California Water Service Group (CWT) 2013 Q2 法說會逐字稿

Good day. Welcome to California Water Service Group scheduled Second Quarter 2013 Earnings Results Announcement and Teleconference. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Thomas Smegal, CFO of California Water Service Group. Please go ahead, sir.

Thank you, Kyle. Welcome, everyone, to the second quarter 2013 earnings call for California Water Service Group. With me today is Peter Nelson, Chairman and CEO, and Martin Kropelnicki, President and Chief Operating Officer of the Group. A replay of today's proceedings will be available beginning today, August 1st, 2013 through September 29, 2013 at 1-888-203-1112 or at 1-719-457-0820 with the replay pass code of 2783716.

Before looking at this quarter's results we would like to take a few moments to cover forward-looking statements. During the course of this 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 interested parties, to carefully read and understand the Company's disclosure on risks and uncertainties found in our Form 10-K, 10-Q and other reports filed from time to time with the Securities and Exchange Commission.

So now I'd like to look at this quarter's forward-looking statements. I'm going to start with our income statement quarterly results. On the revenue side we recorded $154.6 million revenue for the quarter. That's up 7.7% or $11 million. The biggest factor here is an increase in usage of 9.6 million net of our WRAM account and that includes a $3.6 million increase in accrued unbilled revenue.

And just a reminder that the increase in unbilled revenue, which is an opposite effect to the one we saw in the first quarter, represents an estimate of the water, which has been delivered during the period but which is not yet billed by the end of the period. It is not a component of the WRAM mechanism, which operates on a cash basis. And I do want to point out that part of the increase in usage certainly is sales and in California we measure our sales compared to our adopted CPUC authorized sales.

This year for the periods to date we are at 94% of our adopted sales and in the similar period last year we were at 91% of adopted so there is an increase in our sales, fairly significant one for us.

The other effect on revenue were rate increases adding $3.8 million, which included $3 million of pass-through purchase water offsets and then the effect of our pension and conservation balancing accounts that actually decreased revenue by $2.4 million.

Our production costs for the quarter were $59.6 million. That's up 13.2% or $7 million. Primary drivers here are increased wholesaler water prices and increases in the quantity of water produced. Those costs, of course, are booked to the modified cost balancing account, the MCBA.

As percentages of the total production, purchase water increased to 48% from 47% and local surface water decreased to 5% from 6%, well production remained unchanged at 47% from the same period last year.

Our A&G expenses were $23.2 million for the quarter, up 4.5% or $1 million. Higher labor and benefits expenses are driving this, particular healthcare. And I should note that while the costs for healthcare are higher than a year ago, we have seen a leveling out from the first quarter and, as many of you know, Cal Water self-insures for most of its medical coverage. So expenses in this area will vary with claims throughout the year.

Our other operations expense for the quarter was $17 million, down 4% or $700,000 and that is accounted for by decreased conservation expense, which I mentioned above on the revenue side. That's a balancing account item.

On the maintenance side we saw $4.2 million of maintenance for the quarter and that's a decrease of 9% or $400,000 and that's from decreased costs for main and service repairs.

Our depreciation expense is $14.5 million for the quarter. That's an increase of 5.7% or $800,000 and that is based on the 2012 capital additions that the Company made.

Our income taxes, $9.5 million operating for the quarter, that's an increase of $300,000 from the second quarter of 2012.

Our net other income was zero for the quarter and that's a change of $200,000 downward from last year and that's due to cost incurred to develop new business opportunities. So our net income was $13.5 million for the quarter compared to $13 million in the same period last year.

Our earnings per share, $0.28 on a diluted basis to down 8.6% from $0.31 in second quarter 2012 and the reason for that is the increase in the number of shares, as we had the equity offering in March of this year.

Now I am going to turn it over to Pete Nelson for some comments.

Okay, thank you, Tom, and good morning, everyone. As you saw in the press releases last night, the Board adopted several changes in officer positions and I am going to talk about two of them and then Marty will talk about the two other ones later in the call.

So first, as you saw, I will retire from the CEO position September 1st and transition to Chairman of the Board. I'll still be active and be in the office here probably on a weekly basis and still represent the Company to select outside groups, such as the State Chamber of Commerce Board of Directors and I'll still be active in California Water policy representing the business perspective. But I will be non-Executive Chairman and I don't expect to be on these calls in the future going forward and I must say I have enjoyed working with you and several of us go back many years.

Our conversations and your questions and your perspectives, your insights and in many cases our friendships in many ways and I know this not your job by any means but our exchanges and relationships and friendships over the years have made us a better Company here and I really appreciate that and the relationships. I must say it's been my personal pleasure to work with such a talented analyst community over these last few years.

More importantly, the second change is the Board elected Marty Kropelnicki President, CEO and Director also effective September 1st. I could not be happier with these changes. They are -- our Board spent a lot of their time on executive development and succession planning and when you see changes such as these, they are the result of that ongoing process.

We have a strong leadership group here from the superintendents to the managers to the officers and the Directors across the board. We've got considerable depth and breadth and I feel very good that the Company is in excellent hands.

So I'm going to turn this now back to Tom for the balance sheet segment.

Great thanks, Pete. So just a couple things on the balance sheet, our net utility plan is $1.49 billion and that is up 5% from the 2012 value of $1.42 billion. Our year-to-date CapEx was $66 million for 2013 compared to $62 million for the same period in 2012.

On the cash side, we have $38.5 million in cash at the end of the quarter and total borrowings on our line of credit of $28.8 million. That's $20 million for California Water Service Company and $8.8 million for the Group.

And then the last thing I want to mention on the balance sheet is due to the higher sales and the better recovery that we've seen since the end of 2011 on the WRAM balances, we do report a decline from the beginning of the year of our WRAM MCBA balance of $1.9 million from $46.1 million to $44.2 million. And why that's significant that's been overhang for us for quite a number of years.

This is an account which we've not yet received the money from the customers and is therefore not invested productively in our other activities and so we'd like to see this balance decline even further. We expect with the new rates that go into effect with the 2014 Rate Case decision we will see that account decline in value over the next few years.

So, just to sum up, we had a solid quarter and it was in line with our expectations given the fact that we're in the third year of our California Rate Case cycle with very limited rate relief going on in 2013 for us.

So now I'm going to turn it over to Marty for a regulatory update.

Thanks, Tom. I've got four things I want to briefly mention; day one just my prospective on the quarter; two, give a general rate case update; three, introduce the two new Vice Presidents that we announced yesterday and four, take a moment to reflect on Pete's tenure as CEO at California Water Service Group.

First and foremost on the quarter as Tom mentioned, overall the quarter met our expectations. The first and second quarter in the third year of the rate case are always very difficult quarters for us and the investments that we made in technology, a kind of a Hyperion software, we've implemented an FP&A model has really showed benefit.

We're very happy with how the organization has been managing their operating budgets and everyone's been hitting their targets and that's what has led us to the success that we've seen to date with the budget.

So overall right where we thought we would be and we are glad we're through the slow period into the summer months.

Second thing I want to talk about is where we are with the general rate case process. Overall we had about a four-week settlement period that was set up where we've now been in that process approximately 12 weeks. Clearly the process didn't contemplate the level of complexity with 26 districts, thousands of capital projects in eleven interveners in the process.

We've had seven weeks of face-to-face settlement discussions followed by four weeks of settlement discussions via phone. Overall the environment has remained productive and we believe that we're substantially settled with 95% plus of the issues resolved. And while there is no settlement has been signed we believe that we are getting down to the short strokes here of getting this thing wrapped up. And once the settlement discussion is signed we will appropriately put a release out and a corresponding 8-K to share with everyone that resolves.

Overall a very complex process, very happy with our rates team and how we've been negotiating and also what the environment with all the interveners and the PUC, it's been a very productive environment and has progressed well.

Moving on to the two new Vice Presidents that we want to introduce today, the press releases are out there. First, Tim Treloar has been named Vice President of Operations. Tim joined the Company in 1994 and worked his way up to ultimately lead one of our largest service territories in Central California.

Tim has a BS degree in geology and has the most advanced certifications that the State offers in treatment and distribution. Tim most recently served as Director of Water Quality overseeing all of our compliance programs and labs for the water programs that Cal Water has. So Tim certainly is qualified from an operating standpoint, as well as the lab side of it to lead our operational organization going forward.

In addition, yesterday we named Michael Luu a Vice President of IT and Customer Service. Michael joined Cal Water in 1999 and has been with us for 14 years. Michael has been in a total of nine positions, most of which have been in IT except one, which I'll talk about in just a second.

Michael started as an operator IT department while working to complete his under graduate degree in Manage and Information systems, which he did. He then went on to complete his MBA while working for the Company and moving up in the IT organization. Michael recently completed a six-month rotation as District Manager of Los Altos district, which gave him some operational experience and he has rotated back and now we've promoted him as Vice President of IT in customer service.

Both Michael and Tim are well qualified and we want to welcome them to the officer team here at Cal Water.

Lastly, I want take a minute to reflect on Pete's tenure as CEO. Pete joined the Company as President and CEO in 1996. At that time Cal Water operated exclusively in California serving 38 counties -- or communities, excuse me, with approximately 1.5 million customers served. Under Pete's management we expanded our footprint to four states and the customers served over 2 million that we serve today.

In addition, under Pete's watch we increased our capital program 374%. We increased our revenue 239% and we increased our net income 232%. While those numbers may not mean a lot, let's talk about market cap and shares outstanding.

When Pete joined the Company we had a market cap of approximately $200 million with 6.2 million shares outstanding. As of yesterday we had a market cap over $1 billion with 47.8 million shares outstanding so under Pete's management we've increased our market cap 405%.

If you invested $100 in January 1996 when Pete became President and CEO and held it and reinvested the dividends, you would have had a 425% return as of close of business on Tuesday. That compares to a 275% return to a corresponding investment in the S&P 500 so clearly their shareholders have been well served under Pete's management.

Pete accomplished this while promoting a culture of do the right thing and continuous improvement that has led us to be the leader in customer service and water quality. Cal Water is not just a good place to work but a great place to work and I feel this is best represented by Cal Water being named a top 95 workplace in the Bay Area for a second year in a row.

Being located in in the heart of Silicon Valley with companies that lead the way in innovation throughout the world, there's fierce competition for this prestigious award and we're the only utility to ever be named in this award that's given by the local Bay Area press.

In 2012 -- excuse me, 2013, we were named number 17 of the mid sized companies and we're very proud to be listed and have that award again for this year, so Pete, on behalf of all the employees at Cal Water, thank you for your outstanding leadership as CEO and leading us to be the Company that we are today and we look forward to working with you in your new capacity as Chairman of the Board.

Thank you.

Tom?

Okay so I think we're done with our prepared comments now and, Kyle, if we'll open it up for questions.

Thank you. (Operator Instructions). And we'll take our first question from Heike Doerr with Robert W. Baird.

Congratulations, Marty, on your promotion, Pete on your retirement. Will we still be seeing you at any NAWC, Pete?

You'll still see me at NAWC, yes.

Oh good, glad to hear.

You're not getting rid of me.

We're not trying to. Can we talk, Tom, a little bit more about this reversal? I'm a little confused. I could use a second explanation because I see that your unbilled revenue on the balance sheet has gone up substantially so I had thought that perhaps the reversal hadn't occurred yet.

Okay so let me see if I can walk through this. The unbilled revenue, as I said, is an accrual that we make for the revenue that we expect that our customers will generate throughout the end of the period but we haven't billed them for yet. So we bill our customers everyday almost and so the -- we estimate the water that was used by them and the bill that would be created by them for the period between their last bill and the end of the period.

As we go further into the year in the spring and in the summer, that amount grows because the amount that we expect customers to be using gets higher and higher. What we have for this quarter is a difference between the second quarter of '12 and the second quarter of '13 as far as how much we expect that our customers have used but have not yet been billed for. And that was the $3.6 million that I mentioned at the top of the call.

In the first quarter we had a decrease from '12 to '13 in the unbilled revenue accrual and so we're looking at year-to-year comparisons. If you look at it in total, our unbilled balance, the amount that we have receivable from unbilled at the end of the second quarter of 2013 is very close to the amount that we had at the end of the second quarter of 2012. And so this is not all -- not at all unexpected. It's just a seasonal, kind of a seasonal shift that happened this year where the unbilled didn't creep up at the end of March and it did start to creep up as we went forward.

Okay so just so I have this straight, this unbilled revenue what we're talking about now, has nothing to do with the WRAM item that we saw that was a drag in the first quarter, correct?

It has nothing to do with the WRAM and the reason for that is that the WRAM is on a cash basis so we're only recording our billed revenue to the WRAM and if you think about it, this is a -- it's a good sign that our unbilled revenue is up. It's an expectations that our sales are up and that and that in the next quarter we're going to get more sales that flow into the WRAM so it's kind of a -- at the end of the year we look back and we say there really hasn't been much change in unbilled revenue. That's not going to be a difference from the end of the beginning of January or at the end of December. There isn't really going to be a significant change. It's just a change that happens throughout the year so it's all going to go into the WRAM as we go forward. Sales are up. We're real happy with that and that -- so it's a good sign for us. I guess that's another way to say it.

Okay and as we look at the rate, Keith, can you talk me through the timing of this so you give the Commission a settlement that all of your interveners has signed and then we wait for an ALJ to give us a proposed decision, correct?

Sure. I'll take that, so we have negotiated again for about three months on this and all of the interveners and DRA and Cal Water have the opportunity to sign the settlement when it is written and the key point here is that we've negotiated the settlement and it's in a myriad number of pieces. It's not a formalized document at this point. The formalized document is likely to come maybe in end of September or hopefully maybe even October if it rolls into that time frame.

And so it would be all signed and filed with the Commission, public document and then the ALJ has to look over it and give a proposed decision hopefully obviously approving the settlement as it's filed. And then the Commission would act on that 30 days after the ALJ weighs in.

Okay but there's not stipulated time as far as once you come forth with a settlement how long it takes for the ALJ to rule or is just we just know what the gap is between the proposed decision and the final?

That's right. The ALJ is at -- they have all the time they'd need to write a proposed decision. Obviously the hope with the settlement is that they don't need as much time as they would with a litigated proceeding. We have in California, just as a reminder, we have a provision which requires the Commission to give us interim rates and a start date for rates coincident with the first day of the test year which would be January 1st of 2014, so we will be filing a motion in the case to make sure that we get that so that any delay that might occur would be applied retroactively to that date.

Okay and final question, we're seeing a lot of rate proceedings in California be slowed down, I suspect partly because of the aftermath of San Bruno and how the punitive damages shake out. Is your ALJ on this proceeding involved in any of that? What's the likelihood that your rate case is similarly delayed?

Heike, we don't have good visibility into the exact causes of the delays. I am aware of some delays in some other utility proceedings. I don't believe that our judges involved in any of those cases directly but I know that all of the judges at the Commission are very busy. I think he has a number of cases besides this one that he is dealing with and so it's really unknown to us at this time whether there would -- that delay would be on us as well as on some of the others.

Okay helpful; thanks, guys.

Timothy Winter, Gabelli.

I also want to congratulate everyone, particularly Marty and Pete. You guys have done a great job over the years. Pete, I'm glad you got to see the market cap over a billion dollars and thought Marty's comments were great, especially about the always doing things right attitude. Hopefully you enjoy retirement or well, partial retirement.

I did have one question, Marty, if you could talk a little bit about how close you guys think Cal Water will be to its nine four allowed ROE in 2013?

You know, I don't think we have enough information, Tim, yet to really talk about that but I will say I am guardedly optimistic at how well the organization has been running from a budget to actual standpoint. And you know kind of my spiel on this. About three years ago we implemented Hyperion. We reengineered our budget process. We implemented FP&A team and we put a team out there that works with the districts and the departments on a monthly basis on their budgets. And so generally speaking with the exception of healthcare things have been trending the right way so it's too early to see where we'll come out for the year.

And there are some things that can throw us off if you start getting spikes in healthcare again or you have fuel cost or main leaks, things that are extraordinary expense items. Certainly detract us from hitting that ROE but where we are kind of midyear I am very happy and I am very happy with the outcome of everyone being able to manage to hit their budget targets because it is a very tight budget year for the Company. And the last thing I'll comment to your point about Pete, just to share a little story, on Tuesday night when we were pulling data we -- Pete's cringing as I say this.

Our Treasury Manager and I were pulling all those data together doing an analysis behind it. I think she kind of sums it up the best that prior to Pete Cal Water was an older Company, 70 years old, but the Company really grew up under Pete's watch and that's reflective in the market cap and the size of the assets, the number of analysts that cover us, I think our S&P rating and I think that's a good way to sum up Pete's tenure as CEO is the Company really grew up under Pete's management.

Great thank you and congrats again.

Thanks.

We have no further questions in the queue. I would now like to turn the conference back over to Mr. Smegal for any final or additional remarks.

Well, I just wanted to thank everyone for their continued interest in California Water Service Group and we look forward to talking with you again after the third quarter. Thank you all very much for attending today.

And this does conclude today's conference call. Thank you all for your participation.