American States Water Co (AWR) 2011 Q1 法說會逐字稿

Welcome to the American States Water Company conference call discussing first-quarter 2011 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 p.m. Pacific time and run through Friday May 13, 2011. After logging on to the website, click the investors button at the top of the page. The archive is located just above the stock quote section. 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 1 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, Andrew. Thank you, everyone, for joining us today. With me here is Bob Strauss, President and CEO.

Before I start the quarterly result 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 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 such statements.

With that I would like to discuss our financial results for the quarter. Basic and fully diluted earnings for the quarter ended March 31, 2011 were $0.40 per share, as compared to basic and fully diluted earnings of $0.46 and $0.45 per share respectively for the first quarter of last year. I'll begin with the earnings from continuing operations.

For first quarter of 2011, basic and fully diluted earnings from continuing operations were $0.37 per share, as compared to basic and fully diluted earnings of $0.45 and $0.44 per share for the first quarter of 2010.

Included in earnings for the first quarter of 2010 was $6.1 million of pre-tax income, or $0.19 per share, related to retroactive revenues resulting from contract modifications received at American States Utility Services. These contract modifications reflect approval from the US government, primarily for managing more infrastructure than originally estimated by the government at the Ft. Bragg and Ft. Bliss military bases.

Excluding the impact of the 2 contract modifications, adjusted fully diluted earnings per share from continuing operations for the 3 months ended March 31, 2010, would have been $0.25 per share. When compared to the first-quarter 2010 adjusted earnings, earnings for the first quarter of 2011 increased by $0.12 per share.

I will now discuss the items that resulted in the $0.12 per share increase. First of all, the dollar water margin at Golden State Water Company increased by $6.3 million, or $0.20 per share, for the 3 months ended March 31, 2011, as compared to the same period in 2010.

The increase is due primarily to higher water rates authorized by the California Public Utilities Commission, or the CPUC, in the fourth quarter of 2010. Rate increases for Golden State Water's region 2, region 3, and the general office, were approved in November of 2010, and retroactive revenue were not recorded until the fourth quarter of 2010. Rate increases for region 1 were approved in December of 2010, and were effective January 1 this year.

For Golden State Water's Electric Division, we recorded $958,000 of revenue, or $0.03 per share, in the first quarter of last year. For a memorandum account authorized by the CPUC, which tracked the difference between the 2007 adopted general office allocation, and 1996 adopted allocation. Excluding the impact of this, the electric margin increased by $528,000, or $0.02 per share, during the first quarter of this year due to electric rate increases approved by the CPUC.

Next item is related to all the other operating expenses for our utility businesses. Excluding supply costs, operating expenses for our utility businesses increased by $492,000, or $0.02 per share, due primarily to a increase in depreciation expense as a result of additions to utility plans, and higher composite depreciation rates, approved by the CPUC, partially offset by lower legal and other outside services costs.

Moving on to our contracted services business, excluding the 2 contract modifications discussed previously, pre-tax income for American States Utility Services decreased by $0.04 per share, due primarily to pre-contract cost for design and engineering labor incurred for potential new projects, higher allocation of COGs from administrative offices, and lower margin on construction projects.

Lastly, a increased in effective tax rate at the Golden State Water Company for the three months ended March 31, 2011, as compared to the same period in 2010, negatively impact earnings by $0.01 per share, due to changes between books and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements, and other non-deductible permanent items.

I will briefly discuss the quarterly results from the continued operations related to Chaparral City Water Company. Diluted earnings from these continued operations for the first quarter of 2011 were $0.03 per share, as compared to $0.01 per share for the same period in 2010. The increase in earnings is primarily due to lower depreciation expense, as a result of reporting Chaparral City Water Company as a discontinued operation beginning the second quarter of 2010. No depreciation expenses have been recorded since then in accordance with GAAP.

On April 7, 2011, the Arizona Corporation Commission issued a final order approving the sale of Chaparral to EPCOR Water USA, Inc. The transaction is expected to close in the second quarter of this year. Therefore, no gain on the disposal of Chaparral has been reported during the quarter ended March 31, 2011. 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 will be filed later today.

Moving on to our capital expenditure programs, we continue to focus on our core strategies of prudently investing our infrastructure and controlling our costs. Golden State Water's capital expenditure were about $17 million in the first quarter of 2011, as compared to $16 million for the same period in 2010. We anticipate annual capital expenditures in 2011 for Golden State Water to be in the $75 million to $85 million range.

On April 14, 2011, Golden State Water Company issued $62 million of 30-year unsecured notes at a coupon rate of 6%. The net proceeds from this debt issuance were used to pay down short-term borrowings, and to redeem certain long-term debt, which had a higher coupon rate. Again, we do not anticipate an equity issuance this year due to the proceeds from the potential sale of Chaparral City Water Company.

I will now turn the call over to Bob.

Thank you, Eva. Good afternoon, ladies and gentlemen. I am pleased to announce that last week on April 26, the Board of Directors of American States Water Company approved a $0.02 per share increase in the Company's quarterly cash dividend, to $0.28 per share on the common shares of the Company. This represents a 7.7% increase in the quarterly dividend, and marks the three hundredth consecutive dividend payment by the Company.

By approving this increase, the Board of Directors have affirmed their continued confidence in the Company, and its growth prospects, by rewarding our shareholders who have supported us for many years. For more than 56 consecutive years, American States Water Company's shareholders have received an increase in their aggregate annual dividend. We look at our payout ratio over several years, and we believe there is room for continued growth in the dividend.

Now I'll discuss the status of key regulatory filings and other matters for the Company. In March of this year, Golden State Water filed for recovery of its 2010 auto revenue adjustment mechanism, or WRAM, net of the modified cost balancing account, for a total of $19.6 million. Surcharges are currently in place to recover this amount, in addition to balances from 2009.

Please note that the implementation of the surcharges increases the company's cash flow and does not impact earnings. Based on the California Public Utility Commission's guidelines, recovery periods related to the prior year's balances will range between 12 and 36 months.

In September of 2010, Golden State Water, along with other California water utilities, filed an application with the PUC to modify the recovery period to 24 months or less. The decision is expected in 2011. For the 3 months ended March 31, 2011, approximately $1.6 million dollars of surcharges were billed to customers for collection of the WRAM balance, net of the modified cost balancing account. As of March 31, 2011, Golden State Water has a net aggregated regulatory asset of $34.0 million, related to the WRAM and modified cost balancing accounts.

I'd like to discuss rate increases for 2011 as compared to 2010 adopted rates for Golden State Water Company. The increase in 2011 revenues is expected to be $1.9 million for region 1, $4 million for region 2 and region 3 combined due to escalation-year increases, and $1.6 million for our Bear Valley Electric division.

A general rate case will be filed for all of Golden State Water Company's water regions and the general office in July 2011, with rates expected to be effective January 2013. As you may know, the cost of capital proceeding is separate from the general rate case applications with the CPUC.

On May 2 of this year, Golden State Water Company, along with 3 other California water utilities, filed its cost of capital application. When approved, the rate of return authorized by the California Public Utility Commission will be implemented in rates on a company-wide basis.

Regarding the sale of Chaparral City Water Company, as Eva mentioned, the Arizona Corporation Commission issued a final order on April 7 of this year, approving the transaction, and the sale is expected to close in the second quarter of this year.

On the same day, the Arizona Corporation Commission also issued a decision allowing Chaparral to retain 50% of the $1.52 million total proceeds received from a settlement agreement reached in 2005 with the Fountain Hills Sanitary District, in addition, to recovering $100,000 of rate case expenses we incurred in our appeal of our 2006 general rate case, and the subsequent . remand proceeding before the Arizona Corporation Commission.

Let's turn our discussion to the Company's military subsidiaries under American States Utility Services, or ASUS. Excluding the contract modifications discussed earlier by Eva, and as Eva mentioned, earnings for ASUS decreased by $0.04 per share for the first quarter of 2011, as compared to the same period of 2010, mainly due to the pre-contract costs for design and engineering, labor incurred for potential new construction projects, a higher allocation of costs from administrative offices, and lower margins on construction projects.

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 REAs at various bases, which included 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; but to summarize, I'll quickly talk about the status of each of our price redeterminations. First, we continue to negotiate permanent price redeterminations for the 4 Virginia military bases which are covered under 2 contracts.

We received a contract modification in February of this year resolving the operations and maintenance portion of the first price redetermination for the Ft. Lee contract, which reduced an interim rate adjustment to 14.6%. A proposed settlement of the renewal and replacement components of the Ft. Lee price redetermination is expected to be resolved in the second half of this year. The first price redetermination for the other contract, which covers the other 3 bases in Virginia, has been submitted to the government with resolution expected by the end of the year.

Excuse me, Andrew. We're getting a lot of static on our

Yes. Just one moment, please. Pick up your line .

There's a technical difficulty with the speaker's line. I'm going to place the parties on hold while we reestablish their connection. Thank you.

(call paused)

Mr. Sprowls, please

Okay. My apologies to everyone, but I will continue with my remarks.

The second price redetermination activity I wanted to talk about is we are currently in negotiations with the US government on the first price redetermination for Andrews Air Force Base. In August 2010, the government approved an 18.93% interim increase to contract rates. We anticipate the operation and maintenance portion of the price redetermination to be resolved during the second half of this year. A proposed settlement for the renewal and replacement portion of the price redetermination is expected to be submitted during the second quarter of 2011.

Third, in April 2009, and December 2010, ASUS filed REAs at Ft. Bragg with the government in connection with costs associated with initial capital work. Resolution of these requests is expected in 2011. The first price redetermination for the Ft. Bragg contract is expected to be filed in the second quarter of 2011. An interim increase of 3.6% is currently in effect.

Fourth, ASUS filed an REA at Ft. Jackson in connection with the substandard condition of the inventory assumed at the base. Resolution of this REA is expected in 2011. The first price redetermination for Ft. Jackson will be filed in the second quarter of this year. An interim increase of 3.4% is currently in effect.

Lastly, in connection with an inventory settlement reached in January 2010 for Ft. Bliss, ASUS and the government agreed to waive the first and second price redeterminations under the original 50-year contract. The third price redetermination is expected to be filed in 2012.

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.

We will now entertain any questions you may have about the information presented today. (Operator Instructions)

Garik Shmois with Longbow Research.

Just have a question on the 50% of the $1.52 million dollar proceeds that Chaparral receives as a result of the settlement agreement. Does Golden State get to keep that? How is this handled, and does this impact the closing price at all from the sale of Chaparral?

Yes. We had envisioned that this was going to take some time to get resolved, and we had included in the stock purchase agreement that if, in fact, the order we get from the Arizona Corporation Commission becomes non-appealable, then it gets added to the purchase price.

So this is already factored in?

Yes. The appeal period is period is still running, so we're waiting to see whether it gets appealed at all.

Okay. Thank you very much.

(Operator Instructions)

Heike Doerr with Robert W. Baird.

I wonder, Bob, if you could quantify what the dollar amount is for some of these price redeterminations at ASUS, either in their entirety or perhaps what some of the individual requests are?

We haven't really done that at this point; giving the kind of a guidance associated with that is difficult.

Are these public documents where we could be finding them if I think about how it works for the California rate case, for example, we can go track down what the request is?

No, these are not public filings. I'm not sure going and looking, even if you had access to that, would be all that helpful, because there's a wide range of conclusions on these redeterminations.

Can you maybe then give us parameters on what kind of revenue growth in 2011 we could expect to see out of this subsidiary?

All I can tell you, Heike, is the revenue growth at ASUS is dependent upon a number of things; one thing in particular is, we're still waiting to break through on a initial capital upgrade project at Ft. Bragg, which could be substantial. It's unclear as to whether that's going to -- we hope to have it breakthrough in 2011, but we're always hesitant to be too optimistic here, because things have actually gone slower than what we had thought them to go. But that could actually drive revenues up at ASUS, and then these redeterminations, in many cases, we have interim increases already in place. So, though these are going to help cover our costs, we tend to not be too optimistic here about -- we don't want to project to the market too much optimism here, because it's been a struggle getting these redeterminations through.

I guess then maybe a different way to phrase the question; do you see a 4% year over year drag from the subsidiary in the first quarter? Do you think you would be made whole by year end so we would see flat performance, in a total 2011 compare to 2010?

Of course, in 2010, we had this $0.19 REA. If you carve that out, the general view by the Company is that we'll be as strong as last year or better.

Okay. That's helpful. Thanks.

Jonathan Reeder with Wells Fargo Securities.

Could you elaborate a little bit on what the dividend policy is going forward following the $0.08 annual increase?

Sure, Jonathan. You know, the company tends to look at a dividend payout ratio of about 60%, but it isn't something that every year we expect to hit 60%. It's an approach where we like to continue to grow the dividend. We are a company that -- we're among a handful of companies on the New York Stock Exchange that have grown their dividend for 56 consecutive years, and we look down the road, and we want to see that we still have room for growth in the dividend. So I think it would be a mistake to take our current dividend, divide it by 60% and come up with a projected earnings, because we look at it over three to five years, and our earnings tend to be a little bit choppy because of the rate process in California; you get a substantial increase in year one and then a much smaller increases in year two and year three of the rate filings. Hope that answers your questions.

Yes, I think it does for the most part. So, 6% is kind of the target right now. You guys are below that, so by might be able to anticipate, I guess, a little bit of above-average dividend growth going forward, call it the next three to five years, to kind of get closer to the 60% range. Is that fair?

Yes, I think that's probably a fair appreciation of what our policy is and where we're headed.

Okay, thank you.

(Operator Instructions)

This concludes our question-and-answer session. I would like to turn the conference back over to Bob Strauss for any closing remarks.

Again, thank you all for your participation today and for your continued interest and investment in American States Water Company, and everybody have a good weekend, and those of you that are mothers, have an excellent Mother's Day.

Thank you. This concludes today's American States Water Company conference call. As a reminder, the call will be archived on our Web site and can be replayed beginning Friday May 6, 2011, at 2 pm Pacific time, and will run through Friday, May 13, 2011. After logging on to the web site, click the investors button at the top of the page. The archive is located just above the stock quote section. Thank you for your participation. You may now disconnect.