California Water Service Group (CWT) 2002 Q1 法說會逐字稿

Thank you, everyone, and welcome to the California Water Service Group Conference Call with your host and Vice President and Chief Financial Officer, Gerald Feeney.

Good afternoon, and welcome to Cal Water's First Quarter Conference Call. Normally, either our Chairman, Bob Foy, or Pete Nelson, our CEO, participate in our quarterly conference calls; however, today they're unavailable. After we had our annual meeting, they're in a board meeting right now, so I'll be the host for today.

I will talk about several topics, including our first quarter operating results, rate relief, financing and water supply. Please be aware that some of the comments I will make today can be considered forward-looking statements, as defined by the federal security laws and as outlined in our Form 10-K filing. As such, the forward-looking statements are based on currently available information and management's assumptions, expectations and estimates; however, actual results may vary from our estimates.

Earlier today, Cal Water issued a news release regarding first quarter 2002 operating results. If you did not receive a copy of the news release and would like one during the call, we can have it faxed to you if you call 408-367-8275.

The quarterly earnings for the first quarter 2002 were net income of $1,928,000, or 12 cents per share, a significant improvement over last year's 1 cent per share. For the 12-month period, earnings were $1.08 compared to $1.21; that is a decrease of 13 cents, or 11 percent, for the same period last year.

The results for this year's first quarter are substantially improved over last year, and we are encouraged for the prospects for the full year of 2002; however, as I will discuss, we do have still significant work to be accomplished in the regulatory area.

Several items had a positive influence on the quarter, of all, weather, rate relief and cost control. I will comment on each of these as I go through the review.

Revenue was up $4.6 million, almost 10 percent, for the quarter, and the sources for that increase were in usage by existing customers, which increased by about $2.8 million, rate increases of $1,440,000, and new customers; usage by them consisted of $368,000, for the total increase of just over 4.6 million, or 10 percent. Unlike last year, this year's first quarter's weather was favorable for water sales, temperatures were mild, and there was less rainfall this year. As a result, water sales were percent higher. Revenue from increased usage was $2.8 million.

Rate relief added about $1.4 million to the total increase in revenue. That came from three different sources in the rates area. General rate increases added $575,000, rate increases were effective at the first of the year in six districts in California, added $357,000; and four districts had power offsets that were actually effective towards the end of last year; that added $510,000. Since last year at this time, we have added 5,100 new customers; 1,600 of those customers were added in our Washington subsidiary and 3,500 in California, and the new customers contributed $368,000 to first quarter additional revenue.

On the expense side, total operating expenses decreased to seven percent, or $3,414,000.

Water production, which we define as purchased water, purchased power and , combined accounted for about 38 percent of that total operating cost, the largest single expense group. These costs were up 13 percent, accounting for $2,156,000 of the increase in total operating costs. Total water production for the quarter was 9 percent higher than last year, and that relates back to the increase in usage in revenue. The higher water costs, of course, the higher water production, helped to increase the higher cost of water production.

Purchased water expense itself $876,000 as a result of wholesaler supply rate increases in six districts and also the increased purchases to meet our customers' demand. Rate increases ranged from two to five percent from wholesale suppliers, and one wholesale supplier actually reduced rates, which was a nice event, by nine percent. Our largest wholesalers in the Los Angeles area did not increase rates at the start of this year, which they have in the past, so the rates effect in that area between 2001 and 2002 will be the same. And the San Francisco Water Department, which supplies our three districts on San Francisco Peninsula, have canceled a nine percent increase that they had planned for June this year and that we had thought we would have to pick up the additional cost for, so that also was a nice surprise.

Power costs increased by $1,176,000, or 48 percent, a very significant change from what it was last year. About 40 percent of that increase is attributable to higher power costs charged by the electric companies, with the remainder due to additional pumping we did and using electricity to run the wells. For the next couple of months, we will be paying power costs that are about 40 percent higher than last year, but once we've reached June, we will be at a plateau of about equal to what we had paid last year, so we don't expect to see significantly higher rates except our costs will increase if we do more water.

Fifty-three percent of our water supplied this year came from purchases; 46 percent was from our west supply and one percent came through our three water treatment plants in different districts .

In the area of other operating expenses, payroll cost charged to operation and maintenance during the quarter were $103,000 less than last year, and that is also taking into consideration the fact that there was a three-percent wage increase effective in January of 2002. We do have fewer employees on the payroll at this time than we did last year. That helped to keep the payroll costs relatively flat.

Some payroll costs have also been shifted to capital projects to support the Company's expanded construction budget. Maintenance expense was lower this year by $320,000, and that's due to the fewer maining repairs and fewer service repairs and also in on-scheduled maintenance required at wells. Our scheduled maintenance for the full year 2002, however, we do expect it to be in a range similar to last year.

Depreciation expense by $577,000, and that was mainly because we have a significantly higher amount invested in depreciable plant, on which the depreciation expense is calculated. The income taxes were higher this year because that is the function of income, and with the rise in our net income, income taxes also increased.

In the area of other income, the net other income for this quarter, 2002's first quarter, was $505,000, compared to 393 last year. Non-regulated income was generated from system operating agreements we have with the cities and other private companies, and leases and work we perform for others. There were realistic sales in this quarter of about $51,000, so nothing too significant. Last year, we sold some properties valued at about $99,000 on a pre-tax basis.

In April 2002, we did sign a contract to sell a surplus real estate property in one of our districts that's going to generate in pre-tax income about $1,750,000. That transaction is expected to close during the second quarter of this year.

At today's annual stockholder meeting, the two routine items on the agenda were approved; the Director's slate that was nominated was reelected, and KPMG was appointed as auditors for 2002. The 230th consecutive dividend was also declared, a record that the Company's very proud of. That was declared at $0.28 per share, or $1.12 annually. The second quarter dividend is payable on the to stockholders of record on May 6.

I wanted to bring you up to date, also, on our New Mexico acquisition. We anticipate that closing during the second quarter with the transaction that's going to be valued at about $5.3 million and will serve around 5,000 water and wastewater customers, and that's located near Albuquerque in New Mexico. The one thing we're waiting on in order to complete that transaction, the regulatory approval, although we have gone through the process, and it's just a matter of it going through the commission process now and being approved for the transaction to be completed.

As far as financing for 2002, we do have commission approval, California Public Utility Commission approval, for up to $250 million of new financing, both debt and equity type, through the year 2005, so we have a very significant range there in which to cover. We have agreed to one financing so far this year, and there'll probably be other financing later in the year. The one that we have agreed to is a $20 million senior note issue that we anticipate being funded in late May, and the interest rate there will be 7.11 percent.

Later in the year, we are considering a medium-term note issue and also an equity issue, maybe in the fourth quarter of this year. And the money that we will be obtaining from these financings will be used for our construction projects in support of the expanded construction budgets that we have established to meet construction of a Northeast Bakersfield treatment plant and also as we go through the next several years to deal with the regulations.

And speaking of regulation, I wanted to let you know that in Washington, our Company there filed for a general rate case application in February of 2002, and in April of this year, the Washington Utilities and Transportation Commission issued its decision granting a $1 million increase in annual revenue. That's a little over a 25-percent increase in the annual revenue for that subsidiary, which we're very pleased with.

In California, the California Public Utilities Commission is continuing to process the 15 general rate case applications that were filed last year in July, and evidentiary hearings actually are underway right now with the Commission on issues that have not been resolved between the Company and the Commission staff. Decisions on those 15 applications, however, are not expected until near the end of the summer, possibly even a little bit later, based on the schedule the Commission is on right now.

And I want to address, also, the issue of power cost recovery. Last year in May, the Company filed for authorization to increase rates to recover what we estimated to be about $5.9 million in additional power costs after the Commission had authorized the two large power companies in California to increase their rates. And in October, the Commission changed its long-standing policy of how these type of costs can be recovered, so at this time, we would not be getting immediate relief on those. We do have decisions in four districts that will allow us to recover about $2.7 million in annual revenue from the power costs, but the other districts are being processed through special Public Utility Commission hearing that's not been scheduled yet or through general rate case applications, such as the ones we have before the Commission right now.

As far as water supply is concerned, for most of the state, water storage is around 98 percent of historic levels. So in spite of the low rainfall that was experienced in Los Angeles area this year, we do anticipate that there is adequate water supply for the full year of 2002.

Now, that does conclude my prepared remarks, and I'd be very pleased to take any questions that you might have. So at this point, I'll turn the conference call back to the operator. Wendy?

Thank you, Mr. Feeney. For those of you with a question, please press star, one on your touch-tone phones, and your questions will be answered in the order that they are received. Please keep in mind that if you're using a speakerphone, you need to pick up your handsets in order to utilize that feature. And if at any time your question has been answered, please press star, two to remove yourself from the line-up. Once again, participants, please press star, one to put yourself on the question-and-answer line-up.

Our first question comes from Tim .

Hello, Gerry.

Hello, Tim.

I have a couple questions for you. One is regarding the Public Utilities Commission. I'd read some articles about Mr. being in some kind of trouble and could be removed from the CPUC. I was curious as to what kind of impact that could have on your pending rate cases?

And in the second question, is your planned issuance in the fourth quarter -- can you get that included in the rate decision?

Well, let me get to the first part of your question first as far as the equity. Our plan would be not to do the equity issue until after we have the series of rate cases decided by the Commission, which would allow us to be included in rates because we have agreed with the Commission on a rate structure, capital structure, so we do anticipate that that will be allowed once we get the final decision. But, of course, it won't be reflected in the rate until late this year, as we get into the September/October time frame when that decision's actually rendered.

And as far as the make-up of the Commission, Commissioner --I've only read this in the newspaper, so I'm not precisely sure of his current status. As far as I know, he's still at the Commission. But there was a recent newspaper article, probably three or four weeks ago, that indicated he was going to have to step down from the Commission.

I understand that there was an appeal filed and maybe since he's still there so he would be able to continue and fulfill his full term, which I believe expires at the end of this year. There has recently been another commissioner, a new commissioner, appointed, so there are five commissioners at this time. The new person, his last name is , and he was formerly the president of Southern Cal Edison, so he does have regulatory experience and understands the regulatory process, and he was appointed by Governor Davis probably about six weeks ago at the .

You said in this agreement capital structure. Are you settling certain items of this case as we move along? Was this capital structure recently settled or stipulated?

The Commission no longer allows or will accept what we've referred to in the past as stipulated agreements. What they will accept now are joint recommendations, when a company and the staff agree on something, and they make a joint recommendation.

So they will consider that as one reason to accept the item as it was discussed and agreed upon between the two parties. But there are a number of items that are still not settled. We have settled a lot of the issues, but testimony's going on for those starting last week and will continue for part of this week.

The capital structure isn't one of the areas that we have agreed upon, and a lot of things that they're still discussing deal with the projection of what the average sale could be per customer and things regarding capital projects that we believe need be done to getting the Commission to accept those and include them in the joint agreement. We're at this point going through the regulatory hearing process coming to this .

What was the capital structure, and are we settled or jointly recommended ?

The capital structure will push us back towards a 50 percent. Right now, we're probably around percent equity to two-percent debt. The capital structure that we have submitted and will push us the rate cases back towards debt at two-percent level. And as far as the ROE, that's not been settled yet, but it will come out of the capital structure; it won't be part of the hearings. That will be .

OK, and one last question. What size equity offering would get you back to 50 percent, including what you plan to do with the debt ?

Well, the plan would not be to get back to the 50-percent capital or equities capital structure in one shot. It would be over a period of years. So for this year, we're probably looking at something in the neighborhood of $20 million, or maybe a little bit higher than that as we get towards another year again.

OK, thank you.

Sure.

Thank you, Mr. Winter. Once again, participants, should you have a question, please press star one in order to put yourself in the question-and-answer line-up. Excuse me, Mr. Feeney, we have no further questions at this time.

I'd like to remind the participants that we do have a remote replay scheduled for today at 4:00 PM Eastern Time. In order to access that replay, you may call 1-800-677-6200 and punch in the pin number 2108. We have a correction on the time. It will be today, the 24th, at 4:00 PM Central Time, where it will be available from today's date until May 1. Once again, the replay code is 2108. The 800 number access code is 1-800-677-6200.

Thank you for joining into our conference call and hope you found the information useful to you, and look forward to continuing good results of for the rest of 2002. That ends our call. Thanks very much.