AWR
#Ladies and gentlemen, thank you for standing by.
Welcome to the American States Water Company conference call discussing the Company's first quarter 2016 results.
This call is being recorded.
If you would like to listen to the replay of this call, it will begin this afternoon at approximately 5 PM Eastern Time, and run through Thursday, May 12, 2016, on the Company's website, www.aswater.com.
The slides that the Company will be referring to are also available on the website.
(Operator Instructions) After today's presentation, there will be an opportunity to ask questions.
(Operator Instructions).
This call will be limited to an hour.
Presenting today from American States Water Company is <UNK> <UNK>, President and Chief Executive Officer; and <UNK> <UNK>, Chief Financial Officer.
As a reminder 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.
In addition, this conference call will include a discussion of certain measures that are not prepared in accordance with Generally Accepted Accounting Principles or GAAP in the United States and constitute non-GAAP financial measures under SEC rules.
These non-GAAP financial measures are derived from consolidated financial information but are not presented in our financial statements that are prepared in accordance with GAAP.
For more details please refer to the press release.
At this time I will turn the call over to <UNK> <UNK>, Chief Financial Officer, of American States Water Company.
Thank you, Carrie.
Welcome, everyone, and thank you for joining us today.
During today's call I will review the Company's financial results for the first quarter and <UNK> will discuss liquidity and capital resources, Golden State Water's pending rate case, California drought-related matters and our contracted services business segment at American States Utility Services or ASUS.
I'll begin with an overview of our financial results.
For the first quarter, diluted earnings were $0.28 per share compared to $0.32 per share for the same period in 2015.
Of the $0.28 per share earnings for the first quarter $0.22 was from our water segment and our electric and contracted services segments each contributed $0.03.
Net income for the quarter was $10.2 million compared to $12.1 million for the first quarter last year.
I'll discuss major items that impacted our revenues and expenses for the quarter.
In the first quarter of 2016, water revenues decreased by $5.2 million to $66.3 million as compared to the same period in 2015.
As of today, golden State Water has not received a decision on its pending water (inaudible) rate case which will set new rates for 2016 through 2018.
The revenue requirements for 2016 once the CPUC issues a final decision on the current GRC are expected to be lower than the 2015 adopted level ---+ levels.
Major items impact ---+ impacting the decrease in revenue requirements for 2016 includes a significant increase in supply costs caused by lower consumption, much lower depreciation expense resulting from an updated depreciation study filed with the rate case and decreases in other operating expenses due to the Company's improvement in operation efficiency.
As a result of anticipated reduction in the 2016 revenue level we adjusted our water revenue downward by $5.8 million for the three months ended March 31, 2016 with corresponding decreases to supply costs, depreciation, and other operating expenses to reflect or settle the position with the CPUC Office of Ratepayer Advocates.
The adjustments to 2016 recorded water revenue also reflects Golden State Water's position on litigated capital budget and compensation-related issues in the pending GRC.
These adjustments did not have a significant impact to pre-tax operating income for the first quarter of 2016 as the overall reduction in the water gross margin is mostly offset by the lower depreciation and other operating expenses.
Partially offsetting this decrease in water revenue were rate increases generated from our (inaudible) for capital projects approved by the CPUC in 2015.
Revenue from electric operations for the quarter were $10.6 million as compared to $11 million for the same period in 2015.
The decrease was primarily due to the termination in July 2015 of a supply surcharge to recover previously incurred energy costs.
The decrease in revenues from this surcharge totaled approximately $700,000 for the quarter and was offset by a corresponding decrease in supply cost resulting in no impact to pre-tax operating costs.
The decrease in electric revenue was partially offset by CPUC approved fourth quarter ---+ fourth year rate increases for 2016 and rate increases generated from advice letters for capital projects approved by the CPUC during 2015.
Revenues for our Contracted Services business ASUS decreased $1.8 million to $16.6 million for the quarter.
The decrease in revenue was due to lower construction work in the first quarter of this year driven largely by the timing of engineering and bidding activities.
Construction activity is expected to increase during the remainder of 2016 as compared to the first quarter of 2016.
The decrease in construction work was partially offset by increase in management fee revenues as a result of successful resolutions on prior redeterminations received during the third quarter of 2015.
As mentioned previously, for the first quarter of 2016 the water segment's gross margin was adjusted for both lower revenue and lower supply costs in our stipulated position in the pending water rate case.
Our water and electric supply costs were $17.6 million, a decrease of $4.4 million for the first quarter of 2016.
Any changes in supply costs for both the water and electric segments as compared to the adopted supply costs are tracked in balancing accounts which will be recovered from or refunded to our customers in the future.
Other operation expenses increased by $806,000 for the first quarter of 2016 due primarily to outside service costs at electric segment in response to power outages caused by severe winter storms experienced in January.
In addition, there was an increase in conservation and draw related costs in higher wages.
Administrative and general expenses for the first quarter of 2016 were $20.8 million as compared to $19.5 million for the same period in 2015.
The increase was mainly due to higher legal and outside service costs at the water segment incurred out of condemnation matters during this first quarter.
Depreciation and amortization expense decreased by $757,000 due primarily to the reduction in composite rate stipulated in the pending water GRC resulting from updated depreciation study.
As discussed earlier, the lower depreciation has also been reflected in the lower water revenue.
The decrease was partially offset by an increase at both the water and the electric segments due to additions to utility plant during 2015.
Maintenance expense increased by $593,000 due to a higher level of maintenance performed in 2016 at our water segment.
ASUS' construction expense decreased by $1.3 million to $8.7 million during the first quarter of 2016 as compared to the same period in 2015 due primarily to a reduction in construction activity as mentioned previously.
Again, we expect the construction activity will increase during the remainder of 2016 as compared to the first quarter of 2016.
Interest expense increased to $5.6 million for the first quarter of 2016 as compared to $5.2 million for same period in 2015.
This was due largely to capitalized interest recorded at water segment in Q1 of 2015 resulting from the approval of an additional allowance of our funds used during construction from advice letter filings.
There was no similar filing during the first quarter of 2016.
Income tax expense decreased by 1 point ---+ $2.1 million to $5.8 million driven by a decrease in pre-tax income and a lower overall effective income tax rate.
This slide shows the EPS bridge by business segment comparing the first quarter of this year with the first quarter of 2015.
For more details please refer to the press release.
With that I'll turn the call over to <UNK>.
Thank you, <UNK>.
I appreciate everyone joining us today.
Moving on to liquidity and capital resources.
Net cash provided by operating activities for the quarter decreased by $10.9 million to $27.6 million as compared to the first quarter of 2015.
The decrease in operating cash flow was primarily due to a reduction in cash generated by contracted services due to the timing of billing and cash receipts for construction work at military bases during the three months ended March 31, 2016.
There was also a decrease in customer water usage for Golden State Water increasing the Water Revenue Adjustment Mechanism or WRAM regulatory assets.
We implemented surcharges in March to recover our net WRAM balances for 2015.
In addition, tax payments during the three months ended March 31, 2015 were lower due in large part to the implementation of the tax repair regulation.
Regarding Golden State Water's capital expenditures, we are pleased with our first quarter spending of $29 million on Company-funded capital work.
Our water and electric utilities continue to invest to maintain and improve the reliability of our system.
Our capital investment program is a critical factor in delivering consistent, high-quality service to our customers.
We are on track to invest $85 million to $95 million in capital projects during 2016, which may change somewhat once a decision is issued by the CPUC on the pending water rate case.
In addition, Standard & Poor's rating services recently affirmed an A plus credit rating on both American States Water Company and Golden State Water Company.
S&P also affirmed the stable rating outlook on both companies.
We were pleased with the affirmations as these ratings are some of the highest in the US water utility industry.
While we continue to produce solid financial results, the first quarter performance was impacted by higher outside services and legal costs at our water segment incurred to defend ourselves against condemnation-related actions and lower construction activity at our Contracted Services segment.
However, we do expect construction activity at ASUS to increase during the next few quarters.
In addition, we still await a CPUC decision on our water rate case for years 2016 through 2018.
As we discussed in previous quarters, we filed our general rate case in mid-2014 for all of our water regions and the general office.
The application will determine rates charged to customers for the years 2016, 2017, and 2018.
Golden State Water has settled with the CPUC's Office of Ratepayer Advocates and nearly all of the Company's operating expenses as well as the consumption levels used to calculate rates for 2016 through 2018 which reflect the State mandated conservation targets.
The primary litigated issues relate to our capital budget requests and compensation for managerial level employees.
We're not certain when in 2016 the final decision will be issued.
Once issued rates will be retroactive to January 1, 2016.
As <UNK> mentioned earlier, adopted revenues for 2016 are expected to be lower than the 2015 adopted levels.
As you may know, a big part of the utility's revenue requirement is the recovery of projected expenses.
Our projected expenses for 2016 in the rate case were lower than the 2015 adopted expense levels.
In particular, there was a decrease in supply costs resulting from lower consumption projected, lower depreciation expense resulting from a new study, and a decrease in other operating expenses in the 2016 through 2018 rate case cycle due to our cost control efforts and improvement in operation efficiency.
Because of the Company's efforts we were able to propose significant increases in our capital investment with little to no effect on rates.
As a reminder we have also received approval by the CPUC to defer our electric general rate case and the cost of capital proceeding by one additional year.
Both will now be filed in 2017.
In regard to the drought situation in California in February the State Water Resources Control Board extended the governor of California's executive order imposing mandatory restriction through October 31st, 2016.
In addition, the State Board amended the required reductions allowing limited allowances for warmer climate regions, increased population growth as well as credit for certain drought resilient water supply investment.
Currently all but one of our water systems has met the revised conservation standards.
Based on our drought response actions and customers' conservation efforts to date we do not believe we will be subject to the State Board's penalties for failure to implement a water shortage contingency plan.
Golden State Water has been authorized by the CPUC to track incremental drought-related costs incurred in a memorandum account for possible future recovery.
We are in the process of preparing to file for recovery of drought-related items of approximately $1.3 million incurred mostly in 2015.
Incremental drought-related costs are being expensed until recovery is approved by the CPUC.
Lastly, as of April 26 of this year the US drought monitor estimates 70% ---+ 74% of California in the rank of severe drought.
This is drought ---+ this is down from 86% reported at the end of February.
Increased rainfall and higher snowpack levels over the last few months have helped the drought situation.
Turning to our contracted services business at ASUS, construction activity in the first quarter of the year was lower due largely to the timing of engineering and bidding activity on both renewal and replacement and new capital upgrade work.
We believe construction activity will pick up during the next few quarters.
We are still projecting an EPS contribution from ASUS of $0.28 to $0.32 per share for 2016 as discussed with you during our year-end call.
We continue to work closely with the US Government on outstanding price redeterminations.
We expect the fourth quarter price redetermination for Fort Bliss to be finalized in the second quarter of 2016 and the third price redetermination for Fort Bragg to be finalized during the third quarter of 2016.
Filings for these price redetermination 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 US 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 are actively engaged in new proposals and expect the US Government to release additional bases for bidding over the next several years.
We remain optimistic about the future of our contracted services business.
Finally, I'd like to turn our attention to dividends.
On Monday of this week, our Board of Directors approved a second quarter dividend of $0.224 per share on the common shares of the Company.
Dividends on the common shares will be payable on June 1 to shareholders of record at the close of business on May 18.
American States Water Company has paid dividends every year since 1931, increasing the dividends received by shareholders each calendar year for 61 consecutive years.
We are among less than a handful of companies on the New York Stock Exchange that can boast of such a level of dividend increases.
For the five years ended December 31, 2015, our calendar year dividend has grown at a compound annual growth rate of about 11%.
Given American States' current low payout ratio compared to our peers and our earnings growth prospects, there is room to grow the dividend in the future.
I'd like to thank you for your interest in American States Water and we'll now turn the call over to the operator for questions.
(Operator Instructions) We will begin with <UNK> <UNK> of Wells Fargo.
Please go ahead.
Hey.
Good morning, <UNK> and <UNK>.
I guess on the West Coast it's still morning, but I know, <UNK>, in your prepared ASUS remarks you didn't seem to indicate this was the case.
However your main competitor indicated they expect a slowdown on construction projects during the remainder of the year due to military budget constraints.
Is this anything that you are seeing or expecting.
It is not.
You know our projects are funded.
The slowdown in the first quarter was largely due to the fact that we had to do the engineering and the bidding on the work that we have lined up.
So no, we're expecting to really get the construction activity going here in the last three quarters of the year.
You know, we haven't seen that.
I will tell you we have a lot of projects in front of the government for the upcoming year.
We've done our ---+ what I think is a really good job of scoping out a lot of projects and getting that in front of the decision makers at the military.
So far, we haven't got the indication that we're going to see a slowdown.
You know more about that than I do but our sense is that that may come out before ours does and so we don't want to get everyone's sort of hopes up.
And so I understand the ALJs are a bit understaffed at this point and so they're being challenged to do a lot of decisions so we're trying to be patient with them.
I mean, were there any projects in there that were kind of unusual or different than the spend that you've been, I guess, undertaking the past few years or was it all similar type of spend.
But it's not unusual to have significant differences between the Company and ORA's position.
It is true.
The rate case we experienced before.
So we feel that we made a good showing of the need for the project and provide the solid support as <UNK> mentioned, so we'll see.
Hopefully judge will see that.
Just for the calendar year 2016.
Yes, yes.
Just trying to get an idea of ---+ I mean, I think you said you're going to be filing for a little over $1 million of recovery from previous expenses and our understanding is those, I guess, get turned around pretty quickly, kind of like a 90-day period.
So how that would ---+ if that's going to offset whatever your drought expenses would be this year.
I think ---+
I definitely expect it to offset whatever drought expenses we have this year because our ---+
Thanks, <UNK>.
Thank you.
Yes.
I just wanted to close today by thanking everyone for their continued interest in American States Water and wish everybody a good day.
