California Water Service Group (CWT)

Q2 2010 Earnings Call

July 28, 2010 11:00 am ET

Executives

Martin Kropelnicki - VP, CFO and Treasurer

Peter Nelson - President and CEO

Analysts

Garik Shmois - Longbow Research

Tim Winter - Gabelli & Company

Jim Lykins - Hilliard Lyons

Michael Gaugler - Brean Murray, Carret

Heike Doerr - Janney Montgomery Scott

Presentation

Operator

Welcome to the Second Quarter 2010 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to your host, Martin Kropelnicki.

Martin Kropelnicki

Good morning, everybody and welcome to the second quarter 2010 earnings conference call for California Water Service Group.

With me today is Peter Nelson, President and CEO of California Water Service Group. I would like to remind everyone that a replay of today's discussion will be available from July 29 through September 27 at 1-866-253-6505, ID number 1469346.

Prior to looking at the results for the quarter, I would like to take a brief moment to discuss forward-looking statements. In particular, during the course of this conference call, the company may make certain forward-looking statements because these statements deal with future events, they are subject to various risks and uncertainty and actual results could differ materially from the company's current expectations. Because of this, the company strongly advises all current stockholders as well as all interested parties to carefully read and understand the company's disclosures on risk and uncertainty found in our Form 10-K, Form 10-Q, and other reports filed from time-to-time with the Securities and Exchange Commission.

Having said that, let's jump into the quarter and go to the quarterly results and after I go through the results, I will hand it over to Pete, who will give you an update from an operational perspective.

For the quarter, the company had revenue of $118.3 million, up $1.7 million or 1.4% over the same period last year. There are four main components that drove the change in revenue.

One, we had a rate relief at $8 million. That rate relief can be broken into two buckets. Approximately $4 million of step increases that would have gross margin associated with the step increase and $4 million of offsets and offsets basically go to cover increase costs, but there is no gross margin that goes to the bottom line on that.

New customer revenue added approximately $600,000. Usage by existing customers was down $12.7 million and the net effect of the WRAM, MCBA and the WRAM is the water rate adjusted mechanism and then the modified cost balancing account was a positive $5.8 million. Included in that debt number for the WRAM was the $5.3 million negative adjustments or reduction due to production costs being lower than the adopted numbers.

Going down to the production costs and looking at operating expenses. Operating expenses were up 1% or $1.3 million to $102 million for the quarter. Looking at the production costs. There is three components of the production costs, purchase water, purchase power and pump taxes are all covered by the modify costs balancing account or the MCBA.

Purchase water was up $753,000 or 2.4% for the quarter. Overall, water production for the company was down 14%, but that was in the purchase water and was offset by higher wholesale water prices.

Purchase power for the quarter was down $170,000 or 2.2% compare to last year and pump taxes were down $451,000 or 18.3% compare to Q2 2009.

Admin and general expenses for the quarter were down $904,000 or 5% to $18.5 million. That has to be primarily with our increase capital spending and more expenses being allocated to construction projects. So people who will work on construction we allocate their time to the project and the overhead that follows or benefit costs follow that.

Looking at other operations. Other operations for the quarter increased $400,000 or 3% to $14.7 million. That was driven primarily by three categories. One, increased spending on conservation. Two, cost associated with our front office and customer service. Three, increased purchases of chemicals and filters.

Maintenance expense for the quarter was up 20%, or $800,000, to $5.2 million. This was driven by more maintenance on water maintenance which is typical this time of the year. Depreciation and amortization increased $400,000, or 4%, to $10.6 million, driven by the capital additions put into plan during 2009.

Income taxes were up $200,000 or 5%, to $4.1 million due to a slightly higher tax rate and property and other taxes were up $200,000 as well, primarily due to increased franchise fees and property taxes.

Net operating income for the company was $16.3 million, up $329,000 or 2% over the same period last year. Going down to other income and expense, other income and expense was breakeven and that compares to a positive $1.5 million last year. So that's a pretty big swing and that's primarily driven by a mark-to-market adjustment associated with assets that the company has associated with some of its benefit plans.

So the swing went from a positive 1.8 to a negative $700,000 and that's primarily reflected just in the volatility associated with the stock market that we saw during the quarter.

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