American States Water Co (AWR) 2007 Q1 法說會逐字稿

Good afternoon. My name is Nicole. And I will be your conference operator today. At this time I would like to welcome everyone to the American State Water first quarter 2007 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. Mr. Sprowls, you may begin your conference.

Good morning, or afternoon, ladies and gentlemen, and welcome to the presentation on American StateS Water company's first quarter 2007 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 the 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 10K and Form 10Qs on file with the Securities and Exchange Commission. The factors underlining 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 flagship subsidiary Golden State Water Company as GSWC, and American States Utility Services as ASUS. Having said that, let's begin with the results for the quarter.

Basic and fully diluted earnings for the quarter ended March 31st, 2007, were $0.40 per share as compared to basic and fully diluted earnings of $0.35 per share for the same period ended March 31st, 2006. Significant items that impacted the earnings for the first quarter of 2007 in comparison to the same period of 2006, include, first, the recording of a pretax unrealized gain of $2.7 million or $0.09 per share, unpurchased power contracts in 2007 due to increasing forward energy prices versus a pretax unrealized loss of $2.2 million or $0.08 per share unpurchased power contracts in 2006, positive change of $0.17 per share from 2006 to 2007. As previously pointed out, these unrealized gains or losses do not impact the company's cash flow. Second, a favorable decision issued by the California Public Utilities Commission on April 13th, 2006 regarding the treatment of Golden State Water Company's water rights lease revenues received for 2004 and 2005 increased pretax income by about $2.3 million in March of 2006, or approximately $0.08 a share when compared to the same period in 2007.

Third, an increase in pretax operating income of $1.2 million or $0.04 per share in 2007 contributed from American States Utility Services and its subsidiaries for operating, maintaining, and improving the water and waste water systems at military bases for the US government when compared to the same period of 2006. And fourth, a delay by the California Public Utility Commission in processing Golden State Water Company's general rate applications for rate increases in region 2 and to cover general office expenses. Other items impacting the results of operations for the first quarter of 2007 as compared to the same period of 2006 are as follows: total operating revenues of $72.3 million for the first quarter of 2007, increased by $8 million compared to revenues of $64.3 million recorded in the first quarter of 2006, an increase of 12.4%. Water revenues decreased by .8% reflecting the recognition of $2.3 million of water rights lease revenues in the first quarter of 2006 for years 2004 and 2005 as previously discussed. This decrease was partially offset by rate increases approved by the PUC and effective January 1st, 2007, and higher consumption in 2007 due to weather changes from the first quarter of 2006.

Impacting the water revenues in the first quarter of 2007 was a delay by the California Public Utility Commission in processing Golden States Water Company's general rate applications for rate increases in region 2 and the recovery of general office expenses at the corporate headquarters. Included in the rate increases in 2007 was an interim rate increase for Golden State's region 2, effective January 1st, 2007, subject to refund, totaling approximately $260,000 for the first quarter and about $1.2 million for the entire 2007 year. If Golden State Water Company receives a favorable PUC decision on all of the items that are still contested, we estimate that it will add annualized revenues of approximately $5.2 million for 2007. If the PUC's decision favors the position recommended by the division of rate pair advocates at the PUC on all contested items, it could result in an estimated $1.5 million reduction in annual revenue. A portion of the rate decision to cover general office expenses at the corporate headquarters, will also affect the rates in region 3, because the application was previously filed in 2005 with the region 3 rate case and was deferred for one year to be combined with the region 2 case as discussed. The final decision by the PUC on the general office could add to region 3's annualized revenues by approximately $3.8 million, reduce the revenues by $1.3 million or somewhere in between. Region 3 received an interim annual rate increase of $135,000 effective January 1st, 2007.

It is important to note that the amount of increase or decrease ultimately decided on by the PUC will be retroactive to January 1st, 2007, after netting the increases from the interim rates. The company will true up the cumulative difference when the PUC issues the final decision, which is expected in mid 2007. Water revenues impacted from these decisions could range from an annualized increase of $9 million to a reduction of $2.8 million. The electric revenues increased by 6.3% due to higher residential usage, partially offset by lower industrial usage due to cooler weather conditions. Contracted services operating revenues were $13.1 million during the first quarter of 2007, an increase of $7.9 million primarily due to a $7.3 million increase in construction revenues at American States Utility Services for special projects performed by its Fort Bliss water services company subsidiary. The contracted amount for this special project is an approximate $20 million. We expect to complete the project by the end of August 2007. There was also an increase in revenues due to the operation of water and waste water systems at one military base in Maryland and three bases in Virginia. And the waste water system at an additional base in Virginia for the entire first quarter of 2007, while the operation of these systems commenced at various times during the first and second quarters during 2006.

Total operating expenses for the first three months of 2007 increased to $55.4 million as compared to the $50.3 million recorded for the same period in 2006, reflecting a slight decrease in supply costs resulting from a favorable water supply mix change caused by purchasing less imported water needed to replace ground water supply not pumped in the prior year. A pretax, unrealized gain of $2.7 million on purchased power contracts in 2007, compared to a $2.2 million pretax unrealized loss in 2006, as we previously discussed. Increases in other operating expenses due to higher chemical and water treatment costs and a full quarter of military base water and waste water operations in 2007, compared to a partial quarter of operations at certain military bases in 2006. Increases in administrative and general expenses due primarily to high labor costs, and increased tax and outside legal services. An increase in required and emergency maintenance activities on Golden State Water Company's wells and water supply sources, increased depreciation and amortization expense, reflecting among other things the effect of closing approximately $73 million of additions to utility plant during 2006. Higher property taxes and payroll taxes, a significant increase in the construction expenses reflecting primarily the costs incurred for the special project at Fort Bliss, and a net pretax gain of $367,000 on the sale of property.

Interest expense increased to $5.5 million compared to $5.3 million for the same period of 2006, primarily reflecting an increase in short-term cash borrowing at higher interest rates. Interest income decreased by $323,000 due primarily to the initial recording in the first quarter of 2006 of interest accrued on the uncollected balance of the Aerojet litigation memorandum account authorized by the California Public Utility Commission. The first quarter's 2007 income tax expense increased to $5 million compared to $3.8 million for the same period of 2006, due primarily to a 23.6% increase in pretax income and a higher effective income tax rate. As you can see, unrealized gains and losses on purchased power contracts continue to impact our earnings. As previously discussed, Golden State Water Company has reported an unrealized gain of $2.7 million for 2007, due to an increase in the current forward market prices since December 31st, 2006. There was a pretax unrealized loss of $2.2 million for the three months ended March 31st, 2006. The unrealized gains and losses are incurred only by Golden State Water Company's Bear Valley Electric division.

Bear Valley Electric's operating revenues for the first quarter of 2007 were $8.9 million, which was 12.3% of total consolidated operating revenues of $72.2 million. An increase results from the recognition of an unrealized gain on the income statement for the remaining amounts to be purchased under the purchase power contracts, while a decrease in energy prices results in the recognition of an unrealized loss on the contracts. Golden State Water Company has recognized these contracts at fair market value on its balance sheets, resulting in a cumulative unrealized loss of $944,000 at March 31st, 2007, compared to a cumulative unrealized loss of $3.7 million at December 31st, 2006. The current quarter's change of $2.7 million in these balances decreased expenses on the income statement and positively impacted the quarter's earnings by $0.09 per share. The current cumulative unrealized loss of $944,000 on the balance sheet will be reversed through earnings by the end of the contract in 2008.

I would like to remind everyone once again that although the unrealized gains and losses result in significant fluctuations to our income statement, it has no affect on our cash flows. When analyzing the financial performance of the company, we exclude the effect of unrealized gains or losses as they are not reflective of our day-to-day operations. The unrealized gains and losses are reflective of changes in electricity cost that are outside of management's control. Now, I'll turn the call over to Floyd Wicks.

Thank you, Bob. And good morning, everyone. I'll now discuss the status of key regulatory filings and important actions. In January of '07, Golden State Water Company filed an application with the PUC for rate increases in what we know as region 1. In the filing, Golden State Water requested rate increases, which are expected to generate approximately $10.6 million in annual revenues beginning in 2008. With additional increases of $.5 million in '09, and $1.0 million in 2010. The decision on this application is expected in late 2007.

As Bob discussed, we are anxiously waiting for the rate increases in region 2 and the recovery of general office expenses at the corporate headquarters. Golden State Water has already settled many items with the division of rate fair advocates at California Public Utilities Commission. The rate impact on region 2 revenues from these decisions ranges from an increase of $5.2 million to a $1.5 million reduction in annual revenues. Due to delays on this application, the PUC approved interim rates subject to refund totaling $1.2 million that became effective January 1st of this year. The critical point to remember is that the amount of increase or decrease ultimately decided on by the PUC will be retroactive to January 1st of this year.

The final decision on this application is expected in mid 2007. It's important from the aspect of -- of the retroactivity that you realize that some of the gains if we get a gain later in the year from the rate increase that it would be retroactive to the first quarter of this year and throughout 2007. The application for rate increases to cover general office expenses was previously filed with the region 3 case and was deferred for one year to be combined with the region 2 case as previously discussed. Golden State Water and the division of rate fair advocates at the PUC agreed that when Golden State Water company receives rate increases for general office expenses, the increases could be applied to region 3, since they are a year late. The rate impact on region 3 revenues from the general office case ranges from a positive $3.8 million to a possible $1.3 million reduction in annual revenues. Again, the amount of increase or decrease ultimately decided on by the PUC will be retroactive to January 1st of '07.

Let's now turn our attention to a review of water supply issues. Water supply and revenues are significantly affected, both in the short run and long run by changes in weather conditions. Both California and Arizona have been experiencing lower than normal precipitation. According to the national weather service, downtown Los Angeles is in the driest rainy season from July '06 to June of '07 on record. With only 2.47 inches of rain, or about 18% of normal through March of '07. California snow pack as of April '07 was only at 40% of the normal level and southwest Arizona snow pack is below 50% of normal. With the Verde River Basin being the lowest at below 25% of the normal level. Due to significant storms during the winter of '05 and '06, California reservoirs are at 110% of normal and Arizona reservoir storage at 68% of average. Snow pack above Lake Powell is 65% of average. Currently Lake Powell, which is on the Colorado River (inaudible) is at 64% of average or 11.6 million acre feet, which is 933 million acre feet -- I'm sorry 11,637 million acre feet, which is 933 million acre feet more than last year at this time.

According to the National Weather Service Climate Prediction Center, the prospects for significant drought relief across California and southwest Arizona are remote as the snow season comes to a close and the snow pack remains well below normal. The dry conditions are expected to continue at least through July of this year. The National Weather Service expects that the onset of the thunderstorm season in July should bring some short-term relief to Arizona. In light of supply variability and the general scarcity and value of water supplies available in the western US, we continue to make efforts -- we continue our efforts to make careful use of water and to send active conservation messages to our customers. However, customer conservation can result in lower water sales than would otherwise occur and lower volumes of water sold can have a negative impact on our earnings. In order to remedy the financial disincentive associated with water conservation, we have work collaboratively with the PUC and the Arizona Corporation Commission to address rate structure issues. Currently, we are actively participating in the PUC's conservation order initiating investigation OII as referred to by everyone in the industry. Through the conservation OII, the PUC in California proposes to eliminate disincentives to promoting conservation. Among other potential solutions being considered by the PUC, our revisions to tariff structures to create increasing rate blocks, so that greater consumption will be tempered by higher unit pricing to consumers and sales adjustment mechanisms to partially decouple volume of sales from Golden State Water Company's revenues.

With respect to growth in the company, I'm very pleased to report to you that our American States Utility Services efforts on military privatization have resulted in a $1.2 million increase in pretax operating income or approximately $0.04 per share increase as compared to the same period of 2006. As Bob discussed before, American States Utility Services generated $13. million of revenues in the first quarter of '07 for managing construction projects on the existing water and waste water infrastructures at various military bases as compared to $5.2 million in the first quarter of '06. Operating income from ASUS in 2007 increased by $1.2 million to $2.2 million from last year primarily due to the $20 million special contract with the US government for the construction of certain improvements to the existing waste water infrastructure located at Fort Bliss in El Paso, Texas. This construction project is supplemental to the company's 50-year contract with the US government to manage the entire water and waste water systems at Fort Bliss. It is scheduled to be completed by the end of August of this year.

And finally, I want to thank you for your support and to take this moment to remind you that, number one, our total return prospects are reflected in our financials. Our growth opportunities are coming to fruition. And number three, 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. As reported in our recent news release, the Board of Directors of American States Water Company approved a quarterly dividend of $0.235 per share on the common shares of the company. This action marks the 284th consecutive dividend payments by the company. For more than 52 consecutive years, American States Water Company shareholders have received an aggregate annual increase in their dividends. American States shareholders should be pleased to note that by using SEC guidelines for reporting financial performance, and $100 invested in shares of American States Water Company at December 31, 2002 would be worth $182.65 at March 31 of '07. By contrast, that same $100 invested in the S&P 500 would be worth only $174.45. Thank you for your time and attention, and I'll now turn the conference over to the operator to entertain any questions you may have.

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Alan Seymour with Columbia Management.

Yes, hi. Can I -- I'd like to pursue a little bit this military base side of things, if I might. If I understand correctly, that -- you're kind of passing through construction. Do you have a sense of the magnitude of that as you go forward during the year? And there must have been some thoughts about what the necessary -- I think you may have mentioned it in the past, but I don't exactly recall, how much construction the military side needs.

Well, excuse me, there's two parts to that. The part, I'll say part A would be related to the 50-year contract we have with the US government at each of the various military bases. That includes within the 50-year agreement includes a provision for what I would refer to as normal renewals and replacement. In addition to that, and I say normal, it would be based more on a master plan improvement program that we would have at each of the bases. In addition to that, where there's experiencing rapid growth in the base itself, namely Fort Bliss, there are supplemental contracts that come up from time to time, which we really can't predict, because we don't know all the ins and outs of what the base -- the base closures and the ones that are going to expand. But clearly Fort Bliss is seeing the benefits of a dramatic expansion. It's been our understanding that they intend to bring in about 25,000 to 30,000 new troops within the next few years. And that's, of course, causing a lot of this current construction. So we'd -- we're not in a position really to forecast any capital construction related to that. We just know we're getting the benefit of having -- just being there on site. We know we provide excellent service. And they're utilizing our services beyond the 50-year contract. Bob, do you have anything more you want to add to that?

Just a comment that in '06 our ASUS contracts generated about $16.5 million of revenue. We did have a special project during the first quarter of '06, that was part of that $16.5 million. It's not nearly the size of this waste water expansion project that we have at Fort Bliss. The estimated revenues on the waste water expansion project is $20 million. So, somewhere in all of that, you can probably derive sort of a projected revenue for '07.

Okay.

I might add too, with regard to ASUS we've listened to a lot of those on the call as to our carving out ASUS more so as it becomes more predominant as a key player in our company. And so we've done that as you may see in the financials this quarter.

Right.

We do plan on filing the 10Q tomorrow. We do have a business segment footnote in there that provides some pretty good data on ASUS on its own. So, may have to wait for tomorrow to sort of get some of those details.

Good point. Thanks, Bob.

Great, thank you.

(OPERATOR INSTRUCTIONS) There appear to be no further questions at this time. Are there any closing remarks?

Yes, thank you. Again, I'd like to thank you all for continuing to participate in following our company and your continued interest and investment in American States Water Company is greatly appreciated. Thank you all.

Thank you for participating in today's conference call. You may now disconnect.