of construction work, as there is is currently in Fort Bliss, construction work, we get by contract, certain percentages of that business as well, for oversight and inspection, those kinds of things. So it is a little different way of accounting for the revenue coming in. It is not driven whatsoever by seasons.

So it should moderate your seasonality. But I guess the other question is -- ?

As Floyd mentioned, there is really 2 revenue streams. There is an O&M revenue stream, and there is is a capital revenue stream. And it is a function of how much, in some cases, how much capital is going into the ground. And how much capital is going into the ground is sometimes a function of what base you're talking about. So I guess you have to look at it sort of as a portfolio approach, because we've got a number of bases at this point.

So the variability would likely be the capital spending related to that, and I will call it management fees related to that?

I think that's fairly accurate. The kinds of dollars you spend on the capital side tend to drive the revenues.

And I would say as well, like many city-owned operations that have been neglected perhaps over the years, and I don't mean to say they're all like that. A lot of cities do the right thing. But government installations may require more capital in the first few years of the operation. There will always be some capital work going on, but probably front-end loaded on some of these bases, if they hadn't been taken care of properly. So that's -- as we add more bases, over time - we're hopeful that we will of course - and that you will see more of that evening out, if you will, as we get more bases coming into our operations.

Okay. Now, do the bases have the clean water issues that the cities do? Because obviously, some of of the cities haven't -- you're correct, they haven't done a very good job kind of treating enough water, I guess.

I understand. And yes, they have to abide by the same Federal Safe Drinking Water act as we do. And there are some issues with regard to treatment, water treatment at various bases on the water and waste water side. And we're addressing all those issues as our top priority. So as we get more information on that, having just taken over the operations, we're not -- we really can't get into a lot of detail at this point. But that detail will be forthcoming.

Great. Thank you very much.

Francesca McCan.

Good quarter. Nice to talk to you. A quick question about the Region 3 rate case. And you had said that came in at 9.8.

Yes. In ROE, yes.

What, I guess, what was filed for, and what can we expect moving forward with other cases? Or is this kind of setting a a standard? I guess can you go into that a little bit more?

Well, we don't believe it is a standard going forward. At least, that's our hope. We have seen some more recent cases that the ROEs being authorized are in, I would say, a range of 10 to 10.4. And this was an older case. And some of the -- I don't want to keep pointing to abnormal regulation, but there are some carry-overs from some past administration, with regard to California regulation. But I'm very pleased to say generally, that regulation in California has improved dramatically. But the Region 3 case is kind of an example of some of the carry-over I referenced. I don't know if that helps or not. But I'm hoping it doesn't carry forward in our Region 2 filing we have before the commission right now.

Okay. Right. I mean the explanation does help. I guess, from our perspective, it is just a little bit disconcerting, given that the nature and the new makeup of the CPUC is so much more favorable. So I do understand that some of this [inaudible] is kind of more historical. But, I guess just a little bit of a surprise on that one.

I'm understanding that, and we're improving our communication with the PUC as the new people have come in and the staff members are changing, and so on. So we're hopeful that's going to be of some help. But we're certainly watching it every bit as closely as you are.

Okay. And then also, with the commission, are you finding Commissioner Vaughn to be quite helpful? And what about the newest commissioner, Rachelle Chong. What feedback are you getting from her, and I guess how is that perceived?

I've met both of them personally, and I'm extremely impressed with both of them. From a business-friendly point of view, I say that in a sense of fairness, not that they're going to be favoring business over customers, or anything like that. It is a matter of doing the right thing, and realizing that our customer base is one and the same. We serve the same people they're trying to serve. And I believe both commissioners Vaughn and Chong have demonstrated that willingness to work with our industry. I was actually on a panel with Commissioner Vaughn recently in San Francisco, and I think those kinds of inter-plays help a lot, as well. They see our Company's willingness to get involved. And I just believe it is going to be a very -- very good solid commission going forward. And we've seen some recent cases that are a good example of that.

Okay. And then any idea just weather-wise, thus far for Q2, how things are looking so far? And then projections kind of for the rest of spring and going into early summer?

I would say April -- April was probably one of the wettest Aprils on record in California. And I don't know, it is is usually a fairly dry month. But I believe the first 5 days of April exceeded the whole monthly average, and then it continued to rain beyond that. So it gives you an idea what we're dealing with. And as much as we need the inventory, we did not need the last part of April to be wet as well. So my estimate at this point, is that the second quarter of '06 sales-wise, would probably be less than the sales in the second quarter of '05. That's just a guess at this point. But unless we get some fairly extreme dry, hot weather in the latter part of the quarter, that would be my guess.

Okay. All right. Well, great. Thank you. That's all for me then.

[OPERATOR INSTRUCTIONS] Steve Gambuzza.

Just a quick question on the -- back to the military privatization contracts. When you differentiate between the 2 revenue streams, the kind of -- you refer to them, as one of them as a capital stream. Is -- what exactly are the capital requirements of these contracts? Are you actually investing your own capital? Or are you managing the capital investment on behalf of the military?

Well, each contract is a little different. I would say as a general rule, there is a category that we will refer to as replacement. It is R&R -- , I'm a' struggling for the other R, Bob, can you help me?

Repair and replace?

I'm sorry?

I think it is repair and replace.

It is a different category than the actual operations -- hands-on operations. And in most cases, the government actually provides that capital on an annualized basis. And as an example, we have collected, I believe at Fort Bliss, something on the order of about $2 million a year. And then if there are projects over and above that, that become labeled differently, like an emergency-related project, which we also had at Fort Bliss, there was a fairly extensive waste water pipeline that had to be replaced. And so that becomes part of that R&R category. And the government -- if we had to front the capital because of an emergency nature, we would get the reimbursement dollars coming back directly from the government on those investments.

Do you capitalize or expense all of those -- when you make those R&R type -- when you spend money to make R&R type improvements, do you capitalize those expenses or do you expense them as incurred?

They're on the capital plant side, which is unusual. We actually own the facilities at these bases. So it is more of an asset management kind of a situation, where the dollars expended go into capital. But then when we get reimbursed by the government, that comes in as a contribution to offset what we've invested in that new plant. So essentially -- .

So it doesn't go through the income statement?

-- it keeps us whole going forward.

So basically, the effect of capital spending essentially doesn't go through the income statement, because you capitalize it, and comes back to you via a contribution from the government.

I would have to call on Bob -- there is some transition period where I believe we do get some interest on money that is expended in between these payments.

Right. We do get interest. We also make a profit on the dollars that we put out for capital. So the profit component does flow through the income statement.

So when you -- and on that point, Bob, are there actual dollars that you -- are there situations where you just invest capital, and don't get reimbursed, and you earn a rate of return on that capital investment? So we should see a portion of your consolidated capital expenditures going forward towards this business?

No, it is more, I believe, every dollar we spend, we get reimbursed.

Okay.

That's the intent of the contracts, and like I mentioned, there's -- like any governmental entity, there will be some delay between the time you actually expend the money -- .

And when you collect.

-- send the invoice, and you know, it is not a 10 day turn-around.

So you may have to float some capital for a period of time, but you will get some interest on that?

That's correct.

You really make money on this by managing, not by financing?

That's exactly right.

At the end of the day, we really -- we don't capitalize these dollars on our books. We recognize the profit based on a percentage of completion method. So that's really sort of how the accounting works on it.

Okay. Thanks very much.

[OPERATOR INSTRUCTIONS] At this time, there are no further questions. Gentlemen, do you have any closing remarks?

Well, I would thank everyone for their interest. And the questions were great. And I appreciate the opportunity, both Bob and I do. And thank for your participation today, and your continued interest in American States Water Company.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.