American States Water Company (AWR) Q1 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing the company's first quarter 2015 results. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 5 p.m. Eastern Time and run through Wednesday, May 13, 2015, on the company's website, www.aswater.com. [Operator Instructions] As a reminder, this call will be recorded and will be limited to no more than 1 hour. In addition, certain matters discussed during this conference call may be forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Please review a description of the company's risks and uncertainties in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission. At this time, I would like to turn the call over to Eva Tang, Chief Financial Officer of American States Water Company. You may begin.

Thank you, Chad. Welcome, everyone, and thank you for joining us today. On the call with me is our President and CEO, Bob Sprowls. I'll start by discussing the first quarter financial result. Diluted earnings for the first quarter of 2015 were $0.32 per share compared to $0.28 per share for the same period in 2014. Net income for the quarter was $12.1 million compared to $11 million for the same period last year. The increase in our consolidated earnings was primarily driven by a decrease in our expenses at the water segment. Compared to the same period last year, earnings at our water segment increased by $0.02 per share. Earnings for the electric segment increased by $0.01, and earnings at our parent company increased by $0.01 per share. In Q1, water revenues increased by $747,000 to $71.5 million as compared to the same period in 2014. The increase was primarily driven by third year rate increases effective January 1, 2015, for certain rate-making areas as well as increases in -- increases generated from revenue recovery related to capital projects approved through advice letter filings. The increases were partially offset by a decrease of $880,000 in surcharges during the first quarter of 2015 to recover previously incurred costs. The decrease in revenue from these surcharges is offset by corresponding decrease in operating expenses, primarily administrative and general expense, resulting in no impact to pretax operating income. Revenues from electric operations for the quarter were $11 million as compared to $10.5 million for the same period in 2014. The increase in revenue is primarily due to a change in the monthly allocation of the annual base revenue requirement as stipulated in the CPUC's November 2014 final decision on the electric general rate case. Differences in the 2015 versus 2014 monthly revenue spread will reverse during the year, and therefore, we expect a $0.01 per share increase for the quarter to reverse during the year. Revenues for our contracted services business, American States Utility Services, decreased $2.3 million to $18.5 million toward the first quarter of 2015. The decrease was due to a reduction in construction activities partially offset by an increase in revenues resulting from favorable changes in cost estimate for certain capital work in progress. These projects and cost estimates are continuously evaluated and revised accordingly. Revenue for this project are recognized based on the percentage-of-completion method of accounting. Our water and electric supply costs were $22 million for the first quarter of 2015. Any changes in supply costs for both the water and electric segments as compared to the adopted supply costs are tracked in balancing. Other operation expenses decreased by $787,000 for the quarter as compared to the same period in 2014 due to a decrease in water treatment costs, bad debt expense and cost for materials and supplies at our water segment. Administrative and general expenses for the first quarter were $19.5 million as compared to $20.2 million for the same period in 2014. During the quarter, there was a reduction of $889,000 in surcharges for recovery of various A&G costs previously incurred as compared to Q1 of last year. Again, surcharges have no impact to pretax operating income. Excluding this decrease in surcharges, overall A&G expenses increased by $232,000 due to increases in legal and outside services and general liability insurance cost at our contracted services segment. These increases were partially offset by lower legal expenses at our water and electric segments. Maintenance expense decreased slightly by $12,000, and increase at our contracted services segment was mostly offset by decreases at our water segment. However, we do expect planned maintenance expense for the water segment to be higher in 2015 as compared to 2014. Depreciation and amortization expense was $10.5 million for both periods. Increases in depreciation expense at our water segment resulting from additions to utility plans were offset by a decrease in depreciation expense at our electric segment due to lower depreciation composite rate approved by the CPUC in the electric general rate case in November of 2014. Property and other taxes decreased by $49,000 compared to the same quarter in 2014 due to a decrease in gross receipt taxes for the contracted services segment. ASUS' construction expenses decreased by $3.4 million to $10 million during the quarter as compared to the same period in 2014 due to decreases in construction activity. Interest and other nonoperating expenses net of interest income decreased to $4.8 million for the quarter as compared to $5.4 million same [ph] period in 2014. This was due to an increase in capitalized interest at our water segment approved by the CPUC and the replacement of $15 million of term -- long-term notes in 2014 with lower interest-bearing cost -- bearing notes. Income tax expense increased by $1.5 million to $7.9 million as compared to the same period in 2014, driven by increases in pretax income and higher effective income tax rate at each of our business segments. Moving on to liquidity and capital resources. Net cash provided by operating activity at -- for the quarter decreased by $2.4 million to $38.5 million as compared to $40.9 million for the same period of last year. The decrease was primarily due to the exploration of various surcharges incremented in mid-2013 for recovery of previously incurred cost at Golden State Water as well as a decrease in water consumption. These decreases in cash were partially offset by increasing cash generated by contracted services due to the billing of and the cash receipts for construction work at military bases during Q1 of this year. In regards to Golden State Water's capital expenditures, we spent approximately $15 million on company-funded capital work during the first quarter. We are still expecting to invest approximately $85 million to $95 million in capital projects during 2005 -- 2015. For additional details on our first quarter results, please refer to our earnings release and Form 10-Q issued yesterday. With that, I'll turn the call over to Bob.

Thank you, Eva. I appreciate everyone joining us today. For the first quarter, both Golden State Water Company, our regulated water and electric utility subsidiary, and American State Utility Services, our contracted services business, delivered solid earnings. In addition, we've been responding to the ongoing drought situation in California by formulating an action plan to align with the state's emergency regulation. We were also very focused on defending our positions in the general rate case application we have filed for the water segment of Golden State Water, which I'll discuss in more detail a bit later. Let me start by discussing the drought situation in California, the ongoing directives by the state and how that affects Golden State Water Company. In March 2015, the State Water Resources Control Board or the State Board approved expanded emergency regulations targeting a reduction in water use throughout the state. On April 1, 2015, the Governor of California passed an executive order directing the State Board to impose even greater restrictions to achieve an aggregate state-wide 25% reduction in urban water use through February 2016. In April, the State Board proposed additional emergency regulation -- regulations to meet the Governor's executive order. The reductions proposed by the State Board vary by area, depending on historical water use per capita and reductions to date. The State Board approved the emergency regulations yesterday. Golden State Water Company's current water conservation and rationing plan approved by the California Public Utilities Commission or the CPUC is aligned with the July 2014 and March 2015 emergency regulation. We will be filing updated drought response actions with the CPUC for each service area to meet the new mandates. The regulations will not take effect for our customers until they are approved by the CPUC, which, as you know, regulates Golden State Water over such issues. Compliance with the mandatory reductions may result in increased customer complaints due to higher customer rates and general dissatisfaction with usage reduction mandates. During the first quarter, billed water consumption decreased by 13% as compared to the same period in 2014 due to conservation efforts. As a reminder, a change in consumption does not have a significant impact on the company's financial results due to the water revenue adjustment mechanism account in place for all of our water service areas. The commission also authorized us a drought memorandum account to track additional costs incurred in promoting conservation and implementing restriction measures. These mechanisms provide Golden State Water an opportunity to earn its authorized return on equity. In other regulatory matters, settlement discussions regarding Golden State Water's pending general rate case for all of our water regions and the general office have begun. This rate case will determine rates for the years 2016, 2017 and 2018. Our requested capital budgets in the application average approximately $90 million a year for the 3-year period. The 2016 water gross margin is expected to decrease by approximately $700,000 as compared to the currently adopted levels due in part to a decrease in annual depreciation expense resulting from an updated depreciation study. As I just mentioned, settlement discussions with all parties have begun with hearings scheduled to commence on May 26, 2015. A final decision on this case is -- on this rate case is expected by the end of 2015 with new rates effective January 1, 2016. Turning to our contracted services business at American States Utility Services or ASUS. We continue to work closely with the U.S. government on the remaining price redeterminations. We expect the third price redetermination for Andrews Air Force Base in Maryland and the second price redeterminations for the military bases in Virginia and Fort Jackson in South Carolina, all to be completed during the second quarter of 2015. Filings for these price redeterminations, requests for equitable adjustment and contract modifications awarded for new projects provide ASUS with additional revenues and margin and the opportunity to consistently generate positive earnings. We also continue to work closely with the U.S. government for contract modifications relating to potential capital upgrade work as deemed necessary for improvement of the water and wastewater infrastructure at the military bases. In addition, we're actively engaged in new proposals and expect the U.S. government to release additional bases for bidding over the next several years. We remain very optimistic about the future of our contracted services business. I'd like to turn our attention to dividends. On April 28, 2015, our Board of Directors approved a second quarter dividend of $0.213 per share on the common shares of the company. Dividends on the common shares will be payable on June 1, 2015, to shareholders of record at the close of business on May 15. American States Water Company has paid dividends every year since 1931, increasing the dividend received by shareholders each calendar year since 1954. Given American States' current payout ratio compared to our peers and our high shareholders' equity ratio as a percent of total capitalization, there is room to grow the dividend in the future. Additionally, American States Water has a stock repurchase program in place, which was approved by our board in March 2014. At the end of the first quarter, we have repurchased approximately 902,000 shares on the open market since the program began. The program includes the repurchase of up to 1.25 million shares. To close my prepared comments, I'd like to thank all of you for your interest in American States Water, and I'll now turn the call over to the operator for questions.

[Operator Instructions] And we have a question from Jonathan Reeder with Wells Fargo.

Bob and Eva, a couple of questions if you don't mind me asking. First on ASUS. It sounds like there were -- the changes on the expense side in the quarter maybe allowed you to accelerate some revenue recognition. I may have missed your explanation of that earlier in the call. Is that accurate?

Yes, actually what happened, Jonathan, is as we go through projects, we have to estimate sort of the cost that it's going to take to complete the project, and as you get closer towards the end of the project, you have a better handle on what those project costs are. During the first quarter, we had some projects that were nearing completion, and we were able to, in effect, have a better margin on those projects because the costs weren't as high as what we had originally estimated. So we were able to bring some of that into income during the first quarter. Eva, do you have anything to add?

And Jonathan, we -- as part of our internal control and we review the progress of each capital project with ASUS on a monthly basis. So this is just part of our continued evaluation on each project, and to result, the estimated cost is not something -- the cost we recorded changes is really to estimate the percentage of completion that impacts the revenue, and this happened throughout the years. And this quarter, probably a little bit more than usual, but it's ongoing process. We always will have this kind of situation either going up or down on the cost estimate.

So if you didn't revise that cost estimate, I mean, do you know what ASUS would have been rather than $0.04? Was it worth a couple of pennies?

Well, understand that we do this every quarter. It just happened to be a little more this time I would say. Eva, is that accurate [ph] ?

Yes, probably more than the first quarter last year.

Yes, yes, really, it's a quarter-to-quarter effect, Jon.

Okay. Does it at all in any way impact, Bob, your expectations for ASUS on a full year basis being similar to 2014?

It does not, Jonathan. We're -- as we talked during the year-end call, we did $0.31 at ASUS for 2014. There were couple of onetime items there that sort of were $0.05, and I think the guidance that we gave to everyone was the $0.26 was probably a decent number for 2015. And I -- we still think it's a decent number for 2015.

Okay, great. In terms of the share repurchase program, sounds like you have around like 350,000 left to repurchase. Any comments around when you expect the remainder of it to be completed?

We continue to make progress on that, and we have made progress since the -- since March 31. So there's a good chance we'll wrap that up either in the third quarter or -- I'm sorry, in the second quarter or in the third quarter.

Okay. So roughly midyear is kind of the goal?

Yes, I think so. I mean, we have an algorithm built up so that we're buying these shares at a discount, and as long as the algorithm works, we end up buying shares. So it's -- we're not out there making decisions. The algorithm allows us to buy stock. If the stock's trading below the 30-day trading average, then it allows us to buy.

Okay. And then last question in terms of the pending GRC. Just wondering from early kind of settlement discussions that you've had and the fact that the case overall isn't asking for a large increase at all, are you pretty optimistic in terms of reaching a settlement agreement more so than perhaps on past cases?

Actually, I'm probably a little less optimistic than we've been in prior years because we have a -- I would say, we're trying to keep sort of our rates flat through this rate case, and so we've got some very good cost reductions in there. And you know from your career ORA will come in and argue basically every dollar in there. So I think we're -- we think there'll likely be more things go to hearings this time than in the past.

[Operator Instructions]

We'll, Chad, if you're not getting questions, I don't want to keep the very important people on the phone any longer than we need to. I'll just go ahead and close here by thanking everyone for their participation today, and I look forward to speaking to all of you as does Eva during the next quarter. Well, thank you, everyone.

This concludes today's American States Water Company Conference Call. As a reminder, the call will be archived on our website and can be replayed beginning Wednesday, May 6, 2015, at 5 p.m. Eastern Time and will run through Wednesday, May 13, 2015. Thank you for your participation. You may now disconnect. Take care.