California Water Service Group (NYSE:CWT)
Q2 2013 Earnings Call
August 1, 2013 11:00 AM ET
Thomas Smegal - Chief Financial Officer
Peter Nelson - Chairman and Chief Executive Officer
Martin Kropelnicki - President and Chief Operating Officer
Heike Doerr - Robert W. Baird
Tim Winter - Gabelli
Good day. Welcome to California Water Service Group's scheduled second quarter 2013 earnings results announcement and teleconference. (Operator Instructions) 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. 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 1, 2013, through September 29, 2013, at 1-888-203-1112 or at 1719-457-0820 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 disclosures on risk and uncertainties found in our form 10-K, 10-Q and other reports filed from time to time with the Securities and Exchange Commission.
But 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 a $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 RAM 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 a not a component of the RAM mechanism, which operates on a cash basis.
And I do want to point out that the 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 period to date, we are at 94% of our adopted sales and in the similar period last year we were at 91% of the 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 includes $3 million of pass-thorough purchase water offsets and then the effect of our pensions and conservation balancing accounts actually decrease revenue by $2.4 million. Our production cost 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, purchased 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 expense are driving it, particular health care. And I should know, while the costs of healthcare were 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 decrease conservation expense, which I mentioned above on the revenue side, that's a balancing account item.
On the maintenance side, we saw a $4.2 million of maintenance for the quarter, and that's a decrease of 9% or $400,000 and that's from decreased cost 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 are $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.
For our net income, it 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, down 8.6% from $0.31 in second quarter of 2012 and the reason for that is that the increase in the number of shares as we have the equity offering in market this year.
Now, I'm going to turn it over to Pete Nelson for some comments.
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'm 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 1 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 group, such as the State Chamber of Commerce Board of Directors and I'll still be active in the California Water Policy representing the business perspective.
But I will be a 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, this is 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 1. I could not be happier with these changes. Our Board spent a lot of their time on the 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.
Thanks Pete. So just a couple of things on the balance sheet. Our net utility plant 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 at $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 balance sheet is due to the higher sales and the better recovery that we've seen since the end of 2012, on the RAM balances we do report a decline from the beginning of the year of our RAM MCBA balance of $1.9 million from $46.1 million to $44.2 million.
And why that's significant? That's been an 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 therefore not invested productively on other activities and so we'd like to see this balance decline even further. We expect with the new rates that's going to effect with 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 perspective 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 and the third year to rate case are always very difficult quarters for us and the investments that we've made in technology, a kind of the 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 today with the budget. So overall, right where we thought we would be and we are glad we're through the slow period into the end of the summer months.
Second thing I want to talk about is where we are with the General Rate Case process. Overall, we had about four week settlement period that was set up, where we've now been that process approximately 12 weeks. Clearly the process didn't contemplate the level of complexity with 26 districts, thousands of capital projects and 11 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 are 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 the resolve.
Overall, it's a very complex process. Very happy with our rates team and how we've been negotiating also with 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, we want to introduce today, that 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 certification that the state offers in treatment and distribution. Tim most recently served as Director of Water Quality overseeing our overall compliance programs and labs for the water programs that Cal Water has. So Tim certainly is qualified from a operating standpoint as well as the lab side of it to lead our operation in the organization going forward.
In addition, yesterday we named Michael Luu, 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 in IT while working to complete his undergraduate degree and managing the 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 rotated back and now we've promoted him to Vice President of IT and Customer Service. Both Michael and Tim are well qualified and we want to welcome them to the office routine here at Cal Water.
Lastly, I want to 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 communities with approximately 1.5 million customers served. Under Pete's management, we expanded our footprint to four states and the customer served over 2 million that we serve today. In additions, under Pete's watch, we increased our capital program 374%. We increased our revenue 239% and we increased our net income 232%.
Well, 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 a $1 billion with 47.8 million shares outstanding. So under Pete's management, we have 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 275% return to its corresponding investment in the S&P 500. So fairly the 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 to be the leader in customer service in the 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 the Top 95 Work Place in the Bay Area for second year in a row.
Being located in the heart of Silicon Valley with companies that lead the way in innovation throughout the world, there is 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 2013, we remained number 17 as 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 of 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 a new capacity as Chairman of the Board.
So I think we're done with our prepared comments and we'll open it up for questions.
(Operator Instructions) And we'll take our first question from Heike Doerr with Robert W. Baird.
Heike Doerr - Robert W. Baird
Congratulations, Marty, on your promotion, Pete on your retirement. Will we still be seeing you at any NAWC, Pete?
You'll see still me at NAWC, yes.
Heike Doerr - Robert W. Baird
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.
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 expected our customers will generate throughout the end of the period, but we haven't build them for yet. So we bill our customers' everyday, almost. And so we estimate the water that was used by them and the bill that would be created by them for the period between the 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 at all unexpected, it's just kind of a seasonal shift that happened this year, where the unbilled didn't creep up to add at the end of March, and it did start to creep up as we went forward.
Heike Doerr - Robert W. Baird
So just that 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, it's a good sign that our unbilled revenue is up, it's an expectation that our sales are up, and that in the next quarter, we're going to get more sales that flow into the WRAM.
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 beginning of January, 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 happy with that. So it's a good sign for us. I guess that's another way to say it.
Heike Doerr - Robert W. Baird
And as we look at the Rate Case, can you talk me through the timing of this, so you give the commission settlement that all of your interveners has signed, and then we wait for an ALJ to give us a proposed decision, correct?
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 timeframe. So it will be all signed and filed with the commission, public document. And then, the ALJ have 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.
Heike Doerr - Robert W. Baird
But there is not stipulated time as far as once you come forth with a settlement, how long it takes for the ALJ to rule or is we just know what the gap is between the proposed decision and the final?
That's right. The ALJ, they have all the time they need to write a proposed decision. Obviously, the hope with a settlement is that they don't need as much time as they would with a litigated proceeding. We do 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 past year, which would be January 1, 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.
Heike Doerr - Robert W. Baird
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 delays. I'm aware of some delays in some other utility proceedings. I don't believe that our judge is 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, the size of this one that he's dealing with. And so it's really unknown to us at this time, whether that delay would be on us as well as on some of the others.
We'll take our next question from Tim Winter with Gabelli.
Tim Winter - Gabelli
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?
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 budgeted actual standpoint. And kind of much feel 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 are on a monthly basis on their budget.
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 if you have fuel costs or mainly things that are extraordinary expense items. Certainly detract us from hitting that ROE, but where we are in kind of mid-year, 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're pulling data, Pete's cringing as I say this, our Treasury Manager and I were pulling all the data together doing analysis behind it. I think she kind of sums it up the best. Prior to Pete, Cal Water was a 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 analyst 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, as the company really grew up under Pete's management.
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.
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