California Water Service Group (CWT) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the California Water Service Group First Quarter Earnings Results Analyst Teleconference.

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 telephone keypad. As a reminder, this conference is being recorded.

Introducing your host for today's conference, CFO, Richard Nye. Sir, you may begin.

Thank you very much. Good afternoon, everyone, and welcome to the earnings call for California Water Service Group. Today, we will be discussing the first quarter results for Cal Water. We also will be providing an update on several items, such as our rate case filings, capital expenditures, financing plans, some comments on water supply, and the dividend that was recently approved by the board. Then, we'll 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 by the Federal Securities laws and as outlined it the company's SEC 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 website.

OK, with that, let me cover the first quarter results and compare them to the first quarter of 2003.

Revenue was $60.2m, up 17% from the prior year. Our net income was a positive $1.4m, which is $0.08 a share, and that compares to a loss of last year of about $.8m or a loss of $0.05 a share.

The operating revenue increase of 17%, or $8.9m, was primarily due to increases in rates. Also, increases in new customers lifted revenues and we also had an increase in usage from our existing customers.

The weather impact was fairly mixed, in that the weather for January and February we had experienced lower temperatures and higher rainfall, which hurts our business. But then, in March, it went the other way where we had higher temperatures and lower rainfall.

Let me share with you the breakdown of the revenue increase of the $8.9m. About $7m came from rate increases; about $1.6m came from increases of usage by new customers; and then about $.3m came from increases in usage from our existing customers.

Since the revenue impact on the rates is so big, and since we've had so many different rate filings in the equation, I thought it would be beneficial that I give you a further breakdown of that $7m impact from rates.

Approximately $.7m came from step rate increases; $1.2m was from the Bakersfield Treatment Plant; $1m was for the purchased water offsets; about $.5m from balancing accounts; about $2.4m was related to the 2001 General Rate Case, or GRC; and then we also have a catch up component from the 2001 GRC, which contributed about $.9m to our revenue increase. We had $.2m from interim rates for our 2002 General Rate Case, and then about $100,000 from our operation for Hawthorn. And those components add up to be the $7m increase in rates. So obviously, a lot of activity going on for changes in our rate structure.

On the variance of the $1.6m for usage of new customers, that includes about $.7m for Hawaii operations. These operations were acquired in May of 2003, so they were not-- we did not have Hawaii in our first quarter 2003 numbers.

Let me move on to operating expenses. Total operating expenses were $54.8m for the three months ended March 31, 2004, compared to $48.7m for that same period of 2003, which is an increase of about $6.1m or 13%.

The biggest component of our operating expenses is water supply, so let me talk about that a little bit. Our supply of water for California breaks down as follows: In the first quarter of this year, we got about 40% of the water was from well production, and that's down from the total mix. It was 48% in the first quarter of 2003. Our purchased water was up as a component of the total. It was at 56% in the first quarter of 2004, compared to 51% in the prior year. And then our surface water was 4% of our total water supply and it was 1% in the prior year.

That's just for California. For our other operations, Washington Water, New Mexico Water and Hawaii Water, they obtain all their water supply from wells, so it's 100% for both time periods

Our water production expenses increased $2.1m, which was a 12% increase compared to last year. Of that $2.1m, $2m of it was related to purchase water. The weather really impacted water usage for us in March as water usage was up 19% just for the month of March. This drove a quarter increase for our total water usage of 10%. So, in addition to the water usage being up, we also had increases in purchase water rates, which was up significantly for several of our districts. So, we got a two-sided impact of higher volumes and higher cost per gallon for our water cost.

Moving on to some of the other cost components. Payroll costs that are charged to operations increased about $.6m. Our pension cost was up about 7%, which is about $100,000, and our medical costs for employees and retirees was up about $300,000, which represented a 16% increase. In addition, we had a property damage claim due to flood damage by pipe breakage in one of our districts, which was below our deductibles, and we also had some increases in insurance premiums, and that was about $300,000 impact. You can see from the P&L that the maintenance expense was pretty much flat between the two quarters.

Depreciation and amortization expense increased about $.8m, or 13%, primarily because of our 2003 capital expenditures. A major component of our depreciation expense increase relates to the Bakersfield Treatment Plant, which began operations in 2003. And just that district alone added about $.4m to depreciation expense, so it represented about half of the depreciation increase that we saw in 2004.

Our federal and state income taxes increased $1.5m due to the change in taxable incomes.

On other income and expense, it was about $.6m of pretax income, and that compares to $1.2m of pretax income. You can see on the P&L that we had minimal property sales for the quarter versus last year. We had about $.6m for gains from property sales.

Interest expense decreased slightly, about 1%. This was due to lower interest expense on long term debt as the result of our refinancing on a portion of our long term debt. In addition, we had lower short term borrowings on our credit facility, so that produced lower interest expense. And then we had partially offsetting, a decreased capitalized interest as our work in progress account in 2004 was below what we experienced in the first quarter of 2003.

So, in summary for the results, again, a very good quarter for us. Earnings per share was $0.08 a share compared to a $0.05 share loss in the prior year, so that's an increase of $0.13 per share.

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

Thanks, Dick. Good afternoon. To some of you, almost good evening, ladies and gentlemen. I'd like to share with you the latest developments in rates for our company.

In January of this year we received step rate increases of $4.4m, which go into effect in the early part of this year. In February, we received approval on an advice letter for our Stockton district, related to higher wholesale water costs. The amount was $.7m on an annualized basis. In April, we received a decision on our 2002 General Rate Case filing, covering four districts, which will provide Cal Water with $3.5m on an annualized basis.

Our company's fine and dedicated rates personnel attended numerous workshops in the past quarter held by the California Public Utilities Commission, better known here as CPUC.

Changes are being reviewed to increase efficiencies, with the intent of achieving stated timetables on future filings. In California, the filing frequency for General Rate Cases is once every three years. But in the past, our districts were not spread evenly by the year. For example, one year we filed for 15 of our 24 districts. Starting this year, 2004, Cal Water will convert to filing 8 of our 24 districts and 8 districts each subsequent year, hopefully helping provide a more stabilized revenue stream. We are working with the CPUC so that Cal Water is not financially impacted unfavorably during this transition period.

In addition to this, our headquarters here in San Jose, where Dick and I are speaking from, we will change to filing once every three years; whereas in the past, headquarters was filed every year, but only for the districts up for filing. This new approach will require Cal Water to project headquarter expenses out every three years versus the prior process of projecting out but for one year. However, this change will allow all of headquarter costs to be incorporated into rates for each of our 24 California districts every year.

We continue to work with the Commission amicably to resolve the issue over a significant fine proposed by the CPUC staff. The fine was for our failure to report to the CPUC two very small acquisitions which served but a total of 280 customers. We believe this will ultimately be resolved through a minor payment in relation to the inadvertent infraction involved.

We are also working with the CPUC in their review of property sales. At this time, we cannot provide any estimates as to what the final impact, if any, this review will result in.

As I have mentioned with you in previous analyst teleconferences, the terms for commissioners, CPUC commissioners, Loretta Lynch and Carl Woods will expire in December of this year. We are confident-- we are very confident that Governor Schwarzenegger will make appointments that will be fair and unbiased in their water rate making duties, providing a new enlightened era of CPUC regulation.

Dick, your turn.

OK. Thanks, Bob. Now I'd like to cover our capex and our financing plans.

Company funded capex for the quarter was $8.2m. In the quarter for 2003, we had about $17.9m. So, on a quarter-by-quarter basis, they were down. But, even though the capex was low for the quarter, we're still budgeting to spend the $65.8m that was in our SEC filings for the full year of 2004. So that has not changed.

Also, for our expenditures going beyond 2004, we're planning to spend around $70m to $80m per year for the next 5 years. Being a regulated company, capex represent growth in the business. We only spend after the projects have been approved in rate filings, thus we recoup our expenses and make a return on dollars we spend for capex. We will need to obtain funding for a portion of these expenditures as the business doesn't create enough cash flow, coupled with other cash needs, to fund all of the capex. This is a normal situation for a growing utility business.

Our financing plan is to obtain additional capital, using roughly a 50/50 split between equity and debt over the next several years. I estimate that we will need to obtain $40m to $50m of additional capital in 2004. The markets have been very supportive for us in the past and we don't anticipate issues in obtaining capital that we need to grow our business.

Our liquidity is in good shape. At March 31, 2004, we had about $10m borrowed on our main credit lines, which have a combined capacity of about $55m. In comparison, we had about $29m borrowed against these lines at March of 2003. So you can see we have significantly lower short term borrowings.

On the acquisition front, we plan to close on a deal on May 3rd to purchase National Utility Company, which is located in New Mexico, for approximately $1.1m. And this represents the rate base for their water and wastewater systems.

Now, I'd like to turn it back over to Bob.

At this point, I'd like to share with you our thoughts, our latest thinking, as to water supply in the state of California. In general, the California water supply is one of increasing competition for a limited resource, and increasingly stringent potable water quality standards assessed by both the federal EPA and the Department of Health and Services here in the state of California.

The long range outlook for domestic supply is one of challenges, but definitely solvable. Increased domestic demand will be met by the following: new sources, principally from our drilling new wells; increased use of recycled water; storing water underground in wet years to be pumped out and used in dry years; increased conservation, which will need to come from-- basically, from agriculture, to have any kind of a meaningful impact as, in the state of California, agriculture uses about 90% of California's water supply. Desalinization may come into play, depending to a big degree on the economics.

Also, a significant positive force in providing California with future water supplies is a U.S. Congressional effort referred to as Cal Fed. California Senator Diane Feinstein is pushing the Senate for approval of a broad-based water plan. On the other side of the Capitol, the House of Representatives, they have a similar plan and supported by a California Representative, representing my very own district as a matter of fact, Richard W. Pombo, who is also Chairman of the House Resources Committee. We're confident that Cal Fed will result in sufficient water supplies for years to come in California.

Now for a change of pace, I want to report on yesterday's Cal Water Annual Meeting. Each of our Directors was re-elected by a 99% yes vote. And our auditors, KPMG, received an approval of 98% of the votes cast. There were no significant issues voiced by stockholders at the meeting yesterday and, frankly, we are very pleased with the support shown by the ownership of our company.

The board approved a dividend of $0.2825 per common share of stockholders of record on May 10th, payable on May 21st. As you may recall, Cal Water has declared a dividend for the past 59 years in a row and has increased its dividend 37 consecutive years.

Also, we have revised and expanded the information provided on our websites. We have a new site exclusively dedicated to the California Water Service Group, and that address is www.calwatergroup.com. Cal Water Group all one word. We hope that you'll place this address in your favorites and reference this handy guide as to up to date data and happenings on the group level. Now, let me give you that address one more time. I'm a salesman by heart. www.calwatergroup.com. Also, our California regulated business information can be found on www.calwater.com. Now, both these sites are cross-referenced back and forth to each other.

Now we'd like to turn it over to our moderator and open the lines up for questions from you, ladies and gentlemen of the analyst profession. If Dick and I don't get any questions, we're just gonna have to turn around and give you some more answers. Thank you.

Ladies and gentlemen, if you have a question, please press the 1 key on your telephone keypad at this time. If your question has been answered or you wish to remove yourself from the queue, please press the # key. If you are using a speakerphone, please lift the handset before asking your question.

Our first question comes from Heidi Dor [ph] from Janet Scott Montgomery. Your question, please?

Good afternoon, gentlemen. A few questions about the regulatory environment. I'm sure you knew this was coming since I work with Dave. Can we maybe go into-- I understand that you're going to put in for eight different districts at one time. How does it work? Does the CPUC give you one decision for all eight or will they kind of come in fits and spurts, how their decision is?

More than likely, they will receive a decision that includes all eight districts at one time. The rate cases will be presented separately. We'll have hearings in each one of those eight districts. But again, when a decision is made by the administrative law judge, it will include all eight.

OK, great. And can you maybe refresh our memory. Do you have any pending regulatory matters or anything on the horizon that you plan on filing outside of California; in Hawaii or New Mexico or Washington?

Yes, we do. In fact, we just filed for a rate case in Hawaii, so that's in process right now. We're planning on filing for a rate case for our wastewater operations in New Mexico. That's planned to be filed during 2004, but has not been filed at this time. And in Washington, at this time we're not planning on filing for any rate changes for 2004.

And what kind of a percentage increase are-- can you maybe tell me in millions of revenue what you're looking for in New Mexico? Give me maybe a scale?

New Mexico represents a very small component of our business. It only represents like 1% or 2% of our total revenue. And I don't have a dollar number for you what that rate filing will be. In fact, we haven't formulated that yet. So, I don't have that information to share.

And when was the last time that you had been in for rates in New Mexico?

I don't know. We've operated the New Mexico companies only for a few years. We only bought those operations in 2002 and, since acquiring them, I don't think we've had any filings since our acquisition of them.

OK. And switching gears a little bit. I know that you mentioned what the percentage of water production was in wells versus purchased. Can you maybe give us an idea how we should look at that for the rest of the year and maybe into '05? Do you think that it'll stay around the levels that it had in this quarter?

No, for a total year, we normally have it pretty evenly split between wells and purchased and that's, you know, pretty much 50/50. We will see an increase in our surface water because of the Bakersfield Treatment Plant being on board for a full year basis where, in 2003, it was only on board for half, and also in somewhat of a startup mode. You know, so surface water border was about 4%. So, just on ballpark numbers, I would estimate a fairly even split between well and purchased for the total year. The first quarter was a little bit of an anomaly for us just because some wells came out of operation in our [Bear Gulch]. We didn't have our treatment plant going for the full quarter.

And lastly, can you tell us what your average cost per acreage is for this purchased water in the quarter?

I'm sorry, I don't--.

You don't have that handy?

I don't have that information.

OK, no big deal. Thank you.

OK.

Again, ladies and gentlemen, if you would like to ask a question, please press the 1 key on your touchtone telephone at this time.

The next question comes from Selman Akyol of Stifel Nicolaus. Your question, please.

Thanks. Are you guys still open on a 2003 rate case for this year?

Yes. We haven't received the decision on that. You know, we just received the decision on the 2002 rate case. That was in our press release. But, the 2003 is still pending at this point.

Do you have-- when do you expect resolution on that?

We do expect resolution on it this year. I know that's pretty broad. If we've had challenges. I'm trying to estimate when that will happen. It does seem to be moving along at an acceptable pace through the process. But, you know, Selman, I feel uncomfortable trying to give you a good estimate just because of the--.

All right. Not a problem, but let me just ask you this. Can you say what you were asking for in that one? Is it still open?

No, not really, Selman, because what we were asking for, it frankly has changed through the process, as some things have got pushed out into different years and all that. So, until we get a final decision, I'm uncomfortable trying to give what we are asking for because it-- we can stay with that number or it gets changed through the process. And until we get an approved number, I feel uncomfortable trying to guess what that would be.

OK, great. Thanks.

We show no further questions and we'll turn the conference back to our moderator for any further comments.

OK. I would like-- just like to say so we can get it on people's calendar, our next teleconference is scheduled for July 29th, 2004. Please check our website at www.calwatergroup.com to confirm the date and time. And also, you can subscribe to a reminder service to receive an email a couple of days before the call, so that's available.

I would like to thank you very much for your time in listening to our report on California Water Service Group and hope everyone has a great day. Thanks again for your time today. Bye-bye.

Thank you, ladies and gentlemen. This conference call will be available for replay beginning at 7:00 p.m. today and remaining until midnight on May 6th. To access the replay, dial 888-266-2081 and enter passcode 422518. Again, dial 888-266-2081 and enter passcode 422518.

This does conclude the conference call. You may now disconnect.