California Water Service Group (CWT) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the California Water Service Group Second Quarter 2005 Earnings 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. If anyone should require assistance during the conference please press "*" "0" on your touchtone telephone. As a reminder this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Dick Nye, Chief Financial Officer and Bob Foy, Chairman of the Board. Gentlemen you may begin.

Thank you very much Matt. Good afternoon, everyone and welcome to the earnings call for California Water Service Group. My name is Dick Nye, CFO and joining me today is Bob Foy, Chairman of the Board. Today, we will be discussing our second quarter results for 2005 compared to 2004 and we are also going to be covering few other matters such as our regulatory update, capital expenditures, our financing plans, and update on our arsenic projects, and the dividend that was just approved by the Board of Directors. Then we'll open it up for questions from 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 Security Laws and as outlined in 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 that are described in the Company's filings with the SEC. These factors are also available in yesterday's earnings release, which can be viewed from our website at www.calwatergroup.com.

Okay, with that I would like to cover to our financial results for the second quarter and again my comments will be comparing our current quarter versus the second quarter of 2004. To summarize we have more rain this year than the prior year, we had more days that had rained, and also the rain extended in to the May timeframe and even a little bit into June, which is abnormal for most of our districts. This negatively affects our volume, revenue, and net income compared to the prior year. Our revenue was down about $7.4 million or 8%. The causes for that change was primarily due to the rainfall with usage from existing customers being down about $10.8 million. Partially offsetting that was an increase from rates which was about $2.5 million and from new customers of about $0.8 million. On the rate changes I tried to classify those as what I call permanent meaning they don’t have a set time limit on when they expire and temporary. Of the 2.5 million all of the 2.5 million are permanent. We did have some temporary changes in revenue from rates from balancing accounts and from the 2001 catch up but those pretty much offset each other as far as the change to revenue goes. Then I would like to make a few comments on rainfall and temperatures. For our California districts we have 2.5 inches for the quarter, average for our districts compared to last year which was only 0.3 inches, and the historical average is about 1.6 inches for the second quarter.

Temperatures were slightly cooler this year compared to last year in the average by about 1 to 2 degrees, but the big impact was the rain. As far as number of days that have rained for our district it was an average of 14 days for the quarter and compared to last year it was four days so, a big changes in the numbers of days where we experienced rain obviously impacts our revenue to the usage. On our customer growth, customers grew about 1.1% compared to the numbers of customer we had in June of 2004.

Now I would like to move on to our operating costs, the biggest operating costs we have is water production. In terms of million of gallons water production was about -- was down about 13%. In terms of cost it was down about 12% or $4.2 million. Again this decrease in our cost is related to the lower usage from the weather. We have got three major components within water production costs, the biggest one is purchase water that was lower about by about $3 million or 12%. For purchase power it was lower by about $0.8 million or 13% and pump taxes were lower by $0.4 million or 18%. As far as the mix of production for our California operations it was about 50% of the mix was for purchase water and that compares to 48% for the second quarter of 2004. For well production it was 46% compared to 48% last year and surface water was the same, 4% this year versus 4% last year. Our other subsidiaries in New Mexico, Washington, Hawaii all of their production is from well so they don’t have any mixed component between purchase and well production.

Combining the drop in our revenues for usage with the lower cost in water production that we can attribute to the weather, we estimate that the impact on our earnings per share due to weather is approximately 18%, I am sorry 18 cents per share which accounts for the whole change for the quarter. For our other operation costs they were about flat between the quarters, we saw increases in payroll benefits and we are up about 6% or $0.8 million but, these cost increases were almost entirely offset by lower costs for worker’s compensation of about $0.5 million and lower cost for chemical which is lower by about $0.2 million. You can see in our P&L our maintenance cost was up pretty significantly quarter-to-quarter up about $700,000 or 24%. There was not one item or one district that accounted for a large portion of the increase, we had increased maintenance cost for ponds getting ready for the high demand that season that incurs during the summer, we also had increased repair cost in wells and mains. We did see some higher repair costs on the mains due to higher cost related to street paving. On our depreciation and amortization it is up about $0.5 million or 7% related to our capital spending. Federal and state income taxes were down as you would except due to the lower taxable income.

We also had an increase in the amount of shares outstanding, they are up about 8% quarter-to-quarter which is related to the additional shares that were issued in June of 2004. So overall diluted earnings per share was 41 cents per share compared 59 cents per share, a decrease of 18 cents per share. And the big item was the weather that we estimate to be 18 cents a share, so that accounts for the full difference and so we had pluses and minuses that negated each other. I wasn't going to cover in detail the first six months but just to summarize our earnings per share for the six-month period was 45 cents per share compared to 67 cents per share from last year. Again similar to the second quarter the primary cause of the decrease is due to the wet weather. So with that I’d like to turn it over to Chairman Bob Foy.

Thanks Dick, good afternoon everyone. I wanted to provide a bit more information on the impact weather has on Cal Water, the bad news is the higher precipitation costs, our revenue declined in the second quarter of 2005. In Southern California rainfall for the rainy season was the second highest level since records have been kept. In Northern California rainfall was 150% of average but more unusual it rained through the month of May, where the rain usually ends in March or April. The good news is the higher precipitation has increased our water supply. The snow pack in the Seers was much higher than in prior years resulting in snow accumulation 34% higher than average. Reservoir levels throughout the State of California have increased to 16% above average levels and 31% above 2004 levels, these are averages. To give specific -- to give you a specific example, Lake Isabella which is near our Bakersfield district is up 81% from its average.

Also on the brighter side or maybe I should say pucker side temperatures have been soaring in July. Cases implied, in my town where I have lived for years Stockdon in California with water serviced by Cal Water, last Saturday it was a 106 degrees, last Sunday it was also a 106, Monday was a 101, Tuesday a 104, Wednesday, yesterday a 100 degrees, and we should hit a 100 degrees again today.

Let's move on to our Bakersfield district. It's our largest district in our company in terms of people served. 247,000 water users by means of our own operations and contract operations that we have with the City of Bakersfield. We have had a current heat pattern there that threatens to become the longest heat wave in the past ten years. This appears to be a certainty as high as range from 107 to a 113 degrees with little relief inside and then per an article that was issued by the associated press on July 23rd to quote a sentence in that article, some 200 cities in the West hit daily record highs last week. Now let's talk about something else positive, as noticed -- as we have noticed or mentioned to you in past analyst calls two new commissioners were appointed this year to the Californian public utilities commission also know as the CPUC. Their names are Diane Grueneich and John Bohn. Ms. Grueneich was confirmed by the California state senate in May, Mr. Bohn was appointed in May and his confirmation hearings have yet to be -- have yet to take place. Both are full loading members of the CPUC and will serve 6 year terms each. Diane Grueneich is a democrat and has an environmentalist background. Prior to joining the CPUC she was the principal of a -- the principal of attorney of a law and consulting firm that she founded back in 1986. She has 27 yrs experience in energy and environmental, to include working for a San Francisco law firm specializing in energy issues and she has been staff council at the California Energy Commission. She has a law degree from the Georgetown University School of Law and a Bachelor of Arts degree in Human Biology from Stanford University.

John Bohn on other hand is a Republican and has served in positions with private companies, public agencies, and governmental agencies. In 2001, he became Chairman of Global Net Venture partners, a global financial and advisory firm. Previously he co-founded and became Chairman of Chematch an internet based petrochemical trading exchange. He also served as President and CEO of Moody’s Investor Service for over 7 years. So his other experience includes service in the U.S. Treasury Department, being a U.S. Ambassador and Executive Director of the Asian Development Bank, and he was made Vice Chairman of the Export, Import Bank of the United States. Mr. Bohn has a law degree from Harvard and a Bachelor of Arts degree from Stanford University.

While we are just beginning to work with these two Commissioners we are encouraged by what we have seen. I have had the personal pleasure of meeting both of them and it strikes me in my opinion that they are both well qualified, they are both willing to understand the issues, and appear thorough in their thought process in looking at the issues, where that long last a balance between consumer and investor owned utility viewpoints. Last week we received a decision from the CPUC for our 2004 general rate case, which gave approval for annual rate increases of $7.6 million. The decision reached was substantially the same as the proposed decision announced last month. As we have reached the preliminary settlement with the staff, the approval from all five Commissioners was received, which would include Commissioners Grueneich and Bohn.

One highlight of this recent decision was receiving a return on equity of 10.1%. Let me go to that figure one more time, 10.1%. This is the highest rate granted by the CPUC to our company since the mid 90's. This decision covers 50% of Cal Water customers. We think that’s very significant. As disclosed earlier, the staff of the CPUC raised issue with our treatment of sale of surplus property. We continue to believe in our position that we were in full compliance with the applicable regulations and believe our responses to the issues raised solidified our position. Due to some unforeseen circumstances at the CPUC unrelated to this matter this issue will probably not be resolved until the fourth quarter of this year and other regulatory matters we submitted our preliminary filings for the 2005 GRC, which covers approximately 25% of our customer base. It is too early to communicate the amount of rate release at this time as adjustments will be made to the preliminary filing. This process is in its early stages and is unscheduled.

Now we did receive approval for on an advice letter basis for our West Lake district which will amount to approximately $600,000. It is currently pending a filing for balancing accounts for about $500,000 worth of refunds to customers related to purchase power expenses occurred in 2004. This filing is expected to be effective in the third quarter or early fourth quarter therefore the amount is expected to impact both our 2005 and 2006 financials. Also when certain capital projects have been placed in service we will file for rate adjustments through advice lawyers, which is a PUC rate adjustment mechanism for specific items. Although slow as to the impact to our total business we are planning to do a filing for our New Mexico operations in the third quarter this year. For our State of Washington and Hawaii operations we are not planning on any filings in 2004-2005. Now I would like to pass the ball back to Dick.

Okay, thanks a lot Bob. Now I would to cover our capital spending and financing plans. For the second quarter capital expenditures for company funded CapEx was about $14 million and that compares to $13 million last year. Year-to-date that put us at about $29 million for company funded capital expenditures compared to 21 million the prior year. Our full year budget for capital expenditures for 2005 is about $85 million. Due to some lags in the actual spending versus budget, I currently estimate that our cash outflow for the current year well, is expected to be around $70 million, as some of these expenditures will fall in to 2006 as far as when the cash is actually paid for the expenditures.

Beyond 2005 as we stated before, our capital spending is estimated for the next 5 years to be somewhere between $70 million to $80 million per year. So, still a very significant level of capital expenditures that we see on the horizon. As far as liquidity we are in very good shape, we have got about -- have about $80 million in cash at June 30th, got full use of our credit facilities. For right now there is no major financing plan for this quarter, for the next quarter we may do a debt issuance in the December timeframe or that may slide into 2006 and again that will just depend on the current timing of cash flows related to capital expenditures. I wanted to make a brief comment on Sarbanes Oxley Section 404 which is on internal controls, just so the questions come up from few people and although this isn’t a huge component of our cost structure, it is – it has been one that has had some variance to it.

Related to 2004 we had spent about $900,000 of external costs for Sarbanes Oxley Section 404. For 2005 we are estimating external cost to be in the $500,000 to $600,000 range mainly due to the reduction of outside consultants. Also we have higher two additional employees who will be heavily involved in the Section 404 work. I would like to note that the SEC and PCA will be detriment with some additional guidance in May but we don’t see that this is really going to translate into any real reduction in auditor fees. We do see that our auditor fees or expect our auditor fees to go down some in 2005 but this is mainly just to being in the second year of this process and having reduced cost due to elimination of startup type of activities. So, with that I would like to turn it back over to Bob

Thanks Richard. In January 2006 the Federal Environmental Protection Agencies limit for arsenic will change from 50 parts per billion to 10 parts per billion. We have been working towards compliance with the CPU regulations and feel confident we will meet the standard. Currently only 3 out of our 24 California districts have arsenic issues that need to be addressed. These three districts are Kern River Valley, Stockdon, and Bakersfield. In Kern River Valley alternative supply is being developed using surface water and drilling new wells. There are three separate projects that are estimated to cost $5 million and these are expected to be in service in the fourth quarter of this year. Now in Stockdon, a blending approach is being utilized. There is one of the blending facility, it's estimated to be in service in January 2006 and will produce enough volume to support demand by our customers in the early part of that year.

Phase II is estimated to be ready in the second quarter of 2006 which will increase supply to meet the higher demand during the summer. The cost of both phases for Stockdon is estimated at $15.6 million. In Bakersfield the solution is geared to warrant redirecting current supply by adding names. The cost of this project is estimated at $4.8 million and is projected to be in service by January 2006. An interesting item that is that none of these projects is using treatment to meet the new standard. The total of these three districts is about $25 million that will allow town water to be in full compliance with the new standard. We expect to recover all these expenses in rates. Certainly this is good news as you know because we earn on invested capital.

Now let me turn to another subject. In order to further energize our company to positively addressing the needs of our valued customers and our valued stockholders. Officer reorganization changes have been made. Note, no one new has been brought in from the outside which is a strong indication of the respect we have to the abilities of our officer core. You would have noticed that all of these changes in yesterday press release. But here are couple of examples that we think are significant relative to these changes. Effect of October 1, 2005, California Water Service Company's Chief Engineer, Mike Rossi will become the Vice President of Engineering and Water. Rossi began his career with the company back in 1977. He holds a Bachelors of Science degree in Civil Engineering and a Master of Science degree in businesses administration, both earned from that distinguished University, San Jose State University. He is also a registered Civil Engineer and State certified water treatment and water distribution operator. Robert Guzzetta who currently holds that position was appointed as the Vice President of Operations. He will exceed Raymond H. Taylor who served a company with distinction for 23 years. As Board Chairman I think these moves are very strategic, they are packed with energy and synergy for our company, we're very excited, but, interesting enough this all started when a number of months ago Mr. Taylor came in and advised us that he was retiring. And rather than just filling out one position either from within or from the outside which you know here's a golden opportunity to take advantage of our dedicated officers and make changes and what we have done has been so well received within the company and so well received outside the company that we are just absolutely are delighted and we think these changes are going to serve again our customers extremely well and we think it will serve our stockholders extremely well. And finally here are two great words you will hear from a Board Chairman at yesterdays annual meeting the Board declared a dividend of 28.5 cents per common share. It will be payable on August 19th to stockholders of record August 8th. 2005 marks the 60th year that Cal Water has paid a dividend and it is the 38th consecutive year where we have increased our dividend. Now, I would like to open it up for questions from the analysts. Matt, you take over please.

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 David Schanzer of Janney Montgomery. Your question, please.

Good afternoon and congratulations on getting through a typical weather quarter.

Thank you David

That was actually my major question, I wanted to get a clarification on that 18 cents, is that 18 cents versus last year or 18 cents versus normal?

18 cents versus last year.

Could you give us a rough ballpark idea of what you think that would have been had you had normal weather?

It would have been a lower amount because we had favorable weather conditions in the second quarter of 2004 but I didn't do a calculation on that Dave, I can tell you --

Would you guess ballpark somewhere in the vicinity of 10 cents or 11 cents?

It will just really be off the wall, I guess.

Okay. So I would get back offline and maybe go over that number with you. I guess I don’t think, I just would say that your report was pretty all inclusive, I don’t have any other questions.

Boy, that is so great Dave.

Yeah, thanks. Good job guys

Thank you very much

Thank you

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

Yes, thanks. I just have a couple of quick questions if I may?

Sure.

First of all on your maintenance expense, the 3.8 million is that kind of what you foresee going forward, is that your run rate?

Well, we don’t -- as you know, we don’t give forecast on our earnings and such but maintenance is also very difficult to project because on a main brace we have to hurry up and go get it fixed. A lot of our maintenance expenses I would call are not planned maintenances, they are reactions to something that broke and we have to hurry up and get it fixed. So its, we don’t provide predictions on that and even if we did it would be real hard to give a prediction. It does feel like what we experienced in the second quarter thought that was much higher than what we’ve seen on a run rate basis.

Okay, so then you basically just had a lot more unplanned for main expense.

Yes

Okay and then the other question I had was on your 7.6 million in terms of annual rate increases, that you received from a regulatory stand point.

Yeah.

What did do you originally file for on that number?

We originally filed for $26.5 million.

Okay, that’s what I kind of thought it was a 20 plus number, is there anything that came back in terms of why the widespread between what you ask for and what you got?

While there were some major changes I guess, some were expected in that. In the original filing of 26.5 million just because the way the filings go that includes step rate increases which we received those in January of this year for those districts that were in the filing. So, that was one of the big changes between the 20's product, a huge change but one of the changes between the 26 and the $7 million. The other item was that there were some capital expenditures that the PUC essentially carved off and once we get those projects completed, we can go back to them and ask for increases through advice letters. So they are kind of putting them on hold until we can put those projects and serve it. So that was kind of the two big changes in there.

Okay, now you are going to get just on a ballpark level if you were to adjust that 26 for the separate as well as the -- I guess what the CPUC carved out, where would you go back and say that original estimate was?

I don’t have a number on that, I mean you are probably talking I don’t know maybe $13 million to $15 million or something in that range.

Got you.

Compared to what we received as 7.6.

Got you. Okay, great. Thanks.

Okay

You are welcome.

Once again ladies and gentlemen if you have a question please press the "1" key on your touchtone telephone. Our next question comes from Steve Bamboosa (phonetic) from Longworth Capital (phonetic). Your question, please.

Good afternoon gentlemen. What portion of your oil production costs relate to electricity for pumping well water and given the hot weather thus far in Q3, how you are expecting these cost of trend for the quarter?

I am not sure I quite understand your question, you want to know what percentage of our cost relates to --

You mentioned production cost and water production cost is having kind of 3 main components?

Oh yes.

And I know you pump about half your water from wells and is there a significant electricity component, that goes into that, that cost item?

Yeah, hold on just a second. I will give you an example for the second quarter you can see our total water production cost is about $29 million, okay, of that amount about 5.2 million is for purchase power.

A 5.2 million, okay.

Okay and I am sorry what was the second part of your question.

And I guess in terms of how that -- what drives that cost, is it basically spot prices for purchase power?

No, it is not spot prices in that and we don't lock into energy contracts. It's the range that we are charged from the power company's on basically when we use it. We do get different rates if we can use power on off-peak hours versus peak hours and so we will see a fluctuation there on the power that use both the pump water out of the wells and the power that are used to maintain pressure throughout the water system.

Great and then the second question is what was the proposed ROE and equity ratio that was filed this part of 2005 January case that you just mentioned, was it the same as what you were authorized in year 2004 rate case?

No, in our original filing our requested ROE was around 12% and we received 10.1 authorized ROE.

And so for the next, you mentioned that you filed the new rate case for the '05, you file the new rate case covering 25% of your customers?

That’s correct.

What are the ROE you request there?

Well, we are in the middle of that process but we will request a similar amount around 12% ROE.

Okay. Thank you very much.

Okay, you are welcome.

You bring out an interesting point on the ROE, one of the main trusts of our organization called the California Water Association, that’s made up of industrial water utilities just in California, one of their main thrush efforts is to work for the PUC staff and the commission towards increasing that ROE through the years and that’s going to be one of their major projects. Like just to get higher and higher ROEs and that we think we should too.

Thank you.

Thanks.

Our next question is from Tim Winter of A.G. Edwards, your question please.

Hi guys.

Hi Tim.

Can you talk a little bit about how you plan to get recovery in our weight recognition of this Arsenic projects, is this going to be like immediate advise letter, site increases or will it be covering the general rate case?

That will be covered in our general rate case filings, it won’t be a special advise letter for the arsenic because in our GRCs we not only put in the first year cost, but we also put projection in for capital expenditures for the next 2 years and so these arsenic projects are already in those filings. For example like for Stockdon it was included in our 2004 GRC, the Stockdon arsenic project.

Okay, can you talk a little bit about the [mounting] accounts, are you being squeeze it all or earning below ROE in any of your districts because of higher balancing accounts and where is the California industry on getting that corrected or restored to our what had been prior to the previous commission?

I am not quite sure I understand your question. We do have the instance where if we over earn in a particular district we are not allowed to get full recovery of the balancing account so, that restriction is still in place, is that what you are asking Tim

Right and aren’t two guys -- isn’t the industry trying to get that restored to previous recognition?

Yes, we are working to getting that to where we get full recovery of the balancing account here regardless of whether we over earn or under earn in a particular year.

Major effort Tim will take place in that regard.

Okay, thank you.

Okay, thank you.

You are welcome.

Gentlemen at this time I am showing no further questions.

Alright, thank you Matt.

Ladies and gentleman, a replay of today’s conference will be available beginning today -- beginning at 7 O'clock PM Eastern Time. To access the replay please dial 1-888-266-2081 and enter a replay code of 733669. Again the replay will be available today beginning at 7 PM Eastern Time through September 25, 2005. The dial in numbers 1-888-266-2081 with the replay code of 733669. This concludes today’s conference. Thank you for participating. You may now disconnect. Good day.

Thank you very much every one for participating in the call, I really appreciate it.