California Water Service Group (CWT) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter and-year end 2005 conference call. At this time all lines in a listen-only mode mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during this conference please press star, then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. John Tootle, acting chief financial officer. Sir you may begin.

Thank you Matt. Good afternoon everyone and welcome to our fourth quarter and year end earnings call for California Water Service Group. Today we will be discussing the fourth quarter and full year results of operation for 2005 for California Water Service Company and Group. We will also be providing an update on several other items such as regulatory matters, capital expenditures, arsenic compliance, and a dividend approved by our board.

Before we get started I would like to address some legal matters. First, I would like to read the forward-looking statement. As an introduction to the information we will be discussing, please be aware that some of the comments can be considered forward-looking statements as defined by the federal securities law and outlined by 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 rulings to vary from expectations are described in the company's filings with the SEC. These factors are also available in yesterday's earnings release, which can be viewed on our web site at. www.calwatergroup.com. Secondly, our announced results are unaudited. We do not expect our announced results to significantly differ from our audited results which will be reported in our 10K filing in early March.

Now turning to the financial results for the fourth quarter of 2005 versus the fourth quarter of 2004. Revenues were up by $8.5 million or 12% to $77.8 million. Revenues increased primarily due to an increase in rates of $3.3 million, of which $3 million was permanent and $300,000 was temporary. Usage also increased by $4.3 million. In Southern California and Central Valley, precipitation was down for the quarter, but in Northern California precipitation increased. Overall precipitation was lower as well as the number of rain days for us in California this year. Overall temperatures were slightly warmer for the quarter.

New customers contributed about $900,000 in revenues. That's a customer growth of about 10.7% over the prior year. Overall operating costs were up by $8 million. That's an increase of 13% to $69.9 million. Water production costs were up as well as water production itself. Water production went from 26,100 million gallons to 28,400 million gallons for the quarter and that's an increase of about 8.5%. The water cost increased 2.9%, which is -- I'm sorry, $2.9 million or 12% and that totaled $27.2 million. The higher purchase water cost was up 8% from $19.2 million to $20.8 million. Water credits associated with purchased water were up to $300,000 from $100,000 in the prior year. Generally, purchased water is our highest priced water source.

Purchased power increased from $3.8 million to $4.8 million or 26%, and that was primarily due to higher power rates in California, and we anticipate that we will be able to recover those rates in the future. Pump tax increased from $1.3 million to $1.6 million, which is about a 21%, and that's of course associated with increased pumping during the quarter. Our mix for California only was purchased water decreased from 52% to 51%, well production increased from 44% to 45% and surface water stayed about the same at 4%. Overall the margin after taking into account water costs increased about 13% or $5.6 million due to the higher revenues. Other operations costs were flat. Payroll and benefits were up very slightly at about 2.3%. Other operating expenses, maintenance was up $0.5 million or 16%; depreciation was up $1 million or about 16%, and that's due to higher rates authorized by the commission in connection with our 2004 GRC that was adopted in July of 2005.

The state and federal income taxes were up $3.2 million. That's an increase of 143% and that's primarily due to -- two- thirds of that is due to higher taxable income and one-third is due to a higher effective tax rate. The property taxes and other were up $200,000 or about 17% over the prior year, and that's of course due to just increased plant. The nonoperating and regulated income is up $1.7 million or 275% due to property sale of $1.5 million in our Los Altos district. The property was no longer necessary and useful for regulated operations. There were no comparable sales -- property sales in the prior year. Interest expense is flat. The weighted average of shares outstanding increased slightly and had a negligible impact on earnings per share. Overall the diluted earnings per share were $0.32 cents per share compared to $0.20 cents per share, an increase of 12% or 56%. In review the big items are increased revenues, and increased sales or increased -- other income due to the sale of property.

Turning to the full year, our earnings per share is $1.47 compared to $1.46, that's a 1% increase. Revenues increased 2% to $320.7 million, of which $12.3 million was due to rate relief, $4.1 million due to new customers, and that was offset by $11.2 million drop due to usage by existing customers. Water production cost decreased by $3.5 million or 3%. Other operating costs increased by $1.7 million or 2%, and that was primarily due to associated employee benefit costs. Maintenance increased by $2 million or 15% due to recommends associated with pumping and water treatment equipment as well as mains. The depreciation increased $2.6 million or 10% as previously discussed and that had to do with higher rates authorized by the California commission. Increased income taxes of $2.9 is due to the slightly higher income and the higher effective tax rate. Operating income overall decreased from $41.4 million to $39.8 million or 3%. That was offset by other income which increased $2.4 million to $5.1 million or $2.7 million increase which represents about 113%. And that's primarily due to the property sales. Interest expense was flat. With that I'm going to turn it over to our president, Pete Nelson.

Thanks very much John. I'm going to talk about three areas briefly. First I'll talk about our 2005 financial results which John just went over. Then I'll talk about arsenic and water quality because I'm always asked questions about the arsenic rule. And third I'll talk about regulation. I've got three or four items there. So first our 2005 results, as John just went over them with you. I'm pleased with the final results. Highlighted with revenue at $321 million and net income at about $28 million, those are both all-time highs for the company. And earnings per share at $1.47 is the second highest earnings per share and does beat 2004 by $0.01 a share. So, overall as I said I am pleased with the results, especially in light of all the rainfall we had here in the first two quarters of the year.

Southern California had had, I believe, their second wettest year on record in early 2005, and I think they had about three times normal rainfall by drove consumption and sales down in California all the way into the early summer. So with that kind of drop in sales and putting us behind, it feels good to get caught back up and produce those results.

Second item is water quality and arsenic, and we've have talked about this for two or three years now. The new arsenic standard of 10 parts per billion went into effect last week, and we'd been planning on this for about three years and have dedicated the infrastructure and put it in place, and I believe it's about $25 million in capital for us. We do expect to be in full compliance as we planned for arsenic.

Next I'll move to several regulatory items. First in California we do have a new California public utility commissioner. Her name is Rachelle Chong. She was sworn in in December, and she fills Susan Kennedy's seat and her term, which expires at the end of 2008. Commissioner Chong has 21 years of experience in telecommunications law and policy. In fact, she was an FCC commissioner back in the mid-to-late 90s. We don't have any experience with commissioner Chong yet, but we have heard very positive things about her qualifications, so we are looking forward to getting to know her in her term. Second regulatory item is return on equity You have probably seen in the last couple of weeks the California commissioners granted water utilities returns on equities in the 9.8% to 9.9% range, and this is very disappointing to us. We believe the water authorized return on equities deserve to be higher on their own merit, when you balance the risks and returns of the water business in California and the California water utilities ability to achieve the authorized rate of return in California, but also in comparison to the return on equities granted to other utilities such as electric and gas companies in state. We're currently in hearings on our 2005 general rate cases and we're hopeful that fair returns will be adopted there. Just as a reminder, our last granted rate of return was 10.1% in 2005.

The last two regulatory items I have are more bigger-picture items and I'll talk a little about regulation in water, nationwide, then in California as a whole. First nationwide, three months ago, I was lucky enough to be selected and sworn in as the new president of our national water professional association, which is called the National Association of Water Companies. Big honor for me.

The public utility commissioners or regulators have an equivalent professional organization that's called the National Association of Regulatory Utility Commissioners, acronym NARUC. In 2005 NARUC, which is the commissioners professional group, adopted what they call the best regulatory practices for water regulation. This is an important document, and it's to my mind -- to my memory, at least, the first time such a resolution has been adopted by the national regulatory commission association. And in this best practices document, and we can refer you to their web site or we can get you a copy of it, but there's 28 best practices identified for water regulation. Among those best practices are things like a distribution system improvement charge or DISC, acquisition adjustments to consolidate nonviable water systems, earning a fair return on capital investments, several others as you can guess, a total of 28 best practices. If many of these best practices are adopted by states where they do not exist today, that will definitely improve water regulation nationwide and in those states where they would be adopted.

The second big-picture item is in California where the California Public Utilities Commission approved on December 15th last year their water action plan, which I believe also to my mind is a first time that they have adopted a water action plan. What the plan does is it lays out the policy objectives to guide the commission and the commission staff in regulating the water utilities in state. Again, we can get you the web site to look at the full plan. It's 28 pages long, or we can get you a copy. But you will see several of the best practices from the NARUC document and many other best practices and good regulation in this water action plan. Things like promoting infrastructure investment, consider putting in a disk, streamline PUC decision making, provide incentives through acquisitions of small private systems by larger water entities, just it's a very well written document.

I think when you look at both of these, the best practices document and the water action plan, there's many positive regulatory practices that are outlined here. I'll have to caution everyone as I caution ourselves here that these are best practices and plans that are now on paper. And they will take some considerable time and work and effort to make them and put them into practice in those states where they don't exist already. So that's my quick report and I'll turn this back to John to talk about financing and capital investments.

Thank you Pete. In the fourth quarter of 2005, the company had capital expenditures of about $26 million and that's versus $15 million for the prior year. You'll see it's an increase of $9 million, and a lot of that was to get in compliance for the arsenic rule that Pete has fully disclosed. The company for the year, the company's capital expenditures that they funded were $68 million compared to $49 million in the prior year. The capital budget for 2006 is about $85 million, about the same as what we had in 2005.

We expect our spending in 2006 and beyond to increase to the $70 million to $80 million as we expect spending will more closely match our budget. From a liquidity standpoint we are in good shape At the end of the year we had about $9 million in cash, and full use of our credit facilities; there were no short-term borrowings. In 2005 first quarter, we got a large tax rebate, refund that was from bonus depreciation for the prior year. We will not receive such a -- we do not anticipate receiving such a refund in 2006. So as a result, we will have to probably start borrowing on our short-term credit line in the first quarter of this year. We do not have any major financing planned for the first quarter, but anticipate that in the latter part of the year we will be doing either a debt or equity issuance.

I just wanted to comment also that in the past at this time we may have been announcing results of decisions by the commission on rate cases. As I explained on our third quarter call, our rate case cycle has changed, it's now a fiscal cycle which goes June -- July through June. So we will be anticipating our decision for our 2005 general rate case filing in, probably May 2006. Before we leave the commission issues, I want to also let people be aware that we had a very favorable decision in the fourth quarter regarding our gain on sale of property no longer necessary and useful for regulated operations. If you recall as we have disclosed in prior filings and reports, the commission asked the company to go back and to report on their sales from 1995 to about 2003 as to why particular properties were transferred out of utility operating plant, what we call rate base, to nonutility plant. And the commission found that the company had followed the commission rules and that with we had followed prudent practices and criteria in moving, transferring those properties out of utility rate base, and as such they thought that the penalty that the Office of Rate Payer Advocate had proposed was inappropriate. Unfortunately, they have not completely decided what to do with the gain on the sale. We have a generic proceeding which is open and the ultimate disposition of the gain was I'm going to say punted to that proceeding. There has been a proposed decision issued in the generic proceeding and it basically says that for water companies that reinvest their proceeds, which the company has done, back into utility plants, that the company should earn a full rate of return on those reinvested proceeds. So the gains would go 100% to the shareholders. Now, I would like to turn to our dividend.

I'm pleased to announce that the board of directors has increased the annual dividend from $1.14 in 2005 to $1.15 in 2006. This marks the 39th consecutive annual dividend increase in our 61st consecutive year for which we have paid a dividend. The quarterly dividend which will be $0.2875 per common share will be payable on February 17th to stockholders of record on February 6th. With that, this concludes our prepared comments and Matt, would like to start the question and answer period.

Thank you. Ladies and gentlemen, if you have a question at this time please press the one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from David. Schanzer from Janney Montgomery.

Yeah, hi. Good afternoon and congratulations on a good quarter. First of all could you give us an idea of what kind of tax rates you're expecting next year.

For 2005 --

For 2006 in other words, normalized tax rate going forward.

2006, we're expecting a rate slightly higher than the statutory rate. Probably about 41% to 41.5%.

Okay, great. And what was the impact of the weather on the quarter.

Well, overall the impact of weather was favorable for us.

Do you have it in cents per share or EBITDA or anything like that?

I don't have it in cents per share. The -- as I announced, the amount of revenue that it increased for the share was for existing customers about $4.3 million increase in revenues.

Okay.

If you want to I can give you a call back and have that in --

Yeah, if we could chat about that offline that would be great. The $1.7 million from the gain on the sale of property, that you got this year, do you suspect that that also will be subjected to scrutiny?

At this point, as I reported we're pretty favorable that that will not be, that they won't come back and look at it from a question of criteria of whether or not we properly transferred the property. We follow -- our engineering department follows now a very set guideline, I want to say checklist. That's what we discussed, and we went over with the commission, and that's what they found was reasonable, and really sort of followed an industry criteria for determining whether or not you wanted to maintain a piece of property and rate base and have rate payers continue to pay on that property when it wasn't being immediately used. So no, I don't think that that will be an issue going forward, Dave.

Okay. At one point there was a consideration about pursuing weather norm clause to make your results independent of rainfall and so forth, is that still up for grabs?

Yes, the revenue adjustment mechanism

Yeah

Yeah, we applied for that in our 2005 rate case and unfortunately with the -- switching over to the fiscal year from a calendar year, we're right now in the middle of hearings on our 2005 rate case. So, we have no idea what will come out of that, of the process until probably May.

Is it possible that that would be considered in it?

Yes, we anticipate that it will be.

Okay. And Pete spoke a little bit about arsenic at the national standard, we have heard rumors from time to time that the state of California might consider its own standard, is that still a rumor?

Well, Dave, we always hear the rumor, but I haven't heard the rumor for months and months and I do not expect California to adopt a more rigorous standard.

Okay. Moving on to more deep regulatory matters. The new commissioner, Rachelle Chong, which political party does she come from, do we know?

I believe it's the Republican party.

Okay. And the ROE of 9899 that you talked about, was there anything that approximated, I know this is not a Supreme Court case, but was there anything that kind of approximated a dissenting opinion, was there any sane mine there that spoke out against such a low ROE.

Let me address that. The decision of course that we were referring to was that came out with regard to American states.

I know.

And John Bohn, one of the new commissioners, did reserve the right to file a dissent I'm going to say relative to penalizing the company on rate of return. He did not think that that was appropriate to use a penalty in that form. So that was the, I would say the only sort of further Insight that we got out of that.

Yes.

To let you know, other water companies in California that are less or not as I'm going to say widely watched, some of them have been getting around 10. So right around 10%. So we're not seeing that it's moving up.

Well, it's sort of disappointing I think from our perspective because after you folks had gotten the 10-1 I think many of us were expecting some improvement. rather than recidivism, but it appears that that's the case. The other commissioner that was appointed slightly before John, I take it was okay with the 9899? Or don't we know.

We don't really know.

Okay.

I would say from that one decision you can't read much more into it.

Well, maybe the best thing for me to do is talk with American states and not put you folks on the spot. I guess that's about all I had to ask, thanks.

Thank you.

Thanks Dave.

Again, if you have a question please press the one key on your touchtone telephone. Mr. Tootle I'm showing no further questions at this time.

Thank you. All right. Well, with that I want to thank everybody for joining us on the call today. And for listening to our report. We anticipate that our next teleconference is scheduled for April 27th, 2006, at which time we will be discussing our first quarter 2006 results. You can check our web site at www.calwatergroup.com to confirm the date and the time. Once again, if you can you can subscribe to a reminder service we have and we will provide an e-mail to you a couple days before the call. Once again thanks for listening and have a great day. Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect, have a great day.