American States Water Co (AWR) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Today is May 6, 2010. Welcome to the American States Water Company conference call discussing first quarter 2010 results. If you have not received a copy of this morning's news release announcing earnings for the quarter please call 909-394-3600, extension 651, and one will be faxed or e-mailed to you. If you would like to listen to the replay of this call it will begin this afternoon at approximately 2:30 PM Pacific Time and run through Thursday, May 13, 2010. The phone number for the replay is 800-203-1112, and the conference ID number is 9324991.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call will be recorded and will be limited to no more than one hour. At this time, I would like to turn the call over to Eva Tang, Chief Financial Officer of American States Water Company.

Thank you, Miranda. Good afternoon. Thanks for everyone -- thanks to everyone for joining us today. I also have Bob Sprowls, President and CEO here with me on the call.

Before we start the discussion, I would like to remind you that certain matters discussed during this conference call may be forward-looking statements intended to qualify for the safe harbor from liability established by Private Securities Litigation Reform Act of 1995. Please review a description of the company's risks and uncertainties in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission. All forward-looking statements are made as of today. The company is under no obligation to update such statements.

During our presentation today, Bob and I may refer to American States Water Company as AWR, Golden State Water Company, as GSWC, Chaparral City Water Company as CCWC, and American States Utility Services as ASUS.

With that I would like to discuss our financial results for the first quarter of 2010. Basic and fully diluted earnings for the quarter ended March 31, 2010, were $0.46 and $0.45 per share respectively as compared to basic and fully diluted earnings of $0.28 per share for the first quarter of 2009.

The $0.17 per share increase in diluted earnings for the first quarter of 2010 is due to the following items. First of all, the water gross margin increased by $828,000, or $0.03 per share during the first quarter 2010, primarily due to higher water revenue.

Water revenues for the first quarter of 2010 increased by about $1.1 million over the first quarter of 2009 water revenue. Due to the implementation in September of 2009 of the water revenue adjustment mechanism or the WM account for Golden State water region 1, and an increase in customer rates at Chaparral City Water Company approved by the Arizona Corporation Commission last October. Due to the delay in Golden State Water's region 2, region 3, and general office rate case, water revenues for regions 2 and 3 have been recorded based on the 2009 adopted revenue. The final decision is anticipated in September 2010.

The electric gross margin increased by $2.5 million, or $0.08 per share during the first quarter of 2010. The increase is due to increases in electric rates approved by the California Public Utilities Commission, or the CPUC, in October 2009. The decision added approximately $1.5 million to electric revenues during the first quarter of 2010.

We also recorded $320,000 to the rate base -- to the base rate revenue adjustment mechanism account, which was implemented in November 2009, to adjust the fair value electrics revenue to the adopted level. The base rate revenue adjustment mechanism is to de-couple revenue from sales. Similar to the WM for water, the increases were partially offset by a decrease in actual customer usage as compared to the same period of 2009.

In addition, in March 2010, the CPUC approved a recovery of $958,000 included in a memorandum account which tracked the difference between the 2007 adopted general office cost allocation to Bear Valley Electric and the 1996 general office allocation. This is a one-time item in 2010 first quarter.

Operating expenses other than supply costs increased at the company's utility businesses by $1.9 million, or $0.06 per share, due to increases in labor related costs, legal and consulting service costs, and depreciation expense as compared to the first quarter of 2009. Legal costs increased by $1 million, or $0.03 per share in 2010's first quarter, primarily due to costs incurred in preparing for trial and finalizing a settlement agreement with two former officers of Golden State water. Pretax operating income at ASU has increased by $6.8 million, or $0.23 per share during the first quarter of 2010 as compared to the first quarter of 2009. The increase is due to increased construction activities and contract modifications received from the US Government, resulting to requests for equitable adjustments.

The contract modifications increased revenues and pretax operating accounts by a total of $5.6 million, or $0.19 per share. As I discussed with you during our 2009 fourth quarter earnings call, ASUS received a contract modification from the US Government in January of this year. Approving a $6.5 million equitable adjustment for Fort Bragg we recorded $3.1 million of pretax income during the first quarter of 2010.

Approximately 2.8 million of the $3.1 million is retroactive from the commencement of the contract in March of 2008, to December 2009. The remaining $3.4 million is related to renewal and replacement funds. We have recorded the $3.4 million as deferred revenue which will be recognized in construction revenues when the work is performed and costs are incurred.

During the first quarter, ASUS also received a contract modification for Fort Bliss resulting for our request for equitable adjustments. As a result, we recorded $2.5 million in pretax income and $510,000 in interest income during the first quarter of 2010. The modification also provides for $3 million in renewal and replacement funds, which was recorded as a deferred revenue liability and will be recognized in construction revenues when ASUS performs the work.

Next item is income tax expense for the first quarter of 2010 was $6.1 million, as compared to $1.4 million for the same period in 2009. The increase is primarily due to an increase in pretax income and an increase in the effective income tax rate. The effective tax rate for the first quarter of 2010 was 41.7%, compared to 21.7% for the same period of 2009.

The increase in the effective tax rate was due to a tax benefit of $918,000, or $0.05 per share, recorded in the first quarter of 2009. Resulting from changes in the California apportionment law which did not recur in 20 10. This is also due to changes between booked and taxable income that are treated to adjustment in accordance with regulatory requirements, which negatively impacted earnings by another $0.03 per share, compared to the first quarter of 2009.

Lastly, the issuance of 1.15 million shares of AWR's common stock in a public offering completed in May of 2009 diluted earnings by $0.03 per share for the first quarter 20 10. A more detailed discussion of our results for the quarter is included in our earnings release issued this morning and will be provided in our Form 10-Q which is expected to be filed tomorrow.

Moving on, our capital expenditure program. We continue to focus on our core strategies of prudently investing our infrastructure and controlling our costs. Capital expenditures were approximately $16 million in the first quarter 2010 as compared to $17.7 million for the same period in 2009.

We still anticipate capital expenditures in 2010 for Golden State water in to the $80 million to the $85 million range. Our current syndicated credit facility expires in June of this year. We are in the process of securing a new facility before June. We do not expect to raise cash by issuing long-term debts or equity in 2010 at this point. I will now turn the call over to Bob.

Thank you, Eva. Good afternoon, ladies and gentlemen. I would like to take a brief moment to address the water supply issue that is currently facing the state of California. On April 13, 2010, the Metropolitan Water District of Southern California, MWD approved an allocation plan that will continue the water supply reductions to its member agencies for a second year.

As during the 2009 water year, MWD plans to achieve a 10% reduction in deliveries over the average deliveries for the 2004 through 2006 period by imposing significant penalty charges for those purviers that don't reduce their deliveries by the required amount. In addition, MWD plans to implement a 7.5% rate increase effective January 1, 2011.

To avoid the supply allocation penalties imposed by MWD during the July 1, 2009, through June 30, 2010 water year, Golden Stated Water Company implemented mandatory and voluntary water conservation and allocations in certain of our service areas. Since then, Golden State Water customers have been successful reducing their overall water supply demand.

Based on current and estimated future demand, Golden State Water Company has implemented voluntary conservation in those areas that were under mandatory water conservation in 2009. Water consumption was down approximately 13% during the first three months of 2010 when compared to the same period in 2009. Though we have received some welcome rain in California, and large amounts of snow in the Sierras this winter, several of the state's major reservoirs are still at levels below their historical average.

Every year, the California Department of Water Resources, DWR, establishes the state water project allocation for water deliveries to the state water contractors. The Department of Water Resources generally establishes a percentage allocation of delivery requests based on a number of factors, including weather patterns, snowpack levels, and reservoir levels. The DWR also must factor in the pumping restrictions imposed on the San Joaquin Sacramento Delta by the federal judge.

The percent allocation given to state contractors can vary throughout the year as weather and other factors change. DWR recently announced that it would increase the 2010 state water project allocation to 40% to match 2009's allocation percentage.

Now I will discuss the status of key regulatory filings and other matters for the company. First, in March 2010, Golden State Water Company filed an advice letter with the CPUC for recovery of the region 2 and region 3 undercollections associated with the water revenue adjustment mechanism, or WRAM, net of the modified cost balancing accounts or MCBA, of $18.3 million as of December 31, 2009.

A surcharge was put in place in March 2010 which is expected to recover the amounts accumulated. In April 2010, Golden State Water Company filed advice let wears the CPUC for recovery of $2.8 million, which represents the net underrecovery of the WRAM MCBA for region 1 as of December 31, 2009.

Going forward, Golden State Water Company will seek recovery of its WRAM net of the MCBA on an annual basis. As of March 31, 2010, Golden State Water Company has a net aggregate regulatory asset of $26.2 million, which is comprised of $30.9 million under collection in the WRAM account and $4.7 million over collection in the MCBA accounts.

Second, in June 2009, the California Public Utility Commission authorized Golden State Water Company to track the difference between the 2007 adopted Golden State Water Company general office cost allocation to Bear Valley Electric and the 1996 adopted Golden State Water Company general office allocation to Bear Valley Electric in a memorandum account effective and retroactive to June 4, 2009.

The 1996 general office allocation was included in Bear Valley Electric's rates at the time of the most recent rate case that was filed. That in rate case filing the 2007 general office allocation was proposed to be included in Bear Valley Electric's rates in 2009 as part of the rate case. The amount in the memorandum account was about $958,000 as of December 31, 2009.

In March 2010, the California Public Utility Commission approved for recovery this memorandum account through a surcharge over a 24-month period effective May 1, 2010. Accordingly, during the first quarter of 2010, Golden State Water Company recorded a regulatory asset and a corresponding increase to earnings for amounts included in this memorandum account.

Third, as a result of the decision from the Arizona Corporation Commission in October 2009, as part of Chaparral City Water Company's rate case, Chaparral City Water was ordered to return to customers 100% of a settlement reached in 2005 with a local sanitary district resulting in the recording of a $760,000 loss in the third quarter of 2009.

In 2005, the sanitary district paid Chaparral City Water Company $1,525,000. When Chaparral City Water originally accounted for the settlement we made the assumption that 50% of the settlement would go to shareholders insistent with the Arizona Corporation Commission's past practice. In November 2009, Chaparral City Water filed an application for rehearing on several issues decided in this rate case, including that 50% of the settlement proceeds should go to shareholders. The Arizona Corporation Commission granted Chaparral City Water's request to hold a rehearing on the issues.

In January 2010, a procedural conference was held with the judge and the staff of the Arizona Corporation Commission involved in the rate case to address this issue. The final decision by the ACC is expected in the third quarter of 2010.

Now I would like to take a moment to discuss the status of the pending general rate case proceedings and other recent filings for the company. As you will recall, California Public Utility Commission issued a proposed decision on Golden State Water's region 2, region 3 and general office rate case in November 2009 which it subsequently withdrew in December due to the complexities of certain issues. The PUC has reopened the general rate case proceeding to receive supplemental information from the company on a number of items in the rate case.

I would like to remind you that depending upon how the Commission ultimately rules two of the issues could result in a write off. The first issue has to do with a review of the dollars Golden State Water Company spent on a plant improvement project. The debate is whether the costs incurred were necessary to serve incumbent customers, new customers, or both.

The division of rate per advocates or DRA is arguing that the cost were incurred to expand the system to serve new customers and cost recovery for the improvement therefore should have been received from the developer that brought these new customers on-line. We believe the dollars had to be spent anyway to properly serve the current customers. If DRA is successful in arguing this point, Golden State Water Company could be forced to write off up to $3.5 million from rate base and provide a credit back to customers for rates that Golden State Water Company has received to date.

The second issue concerns Golden State Water Company's approach to recovering rate case costs. Golden State Water has incurred $2.4 million of rate case related expenses during the preparation and processing of this rate case. These are direct costs consisting primarily of outside consulting and legal costs.

The company and DRA are essentially in agreement about the amount a rate case costs to be recovered in rates. Historically, we deferred rate case costs as a regulatory asset which are then recovered in rates and amortized over the term of the rate cycle once the new rates go into effect.

In this case, the DRA has challenged this historical practice and believes that rate case costs should be projected for future years and recovered prospectively. We believe that DRA's rationale is inconsistent with our historical practices and that the CPUC has authorized our historical practice in prior rate proceedings.

If DRA prevails, and the PUC determines that the costs represent future costs and not deferred costs, Golden State Water will have to write off $2.2 million of deferred rate case costs that are included in our regulatory assets at March 31, 2010, plus the additional costs incurred processing the remainder of this case. In January 2010, the PUC approved interim rates for Golden State Water Company's region 2 and 3 rate making areas pending a final decision on the general rate case. While the increase for interim rates was zero, it is important to establish the effective date so that the rates, once approved by the PUC will be retroactive to January 1, 2010. A final decision is expected in September 2010.

We expect the new rates to be retroactive to January 1, 2010. At this time, we cannot predict the outcome of the final decision. We filed a general rate case for region 1 on January 4, 2010 for a two-year rate cycle with rates effective 2011 and 2012. If approved as filed, region 1 is expected to generate approximately $57.1 million in annual revenues in 2011 and $58.3 million in 2012.

A general rate case will be filed for all three water regions in July 2011 with rates effective January 2013. Let's turn our discussion to ASUS's performance. ASUS has continued to record positive earnings for the quarter. Even excluding the effects of the two approved requests for equitable adjustment of $0.19 per share during this quarter as discussed earlier by Eva, ASUS has shown improved financial performance in operating income by $0.04 per share the first quarter of 2010 as compared to the same period in 2009 due to an increase in construction activities.

We believe successful price redeterminations and requests for equitable adjustment, or REA filings will provide added revenue prospect I feel to help offset increased costs and provide ASUS the opportunity to consistently generate positive operating income at its military subsidiaries. We are still working to finalize prospective price redeterminations and requests for equitable adjustment at various bases, which include adjustments to reflect inflation in cost and changes in operating conditions and infrastructure levels from that assumed at the time of the execution of the contracts. The timing of the conclusion of such filings is somewhat unpredictable.

To summarize, I will quickly talk about the status of each of our price redeterminations. First, price redeterminations for the four Virginia bases have been submitted and are under review by the US Government. The price redeterminations are expected to be completed in 2010. We have received interim management fee increases at the four Virginia bases.

Second, the first price redetermination for Andrew's Air Force base is under discussion with the government regarding the status of the redetermination filing as well as and interim inflation adjustment to the monthly fees under the contract. We are unable to predict the outcome of these discussions with the US Government or the timing of the finalization of the price redetermination at Andrew's.

Third, we have two requests for equitable adjustment outstanding at Fort Jackson for emergency construction costs mostly incurred in 2008 and for infrastructure at Fort Jackson which is in poorer condition than originally presented under the 50 year contract. The first price redetermination for Fort Jackson is scheduled to be filed in the second quarter of 2010. We have requested an interim increase in the monthly fees at Fort Jackson while the permanent price redetermination is pending.

Lastly, the first price redetermination for Fort Bragg is scheduled to be filed in the second quarter of 2010. Finally, American State's shareholders should know that using the SEC guidelines for reporting financial performance $10,000 invested in the shares of American State's Water at December 31, 2004, would be worth $15,461 at March 31, 2010, and this amounts to an annual compound growth in shareholder value of 8.65%.

Before I turn the conference over to the operator to entertain questions, I would first like to thank you again for your continued support and interest in the company. And I will turn it back over to you, Miranda.

Thank you. We will now entertain any questions you may have about the information presented today. (Operator Instructions) And we'll pause for just one moment to assemble the queue. We'll go first to Christopher Hurdle with Janney.

Hello, Bob. Hello, Eva.

Hi C.J.

Hi C.J.

Just a quick question for you on the rate cases. We have the delayed region 2 and 3 case expected in September, and the region 1 case planned for mid-2011. So I'm wondering if there's any reason to expect that there could be a delay in the region 1 case based on what's happening with the review of the region 2 and 3 case? So what's your outlook there? Are they kind of on a parallel track at the commission, or could there be a delay in the region 1 case because of the review that 2 and 3 is going through?

Well, first of all, the region 1 case is scheduled to be settled by the end of 2010 with rates effective January 1 of 2011.

Okay.

Okay. And it is on a different path than the region 2, region 3 general office case. You know, these things can always slow down, but I don't think the two are at all tied together. I think the delay in region 2, region 3 general office case had to do with certain complexity of issues that we should get behind us as part of that particular case. So we're, you know, expecting the region 1 case to be on schedule. And just so you know what we'll do in mid-2011, is that will be the first time that we file a complete Golden State Water Company rate case with rates effective 2013.

Water region.

Per water regions.

All right, great. And then just a bigger picture question. Can you talk a little bit about how you're viewing the potential dividend tax increases that could come about in 2011 and what impact -- if there is any, that you think it could have on the dividend policy or your payout ratio? Is there a way to use those funds internally investing in capital as opposed to paying them out if investors are going to be facing this higher tax rate?

Well, I think, C.J., what you mentioned was the qualified dividend preferential rate expired 1/1, 2010, or at the end of this year. I don't think it will affect AWR as an issuer of the dividend. It's more of the shareholders who are investing in our stocks. So to that end, I don't think that will impact our dividend policy going forward. Bob can answer that.

I agree, Eva, we have he no plans to change our policy. We're very proud of the fact that we've increased our dividend for the I think going on 56 consecutive years. We're one of the few companies with a record like that and we take that very seriously. So we do recognize that shareholders may have to pay more tax on the dividends they receive, but at this point we have no plans to change our policy. We generally focus on a payout ratio of about 60%, which already we're maybe towards the lower end of the utility industry, but we feel that that's -- we can still continue to increase our dividend and be in that 60% range.

Great. Okay. And just one housekeeping item. Is there any way that you can break out the water supply costs in terms of purchased water and power?

That will be broken out, of course, in the Q we file tomorrow.

Right. You'll have detailed information on the Q tomorrow.

Okay. We'll just wait until then. Great. Thanks so much.

Okay. Thank you.

Thank you, C.J.

Ladies and gentlemen, (Operator Instructions) We'll go next to Vachelle Ketrowon with Longbow Research.

Good morning, Eva, Bob.

Hi.

Hi.

Could you give us some color on the overall profitability of the military base business if you exclude the special construction work that you do?

Well, difficult question to answer. Because the construction work has been very helpful in terms of driving the profitability, and there's a lot of construction work to be done at that the various military bases, and I know we come in, and we say that ASUS did better than last year because of increased construction work. But that's a key component to the profitability of that business. So, you know, we really haven't given any guidance on ASUS, and also we're hesitant to discuss margins on the construction business component. But, you know, it is a business that the construction component, you know, there's plenty of work to be done, particularly at Fort Bragg. That's a business that -- or that particular base has got quite a backlog of construction work, and we're just -- we're trying to get some contract modifications to get going there.

Okay. But just an equitable adjustment that you received recently and you receive more of these down the line, these must be improving the profitability of the business in general, like excluding the special contract construction which is more (indiscernible)

Yes, the REA's are a way to sort of compensate us for kind of a variety of things. Fort Bragg, we've got an REA because we took over more inventory there than what was included in the original RFP, and the same could be said for Fort Bliss. So for both of those bases, we do have a larger amount of assets that we're managing than what we -- than what was included in the RFP. The REA that we've gotten at Fort Jackson had to do with some emergency work that we had done there, and we sort of have an internal debate whether to do the emergency work ahead of getting contract modifications. The plan is to get contract modifications before we go out and do something that isn't in the contract. But when you have an emergency situation, you want to be sure to take care of those things first. So we are -- we do feel like we've learned a lot in terms of getting -- understanding how to operate this business.

For first quarter, our construction activity increased compared to last year, same period of time. So our revenue of construction actually increased as a result. But our construction expenses, if you look at our earnings release, actually pretty flat, same quarter last year. Mainly because during this quarter we have a lot of firm fixed contracts to which we actually incurred higher margin during the first quarter, because we utilize a lot of in-house labor and -- so hopefully that is helpful to your question.

We are focused internally when we look at profitability of the various revenue streams at ASUS. We are focused on trying to be profitable not only on the construction side, but also on the operations and maintenance side one of the key components of being profitable on the O&M side is getting timely price redeterminations. That's been a little bit of a problem for us. As we try to go through this first round of price redeterminations.

My last question, could you give us any update on the status of bids for additional military base contracts, and are you seeing more contracts opening up for bidding?

Well, you know, there -- the government is moving fairly slowly in the privatization of the military bases. You tend to divide the Department of Defense into the various branches of the military, the army, the Air Force, and the Navy, and it seems like the Army and the Air Force have headed down the path of getting on board with the military privatization activity, where the Navy has not. But there are still plenty of Army bases and Air Force bases to privatize. So there's more work to be gotten out there, but it is sort of slow going. It's not like we're -- well, Fort Meade was a contract that went to one of our competitors, but that, to my knowledge, that's the last base -- that's the only base that's been let out, probably in the last year. There's a lot more bases to be done. It's just slow going.

That's all I have. Thanks a lot, guys.

Thank you.

And we have no further questions at this time but as a final reminder it is star 1 for any questions or comments. We'll pause for just one moment. It appears we have no further questions from the phone audience. I'll turn the conference back over to Mr. Sprowls for any additional or closing remarks.

Thanks, Miranda. I just wanted to mention that our shareholder meeting is on May 27th and the company would like to encourage all shareholders who have not already voted their proxies, to do so. Again, thank you all for your participation today and for your continued interest and investment in American States Water Company.

Thank you. This concludes today's American States Water Company conference call. Ladies and gentlemen, we do have a correction to the replay number for today's call. The corrected phone number to dial in on is, 888-203-1112. Again that is the corrected number. It is 888-203-1112. And again that replay will be starting approximately at 2:30 PM Pacific Time today, and the conference ID that will you need is 9324991. So again, the dial-in number, 888-203-1112, conference ID number 324991. You may also access the replay at www.aswater.com. Thank you for your participation. You may now disconnect.