American States Water Co (AWR) 2006 Q2 法說會逐字稿

Good afternoon. My name is Michelle and I will be your conference operator today. At this time I would like to welcome everyone to the American States Water Company second quarter 2006 conference call. [OPERATOR INSTRUCTIONS] There will be a recording of this conference call available beginning at 5 p.m. eastern time today through 11:59 eastern time on August 16, 2006. The conference ID number for the replay is 3184913. Again the conference ID number for the replay is 3184913. At this time I would like to turn the conference over to Mr. Sprowls, Chief Financial Officer. Sir, you may begin your conference.

Thank you. Good morning, or afternoon, ladies and gentlemen, and welcome to this presentation on American States Water Company's second quarter 2006 results. I am 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 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-K and Form 10-Qs on file with the Securities and Exchange Commission. Factors underlying the Company's forward-looking statements are dynamic and subject to change, therefore these forward-looking statements speak only as 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, our primary subsidiary, Golden State Water Company, as GSWC and our non-regulated subsidiary, American States Utility Services, Inc, as ASUS. We may also refer to the California Public Utilities Commission as CPUC. Having said that, let's begin with the second quarter 2006 results. Basic and fully diluted earnings were both $0.36 per share for the three months ended June 30, 2006, as compared to basic and fully diluted earnings of $0.34 per share reported for the same period ended June 30, 2005. Net income for the second quarter ended June 30, 2006, increased by 9.3% to $6.3 million compared to $5.7 million for the same period in 2005.

Significantly impacting the second quarter results were an unrealized loss of $923,000 or $0.03 per share on purchase power contracts, as compared to an unrealized gain of $459,000 or $0.02 per share for last year's second quarter, a 6.3% decrease in billed water consumption for the three months ended June 30, 2006, negatively impacting earnings by $0.04 per share. Water rate increases added approximately $1.2 million to revenues, or $0.03 per share, partially offset by higher expenses, as we will discuss later, and a lower effective income tax rate increased second quarter earnings by $0.06 per share resulting from a $400,000 tax benefit related to an internal revenue service refund received in May, 2006, and differences between book and taxable income that are treated as flow through adjustments in accordance with regulatory requirements. Total operating revenues of $62.1 million for the second quarter of 2006, an increase of $1.6 million, compared to revenues of $60.5 million recorded in the second quarter of 2005.

Water revenues reflected a 0.8% decrease when compared to the prior year's results due to a 6.3% decrease, or $1.7 million, in billed water consumption, caused predominantly by changes in weather conditions. Partially offsetting the decrease in consumption was a $1.2 million increase in water revenues for the second quarter of 2006 resulting from rate increases. Electric revenues increased by 15.4% to $7 million, compared to $6.1 million for the three months ended June 30, 2005, primarily as a result of a 14.1% increase in consumption due to winter weather conditions, which allowed the ski resorts to remain open well into May. Rate increases in April, 2005, also contributed to the increase in electric revenues for the second quarter of 2006. Other operating revenues increased by 129.4% to $2.0 million for the three months ended June 30 of '06, compared to $867,000 for the three months ended June 30, 2005. The increase was due primarily to an additional $841,000 of revenues generated by American States Utility Services from the operation of water and wastewater systems pursuant to new contracts at military bases in Maryland and Virginia.

Additionally, revenues increased as a result of a decision issued by the California Public Utilities Commission on April 13, 2006, that enabled Golden State Water Company to record water rights lease revenues received from the city of Folsom subsequent to January, 2004, as income. Prior to that decision water lease revenues that Golden State Water collected in 2004 and 2005 were included in a regulatory liability account with no amounts recognized as revenue. For the second quarter of 2006 Golden State Water Company recorded additional water lease revenues of $299,000.

Total operating expenses increased by 6.1% to $48.0 million, compared to $45.3 million for the same period in 2005, reflecting: first a 10.6% increase in the cost of power purchased for pumping and a 21.5% increase in ground water production assessments due to more wells in service or pumping during the second quarter of 2006; second, a 1.4 million decrease in the pretax unrealized gain on purchase power contracts, reflecting a decrease in current forward market prices since last quarter; third, a 19.9% increase in the cost of power purchased for resale due to higher customer demand; fourth, an increase in other operating expenses primarily from higher operating costs at the new military bases in Maryland and Virginia; fifth, an increase in depreciation and amortization expense reflecting the addition of $100 million to utility plant in 2005; sixth, higher maintenance expenses due to increased well maintenance for Golden State Water Company and increases in well treatment and emergency repair costs; and seventh, an increase in property and other taxes due to higher property values and payroll taxes.

Partially offsetting these increases in expenses were: an 11.1% decrease in purchased water costs due to lower customer demand and less purchased water needed to replace wells temporarily out of service; a decrease in the provision for supply cost balancing count, partially reflecting a CPUC decision in April, 2006, which eliminated the earnings test; and a decrease of 6.1% in administrative and general expenses, primarily resulting from a favorable CPUC decision that allowed Golden State Water Company to reclassify $709,000 in legal costs as a regulatory asset. Interest expenses increased by 11.2% to $5.3 million, compared to $4.8 million for the second quarter in 2005. The increase is due to the issuance of $40 million of additional long-term debt in October, 2005, and increased interest rates on short-term borrowings, partially offset by a decrease in short-term debt amounts.

Interest income increased to $963,000 for the three months ended June 30, 2006, due to a 5% interest accrual on the $8 million settlement with Aerojet General Corporation, which will be paid over a five year period beginning in December, 2009; accrued interest on the uncollected balance of the Aerojet litigation memorandum account authorized by the California Public Utility Commission; interest income of $381,000 related to an IRS refund received in May, 2006; and interest earned on short-term cash surplus. Income tax expense decreased for the three months ended June 30, 2006, due in part to a decrease in pretax income of 7.2% and a decrease in the effective income tax rate. During the second quarter of 2006 AWR received a refund with interest from a previously filed refund claim with the IRS. Consequently in the second quarter of 2006 AWR recorded a tax benefit of $400,000 related to this refund. Now let us turn our attention to the financial results for the first six months of 2006, in comparison with the first six months of 2005.

Basic and fully diluted earnings were $0.71 per share for the six months ended June 30, 2006, compared to basic and fully diluted earnings of $0.57 and $0.56 per share respectively for the first six months of 2005. The major items impacting the increase in earnings for the first six months of 2006 included the following; on April 13, 2006, California Public Utility Commission decision enabling Golden State Water to transfer about $2.3 million of water rights lease revenues received from the City of Folsom for 2004 and 2005 from a regulatory liability account into operating revenues, which added about $2.9 million or approximately $0.10 per share to income; an increase in American States Utility Services pretax operating income of $1.6 million over the first six months of 2005, or $0.05 per share, primarily due to profit recognition and reimbursement for special projects at Fort Bliss; a $1.7 million increase in interest income, or $0.06 per share, as a result of accrued interest on the Aerojet litigation memorandum account balance and the interest on a tax refund received in May, 2006; the lower effective tax rate, its effect on earnings reflecting an increase of $0.09 per share; and an increase in water revenues due to higher consumption and rate increases.

Partially offsetting these increases was a significant decline in the cumulative unrealized gain on purchase power contracts due to lower forward energy prices during the first six months of 2006. The unrealized loss on purchase power contracts decreased pretax income by approximately $3.1 million, or $0.11 per share in 2006, as compared to an unrealized gain on purchase power contracts of $3.5 million, which increased earnings by $0.12 per share during the same period in 2005. Total operating revenues of $122.7 million for the first six months of 2006 increased by $12.4 million, compared to revenues of $110.3 million recorded in the same period of 2005, an increase of 11.2%.

Of the total increase in revenues, water revenues increased by 6.5% due to rate increases and higher consumption in 2006 resulting from weather changes, electric revenues increased by 13.4%, reflecting rate increases in April, 2005, and a 9.7% increase in consumption. Other operating revenues increased by 256.2% to $6.1 million during the first six months of 2006, primarily due to the recording of water rights lease revenues from the City of Folsom from January, 2004, to June of 2006, of $2.9 million in total, as we discussed earlier. In addition, an increase of $1.5 million in revenue reflects recording of Fort Bliss Water Services Company revenue of approximately $565,000 during the six months ended June 30, 2006, based on the percentage of completion method for contract revenue recognition for several projects at Fort Bliss and additional revenues totaling $1.1 million generating from operating the water and wastewater systems at new military bases in Maryland and Virginia, which began operations in early 2006.

Total operating expenses for the first six months of 2006 increased to $94.6 million, as compared to the $83.5 million recorded for the same period in 2005, reflecting a 6.6 million decrease in the unrealized gain on purchase power contracts, previously discussed, a 9.5% increase in the cost of power purchased for pumping and a 14.8% increase in ground water production assessments due to an increase in customer demand and increased pumping volume resulting from more wells and service for pumping in 2006, a 14.1% increase in the cost of power purchase for resale to customers in Golden State Water Company's Bear Valley Electric Division, reflecting higher customer demand, an increase in other operating expenses due primarily to the commencement of operation of the water and wastewater systems at new military bases in Maryland and Virginia; an increase in depreciation amortization expense; an increase in maintenance expense due primarily to an increase in required maintenance on Golden State Water Company's wells and water supply sources at all regions and increases in well treatment and emergency repair costs; higher property and other taxes and a net pretax gain of $760,000 on a settlement reached with the Fountain Hills sanitary district in February, 2005, for the capping of two Chaparral City Water Company wells in order to facilitate the sanitary district's ability to secure certain permits.

Interest expense increased by 10.3% to $10.5 million, primarily due to $40 million of additional debt issued in October, 2005, offset partially by a decrease in short-term debt. Interest income increased to $1.8 million due to interest income accrual on the $8 million settlement with Aerojet. Interest accrued on the balance of the Aerojet litigation memorandum account. Interest income of $381,000 related to a tax refund received in May, 2006. And interest earned on short-term cash surplus. Although there was an increase in pretax income of 11.7%, income tax expense decreased by 8.0% to $7.3 million compared to $7.9 million, as a result of flow through adjustments and an IRS refund claim discussed previously. Now I will turn the call over to Floyd.

Thank you, Bob, and good day, everyone. The second quarter's and six months' results, as discussed by Bob, demonstrate our ability to control and recover operating expenses and to earn an adequate return on invested capital. Capital investment creates the basis for long-term earnings growth and is a key facet of our strategy to increase shareholder value. Over the past three years American States, primarily through Golden State Water Company, has invested over $200 million into construction programs for the new improvements and replacement of aging infrastructure. Our projected construction expenditures for '06 are approximately 72 million for upgrades to water supply and distribution facilities. As of June, '06, June 30, we have invested approximately $34.1 million. Prudent and timely capital expenditures are truly reflective of the Company's aggressive efforts to improve its earnings.

I'll now describe some of the important regulatory matters which have occurred since the beginning of the second quarter of '06. In February '05 Golden State Water filed an application with the PUC for rate increases in its region two service area and to cover general office expenses. A decision on this application is expected in late 2006 for rates effective in January of '07. Currently we're unable to predict the ultimate outcome of this rate case. As reported to you last quarter in a CPUC decision issued on April 13th of '06, the utility's recovery of previously incurred supply costs was no longer subject to any reduction due to comparing actual returns to the PUC's authorized rate of return. This is called the earnings test. We began recording under and over-collections of the water supply balancing accounts on a monthly basis thereafter. In 1997, the Santa Maria Valley Water Conservation District filed a lawsuit against multiple defendants, including Golden State Water, the City of Santa Maria and several other public water purveyors. The plaintiff's lawsuit seeks adjudication of the Santa Maria ground water basin.

As of June 30 of '06, Golden State Water has incurred costs of approximately $6.2 million in defending its rights in the Santa Maria basin, including legal and expert witness fees, which have been deferred in utility plant for rate recovery. In February of '06 Golden State Water filed for recovery of these costs with the PUC. A settlement of the lawsuit has been reached among settling parties subject to PUC approval. The settlement, among other things, if approved by the California Public Utilities Commission, would preserve Golden State Water's historical pumping rights and secure supplemental water rights for use in case of drought or other reductions in the natural yield of the Santa Maria basin. The stipulation, if approved, would preserve Golden State Water's position with the settling parties. We cannot predict the outcome of the case as to the non-settling parties. Also reported to you in the first quarter conference call, and discussed by Bob earlier, the California Public Utilities Commission authorized Golden State Water to reinvest all lease revenues received from the City of Folsom since January of 2004 in water system infrastructure.

And to include such investments in the rate base upon which Golden State Water earns a rate of return. This favorable decision added about $2.9 million to pretax income, or about $0.10 per share for the first six months of this year. In April '06, the California PUC approved Golden State Water Company's region two advice letter, which requested recovery of the expenses recorded in the outside services memorandum account as of December of 05. The decision authorized recovery of this memo account to record costs incurred while working with a multitude of water districts, West Basin Water Association and Central Basin Water Association, on water supply reliability and rate related issues in region two. Golden State Water incurred approximately $709,000 in related expenses in 2004 and 2005. Golden State Water sought and received authorization to amortize the cumulative total of approximately 719,000 over a 12 month period through a surcharge on customer rates.

Accordingly Golden State Water Company recorded a reduction of 709,000 to outside legal services and interest income of $10,000 in the second quarter of '06. I would also like to update you on our American States Utility Services efforts on military privatization. For the first six months of this year, compared to last year, ASUS, American States Utility Services, pretax operating income increased by 1.6 million or about $0.05 per share by operating and maintaining certain water and wastewater systems for the U.S. government. The increases included revenue recognized for certain special projects and reimbursement of various operating costs incurred during the startup transition periods. 2006 continues to show promise and, as always, we're happy to share the results with you.

Thank you all for the support and interest you show by reminding your clients of the three reasons for holding American States Water Company in their investment portfolio. Number one, the Company's total return prospects are reflected in our financials. Number two, growth opportunities are coming to fruition. And three, our management team is meeting today's challenges, is prepared to meet tomorrow's. American States shareholders should be pleased to know that using SEC guidelines for reporting financial performance, $100 invested in shares of American States Water at December 31 of 2001 would be worth 178.24 at June 30, 2006. By contrast, the same $100 invested in the S&P 500 would be worth only 119.77. As always, I want to take time to thank you for your time and attention. I will now turn the conference back to the operator to entertain any questions you may have.

[OPERATOR INSTRUCTIONS] Also if you have not received a copy of this morning's news release announcing earnings for the quarter, please call 909-394-3600, extension number 710, or it can also be faxed or e-mailed to you. Your first question comes from Ajay Jain with UBS.

Hi, good morning.

Good morning.

I was wondering if you can talk about what's been driving some of the volatility in water consumption. Obviously, weather is unpredictable and I know it was a big negative factor throughout last year. But in the March quarter of this year it looks like consumption was up fairly sharply, then it was down again more recently. How should we look at the underlying demand going forward in general, is there anything else besides the weather impact that you think contributes to this volatility in consumption.

I'll take a crack at that. In the first quarter of this year was a drier quarter than the first quarter of '05. But then April came and essentially in the first four or five days of April we had enough rain that it was actually more than the average for the whole month in just the first four or five days of the month. Then it continued to rain after that and ended up being, I think, the wettest April on record in southern California. So that certainly impacted the second quarter results compared to second quarter of '05. So I don't know how you can predict that. We base our budgets on normal, whatever normal is, and we're hopeful that in future rate cases we're going to address these issues at the Public Utilities Commission with respect to plans to have some sort of a revenue adjustment mechanism similar to what the energy companies have in California.

Okay. And can you speak to what you're seeing in terms of the consumption trends for this quarter so far? Do you think it will have a positive or negative swing year-over-year.

We don't really know for sure. All I can say, the last probably three weeks has been, we have been setting records out here with regard to temperature. So we hope it has a corresponding positive effect on sales. Bob, do you have anything more to add to that?

I don't, just maybe a comment on Ajay's first question. We do have some customer growth, less than 1% at Golden State Water and customer growth at, fairly significant customer growth at Chaparral City Water. But that's still just Chaparral City is obviously a small part of our business. But that will affect consumption, but it's, I think, typical customer growth is less than 1% at Golden State.

Okay, great. Bob, as it relates to the favorable tax ruling, does that have any implications for what you consider to be an effective tax rate over the balance of the year or was it just a one time thing for the June quarter?

Last year we began booking sort of state taxes differently than we had previously, with a sort of a lag approach, one year lag. So we would get the state tax deduction for federal purposes in a one year lag situation. We had high earnings last year for the Company, strong earnings, and as a result we're getting pretty good state tax deduction this year because of that for federal purposes. So that should help keep the effective tax rate a little lower, the tax refund helped, and then as you know, Ajay, from a regulatory perspective, the whole flow through approach, where we flow through the benefits to customers tends to bounce the effective tax rate around a little bit.

Okay. I guess I'm just wondering how representative the lower tax rate from the most recent quarter is over the balance of the year, is that something you can quantify or -- ?

Yes, I think the -- I think it's artificially low because of that tax refund. But when you sort of back that out I think going forward, at least for the remainder of the year, except for that adjustment the effective tax rate should be fairly consistent with where it would have been.

Okay.

Except for that tax benefit.

Then lastly, it looks like the increase has been in expense was kind of broad based. Bob, can you provide any more color on the increased maintenance cost? I mean, apart from the emergency repair cost, was the rest of the increase isolated, again, to the June quarter or are your maintenance costs effectively rebased in any way.

Yes, for the June quarter the maintenance costs were up about 30%. Again, we were talking about the well maintenance that we are having to do for the quarter.

There was quite a push in our regions to get wells that had been off-line back on-line and that did happen. But of course, you incur expenses in so doing. And there was a fairly significant swing expense-wise in that power contract we have. That swing was fairly dramatic from year to year.

Yes.

$0.12 gain last year to $0.11 loss this year. So that was very, very significant.

Will any of that increase in maintenance cost spill over into the back half or is it kind of a done deal now?

You know, it's hard to predict with maintenance. We attempt to get a lot of the well maintenance done during periods of low demand. Now we're in a high demand period, we hope that the wells are going to produce as predicted. So typically we have more of our maintenance on wells forecast in our budgets, at least for last quarter and first quarter. So hopefully that gives you some sort of an answer. I'm not sure if it's the one you're looking for.

No, that was very helpful. I guess I just had the similar question on the increase in operating cost at the military facility as well. Will any of that cost spill over, do you expect any residual cost pressures in the back half of the year from your military activities?

The expenses there obviously sort of year to year are higher because we have gotten more bases.

Okay. So it's a percentage of sales, we shouldn't infer that costs are going up?

No. It's just we added five bases year-over-year, here. And, again, as we have told folks previously, each base is different, so it doesn't mean that we're going to have five times as much expenses, because Fort Bliss is, obviously, a very major base. But what sort of drives profitability there is CapEx and we just haven't started spending capital expenditures at the east coast bases that we have recently picked up because they're so new.

Got you.

Just a side comment on the military privatization effort, the sales or revenues we receive from those operations are not based on metered consumption, so that's a good thing. Hot or cold we're still going to get revenues coming in.

Right. So there's not a lot of variability in terms of the consumption.

Correct.

Great, thank you very much.

[OPERATOR INSTRUCTIONS] And at this time there are no further questions.

They let us off easy. Thank you all so much for your participation today and, again, for your continued interest in investment in American States Water Company. Have a good day.

Thank you for participating in today's American States Water Company second quarter 2006 results conference call. This call will be available for replay beginning at 5:00 p.m. eastern time today through 11:59 p.m. eastern time August 16, 2006. The conference ID number for the replay is 3184913. Again, the conference ID number for the replay is 3184913. Thank you, ladies and gentlemen, you may now disconnect.