American States Water Co (AWR) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Today is August 5, 2010. Welcome to the American States Water Company conference call discussing second 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 2:00 PM Pacific Time and run through Thursday, August 12, 2010. The phone number for the replay is 888-203-1112 and the conference ID is 754-5421. You may also access the replay at www.aswater.com.

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'd like to turn the call over to Eva Tang, Chief Financial Officer of American States Water Company. Please go ahead.

Thanks, Erin. Thank you all for joining us today. I also have Bob Sprowls, President and CEO, here with me on the call. Before I start the quarterly result discussion, I would like to remind you certain matters discussed during this conference call may be forward-looking statements intended to qualify the Safe Harbor from Liability established by the 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 its statements.

With that , I would like to discuss our financial results for the second quarter of 2010. Basic and fully diluted earnings from continuing operations for the quarter ended June 30, 2010, were $0.47 per share as compared to basic and fully diluted earnings from continuing operations of $0.64 per share for the second quarter of 2009. The $0.17 per share decrease in reported diluted earnings for the second quarter of 2010 from continuing operations is due to the following significant items -- first of all, in the second quarter of '09, we recorded $2.8 million of additional revenue related to water conservation memorandum accounts for all water regions of Golden State Water Company, based on the approval from the California Public Utilities Commission for Regions II & III in April of 2009. There was no corresponding increase in 2010. This one-time item negatively impacted water gross margin for Golden State Water Company by about $0.09 per share for the second quarter of 2010, as compared to 2009's second quarter. Excluding this negative impact, water gross margin would increase by $0.03 per share for the quarter, largely due to the recording of additional $1.3 million during the second quarter of 2010, as the result of implementing the Water Revenue Adjustment Mechanism and Modified Cost Balancing Account in September 2009 for Region I' rate making areas. Due to the delay in Golden State Water's Region II, Region III and general office rate case, water revenues for the two regions have been recorded based on the 2009 adopted revenues. A final decision is anticipated in October of 2010.

New rates, once approved by the CPUC, will be retroactive to January 1, 2010. The electric gross margin of Golden State Water increased by $1.5 million or $0.05 per share during the second quarter of 2010, primarily due to increases in electric rates approved by the CPUC as part of October 2009 Bear Valley Electric Service general rate case decision, which added approximately $1 million to electric revenue for the quarter. We also implemented the Base Rate Revenue Adjustment Mechanism in late 2009 to de-couple revenue from sales which added about $359,000 of revenue. A settlement agreement reached between Mirant Trading resulted in the recording of $1 million or $0.03 per share in proceeds, as a result of the reduction to legal costs in the second quarter of 2009. There was no similar reduction in the cost in 2010's second quarter. Operating expenses, other than supply costs, increased at Golden State Water Company by $2.5 million or $0.08 per share, due to increases in maintenance expenses, labor-related costs, property taxes, legal and consulting services and depreciation expense, as compared to the second quarter of '09. The increases were partially offset by a decrease in pension costs.

One point worth noting is that the increases in operating expenses were incurred with no corresponding rate recovery, due to the delaying the CPUC's decision on Golden State Water's Regions II, III, and general office rate case. We expect the retroactive rate increases from the decision later this year will provide rate recovery of these cost increases. Pre-tax operating income at American States Utility Services increased by $680,000 or $0.02 per share during the second quarter of 2010, as compared to the same period in 2009, due primarily to an interim increase in management fees for operating and maintaining the water and wastewater systems at the Fort Bragg military base. Interest expense, net of interest income, increased by $452,000 or $0.01 per share during the second quarter of 2010, as compared to the same period of '09, due to interest expense recorded in interest balancing accounts orders by the CPUC in July of '09 as related to the cause of capital proceedings, and slightly higher interest rates on short-term borrowings. The effective income tax rate for the second quarter of 2010 increased to 42.7% as compared to 40.9% for the same period in 2009, resulting from changes between book and taxable income that are treated as flow through adjustments in accordance with regulatory requirements. The higher effective tax rate resulted in a $0.03 per share reduction in earnings for the second quarter of 2010. Lastly, the issuance of 1.15 million shares of American States Water common stock in public offering completed in May of 2009 diluted earnings by $0.03 per share.

Included in the quarterly results for the second quarter of 2010 is $105,000 in income from discontinued operation related to Chaparral City Water Company. On June 7, 2010, American States Water entered a stock purchase agreement with EPCOR Water (USA) Inc. to sell all of the common shares of Chapparral for a total purchase price of $35 million, including the assumption of approximately $6 million of long-term debt. $29 million in cash will be paid to AWR at closing. The purchase price is subject to certain adjustments for changes in retained earnings. The sale is also subject to the approval by Arizona Corporation Commission, which is anticipated to be received in 2011.

Accordingly, the operations of Chaparral City Water and direct transaction costs in connection with the sale, have been reflected in discontinued operations. Diluted earnings from discontinued operations for the second quarter of 2010 increased by $0.01 per share as compared to 2009's second quarter, as a result of rate increases effective October 2009 and a decrease in operating expenses, partially offset by transaction costs incurred to date for the sale. In total, diluted earnings per share for the second quarter 2010 were $0.48 per share, as compared to $0.54 per share for the second quarter of 2009. Now, moving on to a summary of the year-to-date 2010 results. For the six months ended June 30, 2010, diluted earnings per share from continuing operations were $0.91 per share compared to $0.92 per share for the same period in 2009.

Impacting the comparability in the results of the two periods on a diluted per share basis were a delay in the decision on Region II, Region III and general office rate case previously discussed, a decrease in water margin of 1.1 million or $0.04 per share, primarily due to revenues recorded in 2009 related to the Water Conservation Memorandum Accounts, a settlement agreement reached with Mirant Trading resulting in the recording of $1 million or $0.03 per share in settlement proceeds as a reduction to legal costs in 2009. There was no corresponding reduction in 2010. An increase in other operating expenses of $4.6 million or $0.15 per share at the Golden State Water Company due to high labor and related benefits and higher OpEx service costs. An increase in interest expense, net of interest income of $462,000 or $0.01 per share, an increase in income tax expense due to a tax benefit of $918,000 or $0.05 per share recorded in the first quarter of 2009, and a higher effective income tax rate, which negatively impacts earnings by approximately $0.05 per share during the first six months of 2010. A decrease of $0.04 per share due to the issuance of 1.15 million shares of AWR's common stock in a public offering completed in 2009. The decreases to diluted earnings per share from continuing operations as discussed above were partially increases by the following, partially offset by the following increases -- an increase in electric margin of $4 million or $0.13 per share due to rate increases approved the CPUC, the CPUC's approval in March 2010 for recovery of $958,000 in general office cost allocation memorandum accounts, and the recording of $680,000 to the Base Revenue Requirement Adjustment Mechanism, the increase in ASUS pretax income of $7.4 million or $0.23 per share as a result of increased construction activities and the contract modifications received from the US government resolving two requests for equitable adjustments that were recorded in the first quarter of 2010. The contract modifications include revenues and pretax operating count by a total of $5.6 million or $0.19 per share.

For the six months ended June 30, 2010, income from discontinued operations increased by $317,000 or $0.02 per share as compared to the same period in 2009. The improved performance at Chapparral was primarily due to rate increases in October of '09 and decreasing operating expenses as compared to the same period in 2009, partially offset by direct transaction costs associate the with the sale. So, in total, diluted earnings per share were $0.93 for the six-months ended June 30, 2010, as compared to $0.92 per share for 2009. A more detailed discussion of our results for the quarter and the year-to-date is also included in our earnings release issued this morning and will be provided in our Form 10-Q, which will be filed tomorrow. Moving on to our capital expenditure program, for the six months ended June 30, 2010, Golden State Water spent $37.5 million in capital projects, as compared to $36 million for the same period in 2009. Capital Expenditures in 2010 for Golden State Water are expected to be $80 million to the $85 million range.

On May 27, 2010, American States Water Company entered the third amendment to the credit agreement and extended the maturity date of its syndicated credit facility to May 27, 2013. The maximum amount that maybe borrowed under this facility is $100 million. American States Water may, under the terms of the amended credit agreement, elect to increase the aggregate bank committment by $40 million. Short-term borrowings as of June 30, 2010, were $40.2 million, as compared to $10.9 million for the same period in 2009. We are also pleased to report that the Standard & Poor's ratings services recently upgraded corporate credit rating on both American States Water Company and Golden State Water Company from A positive to A plus stable outlook. The upgrade reflects the Company's solid capital structure and S&P's expectation on the Company for stable earnings and cash flow for enhanced cash recovery mechanisms and continued regulatory support. I will now turn the call over to Bob.

Thank you, Eva, and good afternoon, ladies and gentlemen. I'd 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 by imposing significant penalty charges for member agencies that don't reduce their deliveries by the required amount. To avoid the first year of the supply allocation penalties imposed by MWD and its member agencies, during the July 1, 2009 through June 30, 2010 water year, Golden State Water implemented mandatory and voluntary water conservation and allocations in certain of our service areas. Since then, our customers have been successful in reducing their overall water supply demand. The Company has met the required reduction for the water year ended June 30, 2010.

Based upon current and estimated future demand, Golden State Water has implemented voluntary conservation in those areas that were previously under mandatory conservation. Water consumption was down approximately 11% during the first six 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, reductions in delivery through the delta remain. Every year, the Department of Water Resources, DWR, establishes the State Water Project Allocation for water deliveries to the state water contractors. DWR generally establishes a percentage allocation of delivery requests based on a number of factors, including weather patterns, snow pack levels and reservoir levels. The percent allocation given to state contractors can vary throughout the year as weather and other factors change. On June 23, 2010, the Department of Water Resources increased the allocation on the State Water project to 50%, due to favorable late spring rainfall and snow packed conditions. This allocation is higher than the 40% allocation set in 2009 and is expected to be the final allocation for 2010.

In June 2010, Golden State Water signed an agreement with Cadiz Inc to proceed with the Cadiz Water Conservation Storage Project. Under the terms of the agreement, Golden State Water has the right to acquire an annual supply of 5,000 acre feet of water at a pre-determined formula once an environmental review is complete. In addition, Golden State Water has the option to acquire storage rights in the Cadiz project to allow Golden State Water to manage the supply as part of its overall water supply portfolio. Cadiz is a publicly-held renewable resources company that owns 70 square miles of property with significant water resources and clean energy potential in Eastern San Bernadino County, California. Now I'll discuss the status of key regulatory filings and other matters for the Company. First, in March 2010, Golden State Water filed an advice letter with the California Public Utility Commission for recovery of the Region II and Region III under-collections associated with the Water Revenue Adjustment Mechanism, or WRAM, net of the modified cost balancing accounts 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 the WRAM or Regions II & III, net of the Modified Cost Balancing Account and supply cost balancing accounts as of December 31, 2009.

In April and May 2010, surcharges were implemented for recovery of $2.1 million of the Region 1 WRAM accounts net of the Modified Cost Balancing Account. Approximately $1.5 million of surcharges were billed to customers to decrease previously incurred under-collections in the WRAM and Modified Cost Balancing Accounts. Please note that the implementation of the surcharges increased the Company's cash flow, but it does not impact earnings. Going forward, Golden State Water will seek recovery of its WRAM net of the Modified Cost Balancing Account on an annual basis. As of June 30, 2010, Golden State Water has a net aggregated regulatory asset of $29.6 million, which is comprised of a $37.3 million under-collection in the WRAM accounts, netted against the $7.7 million over-collection in the Modified Cost Balancing Accounts. Second, as previously discussed by Eva, on June 7, 2010, American States Water Company entered into a stock purchase agreement with EPCOR Water (USA) Inc. to sell all of the common shares of Chaparral City Water Company for a net cash total of $29 million and the assumption of $6 million of debt. We filed for approval of the transaction with the Arizona Corporation Commission in July, and anticipate receiving the approval in 2011. We intend to use the proceeds from the sale to pay down short-term borrowings and to defer the need for future equity issuances.

Now, I'd 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, the California Public Utility Commission issued a proposed decision on Golden State Water's Region II, Region III and general office rate case in November 2009 which it subsequently withdrew in December, due to the complexities of certain issues. The CPUC 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 again 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 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 Ratepayer Advocates is arguing that the costs were incurred to expand the system to serve new customers, and cost recovery for the improvements therefore should have been received from the developer that brought these new customers online. We believe the dollars had to be spent anyway to properly serve the current customers. If the Division of Ratepayer Advocates is successful in arguing this point, Golden State Water could be forced to write-off up to $3.5 million from rate base and provide a credit back to customers for rates that the Company has received to date. The second issue concerns Golden State Water's approach to recovering rate case costs. As of June 30, 2010, we have incurred $2.1 million of rate case-related costs with a 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 of rate case costs to be recovered in rates. Historically, we have 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 California Public Utility Commission has authorized our historical practice in prior rate proceedings. If DRA prevails and the CPUC determines that the costs represent future costs and not deferred costs, Golden State Water will have to write-off the $2.1 million of deferred rate case costs that are included in our regulatory assets at June 30, 2010, plus the additional costs incurred processing the remainder of this case. In January 2010, the CPUC approved interim rates for Golden State Water's Region II and Region III rate making areas, pending a final decision on the general rate case. While the increase for the interim rates was zero, it is important to establish the effective date so that the rates, once approved by the CPUC, will be retroactive to January 1, 2010. A final decision is expected in this case in October 2010 and we expect the new rates to be retroactive to January 1, 2010. At this time, we cannot predict the outcome of the final decision.

The increase in operating expenses, other than supply costs as discussed by Eva earlier, were incurred with no corresponding rate recovery, due to the delay in the PUC's decision on the Region II, III, and general office rate case. We expect the decision later this year will provide rate increases to cover the increased expenses. We filed a general rate case for Region I on January 4, 2010, for a two-year rate cycle, with rates effective 2011 and 2012. We have settled numerous items with the DRA. We are requesting a revised annual increase in revenues of $7.2 million, based on these settlement discussions. The DRA has proposed an increase of $4.1 million for Region I. 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 the Company's military subsidiaries under American States Utility Services or ASUS. ASUS has continued to record positive earnings for the year. Even excluding the effect of the two approved requests for equitable adjustments of $0.19 per share, as discussed earlier by Eva, ASUS has shown improved financial performance and operating income by $0.04 per share, for the six months ended June 30, 2010, as compared to the same period in 2009, due to an increase in construction activities and interim increases in management fees for operating and maintaining the water and wastewater systems at Fort Bragg in North Carolina. We believe successful price redeterminations and requests for equitable adjustment or REA filings will provide added revenues prospectively to help offset increased costs and provide ASUS the opportunity to consistently generate positive operating income at its subsidiaries that serve military bases. We are still working to finalize prospective price redeterminations and requests for equitable adjustments at various bases, which include adjustments to reflect inflation in costs 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'll quickly talk about the status of each of our price redeterminations. First, the price redetermination filings for the four Virginia military bases were deemed by the US government to have inadequacies. We are currently in discussion with the government to address these inadequacies. We have received interim management fee increases at the four Virginia bases since 2008. Second, the first price redetermination, for Andrews Air Force base, is under discussion with the government regarding the structure of the redetermination filing. Pending the outcome of these discussions, the government has approved interim management fee increases of 18.9%, effective July through September 2010. Third, we have two requests for equitable adjustment outstanding at Fort Jackson, for emergency construction costs mostly incurred in 2008 and for infrastructure, which is in poorer condition than originally presented under the 50-year contract.

The first price redetermination for Fort Jackson has been delayed pending the outcome of the four Virginia bases and the Andrews Air Force Base discussion with the government. The price redetermination at Fort Jackson is expected to be filed later in 2010. Lastly, the first price redetermination for Fort Bragg has also been delayed, pending the outcome of the government discussions regarding the Virginia bases and Andrews Air Force Base. Due to contract modifications at Fort Bragg to reflect increased inventory level covered under the original contract, Fort Bragg has received an interim increase of $127,000 per month since January 2010 and an additional $18,000 per month from March 1. American States shareholders should know that using the SEC guidelines for recording financial performance, $10,000 invested in the shares of American States Water at December 31, 2004, would be worth $14, 766 at June 30, 2010. This amounts to an annual compound growth in shareholder value of 7.34%. Before I turn the conference over to the Operator to entertain questions, I would like to thank you again for your continued support and interest in the Company.

Thank you. (Operator Instructions) Our first question will come from Heike Doerr with Janney.

Hello, good morning.

Hi, Heike. How are you?

Good morning.

Just one quick question. I wonder, if for some reason you're not on the agenda in late October for the final decision, when would be the next opportunity that the Commission would have to rule on this? Do they meet monthly, bi-weekly?

Every two weeks is my understanding. Is that your understanding, Eva?

I think so. Yes.

So, if we don't get it done in October, there will be another couple of cracks at it in November.

Okay, and do they host a meeting in early December as well?

Yes.

Okay, that's helpful. Thanks.

Okay.

(Operator Instructions) We'll go now to Jonathan Reeder with Wells Fargo Securities.

Good morning. Quick question I had for you, Bob. You mentioned that the revised ask for Region I, is now, I think, $7.2 million? That's down substantially. Can you through the lower ask and the reasoning there? Or maybe what the higher ask included?

Yes. Generally -- the ask is down somewhat, but the reason it's down is we settled a number of issues with the DRA and several of those revolve around capital expenditures. And so there's some projects that we had included in our original ask that we've agreed to not pursue. I think that's the main driver.

Well, previously didn't you disclose that Region I was like a $57 million rate case? Did that include the II and III amount in there?

Well, actually, the $57 million that we disclosed was the revenues for Region I.

Oh, not the incremental?

Right.

I got you, and then the 7.2 is just the incremental amount?

That's correct.

Okay, that makes a lot more sense. And then I was wondering if you could go in a little bit on ASUS? Their performance last year was pretty good, I think annually it came in at like $0.21, and this year, at least first half is kind of trending up. Do you expect a similar trend to continue during the second half or is it just really all dependent on the construction projects?

It is driven by the construction projects. I think there's a little bit of good news in terms of Fort Bragg is starting to do more construction than they were doing previously and so we think that's going to continue. So, we're expecting that business to continue to be profitable. It's very difficult for us to say what the angle of the trend there is though.

Okay, and then last question would be, you guys disclose what Chapparral earned in 2009? I know they completed a rate case later in the year, so the discontinued ops looking a little better than what '09 were. But didn't know if you had the full year contribution from Chapparral for '09?

Oh, what the actual contribution for '09 was?

Correct.

Well, we could give you the operating income level, right, Eva?

Right. Yes. I'm getting there.

Okay.

It's disclosed in our note in the 10-K, so allow me a moment. For Chaparral, for 2009, 12 months ended 2009, Jonathan, Chapparral Water has a loss of $263,000 for the year.

Okay.

That's at the operating income level.

That's -- yes.

And that's pretax, correct?

Pretax, yes.

Yes. Now, of course in 2009, we had some regulatory expenses as we continues to pursue that rate case. So, that's what drove it to a negative number.

Okay and then lastly, Eva, for 2010 CapEx, just for Golden State, did you say $80 million to $85 million?

That's correct.

Okay, thank you.

You're welcome.

Thanks, Jonathan.

(Operator Instructions) We'll go now to Garik Shmois with Longbow Research.

Hi. Thank you. I just have a question, I heard on a previous conference call (inaudible) indicated that they had reached a settlement agreement in their general rate case out in California that would create a balancing account for pension expenses. Is that something you'd look to next year when you file your next general rate case perhaps?

We have asked for one in the current Region II, Region III general office rate case.

Oh, okay.

So, we're waiting for a decision on that. And I would -- it's not a slam dunk that we're going to get it just because Cal Water may have gotten it. Because we're earlier in the pipeline here, so we're not sure where that's going to come out.

Okay, and in your general and administrative costs with the increase, is it possible to split out what was labor and what was pension there?

I think we would talk about it in our 10-Q tomorrow, Garik. We have it down very detailed in that disclosure in the G&A section of the Q.

Okay, I'll look for it then. Thank you very much.

Thank you, Garik.

Thank you.

And we'll take a follow-up question from Jonathan Reeder with Wells Fargo.

Yes, real quick. What was the allowed ROE granted in the Chapparral case last year? That might help.

9.3, I believe. Is that right, Eva?

Yes. I think 9.3.

I believe it's 9.3. So, I guess that compares to what we're getting at in California of 10.2.

Correct. Okay, thank you.

And Jonathan, you understand Arizona is a historical test year versus future test year in California?

Right, and this case was filed, was it like in 2007?

I think we're using 2006 test year.

Right, so pretty outdated there.

Right.

Probably makes sense to reallocate the capital to California.

Yes, our view was that we hadn't planned to grow that business and then it was a decision of if you're not going to grow it should you just get out of the state and redeploy the capital elsewhere? And so that was the decision we made.

Makes sense. Thank you.

Okay.

(Operator Instructions) It appears we have no other questions at this time, Mr. Sprowls. I'll turn the conference back to you.

Thank you, Erin. Again, I just wanted to 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. As a reminder, the call will be available for replay beginning at approximately 2:00 PM Pacific Time. The number for the replay is 888-203-1112 and the conference ID number is 754-5421. You may also access the replay at www.aswater.com. Thank you for your participation. You may now disconnect.