Ladies and gentlemen, thank you for standing by. Today is November 8, 2010. Welcome to the American States Water Company Conference Call discussing 3rd Quarter 2010 Results. If you have not received a copy of this morning's news release announcing earnings for the quarter, please call 909 3943,600, 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 p.
M. Pacific Time and run through Monday, November 15, 2010. After logging on to the website, click the Investors button at the top of the page. The archive is located just above the Stock Quote section. At this time, all participants are in a listen only mode.
Later, we will conduct a question and answer session. As a reminder, this call will be recorded and will be limited to no more than 1 hour. At this time, I'd like to turn the call over to Eva Tang, Chief Financial Officer of American States Water Company. Thank you, Stephanie.
Thank you all for joining us today. Bob Sprowls, President and CEO, is also with me on the call. Before I start the quarterly results discussion, I would like to remind you that 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 ks and Form 10 Q on file with the Securities and Exchange Commission. All forward looking statements are made as of today.
The company is under no obligation to update such statements. With that, I would like to discuss our financial results. In the Q3 results for 20 10,009, we have broken out income from both continuing operations and discontinued operations related to Xiaopra City Water Company due to the pending sale. I'll begin with earnings from continuing operations for the quarter. Basic and fully diluted earnings from continuing operations for the quarter ended September 30, 2010 were CAD0.31 and CAD0.30 per common share, respectively, as compared to basic and fully diluted earnings from continuing operations of $0.53 per share for the Q3 of 2019.
The decrease in reported earnings from the continuing operations for the Q3 of 2010 is due to a one time pre tax charge of $9,000,000 or $0.32 per share recorded at Golden State Water Company during the Q3 of 2010 for the impairment of assets and loss contingencies, resulting from pending regulatory matters. Bob will discuss the regulatory matters later on this call. The one time losses may be adjusted in future periods as additional information becomes known on these matters. Excluding the effect of the $0.32 per share one time charge, adjusted diluted earnings from continuing operations would be $0.62 per share for the Q3 of 2010, which is a $0.09 per share increase as compared to the same period of 2,009. I'll go through the items that resulted in the 0.09 increase.
The water margin, which is revenue minus supply cost at Golden State Water increased by RMB2.6 million or RMB0.08 per share for the 3 months ended September 30, 2010, as compared to the same period of 2,009. The increase is due primarily to water revenue adjustment mechanism accounts, net of modified cost balancing accounts implemented in September of 2009 in Region 1,318 areas. The decoupling mechanism has been in place for Regions 2 and 3 since late November 2008. On October 20, 2010, the administrative law judge and assigned commissioner issued a proposed decision and an alternate proposed decision, respectively, on the Regions 23 and General Office rate case that was delayed by the California Public Utilities Commission or the CPUC early this year. The revenue requirement for both proposed decisions are quite similar.
The increase in the 2010 revenue requirement is estimated to be $31,000,000 which include an increase of $40,000,000 for supply costs. The $31,000,000 increase is in addition to the step increases of $9,100,000 for regions 23 implemented in 2009. A final decision is anticipated in the Q4 of 2010. New rates, once approved by the CPUC, will be retroactive to January 1, 2010. The electric gross margin of Golden State Water increased by $1,500,000 $0.05 per share during the Q3 of 2010, primarily due to increases in electric rates approved by the CPUC effective November 'nine and January 'ten.
We also implemented the base rate revenue adjustment mechanism in November of 2009 to decouple revenue from sales, which added to $224,000 of revenue. Excluding the one time pre tax charge from the pending regulatory matters and supply costs included in the water margin discussed previously, Golden State Water incurred an increase of $1,500,000 or $0.05 per share in other operating expenses during the Q3 of 2010 due to an increase in maintenance costs, labor related benefit costs, conservation related costs and depreciation expenses as compared to 2019 Q3. One thing worth noting is that had the new rates in the proposed decision being in place since January of 2010, pre tax operating income for the Q3 of 2010 would have increased by $3,600,000 or $0.12 per share, which is sufficient to cover the $0.05 per share increase in the operating expenses for the 3rd quarter. Pre tax operating income at American States Utility Services increased by $703,000 or $0.02 per share during the Q3 of 2010 as compared to the same period in 2,009 due primarily to an increase in construction activities at various military bases. Interest expense, net of interest income, decreased by $789,000 or $0.03 per share during the Q3 of 2010 as compared to the same period of 2009, primarily due to a downward adjustment in interest expense recorded in the interest rate balancing account.
A CPUC's resolution received in October 2010 clarified the methodology in calculating the interest rate balance income. This downward adjustment in interest expense was partially offset by slightly higher interest rate on short term borrowings as compared to the same period of 2009. Other income decreased by $591,000 or $0.02 per share due to losses incurred at one of American State Water's investments. The investment is accounted for by the equity method. Excluding the impact of one time charge mentioned previously, the effective income tax rate negatively impact earnings by $0.02 per share, resulting from changes between book and taxable income that are treated as flow through adjustments in accordance with regulatory requirements.
I will now move on to briefly discuss the Q3 results from discontinued operations related to Xiaopra City Water Company. As we discussed the last quarter, American States Water entered into a stock purchase agreement with UPCOR Water USA Inc. To sell all the common shares of Xiaoprau for a total purchase price of $35,000,000 including the assumption of 6 $1,000,000 of long term debt. Approximately $29,000,000 in cash will be paid to AWR at closing. The sale is subject to approval by the Arizona Corporation Commission, which is anticipated to be received in 2011.
Diluted earnings from discontinued operations for the Q3 of 2010 were $983,000 or $0.05 per share as compared to a loss of $193,000 for the same period in 2,009. The increase in earnings is due to rate increases effective October 2009, a loss on the settlement recorded in the Q3 of 2009 based on Arizona Corporation Commission's decision with no responding losses recorded in 2010 and a decrease in depreciation expense as a result of classifying Chaparral's utility plant as assets held for sale since June of 2010. Now on to a summary of the year to date twenty ten results. Let me discuss the continuing operations first. For the 9 months ended September 30, 2010, diluted earnings per share from continuing operations was $1.21 compared to $1.46 for the same period in 2009.
Excluding the effect of the $0.32 per share one time charge, adjusted diluted earnings from continuing operation would be $1.53 per share for the 9 months ended September 30, 2010. This represents a CAD0.07 per share increase as compared to 2009, despite the delay in receiving rate reliefs for regions 2 and 3 and general office rate case. As previously mentioned, once approved by the CPUC, the new rate will be retroactive to January 1, 2010. Had the new rates in the proposed decision being in place on January, one, pretax operating income for the 9 months ended September 30, 2010 would have increased by $10,300,000 or $0.33 per share. Excluding the one time charge impact the comparability in the result of the two periods were an increase in other operating expenses of $7,100,000 or $0.23 per share at Golden State Water due to higher labor and employee related benefit costs and higher outside service fees.
A decrease in other income of $648,000 or $0.02 per share, primarily due to a loss on an investment accounted for under the equity method. The increase in income tax expense due to a tax benefit of 900 and $18,000 or $0.05 per share recorded in 2,009 and a higher effective income tax rate in 2010, which negatively impact earnings by approximately $0.06 per share. A decrease of $0.05 per share due to the issuance of $1,150,000 of AWR's common stock in a public offering completed in May of 'nine. These decreases to diluted earnings per share from continuing operations were partially offset by an increase in the water margin for Golden State Water of $1,500,000 or $0.05 per share, an increase in electric margin of $5,400,000 or $0.17 per share due to rate increases, the approval for recovery of $958,000 in our general office cost allocation memorandum accounts and the recording of $1,000,000 to the base revenue requirement adjustment mechanism. And an increase in American States Utility Services pretax income of $8,100,000 or $0.26 per share, largely due to the approval of contra modifications, resulting in retroactive revenues and increased construction activities.
For the 9 months ended September 30, 2010, income from discontinued operations increased by $1,500,000 or $0.08 per share as compared to the same period in 2,009. The improved performance of Shar Pao City Water was primarily due to rate increases in October 2009 and a decrease in depreciation and maintenance expenses, partially offset by transaction costs associated with the sale. A more detailed discussion of our results for the quarter and the year to date is included in our earnings release issued this morning, and will be providing our Form 10 Q, which will be filed tomorrow. Moving on to our capital expenditure program. For the 9 months ended September 30, 2010, Golden State Water spent $56,200,000 on capital projects as compared to $53,100,000 for the same period in 2,009.
Capital expenditures for calendar 20 10 for Golden State Water Company are expected to be in the $75,000,000 to $80,000,000 range. Consolidated net cash provided by operating activities was $37,100,000 for the 9 months ended September 30, 20 10, as compared to $50,400,000 for the same period in 2,009. The decrease of $13,300,000 was primarily due to an 8.7% decrease in water consumption and the lack of rate increases at Golden State Water Company. We currently have surcharges in place in all three water regions to recover the shortfall in consumption, which is attracted in the water revenue adjustment mechanism account. Once new rates are in place for region 2, region 3 and the general office, a surcharge will also be implemented to recover the retroactive revenues from January 1, 2010.
Again, based on both proposed decisions, revenue increases for 20.10 are estimated to be $31,000,000 Improved performance at American States Utility Services resulted in a $4,200,000 increase in cash flows from operating activities. American States Wallet Company has a $100,000,000 revolving credit facility that is currently utilized to support operations and capital needs. Short term borrowing under this current facility as of September 30, 2010 were $57,200,000 I will now turn the call over to Bob.
Thank you, Eva, and good afternoon, ladies and gentlemen. I'd like to take a brief moment to address the water supply issues that are currently facing the State of California. On April 13, 2010, the Metropolitan Water District of Southern California or MWD for short, approved an allocation plan that continues the water supply reductions to its member agencies for a 2nd year. As during the 2,009 water year, MWD plans to achieve a 10% reduction in deliveries by imposing significant penalty charges for member agencies that don't reduce their deliveries by the required amount. Since then, MWD's outlook for water storage and supply has greatly improved.
Due to a combination of low demands and increased water supply, MWD's storage levels have exceeded expectations. As a result, their Board of Directors will consider ending the allocations at their December Board meeting. To avoid the 1st year of the supply allocation penalties imposed by MWD and its member agencies during the July 1, 2009 through June 30, 2010 water year, Golden State Water implemented mandatory and voluntary water conservation and allocations in various service areas. Global State Water's customers were successful in reducing their overall water supply demand. Water consumption was down approximately 8.7% during the 1st 9 months of 2010 when compared to the same period in 2,009.
MWD has also announced a rate increase of 7.5% beginning January 2011 with another increase of 7.5% for 2012. Increases in prices from wholesalers such as MWD flow through the modified cost balancing accounts. Additionally, on October 14, 2010, MWD announced a long term water plan that if implemented fully may help protect the region from future supply shortages. With an emphasis on water use efficiency through conservation and local supply development. The primary goal of the district's integrated resources plan is to maintain and stabilize regional water supply reliability over the next 25 years.
Every year, the California Department of Water Resources, the DWR for short, establishes the state water project allocation for water deliveries to the state water contractors. The DWR generally establishes a percentage allocation of delivery requests based upon a number of factors, including weather patterns, snowpack levels and reservoir levels. The percent allocation given to state contractors can vary throughout the year as weather and other factors change. On June 23, 2010, the DWR increased the allocation on the State Water project to 50% due to favorable late spring rainfall and snowpack conditions. This allocation is slightly higher than the 40% allocation set in 2,009 and is expected to be the final allocation for 2010.
Finally, in June 2010, Golden State Water signed an agreement with Cadiz Inc. To proceed with the Cadiz Water Conservation and Storage Project. Under the terms of the agreement, Golden State Water has the right to acquire an annual supply of 5,000 acre feet of water at a predetermined formula once the environmental review is complete. In addition, Golden State Water has the option to acquire storage rights in the Cadiz project to allow Golden State Water to manage the supply as part of its overall water supply portfolio. Cadiz is a publicly held renewable resources company that owns 70 square miles of property with significant water resources and clean energy potential in Eastern San Bernardino County in California.
Now I will discuss the status of key regulatory filings and other matters for the company. Early this year, Golden State Water filed advice letters with the California Public Utility Commission for recovery of the 2,009 under collected balances in the water revenue adjustment mechanism accounts, net of the modified cost balancing accounts for all our water regions. Surcharges are currently in place to recover the $20,400,000 balance. The implementation of the surcharges increases the company's cash flow and it does not impact earnings. Going forward, Golden State Water will seek recovery of its water revenue adjustment mechanism accounts net of the modified cost balancing accounts on an annual basis.
As of September 30, 2010, Golden State Water has a net aggregated regulatory asset of $36,200,000 which is comprised of a $49,100,000 under collection in the water revenue adjustment mechanism accounts and a $12,900,000 over collection in the modified cost balancing account. On June 7, 2010, American States Water entered into a stock purchase agreement with Epcor Water USA to sell all of the common shares of Chaparral City Water Company for a net cash total of $29,000,000 We filed for approval of the transaction with the Arizona Corporation Commission in July and anticipate receiving the approval in 2011. We intend to use the proceeds from the sale to pay down short term borrowings and defer the need for future equity issuances. We filed a general rate case for Region 1 on January 4, 2010 for a 2 year rate cycle with rates effective 20112012. Our stipulated position calls for revenue increases of 5 point $4,000,000 $1,200,000 for 2011 2012 respectively.
Whereas the division of ratepayer advocates position calls for revenue increases of $2,100,000 $329,000 for 20.11 2012 respectively. Any revenue increase for 2012 approved in the final decision will be subject to commission approved escalation factors and pro form a earnings tests. Golden State Water has filed for a memorandum account for interim rate increases for 2011 in the event a final decision is not issued by the PUC by the end of 2010. This establishes an effective date for new rates once they are approved by the PUC. A general rate case will be filed for all three water regions in July 2011 with rates effective January 2013.
Now I'd like to take a moment to discuss the pending regulatory matters related to Golden State Water that resulted in a one time pre tax charge of $9,000,000 or $0.32 per share during the Q3 of 2010 as discussed by Eva earlier in the call. On February 15, 2007, the California Public Utility Commission issued a subpoena to Golden State Water in connection with an investigation of certain work orders and charges paid to a specific contractor or numerous construction projects estimated to total $24,000,000 The PUC's investigation focuses on whether Golden State Water was overcharged for these construction projects and whether these overcharges were approved in customer rates. The construction projects completed by this specific contractor related primarily to work on water treatment and pumping plants, which have been placed in service and are used and useful. Should the PUC investigation result in a proposed disallowance of certain previously capitalized costs, such costs and potentially any return earned on such costs may be required to be refunded to the customers upon settlement of the proposed disallowance. The California Public Utility Commission also has the authority to assess fines and penalties.
Although we do not believe a disallowance or penalty is justified and reserving all rights, it is prudent to reserve for a probable loss related to this matter. The reserve estimates for this matter are subject to change as additional information becomes known and the PUC approaches the conclusion of its investigation and determines its next course of action. The other pending regulatory matter that resulted in a one time pre tax charge is related to the Region 2, Region 3 and general office rate case. Golden State Water filed a general rate case in July 2008 for rates effective for years 2010, 2011, 2012. On January 29, 2010, the PUC issued a ruling revising the scoping memo and reopening the general rate case proceeding to receive supplemental information and testimony on a number of issues, including cost allocation, the definition of firm capacity, pension and benefit calculations, general office rent expense, salary and wage adjustments, costs regarding certain capital projects and deferred rate case costs.
As Eva mentioned earlier, the administrative law judge issued a proposed decision and the assigned commissioner issued an alternate decision on October 20. These proposed decisions adopt the partial settlement agreement reached between Golden State Water and the division of ratepayer advocates, which include capital budgets, projected sales levels and supply costs. The proposed decisions also adopt certain positions regarding a number of issues where supplemental information and testimony were provided, including costs regarding the La Serena plant improvement project and other capital projects and deferred rate case costs. The PUC may approve either the proposed or alternate proposed decision as written or modify them based upon comments received during a 20 day comment period, which commenced on October 20, 2010. Mobile State Water is in the process of providing comments to the PUC regarding items in the proposed decisions and cannot predict whether any changes will be made and incorporated in the final decision prior to adoption, which may require an increase in the estimated pre tax charge recorded in the Q3 for the impairment of assets and further negatively impact the company's earnings.
The PUC is scheduled to issue a final decision in the Q4 of 2010. The revenue requirements for both proposed decisions are similar. The increase in revenues amounts to approximately $31,000,000 for 20.10, which includes an increase of $14,000,000 for supply costs. The $31,000,000 increase is in addition to the step increases of $9,100,000 for regions 23 implemented in 2,009. As previously mentioned, once approved by the PUC, the new rates will be retroactive to January 1, 2010.
Had the new rates and the decisions been in place on January 1, 2010, pre tax operating income for the 3 9 months ended September 30, 2010 would have increased by $3,600,000 or $0.12 per share and $10,300,000 or $0.33 per share respectively. The revenue increases for 2011 and 2012 are approximately $3,000,000 $6,000,000 respectively for Region 2 and Region 3 combined. The Region 2 and Region 3 revenue increases for 20112012 are subject to commission approved escalation factors and pro form a earnings tests. I'll now briefly discuss industry wide decisions issued during the Q3. On October 19, 2010, California Public Utility Commission issued a decision regarding affiliate transactions and the use of regulated assets for non tariff utility services, formerly called excess capacity.
The new affiliate rules are intended to establish a standard set of rules to govern transactions between a regulated water utility, its parent and other affiliated companies. The affiliated transactions decision reaffirms previous industry practices and the company continues to monitor its cost allocation and management of the regulated and non regulated segments to ensure the affiliate transactions are in compliance with the prescribed rulings. On October 28, 2010, the California Public Utility Commission adopted the 2010 Water Action Plan, highlighting the actions that the California Public Utility Commission are considering to implement in order to achieve the commission's objectives of providing quality water service through efficient use of water and reasonable rates. The 2010 Water Action Plan represents an update to the Commission's first water action plan, which was adopted in December 2005. The new plan identifies regulatory actions that the Commission will consider, including consideration of offering incentives to promote acquisition of smaller utilities, updating industry standards including revamping of the uniform system of accounts to converge with the Securities and Exchange Commission and Financial Accounting Standards Board standards, developing rules to increase the use of recycled water and desalination, and streamlining the PUC regulatory decision process.
The company will work closely with the California Public Utility Commission to assist in achieving these objectives. Let's turn our discussion to the company's military subsidiaries under American States Utility Services Inc or ASUS. ASUS has continued to record positive earnings for the year. For the 9 months ended September 30, 2010, pre tax operating income for contracted services increased by $8,100,000 or $0.26 per share as compared to the same period in 2,009, largely due to contract modification and requests for equitable adjustments approved by the U. S.
Government during the 1st 9 months of 2010 in connection with request for equitable adjustments previously filed for inventory price adjustments at Fort Bliss in Texas and Fort Bragg in North Carolina and emergency construction work performed at Fort Jackson in South Carolina. We believe successful price redeterminations and requests for equitable adjustment or REA filings will provide added revenues prospectively to help offset increased costs and provide ASUS the opportunity to consistently generate positive operating income at its subsidiaries that serve military bases. We are still working to finalize prospective price redeterminations and REAs at various bases, which include adjustments to reflect inflation costs and changes in operating conditions and infrastructure levels from that assumed at the time of the execution of the contracts. The timing of the conclusion of such filings is somewhat unpredictable. To summarize, I'll quickly talk about the status of each of our price redeterminations.
First, the price redetermination filings for the 4 Virginian military bases were deemed by the U. S. Government to have deficiencies. We are currently in discussion with the government to address the deficiencies. We have received interim management fee increases of 16.9% since 2,008.
2nd, the 1st bright redetermination for Andrews Air Force Base is under discussion with the government regarding the structure of the redetermination filing. In June 2010, notification was received from the government that this price redetermination filing was inadequate. We are currently in discussion with the government on the resolutions. Pending such resolution, the government has approved a retroactive adjustment of $1,000,000 resulting in the recording in the Q3 of of work performed and previously recognized as construction revenue. A prospective 18.9% increase in the contract rates is also in effect on an interim basis.
3rd, our subsidiary that operates Port Bragg expects to file its 1st price redetermination by the end of 2010 and has received an interim increase of 3.6 percent. Our subsidiary that operates Fort Jackson filed a request for equitable adjustment in the Q2 of 2009 with the U. S. Government in connection with costs incurred in response to an emergency sanitary sewer overflow. In September 2010, the government approved the REA resulting in $689,000 in additional construction revenues and pre tax operating income recorded in the Q3 of 2010.
Our subsidiary at Fort Jackson has also filed an REA in connection with the substandard condition of the inventory assumed at Fort Jackson as compared to what was presented in the government's request for proposal. Resolution of this REA is expected in late 2010. The first price redetermination for Fort Jackson will be filed by the end of 2010. An interim increase of 3.4% is currently in effect. Lastly, the subsidiary that serves Fort Bliss reached an inventory settlement with the U.
S. Government in January 2010. This subsidiary and the government agreed to waive the first and second price redeterminations under the original 50 year contract and the 3rd redetermination period filing will be in 2012. Finally, American States shareholders should know that using the SEC guidelines for reporting financial performance, $10,000 invested in the shares of American States Water at December 31, 2005 would be worth $13,221 at September 30, 2010. This amounts to an annual compound growth in shareholder value of 6.1%.
Before I turn the conference over to the operator to entertain questions, I would like to thank you again for your continued support and interest in the company.
We will now entertain any questions you may have about the information presented today. We'll take the first question from Garik Shmois with Longbow Research.
Hi, thanks. Just I wanted a clarification first off on the interest expense. Is the $5,400,000 in the quarter a good run rate to use going forward?
I think you need to adjust out the one time downward adjustment we did and to reduce the deposit. Yes, I think you need to take that into consideration.
Okay. All right.
And Just another comment on that. I mean, to the degree the company goes and issues longer term debt to take out our shorter term debt. Generally, there's a step up in the interest costs when we do that. Okay.
Right. And we probably will issue some long term debt next year just to resolve the intercompany debt levels there.
Okay. Is there an amount that you can share that you're looking to issue or is it too early to say?
Yes, we just the last one we did was about 40,000,000. Dollars I mean that's
probably It's wrong way.
Okay. And then just secondly, if you're facing a potential change in the allocation amount from the MWD, is that going to change any way that your strategy moves going forward?
No, I don't think so. For 1, the conservation that has been achieved over the last 2 years has not only sort of helped the MWD allocation approach, but it's helped us in terms of what we pull from our groundwater basins. So I think the situation has improved since 2 years ago. I want to be sure, Garik, that's responsive to your question. No, it is.
I just wanted to
see if there was going to be any material change in how you approach conservation. So no, that's helpful. That's it. Thank you very much.
Thank you,
And there are no further questions at this time. I'll turn the conference back over to Mr. Sproles for any closing remarks.
Okay. Thank you, Stephanie. Again, thank you all for your participation today and for your continued interest and investment in American States Water Company. And I think it concludes our call today.
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 8, 2010 at 2 p. M. Pacific Time and will run through Monday, November 15, 2010. After logging on to the website, click the Investors button at the top of the page.
The archive is located just above the Stock Hope section. Thank you for your participation. You may now disconnect.