California Water Service Group (CWT) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the California Water Service Group First quarter 2009 Earnings Results. 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. (Operator Instructions) As a reminder, today's call is being recorded. I would now like to introduce your host for today's presentation, Mr. Martin Kropelnicki. Mr. Kropelnicki, you may begin, sir.

Thanks, Howard. Good morning, everybody, and welcome to the First Quarter 2009 Earnings Conference Call California Water Service Group. I'm Marty Kropelnicki, Vice President, Chief Financial Officer, and I'm joined with Pete Nelson, President and CEO. As a reminder, a replay of today's discussion will be available from April 30 through June 29 at 888-266-2081 ID 13347470. Also, our earnings release which was released close of market yesterday is available on our website.

Before looking at the quarter results and beginning our discussion, I'd like to take a few moments to remind everyone about forward-looking statements. In particular, 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 various risks and uncertainties and actual results could differ materially from the Company's current expectations.

Because of this, the Company strongly advises all current shareholders, as well as all interested parties, to carefully read and understand our Company's disclosures on risks and uncertainties found in our Form 10K, 10Q, and other reports filed from time to time with the Securities and Exchange Commission.

Now let's take a brief moment to look at the quarterly financial results. I will then turn it over to Pete Nelson who will give an operational update and then I'll come back and talk a little bit about our balance sheet and our recently complete debt offering.

For the quarter, the Company's revenue was $86.6 million, up 19% or $13.7 million over Q1 of last year. Changes that effected revenue within the quarter were as follows; positive changes were rate relief was a positive $11.6 million, new customers added $2.4 million, and the net effect of the WRAM, the Water Rate Adjustment Mechanism, and our modified cost balancing account, MCBA, was a positive $5 million. That's a total of $19 million of positive changes. That was partially offset by a reduction and $1 million worth of fees that will go to the PUC and a change in usage and other changes of $4.3 million. The net effect is $13.7 million.

Going down, looking at the operating expenses for the quarter, operating expenses increased $12.5 million or 18% to $80.3 million. Looking at the first line on added production costs, purchased water increased $2.2 million or 10.8%, purchased power increased $1.1 million or 31.5%, and pub taxes increased $192,000 or 16.1%.

Admin and general for the quarter increased $5.4 million to $18.8 million, primarily driven by increased benefit expenses for the Company outside legal costs. Other production increased $400,000 or 3% to $12.5 million. Maintenance for the quarter increased 13% or $500,000 to $4.6 million, mainly due to work on mains. And depreciation increased $1 million or 11% to $10.2 million. Taxes other than income increased $300,000 or 1% for the quarter to $4.1 million due to increased property taxes that the Company paid.

For the quarter, the Company had net income of $2.4 million or $0.12 per diluted share compared to $200,000 or $0.01 a share for the same period last year.

With that, I will turn it over to Pete Nelson and he will give you an operational update. Pete?

Thanks, Marty. Good morning, everyone. The first quarter is usually a pretty slow one in more ways than one and this quarter for us pretty much follows that pattern. I can be pretty brief. I'll cover a couple of rate making issues. One is ongoing, a proceeding that is not new to us and we're awaiting a decision in the next steps there. The second rate making issue is one we're preparing and approaching a major filing. And then I'll cover our emergency planning for the flu pandemic or swine flu pandemic which we're looking forward and planning for.

First, rate making. The first proceeding is the cost of capital which sets our authorized return on equity. For those of you who are new on the call, for the California commission, this is a new process where they've taken the cost of capital or authorized return on equity out of general rate cases for water cases and now deal with the returns solely in their own dedicated proceeding. The proceeding we're in the middle of now includes three water companies -- Golden State Water, which is the California subsidiary for American States Water; California American which is the California subsidiary of American Waterworks, and then us, the third party in the proceeding.

The original filing was May of last year and there was a proposed decision issued in December last year. We had some concerns about the proposed decision, in fact we were less than enthusiastic about it. It did recommend a 10.2 return on equity as authorized for all three companies and for us that would be no change. That proposed decision has been held on the PUC's agenda which means a decision has been delayed and at present we are just awaiting the commission's action on this and do not have any idea when that action will take place or what it will look like.

The cost of capital, just looking at the process now, we expect the cost of capital to be set every three years. So, this current proceeding would set the return on equity for 2009, 2010, and 2011 and then the next filing would be for the years 2012, 2013, and 2014.

The other proceeding is one we are preparing for. That is our 2009 general rate case. This is the first time the entire Company, all 29 rate making districts and the headquarters cost will be filed in one general rate case. The draft filing is due to the commission May 1 which is this Friday and from that draft filing the commission staff asks us questions or makes comments or recommendations to us to make it a complete filing from their perspective and then we take their comments and suggestions and questions, modify our filing, and file our final filing on July 1. So, in early July which would be the conference call, we'll be able to give you a much better idea what we are requesting.

This general rate case you probably notice is going to be in process longer than they have been in the past. It will be 18 months because the rates will be set starting January 2011. So, it's a little longer process this time.

The next item is the swine flu which has been in the headlines every day it seems like the last week or so. You'll find from an emergency response point of view all utilities -- electric, gas, telecom, water -- we all respond to emergencies pretty regularly. So, we all have emergency plans in place and test them all the time. We are no exception. We have activated our emergency response plans. In fact, we have a section dedicated to flu pandemic. It's been in the plan for years.

In this case, we're taking guidance from the Centers for Disease Control and Prevention, the World Health Organization, and medical professionals we have here. We're gearing up for more activity. Right now this is a day by day monitoring situation. This is definitely in the middle of our radar screen from an emergency response point of view.

Going back to the quarter, we think this is - the big news here for quarter is financial. This is the first quarter -- one of the first quarters where the new decoupling mechanism, the WRAM modified cost balancing account were kind of put to the test. It looks to me like they are working as they were expected to.

I'll turn this back to Marty to wrap up.

Great. Thanks, Pete.

A couple from the balance sheet I want to talk about and then I'll take a couple moments to talk about our debt offering. The Company ended the quarter with approximately $1.123 billion in net utility plant. That was up approximately 9.9% from Q1 of last year. It was up approximately $11 million from where we were at the end of the year, end of Q4 2008.

During the quarter the Company funded approximately $33 million of capital projects and we ended the quarter work in progress, our construction work in progress balance of $92 million. That's up approximately $35 million from what the WIP balances were in Q1 of 2008.

You may recall our CapEx budget for the year is between $100 million and $120 million. We're off to a good start in meeting that target.

I want to spend a brief moment to talk about our bond offering. As many of you know, on April 8, we filed with the Securities and Exchange Commission a bond offering to amend and restate our existing bond indenture and to sell $100 million of first mortgage bonds. Also, shortly after announcing the deal on April 8, S&P came out with their rating on the bonds. S&P gave these bonds, the first mortgage bonds a double-A minus rating which I think is one of the highest ratings on a first mortgage bond for Cal Water. They also reaffirmed the general corporate rating of A plus.

The bonds were sold at par. They were not sold at a discount and they have a coupon of 5.875%. So, the net proceeds to the Company were $99,350,000. After receiving those proceeds, the Company paid down approximately $46 million of outstanding lines of credit with our bank that we used to pay for some of the capital programs last year and the balance of the dollars will be spend on the 2009 capital program.

So, overall, given the instability in the credit markets, we felt the bond offering went very well. The demand for our bonds was very strong. The deal moved very quick. And we were very happy with the outcome and the rating.

With that, Howard, we will open it up for Q&A, please.

(Operator Instructions) Our first question or comment comes from the line of Mr. Jim Lykins from Hilliard Lyons. Your line is open.

Good morning, everyone. And congrats on the quarter.

Good morning, Jim. How are you?

Good. First, I was wondering if you could tell us what the status is on the reservoirs and aquifers and also any comments on what the drought situation looks like in California right now?

Good question, Jim. Right now we are looking -- in our service territories, we are not expecting any mandatory conservation actions from our wholesale suppliers. That's really where the direction comes.

I'll get a little more specific here. The San Francisco system wholesaler serves our peninsula districts here and they have had a 10% voluntary conservation request in place for months here. The metropolitan water district of Southern California has a 10% voluntary conservation request out also. And then our third supplier, which really doesn't give us much water is the Santa Clara water district. They've asked for a 15% which they call mandatory but there's no penalties involved.

So, we're working with our customers to make sure they have information to reduce their usage in our Los Altos district by 15%. So, I think the rains we got and some more snow in the late spring helped quite a bit. But still the state is trying to reduce its water use. That comes from the governor and from the wholesale suppliers but there's no mandatory in the sense of having a penalty for using more water than the requested conservation amounts.

Having said that, should we be thinking -- can you tell us how we should be thinking in terms of purchased water for the next couple of quarters?

Purchased water costs have gone up and they have been included in our rates.

Also, Jim, this is Marty. The MCBA basically picks up the purchased water cost. Basically that covers our production costs of the Company. So, any swings in purchase power, pump taxes, purchased water all flows through that account.

Okay. I also wanted to ask you about -- there was a decrease in accounts receivable. I'm wondering if that's translating to a higher bad debt expense?

Actually surprisingly enough, no. Pete kind of hit the nail on the head. Q1 typically is one of our slowest quarters from a consumption and sales and revenue perspective. When you look at the details of our accounts receivable, they're down, but that's because we've been collecting those accounts. Our bad debt expense was fairly consistent for the quarter and if you look at our over 60 and over 90 days, they are -- actually over 60 this year is actually better than what it was last year because we've had a lot of strong focus on our receivables.

The over 90 is about the same as last year. And the over 120 is about the same as well. In terms of our receivables, they're about 85% current. So, we haven't seen -- believe it or not, people are still paying their water bills. What I don't know -- is that a function of the AR SWAT team we put in place in the fall of 2007 and we've done a better job? I have heard some of our other companies that we've talked to are starting to see some problems with receivables. We have ramped up our bad debt expense but we have not seen a big swing probably in the last quarter.

Okay. That's good to hear. And one last one and I'll let someone else ask a question. I saw where there's going to be, I believe, $260 million allocated in stimulus funds for California. I'm wondering if there could be any impact with you guys.

Jim, we are not expecting any impact from that. It sounds like a big number, but when you think of the entire state and the water infrastructure needs and public and private agencies are all competing for the money, we're not planning for having any part of that. We have requested stimulus funds mainly for our conservation and water efficiency programs. So, we're hopeful there but we're not planning on receiving any of the money.

Okay. Thanks, guys.

Thanks, Jim. Have a good day.

Our next question or comment comes from the line of Heike Doerr from Janney. Your line is open.

Congratulations on a great quarter.

Good morning, Heike. How are you?

Good. I wanted to quiz you a little bit on the WRAM and how we should be thinking about second quarter. I recall that last year you had a favorable weather comp. The WRAM will eliminate that benefit on a year over year basis. Correct?

Let's pick apart the components of the WRAM. I think that's the best way to understand it. We're nine months with the WRAM and the MCBA, so we don't have a full year behind us to look back. We're not prepared to give any forward guidance on it, but I think if we look back at how the WRAM works, I think you get a sense of what we should expect.

First and foremost, if you look at where we were just with the WRAM, for Q1, the WRAM had a positive balance, meaning we under collected revenue of $5.9 million. That gives us an accumulated balance total on the WRAM of $10.9 million that was under collected. If you look at the modified cost balancing account, we were over collecting the production costs of about $100,000 for the quarter and an accumulative balance of under collection on the modified cost balancing account was $3.9 million.

So, that's where for the quarter you get the net effect of $4.9 million. And if you look at the cumulative effect of the WRAM MCBA, the net amount, it's about $7 million for the nine month period that we had it. So, you look at that and then you look at the fact that we have seen a decline in usage by existing customers and, as Pete said, the WRAM's working. We're ramping up our efficiency programs. As Jim mentioned on the last question, there's been a lot of talk of drought in the state of California. I think people are conserving more. We're seeing that. And the WRAM is stepping in and covering the Company and allowing us to reach for our adopted numbers. I think, as Pete said, the WRAM is working just fine. Those are the exact numbers that come out of our general ledger on the components.

Yes. This can be confusing. I appreciate that. Because we tend to report results this year versus last year. And last year's spring, actually late winter and early spring, we actually had a pretty dry year. So, you look at this year versus last year, sales were down for our customers and that was covered by the decoupling mechanism.

Then you have to also compare this year's actual to this year's adopted which was what was included in the rate case. And so you've got three different numbers. I appreciate it was difficult to kind of analyze those.

Thanks. That's helpful. That's all I had today.

Okay. Thanks, Heike.

(Operator Instructions) Our next question or comment comes from the line of Christian Bradbury from Sidoti & Company. Your line is open.

Hi, guys. How are you doing?

Good. How are you?

Congrats on the quarter. Just one quick question, there were some good questions. It shows that you guys sold some non-utility property. I was just wondering if maybe you could give a little detail on what that was?

Sure. I can talk about that. Keep in mind, Cal Water, because we're so spread out in the state, we actually have a lot of property. When a piece of property is no longer used or useful in utility operations, we will typically dispose of that property. So, in this case, we had a parcel that was no longer used or useful in the utility operations and it was sold for approximately $600,000.

Okay. I guess -- I don't know if I missed this. Did you guys give a date when you're going to receive a decision on the cost of capital?

We didn't give a date, Chris. In fact, we have no idea when the decision or a decision is going to be put in front of the commission again.

Maybe in the next six months?

I don't know. We hope so, but we just can't predict that.

Okay. That's all I have for you guys. Thanks a lot.

Alright. Thanks, have a good day.

You too. Bye-bye.

(Operator Instructions) I'm showing no additional audio questions at this time, sir.

Great. Just in closing, we want to thank everyone for getting through the first quarter with us. I think we're excited to see the WRAM MCBA in full swing here. We look forward to getting into the summer months where we can talk more about our water efficiency programs. And next quarter I think the big thing to watch for will be our general rate case filing when we file that on July 1. So, again, thanks for your support, everyone at Cal Water appreciates that, and we'll be talking to everyone later. Thank you, have a good day.

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