American States Water Company
Q3 2012 Earnings Call Transcript

Published: 5 Nov 2012

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company, AWR, conference call discussing the company’s financial results for the third quarter of 2012 results. If you have not received a copy of this morning's earnings release, please call [phone] extension 651, and one will be faxed or emailed to you. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 2

[Operator:]

We will now entertain any questions you may have about the information presented today. (Operator instructions). We will begin with Michael Gaugler of Brean Capital.

[Michael Gaugler:]

Good morning everyone.

[Robert J. Sprowls:]

Hi, Michael.

[Eva G. Tang:]

Hi, Michael.

[Michael Gaugler:]

By the way, congrats on a really nice quarter.

[Robert J. Sprowls:]

Thank you.

[Michael Gaugler:]

I guess I'd kind of like to focus my questions on the contracted services because that's certainly where the upside was in our model. It sounds like based on your earlier comments today that you expect that segment's revenues to kind of grow in 2013 versus '12. Is that correct?

[Robert J. Sprowls:]

When we look at ASUS, we have reported earnings per share contributions for ASUS of $0.15, $0.19, and $0.21 for the first, second, and third quarters of 2012 respectively. And we've mentioned previously that earnings at ASUS have been strengthened in 2012 by a $58 million water and wastewater project at Fort Bragg. We've also talked before about our $23 million backflow preventer and meter project at Bragg. Both projects will continue into the fourth quarter and throughout 2013. And of course as you look into the fourth quarter and into 2013, fourth quarter in particular, there may be weather issues there and we've got holidays and that sort of thing. But as you look into 2013, there are some new projects at ASUS that one in particular, this Patriot Point Project, which is about an $18 million project. So this project as I mentioned will begin in the fourth quarter. And it should be completed by probably the first quarter of 2014. So as you look to fourth quarter of 2012 and 2013, there's reason for optimism. We had a very strong year so far in 2012. One thing we may see as a potential bit of a drag on earnings going forward would be we are focused on bidding area bases. And that should be a small drag on profitability. So when you look to 2013, you've got some good things. You've got some gearing up to bid on new bases. And there's reasons to be optimistic.

[Michael Gaugler:]

That's helpful because I'm trying to get a sense of is the business sort of stabilizing now where we can kind of just plug in some reasonable growth expectations going forward? Will it be a bit uneven due to how the contracts fall? I'm just trying to take a little bit of the volatility out of forecasting side of things. Then I guess my other question would revolve around water supply issues and how you're feeling here going into fourth and first quarter in terms of supply and how you're looking at that.

[Robert J. Sprowls:]

Yes, on the regulated side, we're in decent shape on that. About I think 35% of our supply comes from MWD, the large water wholesaler. And they get a lot of their water through the Delta State water project. Fortunately, 2012 has been a year where there's been – the allocations have been larger than they've been in the past. With that said, I'd sure like to see a wet winter to continue to help us sort of buildup supply within our underground basins.

[Michael Gaugler:]

All right, again thanks, and congrats.

[Eva G. Tang:]

Michael, I'd like to follow-up on the first question on the ASUS. As Bob talked about 2012 and 2013, please keep in mind though that '12 and '13 are impacted by a few significant projects. Like the wastewater water project at Fort Bragg, the Patriot Point. Those projects completed by the end of 2013, perhaps on '14, unless we receive continued [inaudible] to build significant ones kind of two year or one year projects. So going into '14 and '15, that's something you need to think about model.

[Robert J. Sprowls:]

The difficulty is we don't know if these large projects are out three, four, five years. And it's hard to give people great comfort that there will be those kinds of projects. But we're at a number of different bases and there's a lot of work to be done. So as I said earlier, there is reason for optimism particularly through 2013. And then we'll see where we go from there.

[Michael Gaugler:]

Got it, thank you.

[Operator:]

(Operator Instructions). And our next question is from Jonathan Reeder of Wells Fargo.

[Jonathan Reeder:]

Hi, Bob and Eva.

[Eva G. Tang:]

Hi, Jonathan.

[Jonathan Reeder:]

I just wanted to follow up a little bit to Michael. And maybe even look at it more on a big picture basis. Can you kind of discuss the drivers of Q4 this year what you're expecting versus say Q4 in last year?

[Robert J. Sprowls:]

We could take a little bit of time on that. We've had of course the strong performance at ASUS. And as I had mentioned earlier, $0.15 in the first quarter of 2012 from ASUS. That may be a good starting point to start to think about what ASUS is going to do in the fourth quarter because we do have some weather issues potentially. But we would have had those in the first quarter even though it was sort of warmer than normal. And so that might be I guess a good number to look at for ASUS. On the GSW side, looking sort of back at last year, the needle could get moved up a little bit around versus last year. But we are little bit behind in spending some dollars that we had wanted to spend, but we're just sort of working through it. So there may be a little bit of drag at Golden State Water relative to last year.

[Jonathan Reeder:]

Okay, do you recall what ASUS earned last Q4?

[Robert J. Sprowls:]

Yes, I think it was $0.07.

[Eva G. Tang:]

Yes.

[Robert J. Sprowls:]

So I think there's reason to think that the $0.07 is probably not that great a number. I think with the wastewater project, the $58 million project hitting on all cylinders right now, it's likely to be higher than that.

[Jonathan Reeder:]

Okay, I really appreciate the additional insight into the projects at ASUS. Whenever you can keep us up to date on that, that is greatly appreciated. So thanks a lot for the help today.

[Robert J. Sprowls:]

You're welcome and that's kind of our goal going forward to get more clarity on ASUS as we start to get that sort of clarity.

[Operator:]

(Operator Instructions) And our next question is from (Hika Dor) of Robert Baird.

[Hika Dor:]

Thank you. I wanted to go back. Eva, I had trouble understanding you. Can you repeat the CapEx numbers going forward? I believe you said $70 to $75 million for this year. What is it looking out a couple of years?

[Eva G. Tang:]

I think we look at to spend $85 million on average for the next three years, '13, '14, and '15. Those numbers are based on the settled CapEx dollar with the (NYSE

[Hika Dor:]

And I noticed in the queue quite a bit of detail on some pending rehearing matters. I was surprised to see that there were three or four separate instances, each about $2 million possible impact where the DRA is looking to open up old cases. Can you or Eva maybe talk a little bit about why we see this trend and what's happening here?

[Robert J. Sprowls:]

Let's start to talk about rehearing of the region two, region three case because that's the case it's been out there a while. I think the DRA got approval for the rehearing. If I'm not mistaken, it was midsummer last year, Eva?

[Eva G. Tang:]

Yes.

[Robert J. Sprowls:]

2011 and that was the case that had a lot of difficulty associated with it. It was a case that was delayed. And then it was a pulled decision that got pulled. So there are a number of issues associated with that. But some of the key issues that are, one issue is the La Serena plant improvement project. There's a debate on the expenditures that were spent there were prudent. And I think you'll recall that in 2010, we took a write-off associated with that particular project. And so there is a continued review of that project as part of this rehearing. Testimony in that particular matter is in December I think.

[Eva G. Tang:]

Yes.

[Robert J. Sprowls:]

And then we're not expecting a proposed decision there until June I believe of 2013. Also as part of that rehearing is a question on deferred rate case costs. And this was a matter where we defer our rate case costs and then once we get a rate relief, we then amortize them throughout the period in which the rate relief goes into effect. The DRA would prefer to have you forecast your rate case expenses for the future and have that in rates. And so that's really the issue surrounding that particular matter. We feel pretty comfortable on that particular matter because Suburban Water Company has a similar issue and it went through the commission fine in 2012. But it's still a matter that we have to deal with and also disclose so that everybody is aware of it. The third matter in the rehearing was just the debate over how much general office expenses should be allocated to ASUS. And how do you account the basis? Do you count them as one customer or do you count them as I think 20,000 customers because there is separately metered customers on some of the bases. But at that particular matter, Eva, do you want to talk about the Bear Valley issue?

[Eva G. Tang:]

The Bear Valley if just at the beginning of the rate case. DRA in their report recommended us to decrease our rate by about $3 million. And the first item is just to decrease the recovery of our depreciation expenses because they think we are over collecting in this rate case from 2009 through 2012 because there are some retirement assets. But we think we have a very strong legal argument on that, the retroactive rate making. They can just look at the small period and determine whether we are over or under collecting concerning expenses. So expenses are estimated during any rate cases. So that's one issue. I think the second one is just how you share whether the shareholders should bear the consulting of the service accounts related to rate case finding. And we don’t think that's anything they discussed before in front of the commission. So at this point, all the issues we talk about, we don’t believe we reach any threshold that we need to book anything. So we just want to disclose there so you all know that there are those issues going on and those are the new reports from DRA in the past quarter, total transparency here.

[Hika Dor:]

Yes, I appreciate the additional clarity. From an accounting standpoint should you need to take an additional charge, would we see that come after a proposed decision was filed or would you wait until there was a final ruling?

[Eva G. Tang:]

No, we will assess this every quarter, Hika to the extent they are talking or negotiating or any finding in the quarter. We will reassess whether we reach the accounting probable threshold to book any loss contingency or not. But at this point, we don't believe we have to.

[Hika Dor:]

Got it, and final question. In the current general rate case, you guys had gotten closer. I think you had actually gotten a settlement out. And then because of the purchased water low RAM, the item was reopened. Can you give us an update on where that settlement rests?

[Robert J. Sprowls:]

Sure, settlement was filed in July. And when the parties went to the judge I believe in May or June the judge said, you have this other issue you have to deal with that came out of this (Walman) order that was I think April of 2012, which basically said that each of the utilities would have to sort of deal with the W RAM issue in each of their next rate cases. And because we were already involved in a rate case, the judge said that we needed to sort of propose some things in this particular case or think about – I guess there were five questions that needed to be answered. And so Golden State Water DRA in turn all filed testimony on the W RAM issue. First of all, no party DRA turn or Golden State is recommending illumination of the W RAM nor is anyone really recommending a material change from the decoupling mechanism. DRA has identified a number of issues that they believe should be addressed in the next GRC. One of those particular issues is how [inaudible] water should be treated. Turn rates and a few questions as well that needed to be dealt with in the next rate case. I think issue that Turn raised for this particular case was namely to limit the surcharge for recovery. So you go through and you have an under collection through the RAM. Their approach is they would like to see the recovery be applied two tiers two and three in the increasing tiered rates that we have. Historically, we've averaged it across tiers one, two, and three. And so the company has argued for keeping the RAM as it is. And so the way we look at it is that the judge will need to put out a proposed decision dealing with not only the settlement that we have proposed as well as the W RAM issues that have been raised.

[Hika Dor:]

So do we think an approved decision will come before year end?

[Robert J. Sprowls:]

We do because we think the judge that we have in this case is pretty much by the book and wants to keep on schedule. The RAM issue, of course, that came up again in this (Walman) decision in April. And it has slowed the case down a bit. But the judge has given indications that he'd like to try to keep it as on schedule as possible.

[Hika Dor:]

That's great news.

[Robert J. Sprowls:]

It would be hard to see us getting a proposed decision and approval by year-end. But if we could get a proposed decision by year-end, that would be a great start.

[Hika Dor:]

Okay, thanks for the added clarity.

[Operator:]

And this concludes our question and answer session. I would now like to turn the conference back over to Bob Sprowls for any closing remarks.

[Robert J. Sprowls:]

Sure, thank you Laura. Again, thank you all for your participation today and for your continued interest in investment and American States Water Company. Everyone have a good day.

[Operator:]

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 Monday, November 5th, 2012, at 2