California Water Service Group ( CWT)

Q3 2010 Earnings Call

October 28, 2010 ET

Executives

Martin Kropelnicki - VP & CFO

Pete Nelson - President & CEO

Analysts

Garik Shmois - Longbow Research

Heike Doerr - Janney

Jonathan Reeder - Wells Fargo

Presentation

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the California Water Service Group third quarter 2010 earnings results. 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. And as a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Martin Kropelnicki. Sir, you may begin.

Martin Kropelnicki

Thanks, Tammy. Good morning everybody and welcome to the third quarter of 2010 conference call for California Water Service Group. With me today is Pete Nelson, President and CEO. I’d like to remind everyone that a replay of today's discussions will be available from Oct 28 through December 27 at 1-888-266-2081, ID number 1484282.

Before discussing the results for the quarter I'd like to take a few minutes 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 uncertainties 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 uncertainties down in our Form 10-Q, Form 10-K and other reports filed from time to time with the Securities and Exchange Commission.

Having said that, let's take a look at the quarter and I'll turn over to Pete to talk about some of the evolving issues with the PUC.

Revenue for the quarter increased $7.2 million or 5.2% to $146 million. Included in that number was a gross WRAM adjustment of $11 million in the WRAMs, the Water Rate Adjustment Mechanism associated with revenue and an $8.6 million negative MCBA, which is a modified cost balancing account which tested the production cost where actual production costs were below adopted numbers. That gave us a net $2.4 million increase to income.

Operating expenses for the quarter were $5.4 million, increased $5.4 million or 4.7% to $120.5 million.

I'll briefly go through the production cost breakout between purchase water, purchase power, and pump taxes but please keep in mind these are all covered by the MCBA.

During the quarter purchase water increased 14% or $5.1 million to $40.5 million. Purchased power increased 8% or $750,000 to $10.8 million and pump taxes went down 6% or $200,000 to $3.3 million. Again all three of those components are covered by our MCBA, our Modified Cost Balancing Account.

A&G for the quarter went down $1.3 million or 6.8% driven by lower legal cost outside services and overall the company keeping the operating budget very tight for 2010. Other operations increased 1.7% or $300,000 to $14.9 million. This is partially due to transmission distribution cost partially offset by a decrease in collectible accounts as well as increased use of surface water and chemicals and filters associated with that surface water.

Maintenance expense for the quarter increased 10% or $450,000 to $4.9 million, all associated with our work on mains. Depreciation amortization for the quarter increased $600,000 or 6.6% to $10.9 million, really driven by the 2009 capital improvement program and the plant that we put in service during 2009.

For the quarter income taxes went down $592,000 or 4.4% to $12.8 million. This is due to two things primarily one, the true up as we filed our tax return, we have to file the true up associated with our tax provision as well as the company finished a comprehensive deferred tax review.

Profit taxes and other taxes for the quarter were up 4.2% or approximately $200,000 to $4.5 million associated with just the property taxes in franchise taxes associated with the new property and equipment put in rate base.

Net operating income for the quarter increased 7.35% or $1.7 million to $25.8 million. Other income and expense for the quarter was $1 million about the same as last year and interest expense for the quarter increased 17% or approximately $900,000 due to higher borrowing on our line of credit which is approximately $56 million outstanding at the end of Q3.

Almost all that money is gone into our capital program for 2010. Net income for the quarter increased 4% or $800,000 to $20.4 million and earnings per share for the quarter were 4.3% higher or $0.04 per share higher to $0.98 over the same period last year. So we got a 50,000 feet and look at how the components here, usage was down, which was offset by higher purchase water cost, the WRAM, MCBA seem to be working fine. And as we started 2010, as we told they are running with a stretch here for the company given the fact we asked some of our districts that have gone 3.5 years without rate relief.

Well it’s a tight year from EPS perspective. We believe our operating trends continue to be strong especially on the A&G lines and our CapEx programs and we believe we positioned our company really well going into 2011.

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