American States Water Co (AWR) 2006 Q3 法說會逐字稿

Good afternoon, my name is Casey and I will be your conference operator today. At this time all I would like to welcome everyone to the American States Water Company's third quarter 2006 results teleconference. [OPERATOR INSTRUCTIONS]

Thank you. Mr. Sprowls, 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 third quarter 2006 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 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, our primary subsidiary, Golden State Water Company, as GSWC, our non-regulated subsidiary American States Utilities Services Inc. as ASUS and the California Public Utilities Commission as the CPUC. Having said that let's begin with the third quarter 2006 results.

Basic and fully diluted earnings were both $0.32 per share for the three months ended September 30th, 2006 as compared to basic and fully diluted earnings of $0.72 per share reported for the same period ended September 30th, 2005. Net income for the third quarter ended September 30th, 2006 decreased by 54.4% to $5.6 million, compared to 12.2 million for the same period in 2005.

While this is a $0.40 per share decline, I want to bring to your attention two items that significantly impact the quarterly comparison. First, as discussed in prior filings and earnings release teleconferences, there was a favorable decision issued during the third quarter of last year by the CPUC on July 21st, 2005, regarding the Aerojet memorandum account, which add about $4.3 million to net income in July 2005 or approximately $0.25 per share. There was no similar gain in 2006.

And second, the third quarter of 2006 generated a pre-tax unrealized loss on purchase power contracts of $2.8 million or a $0.10 per share decrease to net income resulting from decreasing forward energy prices, as compared to a pre-tax unrealized gain of $4 million or $0.14 per share increase to net income for last year's third quarter. Eliminating the effect of these two items, basic and diluted earnings per share for the third quarter of 2006 would have increased by $0.09 per share as compared to the same period last year.

It is unfortunate that the Company's reported earnings are somewhat volatile because of the Company's purchase power contract with Pinnacle West Capital Corporation is considered a derivative under generally accepted accounting principle. The derivative negatively swings the quarterly and year to date comparison by $0.24 per share and $0.47 per share respectively. The term of the Company's contract with Pinnacle West ends in late 2008. Between now and when the contract ends, the Company will line up additional power for 2009 and beyond and will be focused on contracting for power in such a manner that is doesn't qualify for derivative accounting. Between now and the end of 2008, the derivative will continue to impact earnings.

Total operating revenues were $73.7 million for the third quarter of 2006, an increase of about $5.6 million, compared to revenues of $68.1 million recorded in the third quarter of 2005. Water revenues reflected an increase of 7.3%, when compared to the prior year's results, due to a $3.6 million increase in water revenues, resulting from rate increases and 1.5% increase in billed water consumption due to warmer weather conditions. Electric revenues decreased by 1.5% to $6.4 million in 2006, compared to $6.5 million for the three months ended September 30th, 2005, primarily as a result of miscellaneous fees offset by a slight increase in consumption due to weather conditions.

Other operating revenues increased by about 132% to $2.3 million for the three months ended September 30th, 2006, compared to $1 million for the three months ended September 30th, 2005. The increase was due primarily to an additional $954,000 of revenues generated by ASUS from the operation of water and wastewater systems at military bases in Maryland and Virginia. Additional revenues increased as a result of a decision issued be the CPUC on April 13th, 2006 that enabled Golden State Water Company to record ongoing water rights lease revenues received from the City of Folsom as income, amounting to $311,000 for the third quarter of 2006.

Total operating expenses increased by 26.7% to $58.7 million, compared to $46.3 million for the same period in 2005 reflecting, first, a $2.8 million unrealized pre-tax loss on purchase power contracts in 2006, compared to the $4 million pre-tax gain in 2005, due to decreases in current [forward] market, energy prices since last quarter, resulting in an increase in operating expenses of $6.8 million for the third quarter of '06, versus the third quarter of 2005 as previously discussed.

Second, an increase in supply cost and other operating expenses primarily from higher operating costs at the new military bases in Maryland and Virginia, partially offset by a 3.6% decrease in supply costs due to more wells and service per pumped water in the third quarter of 2006, which is generally less costly than purchased water.

Third, a $2.3 million increase in general and administrative expenses, due to the new military base operations, higher employee benefit costs, including stock-based compensation expense, due to the adoption of SFAS 1233R effective January 1st, 2006, the increased use of tax and legal outside services, and higher labor costs, due to increased wages.

Fourth, a $1.9 million increase in depreciation and amortization expense, reflecting the addition of $100 million to utility plants in 2005. And fifth, a 16.9% increase in maintenance expense due to increased well maintenance, treatment and emergency repair costs for Golden State Water Company, as well as maintenance expenses for the new military base systems.

Interest expense increased by $5.5 million compared to the same quarter in 2005, reflecting the recovery in 2005 of $5.1 million in previously expensed interest costs, related to the Aerojet memorandum account. The increase is also due to the issuance of $40 million of additional long-term debt in October 2005 at Golden State Water Company, and an increased interest rate on short-term debt partially offset by a decrease in short-term debt balances. Interest income decreased by 6.7% to $695,000 for the three months ended September 30th, 2006, primarily due to the recognition of interest income in July of 2005, totaling approximately $607,000 earned on the $8 million Aerojet long-term note receivable, pursuant to a settlement agreement.

A recording of the interest income had been deferred, pending the final CPUC decision received in July 2005 on the Aerojet matter. This was partially offset by increases to accrued interest of $279,000 on the uncollected balance in the Aerojet litigation memorandum account authorized be the California Public Utilities Commission and interest income of $173,000 related to interest earned on costs incurred for capital upgrade project at Andrews Air Force Base. Income tax expense decreased by 54.1% to $4.8 million for the three months ended September 30th, 2006, due in part to a decrease in pre-tax income of 54.3% offset by a slight increase in the effective income tax rate.

And now let us turn our attention to earnings of the first nine months of 2006, in comparison to the same period in 2005. Basic and fully diluted earnings were both $1.03 per share for the nine months ended September 30th, 2006, as compared to basic and fully diluted earnings of $1.29 per share reported for the same period ended September 30th, 2005.

The $0.26 per share decrease in earnings in 2006 was due to a number of things. First, the recording of a pre-tax unrealized loss of $5.9 million, or $0.21 per share on purchase power contracts in 2006 due to decreasing forward energy prices, versus a pre-taxed unrealized gain of $7.5 million or $0.26 per share on purchase power contracts in 2005, a negative swing of $0.47 per share.

Second, a favorable decision issued by the California Public Utilities Commission on July 21, 2005, regarding the Aerojet matter, which added about $4.3 million to net income in July 2005 or approximately $0.25 per share.

Third, the recognition of approximately $3.2 million of water rights [loose] revenues from January 2004 to September 2006 in pre-tax income for the nine months ended September 30th, 2006, pursuant to a decision issued by the California Public Utility Commission on April 13th, 2006. Of the $3.2 million increase, $2.3 million or $0.08 per share represents revenues for 2004 and 2005 recorded in 2006, while $900,000 or $0.03 per share represents revenues for the nine months of 2006. Prior to that decision, any lease revenues that Golden State Water Company collected in 2004 and 2005 were included in a regulatory liability account with no amounts recognized as revenues pending the outcome of the April 2006 CPUC decision.

Fourth, water rate increases contributed approximately $8.8 million to revenue or $0.31 per share for the nine months ended September 30th, 2006.

Fifth, an increase in ASUSs pre-tax operating income of $1.4 million or positive swing of about $0.05 per share as compared to the same period of 2005 through operating and maintaining the water and wastewater systems for the U.S. Government.

Six, a $2.4 million increase in interest income, excluding the impact of the Aerojet decision mentioned previously, or $0.09 per share, resulting primarily from interest accrued on the uncollected balance of the Aerojet litigation memorandum account authorized be the CPUC, interest income related to an Internal Revenue Service refund, and interest income from the U.S. Government for costs incurred on capital upgrade projects. A lower effective tax rate increased earnings by $0.09 per share resulting primarily from a $400,000 tax benefit relating to an IRS refund received in May 2006, and differences between book and taxable income, which are treated as flow-through adjustments in accordance with regulatory requirement.

Finally, higher expenses other than those I just described which lowered 2006 net income by an additional $0.19 per share, as I will discuss.

Total operating revenues of $196.5 million for the first nine months of 2006 increased by 10.1% compared to revenues of $178.4 million recorded in the same period of 2005. Of the total increase in revenues, water revenues increased by 6.8% due to rate increases and higher consumption in 2006 resulting from weather changes. Electric revenues increased by 8.5%, reflecting rate increases in April 2005 and a 7.4% increase in kilowatt hour usage. Other operating revenues increased 210.1% to $8.4 million during the first nine months of 2006. Excuse me just a second. Excuse me.

Other operating revenues increased 210.1% to $8.4 million during the first nine months of 2006, primarily due to the recording of water right lease revenues from the City of Folsom, as previously discussed. An additional increase of $2.8 million in revenues reflects the recording of [Fort Worth] Water Services Company revenues of approximately $768,000 during the nine months ended September 30th, 2006, based on the percentage of completion method for contract revenue recognition for several projects at Fort Bliss, and an additional revenues totaling $2 million generated from operating the water and wastewater systems at military bases in Maryland and Virginia, which began operations in early 2006.

Total operating expenses for the first nine months of 2006 increased to $153.3 million as compared to the $129.8 million reported for the same period in 2005, reflecting the unrealized loss on purchase power contracts in 2006, compared to an unrealized gain in 2005 as previously discussed. The net effect of which increased operating expenses by $13.4 million.

Secondly, an increase in supply costs and other operating expenses due primarily to the commencement of operations of water and wastewater systems at new military bases.

Third, increases in administrative and general expenses reflecting higher expenses at new military bases, increasing-- increases in pension and benefit expenses, increases in stock-based compensation expense due to the adoption of SFAS 123R, higher wages and increased outside tax and legal services. Increased depreciation and amortization expense, reflecting among other things the effects of closing approximately $100 million of additions to utility plant during 2005.

Fifth, an increase in maintenance expense due principally to increases 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, an increase in property taxes and payroll taxes, and the net pre-tax gain of $760,000 on a settlement reached with the Fountain Hills Sanitary District in February 2005, with no corresponding gain in 2006.

Interest expense increased by 72% to $16 million for the nine months ended September 30th, 2006, primarily due to the recovery of previously incurred and expense Aerojet interest costs, totaling $5.1 million, and $40 million of additional debt issued in October 2005, offset partially by a decrease in short-term cash borrowings, which were also partially offset by higher interest rates. Interest income increased to $2.6 million for the nine months ended September 30th, 2006, from $800,000 for the same period in 2005, due to an 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 $345,000 earned from capital upgrade projects at Andrews Air Force Base and interest earned on a short-term surplus of cash. These increases were partially offset by the July 2005, CPUC Aerojet decision, resulting in the recording of $607,000 in interest income earned on the $8 million Aerojet long term note receivables. The recording of the interest income had been deferred pending a final California Public Utilities Commission decision.

Income tax expense decreased by 34% to $12.1 million compared to $18.4 million as the result of a decrease in pre-tax income, flow-through adjustments and an IRS refund claim discussed previously.

Now I will turn the call over to Floyd.

Thank you, Bob. First and foremost I want to tell you today how elated I am to discuss this Company's dividend history. Nearly 53 years of increased annual dividend payouts, we are one of the very few ongoing companies that can claim such a sustained record of increased dividends. On October 27, 2006, the Board of Directors approved the $0.01 per share increase in its quarterly dividend to $0.23.5 per share on the common shares of the Company. This represents a 4.4% increase in the quarterly dividend. This action, not only marks the 282nd consecutive dividend payment by the Company, it also represents the largest per share quarterly dividend increase by the Company in more than 10 years. It certainly reflects the Board of Directors confidence in the Company and its management.

The third quarters and nine months results, as discussed by Bob, demonstrates how our ability to control and recover operating expenses while earning an adequate return on invested capital and pay dividends have supported our goal of increasing shareholder value. Capital investment creating the basis for the long-term earnings growth is also a key facet of our strategy to increase shareholder value.

Over the past three years, American States Water, 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 $75 million for upgrades to our water supply and distribution facilities. Year to date, through September 30, '06, we have invested approximately $51.1 million. Prudent and timely capital expenditures are truly reflective of the Company's aggressive efforts in improving its earnings.

I'll now describe some of the more important regulatory matters, which are ongoing. In September of this year, Golden State Water Company filed it's long-awaited state-wide policy application. The application requests authority to implement changes in certain rate -making mechanisms, within all service territories in California. Golden State Water Company's overall revenues are not intended to increase or decrease as a result of this application.

In October of '06, Golden State Water filed with the PUC in California an application requesting authorization to issue, sell, and deliver by public offering or private placement, securities not exceeding $200 million in aggregate offering amount. Golden State Water will use the net proceeds to first pais pay down all or a portion of its then outstanding short-term debt, fund its construction expenditures and acquire utility properties.

In February of '06, Golden State Water filed an application with the CPUC for rate increases in its region 2 service area, and to cover general office expenses. A decision on this application is expected in late this year for rates effective January of '07. At this time, we are unable to predict the ultimate outcome of this rate case, but if approved as filed, it would generate approximately $14.9 million in additional annual revenues starting in '07 with additional increases of 4.7 million in '08 and 6.9 million in '09.

Golden State Water has entered into a water transfer agreement with Natomas Central Mutual Water Company for 30,000 acre feet of water to be used exclusive by Golden State Water to serve the southern portion of Sutter County, California, which is coterminous with Natomas boundaries in Sutter County. Golden State Water Company filed for a certificate of public convenience and necessity with the CPUC on May 31 of '06 to provide retail service in a portion of Sutter County as mentioned above. CPUC's review of the application is pending subject to completion of an environmental assessment.

In 1997, the Santa Maria Valley Water Conservation District, which is the plaintiff, filed a lawsuit against multiple defendants, including Golden State Water, the City of Santa Maria and several other public water purveyors. The plaintiffs lawsuit seeks an adjudication of the Santa Maria ground water basin. As of September 30th, of '06, Golden State Water Company has incurred costs of approximately $6.3 million in defending its rights in the Santa Maria basin, including legal and expert witness fees, which have been deferred in the utility plant for rate recovery.

In February of '06, Golden State Water filed for recovery of these costs with the CPUC. A settlement of the lawsuit has been reached, among the settling parties subject to CPUC approval. The settlement, among other things, if approved by the CPUC ,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 Company's position with the settling parties. We believe the recovery of these costs, through rates, is probable.

I would like to update you also on our ASUS efforts on military privatization. While ASUS, through operating and maintaining the water and wastewater systems for the U.S. Government, is still in a net loss position for the first nine months of '06, its pre-tax operating income has increased by 1.4 million or $0.05 per share as compared to the same period of 2005. The increase included revenue recognized for certain special projects and reimbursement of various operating costs incurred during the transition periods at the various military basis. We have been very focused in pursuing this growth initiative and hope it will further improve the Company's earnings.

I want to take this time to thank you all for your continued support and interest in American States Water Company. We are working very diligently to make this Company soar.

And as always, with a great deal of pride and appreciation, I ask you that you remember the four reasons for your clients that they could benefit from holding American States Water Company in their investment portfolio. Number one, total return prospects are reflected in our financials, pursuit of successful growth opportunities, number two. Number three, our management team is meeting today's challenges and is prepared to meet tomorrows. And, number four, our dividend history is outstanding. American States shareholder should be pleased to know that using the SEC guidelines for reporting financial performance $100 invested in the shares of American States Water Company at December 31, 2001 would be worth $192.41 at September, 2006. By contrast that same $100 invested in the S&P 500 would be worth only $126.56.

As always, I want to thank you for your time and attention and I'll now turn the conference back to the operator to entertain any questions you may have.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster. Your first question comes from Ajay Jain with UBS.

Hi, good morning.

Hi, Ajay.

Floyd, I just want to confirm, I think in your closing remarks you mention that the military operations contributed $0.05 per share on a year to date basis; is that the right figure?

Let me clarify that, the difference in the nine month's numbers year to date from '05-- I'm sorry-- not-- September 30, '05, compared to September 30 of '06, the swing was $0.05 a share, I did not mean to imply that $0.05 a share was added-- or incorporated within the earnings per share for '06 year to date.

Okay. So it's still a net drag on earnings?

That's correct. I thought I mentioned that, I may have missed it.

No. I think you did mention that. That clarifies that. And then, Bob, it looks like the AS revenues-- ASUS revenues, excuse me, more than doubled year over year, could you just further quantify the impact of the increase supply cost at the military bases for the quarter and how much of an overhang, if any, that we should expect going forward?

How much of an overhang for, on the operating expense side?

Yes, I guess both on as it relates to the G&A expenses and also the increase supply cost that you mentioned.

Okay. Let me go back to my comments and just reiterate what we talked about there. In terms of the operating expenses for the-- and Ajay, were you talking about the three months or the nine months?

I guess I was more focused on the three months and then on a go forward basis as well.

Okay. Well, a portion of a $2.3 million increase in general and administrative expenses for the three month end was due to the new military base operations. And that's-- we haven't completely broken out the piece that's associated with military bases. We will give you, I guess, some little better clarity on that when we file our 10-Q here in the next few days.

Okay, great.

Okay? And, I guess, that's sort of the same answer for the nine months is we'll try to provide sort of detailed break down for ASUS in terms of it's affect on the various expense categories.

Okay. And, I guess, is that the same answer for the supply costs?

Well, the supply cost, in terms of water supply costs?

Yes.

It's really very little, very little impact there, because we're not really responsible for purchasing the water, we just maintain the system for those military bases.

Okay. I guess, lastly, I noticed the D&A expense is up pretty sharply this year and I assume you've been depreciating that $100 million utility plan since the beginning of '06, is that correct?

That's correct.

So, how'd you say we should look at depreciation expense in '07? Would you say it would be comparable to '06 as a percentage of sales or could it represent a continued head wind, as far as earnings are concerned?

Our CapEx budget is greater than our retirement budget, so our utility's plant is going to continue to grow and as a result our depreciation and amortization expense is going to continue to grow.

Okay.

So-- I mean, I think-- I would say, '06 is a fairly typical year of what we're going to see going forward in terms of CapEx versus depreciation amortization.

Okay. Great. Thank you very much.

Okay.

[OPERATOR INSTRUCTIONS] And we have no further questions at this time.

Okay. Well thank you all again for your participation today and-- and also certainly for your continued interest and investment in-- in American States Water Company. Thank you all.

This concludes today's conference call, you may now disconnect.