California Water Service Group (CWT) 2003 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the California Water Service Group Fourth Quarter and Year-End Results for 2003 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. If anyone should require assistance during the conference please press "*" then "0" on your touchtone telephone. Your host for today's conference, are Mr. Dick Nye, Chief Financial Officer, and Mr. Bob Foy Chairman of the Board. Mr. Nye you may begin your conference

Thank you very much Matt. Today we will be discussing the fourth quarter results and total year results for California Water Service Group. We will also be providing an update on several other items such our rate case filing, capital expenditures, our financing plans, and the dividend recently approved by the Board. Then we will open it up for questions from our analysts, but before we get started, I need 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 defined the Federal Securities Laws and as outlined in the Company's SEC filing. As such, such forward-looking statements are based on currently available information and management's assumptions, expectation, and estimate; however, actual results may vary significantly. Risk factors that could cause actual results to vary from expectations that 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 website.

Now for the results of our fourth quarter 2003, compared to the fourth quarter of 2002. Fourth quarter revenue was $69.6m, up 14%. Net income was $7m, up 146% and diluted earnings per share was 41 cents per share, which was up 116%. Obviously we are very pleased with the quarter's performance. The increases were primarily due to rate increases and surplus property sales. For our operating revenue which increased $8.7m or 14%, this increase was mainly driven by rate increase, however, there were some other factors impacting the bearing. Weather was fairly neutral and the increased usage for existing customers was about $0.3m . Usage by new customers was $1.8m included in that number is $0.7m for Hawaii Water which was acquired in May of this year. The increase in rates was the big factor in the quarter increasing revenue by $6.5m . The fourth quarter was the first full quarter with the 2001 general rate case decision built into our rate. To put things in perspective the 6.5m was more than the rate relief we experienced in the first three quarters of 2003. Here is a breakdown of the $6.5m. 0.5 came from separate increases, the Bakersfield Treatment Plant was 0.8m , balancing account was 0.6m, the 2001 general rate case we will refer to as GRC was 2.9m, there is a catch up component for the 2001 GRC and that contributed $1m and then we had $0.7m for purchase slaughter offset.

Now let me discuss operating expenses. Total operating expenses were 62.1m for the quarter versus 55.5m for the quarter last year. That's an increase of about $6.6m or 12%. The cost related to water production is the biggest component of our operating expenses, here is a breakdown of those costs. Purchase water was about 19.7m for the quarter up 2.2m or 12% compared to the quarter of last year. Our purchase power was $3.9m, a decrease of 1.6m from last year and pump taxes were 1.4m a decrease of 0.2m from last year. Those total up to be about $25m a change of 0.4m or 2% which is very good in our total water production as far quantities were up for the quarter by 5%. Our purchase water costs were up primarily due to wholesale water rate increases in several of our districts. Most of these costs now are covered by our rate. In power we received about $0.9m in credit from power providers PG&E and [inaudible] during the quarter. For our California business operation, 52% of our water came from purchases from wholesale suppliers and that was about the same as the last quarter -- our last quarter 2002. 45% came from well and in 2002 for the fourth quarter that was 48% and 3% came from the surplus water and in the fourth quarter of 2002 that was fairly minimal.

On the cost side the biggest cost increase is due to income taxes and that is in relation to our higher income for the quarter. We also had cost increases in payroll and benefits, which were up about 10% and included in that is our pension cost in that we made a change in our pension plan during the year, which is the primary driver. We had other increases in our operating costs primarily in water treatment where we are having to spend more money for testing, filters, and chemicals. Depreciation is up about $600,000 or 12% due to our capital expenditures and then taxes other than [in pump] is up about 15% for property taxes and payroll related taxes. Moving down to P&L, if you look at the non-regulated income it is down about $0.5m from the previous quarter. The main decrease is due to a water right brokerage activities. This is an activity that's not a consistent business. We take opportunities when the market is available to us. The other activities within non-regulated income had been stable, or actually increased over the prior year. We will see a big jump in the gain on sale of non-utility property. It was $3.1m for the quarter compared to $1m for the last year where we sold, two large non-utility properties in the [inaudible] area. Our interest expense was $400,000 lower that is primarily due to capitalized interest for our construction in progress.

So just to summarize the net income is up 146%, earnings per share are up 116%. The earnings per share is the lower percentage increase because of the additional shares that we issued in the third quarter. Obviously the property sales help boost the quarter results contributed about 11 cents per share with the remaining 30 cents per share coming from operations. Due to the seasonality of the business, the fourth quarter is normally a low quarter so making this level of earnings is very encouraging.

Now, let me give a quick summary of the full year 2003 compared to 2002. Given the strong fourth quarter full year net income was above last year. Earnings per share at a $1.21 was slightly down from last year this gives us a dividend pay out ratio of 93% for the year. Revenue increased by 5% with the variance components as noted in the press release. Of the $12.6m for rate increases for the full year about $5m of that is related to the 2001 general rate case and the catch-up component. On the cost side our water production cost increased about $3.1m or 3%. This was primarily due to increase rate for purchased water and -- we also had incorporated in there the $900,000 of credits from power cost that we received in the fourth quarter, our payroll benefits and related costs are up about $5.5m or 10% for the full year. A big component of this number is our pension cost, which was up about $2.3m or 51%. As I mentioned our plan was changed effective for January 1, 2002 and that was the big driver.

Similar to the fourth quarter we had cost increases in the year for water treatment and also cost related to our Bakersfield Treatment Plant that started up mid-year. Our maintenance cost was up about 10% and we experienced more breaks particularly in [Maine], depreciation was up about $2m again for capital expenditures. For the full year the income from non-regulated activities is down slightly about 5% the -- we had lower income from our water rights brokerage business but it was partially offset by bid increases in our operation and maintenance contracts and our antenna lease. Pre-tax gains on surplus properties for the full year was 4.6m compared with 3m. Would caution people and that due to market conditions, these opportunities may or may not exist in the future for property sales. Our interest cost is up due to higher debt levels, but it is partially offset by the refinancing program that we did on a large portion of our long-term debt. Overall, we are very pleased with the year, especially, given the low earnings that we had in the first six months. In the last two quarters earnings per share was 94 cents a share, which is a 36% improvement over the same time period last year. Now, I would like to turn it over to Bob Foy, Chairman of the Board to talk about our rate filing.

Thanks Dick. Good afternoon ladies and gentlemen. I am pleased to share some time with you relative to our company and its past performances. You know, I was thinking as Dick was chatting sometimes presenters such as Dick and myself, tend to get a little serious, and I suspect that's a case with representatives talking about their Company's throughout the country. So, it made me think about when I arrived at the office this morning, I sat at my desk and I look out in the lobby hall at our corporate headquarters which is surrounded by lawns, I know the sprinklers are on, and I thought, you know, may be I better check out the weathers throughout the country, which I did. And I know that the ladies and gentlemen are listening then on this teleconference will believe this but in the middle [inaudible] according to my Wall Street journal, the temperature range from 9-22 degrees today and on East Coast from 16-28 degrees, so I thought well lets check out the weather out here in the West Coast in [San Jose] area where I am calling or speaking from now at 1:14 in the afternoon, the temperatures are somewhat in the neighborhood in the low 60's and the State of Washington, where our Washington Water Service subsidiary is located the temperature is in the neighborhood of 50 degrees, in New Mexico home of the New Mexico Water Service company it's 49 degrees, and I think you are ready for this our Hawaii Water Service company operation is laboring under a temperature of 83 degrees. Dick would you perhaps agree that cold waters located in areas that are water consumption friendly.

We are in the perfect spot for a water company.

Way to go, Dick. Now for the task in hand, I'd like to share with you developments concerning our rate filing since our last conference call and provide a rate review for the year 2003. Let me start with a general summary, for those of you that have been following our company over the past several years you have heard many times about our challenges on receiving timely decisions from the California Public Utility Commission better know as the CPUC. The prior delays in decisions by the CPUC have impacted our company on many fronts and thus resulting in earnings that have been relatively flat, ratings by credit agencies that have changed, and our prudent decision to delay some capital projects for that first half of 2003. But we have always felt that this was an opportunistic positive challenge and so we've dedicated ourselves to working with the CPUC and not to use them as an excuse. Sometimes we must remind ourselves of their role in being the voice of the consumer, which means they need to ensure that we are investing prudently.

People at the CPUC have their own set of challenges and many times get little appreciation for the work that they do. With that said I believe we have turned a significant, a very significant quarter in our business. Upon reflection there has been much success in 2003 in releasing the [log jam] of rate filings. I also believe our relationship with CPUC has become a more collaborative one, especially during the last 3 months. While things can obviously change quickly, given the process, number of players and number of initiatives, I believe that we are making a meaningful progress.

In 2003, we received approvals on filing that totaled to almost $26m of annual revenue, -- that is right, $26m. To put in perspective that represents about 10% of our 2002 total revenues. Since most of the decisions were received in the later part of the year, about $9m of the $26m annual increase was recorded in our 2003 revenue numbers. In addition, we received approval to recover costs through surcharges that totaled another about $9m in addition to the $26m. Of the $9m in surcharges about $3m was recorded in 2003. These approvals had a big impact obviously on the latter part of 2003 and will have even larger impact on 2004 revenue growth. Let me share with you the components of the $26m. 2.2m was from step rate increases that were affective in January of 2003. We received approval on two advise letters related to the new Bakersfield Treatment Plant; one in April of 1.9m and one in October of $4.2m. In September a decision was issued on our 2001 general rate case commonly referred to as GRC, which was for $12.8m. There were several filings adopted in the September-December timeframe related to increased rates on wholesale water these totaled about $4.8m; all total that's $26m. One final time, that's 26m. As mentioned, we received approval to implement surcharges. These are not permanent increases but still represents significant cash flow and pre-tax profit for us. The 2001 GRC decision in September included a catch-up provision to allow for an effective date going back to April 2003. This was for about $4.5m and will be collected over 12 months and in May we received approval to include 4.6m, which was collected over 44 months. And I have one more item to report.

We received approval this month January to increase rates to step rate increases from prior GRCs. These totaled about $4.2m, which is a great way to start off 2004. There are still several other rate filings in the pipeline. These are for our 2002 GRC, our 2003 GRC, additional balancing detailed filings, and the filing for wholesale water rates for one district. These may have some impact to 2004 revenues, but really it's too early to provide good estimates of the amounts and the timing. Therefore, we are going to refrain from making projections. No questions here ladies and gentlemen and I will explanation for you. Once final decisions are made that will result in changes to customer bills, we will be sure and let you know. I hope this update gives you an appreciation of our progress on rate filings and an indication of things to come. Now I would like to turn the conference back over to -- the weather is great, CFO, Dick Nye.

Thanks a lot bob. Now I would like to cover our capital expenditures and financial plans. The Company funded capital expenditures for the full year of 2003, were $53.9m. In 2002, we had $71.6m. The biggest change was in the expenditures for the Bakersfield Treatment Plant, which primarily were funded in the 2002 year. For 2004, our Company funded capital budget is $65.8m. Preliminary estimates that we've made for our capital budget for 2005 and going forward is to have about $80m in 2005 and around $70m per year for the next three years after that. These are higher amounts than what we had reported in our previous quarter earnings call. This level is high when you compare to levels [spend] at the 1990. We plan on making expenditures to meet water quality standards and to have a systematic and realistic replacement program to our infrastructure principally, [inaudible]. Being a regulated utility company, capital expenditures are the main way that we grow our business, we always stand up to the projects that have been approved in rate filing, thus we were [inaudible] expenses and make a return on dollars we spend on capital expenditure.

As this is a growth in the business, we will need to fund a large portion of these, as the operating cash flow coupled with other cash needs will not be sufficient to cover all the funds needed for our capital expenditure. This is a normal situation for our growing utility business. Our financing plan is to obtain capital using roughly a 50-50 split between equity and debt in 2004 and the next several years after that. I estimate that we will need to obtain about $40-50m of additional capital in 2004. The markets have been supportive for us in the past and we don't anticipate issues in obtaining this capital needed to grow our business. Our liquidity is in good shape. We currently have about $5m borrowed on our main credit lines that have a capacity of $55m. In comparison, we had about 35m borrowed against the lines a year ago and early 2003.

In the fourth quarter, we completed our refinancing program that in total involved $100m of our 270m in long-term debt. The total savings from those refinancing program we estimate to be about $2m on an annual basis. Our effected interest rate on long-term debt is about 6.9% and if you go back two years ago it was around 8.2% in 2001, but we've been able to dramatically reduce that interest rate on a long-term debt.

As noted in recent press releases, Moody's and S&P have shown concerned in meeting their criteria to support our current rating while they have lowered our ratings of A1 and A+, they have put us on watch for negative outlook using their terminology. Their concerns are on the timing of rate decisions by the CPUC and the amount of capital expenditures. If you look backwards, one can understand their position, but if you look forward given the recent decisions we have obtained then things should look a lot better. Our objective with the rating agencies will be to backup our statements with recorded results and show improvement in 2004. Another objective will be to increase their understanding of our business and educate them on how we grow the business.

Now, I'd like to turn it back over to Bob Foy who will share with you some comments on changes that's of CPUC.

Thanks Dick. There are a few developments that are very, in my opinion, very noteworthy, as they do represent some changes at the CPUC. In a decision for the 2001 General Rate Case [Tom] refer to again as GRC. An effective date was established by CPUC which stopped the permit loss from the delay on this case. This was the first time in California Water utility received this treatment in a rate filing. While this did not set a precedent for future filings, we are very encouraged by the CPUC agreeing to this course of action on this particular filing.

Now, let us move onto California Assembly Bill 2838, which became effective for rate cases filed after January 1, 2003. The essence of this bill is to allow our interim billing once the normal time for deciding on a rate case is passed; normal time in this context is 12 months. The CPUC has not yet published implementation procedures concerning AB 2838 at this time. We filed our 2002 GRC in January of 2003, asking for interim rate relief based upon this bill. In October, the Administrative Law Judge allowed for interim rates to be build over the inflationary component of the filing and established an effective date in October or October of 2003. While this was for only two of our districts, our fairly large districts and the amount is fairly minor, we are encouraged by the action and philosophy, as this is the spirit of AB 2838. We view this as a very, very positive change.

Now I'll move on. Two of the five CPUC Commissioners have their terms in office expiring on December 31st of this year. These are two Commissioners who have consistently been the most challenging to obtain positive notes on almost every issue presented by California Water utilities companies. We do not believe that these two people will be reappointed by our new governor of California, Arnold Schwarzenegger. One of Arnold's recent actions is the appointment of Randall Hernandez (ph.), a Republican as he is Appointment Secretary. [Part] of Mr. [Hernandez] background, he is holding senior position with the Southern California [Anderson] and the Long Beach California in Area Chamber of Commerce. We believe, he will be very thoughtful to Governor, Schwarzenegger in finding replacements to understand the business of utilities. Our new governor has been making some news worthy statements recently. To quote from a recent state speech, and I quote "The executive branch of this government is of Macedon frozen in time and about as responsive." And in his budget again "a constitutional amendment for competition in government through outsourcing opportunities will provide one of the necessary tools for reform. This may encourage more municipalities to outsource their water operations either through O&M agreements or selling of their systems. Change is probably well off in the future, but the change in direction gives up hope in this arena." Go Arnold Go. Now back to you Dick.

Okay. A short comment in the meeting of the Board yesterday, there was approval given for the quarterly dividend of 28.25 cents a share for common share holder. The date of record is February 7 and the payment date is February 20. In our press release we did have the 21st but the payment date should be 20. As noted before in other calls we have a very long history of paying dividends, we paid consecutive dividends since 1944 and we have increased the dividend every year for the past 37 years. I would also like to invite all listeners to our annual stock holder meeting on April 28th at 10 o'clock at our [San Jose] corporate office. We would really like to meet you in person and share with you our accomplishments and plans for the coming year. Now I would like to turn it over to our moderator and open it up for question from our end.

Thank you sir, ladies and gentlemen if you have a question at this time please press the "1" key on your touchtone telephone, if your question has been answered or you wish to remove yourself from the queue please press the "#" key. Again if you have a question please press the "1" key on your touchtone telephone. Our first question is from Neil Kalton of AG Edwards, your question please.

Good afternoon guys. Just a question on the land sale gains If my calculation is right it looks like you added about 18 cents to '03 EPS, is there any guidance you could possibly give us even if it is just directionally as to what we can expect there in '04 for the land sale gains?

It's really hard for us to give guidance on that, what we do is work that when there is market opportunity for those property and they also take a long time for the transactions to happen and they are dependent on developers actions and a lot of others things that go into the equation so, to be able to predict those and give you any guidance from that is just extremely difficult for us.

Okay. Fair enough. Thanks.

Again, if you have a question, please press the "1" key on your touchtone telephone. Our next question is from David Schanzer of Janney Montgomery. Your question please.

Yes, good afternoon. I realized you have the best place in the world to sell water but this is a best place for pipe replacement and pipe repair, what I wanted to ask was, you covered a lot of ground in talking about operating and maintenance expenses in the most recent quarter, and I guess, I know, it's hard to pull some of these things out, that you don't control of like the purchased electric power and purchased water to some degree, but if you could somehow pull those things out and look out over the next three quarters, what kind of increases do you see going forward for O&M?

The one that is probably more difficult to really forecast is the maintenance side of the equation, because it just depends on [main breaks] and that sort of thing. I mean we have maintenance cost increases of 10% this past year and thus we can predict that it will somewhere in that range plus or minus 2-3% and that our -- in our operating costs, we will have some increases to -- again it is real hard for us to forecast that but it's probably somewhere in that range.

Let me ask this question, if you are sitting down to budget for the year, do you use something like the rate of inflation as a boogey?

Yeah, we look at that plus we pull our district or operation people in developing our budget, trying to get there with some on where they are seeing their cost to increase that.

Okay. Thank you

David it may interest you to know that in that regard before we set the budget each year our engineering team visits each and everyone of our operating districts and works with that district manager as to what his or her needs are as to infrastructure and improvements and then when they come back to our corporate head quarters they quench the numbers and that's how the budget is developed.

Great, thanks.

Our next question is from Selman Akyol of Stifel Nicolaus your question please.

Thank you, when you are going to the surcharges you said you had 4.5, 4.6, the 4.6 going out of the 24 months then you said you had 4.2m in step rates for this January and would it be prominent going forward?

The step rates will, yes.

Okay. Great, thanks.

Surcharges no they are time sensitive.

Once again if you have a question please press the "1" key on your touchtone telephone. Sir, at this time I am showing no further questions. Ladies and gentlemen at this time I would like to give you instructions to access the digital replay of today's conference call. The conference will be available starting today January 29, 2004, at 7 o'clock PM Eastern Standard Time. To access the conference please dial 1-888-836-6074. You will be prompted to enter a pass code of 359329. Again the dial-in number for the relay is 1-888-836-604 and the pass code to access is 359329.

Okay. Thank you very much, Matt. Just a closing comment our next teleconference is currently scheduled for April 29th. Please check our website at www.calwater.com to confirm the date and time. You can also subscribe to a reminder service to receive an email, a couple of days before the call. I'd like to thank everyone for their time today and listening to our report on California Water Service Group, and we'd like to wish everybody a good day.

Good bye all.

Good bye everyone.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.