California Water Service Group (CWT) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the California Water Service Group first quarter 2006 earnings results conference call. At this time all participants in a listen-only mode. Later we will conduct a question and answer session. Instructions will follow at that time. If operator assistance is needed on the call, please press star, then zero on your touchtone telephone. As a reminder, this conference call is being recorded. Now I would now like to introduce your host for today's call, Mr. Peter Nelson, President and Chief Executive Officer. Please begin sir.

Thanks very much. I want to welcome everyone to the call today. I'm starting the call because it's a very great pleasure for me to introduce our new Vice-President and Chief Financial Officer and Treasurer, Marty Kropelnicki who began with Cal Water on March 13 of this year. Marty replaces John Tootle, who was acting as CFO since about last September. I know most folks on the call have not met Marty yet, so let me give you a little bit about his background.

Most recently – in fact we recruited Marty from a company called PowerLight Corporation, which is a leading global provider and installer of large-scale solar electric systems and also has energy efficiency services. Mary was Chief Financial Officer at that company. Before that he was Chief Financial Officer and Executive Vice-President of Corporate Services and Corporate Secretary at Hall Kinion & Associates, which is a multi-national staffing and consulting company. Previous to those two assignments, Marty worked at Deloitte Touche in their consulting group at Pacific Gas and Electric Company and at Hewlett Packard. Marty has got bachelor's and master's degrees in business economics. He is a welcome member to our team. We're very pleased to have him here. Everyone on this call will get to know and work with Marty in the weeks and months ahead. I think you'll be very pleased and very impressed, as I am, with Marty.

I'll turn this over to Marty to do the disclosure and start the financials.

Thanks Pete. Just to remind everyone that during the course of this conference call, the Company may make certain forward-looking statements. Because these statements deal with future events, they are subject to risk and uncertainty. Actual results could differ materially from the Company's current expectations. Accordingly, the Company advises all current and potential shareholders to refer to the risk factors disclosed in our 10-K, 10-Q, and other reports filed from time-to-time with the Securities and Exchange Commission.

I'd like to go over some of the highlights from the press release that the Company put out close-of-market yesterday starting off with revenue. Revenue for the quarter was 6.2 million, an increase of 8% or 4.9 million from Q1 of 2004. This increase in revenue, 1.9 million was a result of rate increases; 700,000 came from new customers; and 2.3 million was due to increases in water usage by existing customers early in the first quarter.

Going down to the OpEx line, operating expenses for the quarter were 60.4 million, up 4.6 million or 8% over the same period last year. Included in these expenses were 1.6 million of increased water production costs as well as $1.7 million of increases in general operating expenses.

Looking at depreciation and amortization for the quarter. Depreciation and amortization increased $713,000 to 7.7 million. This amount was particularly due to two things, (1) the increased capital expenditures that the Company had in 2005; and changes in depreciation schedules as approved by the PUC last August.

Looking down at the net income line, net income for the quarter was 832,000, up 152,000 or 22% over Q1 of last year. Earnings for the first quarter of 2006 were $0.04 per diluted share, up 33% from 2005. In addition, the Company also declared a 246th consecutive dividend increase in the Company's history.

Pete.

Sure, thanks Marty. I am going to move onto three regulatory issues now. Before I talk about regulatory issues or rate making, I've got to mention the weather as it has hit the press, I think, nationwide in the last month or two. Today in California, at least northern California, it's actually sunny and dry and has been for a couple of days, which looks like spring has finally sprung here. That is about four or five or six weeks late in northern California. As usual, the weather in California has been very unusual this year.

For the first quarter we had a fairly normal January followed by a relatively dry February followed by the wettest March on record when it rained 23 days out of the month. That pattern continued into mid April. Probably the best description of its abnormality in April was our local baseball team, the San Francisco Giants, had back-to-back rainouts April 11 and 12 this year. One rainout is unusual for the Giants. In fact, the last rainout was three years ago. Back-to-back rainouts haven't happened for 45 years in San Francisco. That gives you a picture of how we're unusual again here in California.

Now I'll move on to the three regulatory issues. The first, I'll say a word or two about our new Commissioner, Rachelle Chong. Second I'll talk about earnings tests on balancing accounts, which was eliminated a couple weeks ago at the Commission. And third, an update on our 2005 general rate cases.

First the Commissioner, Rachelle Chong. Rachelle filled Susan Kennedy's seat as she has moved on to work for the Governor's Chief of Staff. This seat terms out at the end of 2008. Commissioner Chong comes from a telecommunications and legal and entrepreneurial business background. Most notably she was an FCC Commissioner in the mid 1990s. I have met Rachelle several times and talked to her on several occasions. To me she seems obviously very well qualified and very impressive, so we are very happy with this appointment.

Second issue is earnings test on balancing accounts, which we've called the W1 decision in the past three years. April 13 this year, the Commission eliminated this regulatory procedure and they voted unanimously to do so. A little background may help for some of the people on the call. Our balancing accounts in the water business in California combine three types of costs. One is our wholesale water rates from our wholesale suppliers. Second is electricity costs to produce water. Third is pump taxes. We track those balancing accounts in each of our 24 rate-making districts in California. Then we true-up those balancing accounts each year at the Commission.

What this earnings test, which was put in place in 2002, means is that to the extent that we were earning more than an authorized rate of return in each of our 24 districts, we were then prevented from recovering those balancing accounts in those districts, even though we incurred those costs prudently and reasonably. This procedure, which I'll call W1, was only place in California and only in place for water utilities. Really made a very un-level playing field for the water companies. The last three years for us – and it was especially difficult for multi district companies, I'll say. The last three years for us, this earnings test cost us $3.5 million in expenses that we prudently incurred and could not recover. So this decision is of course, good news for water utilities in California – that it's been eliminated. Essentially in the balancing account area, we're now essentially back to restoring the rules that were in place prior to 2002.

There might be a little confusion because there still remain one earnings test for water companies in California. That is on what we call on our step rate increases. Let me explain this quickly. Each of our 24 districts has a three-year rate cycle. So we ask for general rate case treatment for eight districts each year – one-third of our districts. When those rate cases are adopted, the years two and three of the rate case cycles are what we call our step rate increases. Those step rate increases are still subject to a similar type of balancing, or to a similar type of earnings test. We're very happy to see W1 eliminated.

The last regulatory issue is the status of our current 2005 general rate cases, which covers eight of our 24 districts. The total request is for $10.9 million in annual revenue. These cases are still in process. They are coming to their conclusion. In fact, we are waiting for a proposed decision from the administrative law judge. It probably should come out in June, if not before for a July 1 effective date. We have no word yet on what the proposed decision will include. We expect it to be reasonably written.

Now I'll go back to Marty for capital programs.

Thanks Pete. Capital expenditure for the quarter was approximately $10.3 million. Our total forecasted CapEx budgets for 2006 is approximately $85 million. This $85 million is a fairly sizeable CapEx for California Water. It's the largest CapEx budget we've had in the current decade. Pete and I are in the process of reviewing the funding requirements for the Company and working with our Finance Committee. We do anticipate that some time this year we will be doing our equity offering to raise capital. We'll share our plan for that once we conclude our discussions with the board.

Looking on to liquidity, the Company finished the quarter – we're on the balance sheet now with approximately $18.5 million in accounts receivable, of which the majority is current. The Company has lines available up to $55 million of which we've drawn about 8.5 million for the year. Q1 tends to be one of the more difficult quarters in that we have dividend payments. One of the slowest quarters for revenue. We expect that to pick up as we go forward. We will be doing some financing activities later on in the year to fund our capital expenditures. We wrapped the quarter in relatively good shape. Pete.

Okay, thanks Marty. I'll make one more comment on acquisitions and then we'll open it up for questions. Although there hasn't been a lot of action in the West Coast lately in the acquisition area. In fact, this market has slowed way down in the last two or three years in the western states, especially in California. In 2005 we were able to add small systems – acquire small systems in New Mexico and Washington and actually one in California, which may have been the only acquisition in California in 2005. We bought a public system in the Bay area here.

Our strategy for acquisitions remains unchanged. Our target market is the western states. We look at small and large acquisitions. They must be accretive to stockholders. Our approach is very cautious, very conservative, very prudent. In looking ahead, of course, we don't comment on specific projects, but I feel very good that we are very ready. We've got the infrastructure in place, the information systems, the organizational structure, and a good track record of acquiring systems both large and small [indiscernible] to make us a large system. A good track record of buying systems and integrating them into our Company in all four states. I guess I'd say we're patient and prepared in the acquisition area for what would come in the future.

With that, I think we're ready to open it up for questions.

Thank you sir. (OPERATOR INSTRUCTIONS) [Francesca McCannon], Stanford Financial.

Hi there Pete and welcome Marty. Glad to have you. I'm looking forward to meeting you in person.

Thank you.

Sure. Just a couple of quick questions. First on the Commissioners. Certainly last fall and [inaudible], it seemed like John Bohn had taken a specific interest in water. Is that – are you continuing to see that and see him being involved in making headway for water issues? My first question.

Also, the newest Commissioner, Commissioner Chong who – what I've heard is that she has more of an interest in telecom. Has she taken a specific interest in water as well?

I'll answer the question. Commissioner Bohn – he denies being the official water Commissioner. However he has shown a real interest. I have seen him join organizations and attend policy forums that are directed strictly to water. He is definitely of the five, he is taking the most interest and is the most active and has become the most conversant with the water issues. I think that is a good trend. John is a very good businessman and a good commissioner.

On Commissioner Chong, she is very inquisitive, very bright. She is a very quick study. I think she has an interest in water also. She is obviously technically skilled in telecommunications. She wants to learn about water. In fact, she has invited all of the water companies to come see her just to introduce themselves and bring her up to speed on the water issues from our point of view. I am very encouraged by her and her openness and her willingness to listen and learn.

Good to hear. Another question on the CapEx budget of 85 million. It was just over 10 in the quarter. How will the other 75-ish be broken down for the next three quarters, more or less what you're seeing now. Will it be a huge investment either in one of the next three quarters, or more even spending across the next three quarters?

We anticipate that – obviously when you start out the first part of the year, you don’t run out and blow your whole budget in the first quarter. There will be a ramp-up time. In addition, given the heavy nature of some of the CapEx projects that we do, i.e., the digging, the trenching, etc., it's hard to do when you have difficult weather, which is what we've had in Q1. You will see it ramp-up. I think you'll see, once it ramps up, I would say by the end of Q2, you'll see a carry-forward through the end of the year.

But not – so thereafter – after the end of Q2 more flat at whatever level it has ramped to, not continuing up the entire year?

Part of the challenge for us – utilities tend to be very capital intensive. Forecasting cash flow needs and matching it to the expenditure rate is really important in terms of planning when you need to raise capital. That is an effort we have underway. Because this is a fairly large CapEx budget for the Company that we've seen in the last five, six years.

Right. That leads to my final quick question. The timing of your equity offering – when are you looking at for that?

That's another good question. Pete and I have started to discuss this. Hopefully it will be some time this year. We don't want to get too far into the year, i.e., into December. I would anticipate right now some time probably in early Q3, if I had to pick a date.

Okay, great. I think that's all for now. I may come back with more. For right now, I'm set. Thank you and congratulations to both of you.

[Frank Bianco from Veritus].

I got on the call late, so you may have answered this. I thought I read somewhere something regarding a possible rate increase. Can you bring me up to speed on that.

Our current major rate increase is our 2005 general rate case, which is composed of eight of our 24 operating districts in California. The total request is $10.9 million of annual revenue. We expect to propose to Susan from the Commission some time in June, if not before.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS) David Schanzer from Janney Scott.

Good afternoon. A couple of questions. The new Commissioner – where did she get her telecom experience – under which Administrations?

I think it's 19 – she was an FCC Commissioner from 1994 to 1997.

What party is she normally associated with?

You mean what political party?

Yes.

I don't know that.

I didn't either. Just curious. In the income statement – well, before you get to the income statement, in terms of the CapEx, the $85 million, is there a percentage of that that you can finance with tax-exempts?

No. I don't believe the Company has done any tax-exempts since we're a for-profit corporation. I'd have to go back and look at the history of the Company. Typically the tax-exempts are usually done by municipalities.

They are also done for pollution control and environmental stuff. Now other State's – some of the typical CapEx things can be moved in that direction. That is why I was asking.

We do have applications in for tax-exempt financing for one of our systems, which is in the Redwood Valley along the Russian River to require a new treatment plant. It's fairly small potatoes compared to the $80 or $85 million.

That is what I was after. There are people who are able to do even more significant-size deals tax-exempt as a way of saving some interest cost.

As far as the income statement is concerned, would you characterize anything that happened in the quarter as being more one-time nature than not.

In the operating expenses you had a couple things. (1)The Company is self-insured on its employee welfare plans. We did have a couple large claims that floated through from employee claims for their health care costs. In addition, we did have to increase our loss reserves associated with a couple accidents in Southern California that we had to beef up our reserves a little bit for.

If you aggregated those things roughly could you give me a dollar amount or a percentage of the O&M increase, or something like that.

It's probably in the ballpark of about 1 million to 1.5 million.

Good information. Property taxes – they seem to be a little higher than we thought they might be. Is there any color you could add?

Sure. We did have some property tax increases that took place effective January 1 as well as some of our franchise fees went up. That is something that we follow. We're given a coupon. We pay it. It passes right through.

Lastly, along the income statement lines, is there anything in the revenue category and/or the expense category that were timing things that might have appeared in the first quarter that you were expecting to appear in the second – or in other quarters?

No. It's accrual accounting so you try to catch all that stuff. No, not really. I think the big thing in the OpEx line was on the self-insured plans all-in where you have the medical, the dental, and our general liability reserves that we had to bring up. That is really where the increase that we saw in the OpEx line [associated with] the other expenses where they really popped up from.

Thank you.

(OPERATOR INSTRUCTIONS) [Michael Goddler with Raine Murray McCarin].

Good afternoon. Most of my questions have already been answered. Could you give me a little color on what your thoughts are on the acquisition front. Specifically, are you looking to stay within the existing regions? Or are you looking at different states now?

Our target market is the western states. Having said that, we see the most opportunities for acquisitions in the states we're already in, especially Washington and New Mexico and, to some degree, Hawaii.

Alright. That's all I had. Thank you.

(OPERATOR INSTRUCTIONS) Mr. Nelson, I am showing no further questions.

Thanks very much everyone for being online. You'll get to know Marty in the weeks and months ahead. Thanks everyone for you attention and questions.

Thanks everyone. Bye-bye.

Ladies and gentlemen, once again thanks for attending today's conference. You may disconnect. Have a great day.