California Water Service Group (CWT) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the California Water Services Group second-quarter results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR GIVES CALLER INSTRUCTIONS). As a reminder, this conference call is being recorded. I would now like to turn the conference over to your hosts, Mr. Dick Nye and Bob Foy. Gentlemen, you may begin.

Good afternoon, everyone. My name is Dick Nye, Chief Financial Officer, and joining me today is Bob Foy, Chairman of the Board. Today, we will be discussing the second-quarter results for California Water Service Group. We will also be providing an update on several other items. We're going to be covering our general rate case filings, the capital expenditures that we've done for the first half and our expectations for the balance of the year, our financing plans, the Northeast, Bakersfield Treatment Plant acquisition, and two new Board members that recently joined our Board, and also our dividend. Then we will open it up for questions from analysts.

Before we get started, I'd like to take care of some legal matters and read the following statement -- as an introduction to the information we will be discussing, please be aware that some of our comments can be considered forward-looking statements as as defined by the federal Securities laws and as outlined in the Company's Securities and Exchange Commission filings. As such, the forward-looking statements are based on currently available information and management's assumptions, expectations and estimates. However, actual results may vary significantly. Risk factors that could cause actual results to vary from expectations are described in the Company's filings with the SEC. These factors are also available in yesterday's news release, which can be viewed from our web site.

Okay, with that, I'd like to talk about our second-quarter results. The second-quarter net income was 4.6 million, equivalent to 30 cents per share, compared to 6.6 million, or 43 cents per share, in the second quarter of 2002. There's three main reasons for the lower earnings -- weather, lower property sales, and delays in decisions by the CPUC, the California Public Utilities Commission.

Operating revenue decreased about $1.2 million, or two percent, to $68 million. Rainfall was significantly higher compared to the prior year; it was almost over three times the prior year amount for our markets. This had a negative influence on our usage. The month of April was particularly higher in rainfall than the same period of last year. Water production decreased six percent due to the lower usage. The breakdown of the changes in our revenue is as follows -- the decrease from usage of existing customers was about $4.5 million negative. Partially offsetting this decrease was increases in our rates of about 1.9 million and increases in new customers of about 1.4 million. Those net out to the decrease of $1.2 million. The rate increases include step rate increases that were effective in January, increases from two advice letters for our Bakersfield plant, rate increases for Washington and amounts for balancing accounts. No revenue was booked for the 2001 general rate case filing, due to not receiving a decision in the quarter, which Bob will address a little later in his comments. The usage by new customers does include about $.5 million for our New Mexico operation and $.5 million for Hawaii. Both of those were acquisitions and they were not in our 2002 second-quarter numbers.

Our operating expenses were down about .5 percent, or $.3 million. Our water costs, which consist of purchased water, power costs and pump taxes, were down about four percent, or $1 million. Our purchased water was down -- lower -- about $800,000. Power was about flat to the prior year, and then pump taxes were down about $300,000. Other Operations costs were up $1.4 million. This was driven by payroll, which was up about $200,000. Also note that that includes the payroll for Hawaii and New Mexico. Our benefit cost is the primary reason for the increase, and that's due mainly to pension costs but also, we've had increases in our health costs. The pension plan was amended effective January, 2003, which is the reason for the increase in that arena.

Our water treatment and water-quality costs were also up about $200,000. You can see from the P&L, maintenance cost was up about $100,000, and that's four our main service lines, meters and tank repairs. Depreciation is up about $400,000 due to higher capital expenditures. The income taxes are down about $1.3 million in relation to the decrease in taxable income. On the other income and expense line, our nonregulated income is up pretty good from last year -- about ten percent -- but the big changes in property sales, so the net change for that line is about $200,000 lower for the lower property sales.

Moving down on the P&L, our interest costs are up about $300,000. That is split between long-term debt of 200,000 and short-term debt of about 100,000. Both of those increases are driven by our higher debt ,levels compared to last year.

In summary, although the quarter is down about 13 cents per share at 30 percent for last year, the variances can be broken into really three main components. First, we estimate the weather impact was about ten cents a share. The decrease from property sales was about four cents a share, and the delay in the 2001 GRC was about 13 cents a share. Now, one thing to note is on the 2001 GRC, those revenues, or earnings, are not permanently lost because we have an effective date of April 3rd, which again, Bob will cover in his comments. Those three items together that I mentioned totaled 27 cents per share, which is obviously a very significant number.

Now, I'd like to just briefly cover the results for the six months ended June 30th. Net income was was $3.8 million, equivalent to 25 cents per share, compared to $8.8 million, or 56 cents per share, in 2002. Similar to just our second quarter, weather and delays in the 2001 GRC were the main reasons for the decline. Operating revenue decreased about $1.5 million, or one percent, down to $119 million. The weather impact on usage drove revenues down about $6.4 million. Partially offsetting that decrease was increases for rates of about $2.7 million and new customers of $2.2 million. Total operating costs increased $2.1 million with increases driven primarily by pension, health costs, maintenance and depreciation, and were partially offset by lower water costs and income taxes. Our Other Income and Expense was slightly lower by about $200,000. Interest is up about $1 million, again due to the higher debt levels. So, for the six-month period, earnings are down about 31 cents per share and for the two primary drivers, the weather impact we estimate at about 15 cents a share and the impact for the delay in the 2001 general rate case filing is estimated at 23 cents a share.

Now, I'd like to turn it over to Bob Foy, our Chairman of the Board, to talk about the status of our rate filings.

Good afternoon, ladies and gentlemen. I'd like to report on where things stand on all of our present general rate case filings. Besides the weather, this is the one area that has the largest impact on our business. In 2001, General Rate Case filing covers 15 of our 24 California districts. This is the largest rate case ever filed by a water company in our state. When we reported to you last May, the general rate case was on the Commission's calendar for June. It was rescheduled to July, and was changed again. It is now on the calendar for Thursday, August 21st.

This latest delay is not all that bad news. There is some language in the proposed decision that was not favorable to Cal Water and to the investor-owned water industry in California. The issue involves the allocation of income and expenses on regulated operations. We are constantly working with the Commission to revise this language prior to the issuance of its official ruling, which we hope will be on August 21st. We cannot accurately predict whether the Commission will make its decision on our filing in August, or whether further delays will occur. As Yogi Berra, that great intellect, once said, 'Forecasting' is awfully difficult, especially about the future." We're not expecting any changes in the amount filed, which is approximately $12.8 million.

As we had mentioned in last quarter's analyst call, we have received a decision that established April 3rd of this year as the effective date of the 2001 General Rate Case filing that I just discussed. This is important because we will be able to recoup the revenue back to April 3rd. The Commission has not ruled on a timeframe for recouping these revenues, but we believe it will be spread over a 6 to 12-month period, based on discussions with the CPUC staff. The other General Rate cases awaiting decisions are the 2002 GRC filed in July of last year for $1.3 million, and the 2003 GRC filed in January of this year for $8.2 million. In addition, we plan on filing another GRC by the end of this month. The amount of this filing has yet to be determined.

On the balancing accounts, which are also referred to as offsettable expenses, we've received a decision in May of this year to bill net surcharges totaling 2.8 million from May of this year to June of next year. Also, we've received approval to bill 1.8 million starting in May of next year and going to May of 2005. These amounts relate to high-energy costs incurred prior to November 29, 2001. For high-energy costs incurred between November 29th of '01 and December 31, 2002, the Commission put in place a different criteria and procedures for recouping extraordinary expenses. Basically, the new rules are that these expenses can only be recovered if that district earned less than its authorized rate of return for that year. The amount of these energy costs is about $6 million.

In April, 2003, the Commission approved another Advice Letter for the Northeast Bakersfield Treatment Plant. The amount was $1.8 million. We will be filing for a third Advice Letter by the end of the year and estimate that the amount to be approximately somewhere in the neighborhood of $4 million. As reported in our 10-k filings, we were informed of a proposed fine by the Commission staff totaling about $10 million for our failure to report to the Commission two very small acquisitions. While we acknowledge we did not notify the Commission on a timely basis of these two transactions, the amount of the fine has no basis, as the total purchase price for these acquisitions was less than $200,000. We believe that once the issue is properly addressed by the top level at the Commission, the fine will be reduced to a minor amount in relation to the infraction incurred. Another California water company committed a similar infraction and was fined less than $ 1000.

While we clearly have had challenges in the working with the Commission in California, we have made some meaningful progress and forged new positive territory. Decisions on the balancing accounts and Bakersfield plant were great news. We have been instrumental establishing new ways to do business. We were the first large water company to receive an effective date related to a delayed decision in California. Also, we believe we are the first water company to receive progress revenue on a major construction progress, versus getting relief after the project was placed into service. We at Cal Water are dedicated to forging a new, progressing and cooperative relationship with our Public Utilities Commission. Now, I'd like to turn this back to our CFO, Dick Nye. Dick?

That was an awful lot of information on rate case, so what I'd like to do is just summarize it just a little bit. If you counted up all the pending general rate case filings we have, it totals $22.3 million. That's obviously a very significant number. We have approval on our balancing accounts to recoup about $4.6 million and again, that decision has been granted to us and we plan on filing for an additional $6 million related to balancing accounts. We've received the Bakersfield Advice Letter of 1.8 million, and we've recouped -- we've already got about a third of that in our revenue through June, and we will have about two-thirds of that, going forward. Then also, we will have $4 million of a filing for the Bakersfield plant that probably will impact our 2004 revenue. It may have some impact in our 2003. So there's some very significant numbers that we have that's coming on our general rate cases and all our filings with the Commissions, which represent substantial numbers for our business.

Now, I'd like to cover our capital expenditures and financing plans briefly. Our Company-funded capital expenditures through the first half of the year was about $32 million. We estimate the full year of 2003 to be approximately $55 million for Company-funded capital expenditures. Now, one thing to note is that all of our capital expenditures are included in our rate case filings. If a decision is made by The Commission to lower the amount of the request on specific projects, then we lower our expenditures or cancel the project. In being a publicly-regulated utility, capital expenditures work similar to acquisitions in that you get to -- by including them into your rate base, they quickly turn into net income once those filings have been done and the decision has been reached. In the next five years, we expect our capital expenditures to be high. Our estimate is for the expenditures to be in the 70 to $80 million range per year for the next five years. These expenditures are principally due to water quality and our replacement program of our main.

Moving onto our financing plans, those plans include going to the equity market in the next six months. These funds will be used to pay down short-term borrowings, fund capital expenditures and for general corporate purposes. At the time of the offering, prospectuses will be provided by us or our underwriters to the investors. In May, we issued $20 million of unsecured private placement notes to refinance debt that had higher interest rates. We plan on making additional debt placements in the second half of the year for refinancing, assuming the economics continue to make sense. Longer-term, we planned on using a balanced approach between debt and equity to finance the capital expenditures and other cash flow needs of the business. Now, I'd like Bob to talk about our acquisitions.

We at Cal Water subscribe to Bill Hewlett and Dave Packard's all too familiar quote "To remain static is to lose ground." Cal Water is not going to lose ground. We completed the Hawaii acquisition this past quarter and established the Hawaii Water Service Company. We are now operating in four western states, California, Washington, New Mexico and Hawaii. The transition has gone very smoothly, thanks to a lot of people's efforts.

In New Mexico, we have another new acquisition pending. The company is the National Utilities Company and the purchase price is about $1 million, which is the rate base. The New Mexico Public Regulation Commission needs to approve the transaction and is on their calendar for August. If all goes well, the transaction will be completed in the fourth quarter.

We have a few other small acquisitions in the pipeline that we cannot elaborate at this time. Part of our growth strategy is to find acquisitions that are immediately accretive to our stockholders. While the landscape for large acquisitions has decreased from prior years, it is being offset by capital expenditures as a source of growth. As Dick just mentioned, capital expenditures impact our results similar to acquisitions, as long as they are built into our rate base.

Even though we have mentioned this in prior calls and by means of a press release, I would like to acknowledge all of the people in our company, construction companies and government agencies that made our Northeast Bakersfield Treatment Plant a reality. The $49 million project was by far the largest plant installation we have ever done and it was on time, and it was on budget, which is a very high compliment for everyone involved. The plant is now operational and will produce 20 million gallons of water a day using water from the Kern River.

Now, let me share with you some just-for-fun statistics. The Northeast Bakersfield Plant will provide water to about 20,000 new homes. It took nearly three years to build, has 35,000 feet of large-diameter pipeline ranging from 36 to 54 inches, was constructed on 15 acres and is run by only seven people. About 30 contractors in total were used on the project with almost all the workforce coming from the Bakersfield area. Twenty different governmental entities were involved in the project in some fashion. My hats off to this (indiscernible) team on a job well done.

On another interesting and I think very important note, our Board has two new Board members that were elected during the April stockholders meeting. Their names are Bonnie Hill and Dave Kennedy. Bonnie has a great deal of board experience, where she currently serves on number of other boards and does consulting work in the corporate governance area for many companies. Dave has been in the water business for decades and was formally the Director of the State of California Department of Water Resources and will be a great value counseling our company. The composition of our Board is nine directors and made up of seven outside members and two inside members, Pete Nelson, our very fine President and CEO, and myself as the Chairman.

In a meeting held yesterday, the Board approved a dividend for the quarter of 28 1/8 cents per common share. The date of record is August 1st and the payment date is August 15th. Cal Water has paid consecutive dividends since 1944 and we have increased our annual dividend every consecutive year for the past 36 years.

On behalf of Dick Nye and myself, thanks for the gift of your time and attention. Now, we would like to turn this conference over to our moderator, Karen, to open the lines up for questions from analysts.

(OPERATOR GIVES CALLER INSTRUCTIONS). Tim Winter.

Good afternoon, guys. I was wondering if you could talk a little bit more about some of the difficulties in getting all of these rate cases approved. I mean, what specifically is the issues (sic)?

Well, Tim, I think one of the major issues -- that there have been two areas of really complete turnovers. The Commission, as we knew it several years ago, is completely changed. We have five new commissioners appointed by the governor of the State of California. In addition to that, because of a new President, Loretta Lynch, she was able to -- which is one of the major responsibilities of the PUC (ph ) president, is to appoint department heads, and she did that. So, on the staff side, there are many, many new faces. Because of all this, there was a new philosophy at the PUC (ph) that was far different than previous commissions, so that is what we have now.

Now, something that's very encouraging, Tim and the rest of your folks, is that the Loretta Lynch is still on the Commission. However, she was replaced as President by the government with a new president, a gentleman by the name of Mike Peavy (ph), who is a past president of (indiscernible) Edison. He certainly knows the regulatory environment. We think that there's going to be -- it will take a while, but we think, under his leadership and his style and his past experience -- I think we're going to see some positive and meaningful changes at the PUC.

Are there any issues specific to the general rate case that are causing concern to the staff? I mean, are any of the things debatable, or is it just waiting for them to approve the settlement? (indiscernible due to multiple speakers).

We've gone through this regiment so many times. Basically, it's the same concerns in the past; it just takes time for you to compromise or to iron them out, so I wouldn't say anything really major.

Is it your belief that the stipulation will be approved as the current form?

Well, we are most hopeful. As I mentioned, it's worth $12.8 million, and we believe -- now, we don't think -- we think that's pretty firm. It's just some language problems that we're trying to work out (inaudible).

Okay thank you and good luck.

(OPERATOR GIVES CALLER INSTRUCTIONS). Neil Kalton.

Good afternoon. On the pending rate filings, once they are applied retroactively, what is the accounting treatment for that? When will that be recognized? Over what time period will be revenues be recovered from customers?

We will recognize that when we bill it out to customers. As Bob had mentioned, we're not sure whether that'll happen over a six or a twelve-month period, but once we get that defined and we get the number nailed down on what the retroactive amount is, we will either be recording 1/6 of the amount or 1/12 of the amount per month, once we get the go-ahead to put it into our customer bills.

Okay. On the general rate filings to be made later, I guess later this month, how many districts will that cover?

That will cover five districts.

Thank you.

Gentleman, I'm showing no further questions.

Okay. Well, thank you very much. To let you all know, our next teleconference is scheduled for Thursday, October 23rd at 1:00 Pacific time. Please check our web site at www.CalWater.com for the call-in number and to confirm the date and time. You can also subscribe to the reminder service to receive an e-mail a couple of days before the call. Thank you very much for your time to listen to our report on California Water Service Group and have a great day. Goodbye.

Ladies and gentlemen, thank you for your participation in today's conference. There will be a digital replay available until July 31, 2003. You may access that by dialing 1-800-615-3210 and the access code is 172-450. This concludes today's conference. You may disconnect at this time, and have a great day. (CONFERENCE CALL CONCLUDED)