Q3 2019 Earnings Call
Being recorded.
If you would like to listen to the replay of this call. It will begin this afternoon approximately at five PM Eastern time and run through Tuesday November 12, 2019 on the company's website www dot a as water dot com.
The slides that our company, we'll be referring to are also available on the web site.
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This call will be limited to an hour.
Presenting today from American States water company.
As Bob Sprowls, President and Chief Executive Officer, and Eva Tang Senior Vice President of Finance and Chief Financial Officer.
As a reminder, certain matters discussed during this conference call maybe 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 gap in the United States and constitute non-GAAP financial measures under as easy rules. These non-GAAP financial measures.
Our derived from consolidated financial information, but are not presented in our financial statements that are prepared in accordance with gap.
For more details please refer to the press release.
At this time I will turn the call over to Bob Sprowls, President and Chief Executive Officer of American States water company.
Thank you Sarah.
Good day, everyone. Thank you for joining us today.
I'll begin with some highlights for the quarter Eagle will then discuss some important financial details.
I'll wrap it up with some updates on regulatory activity issue as dividends.
And then we'll take your questions.
Very pleased to report that we delivered another excellent quarter.
2019 earnings per share.
23% compared to last year's third quarter.
Or Golden State water company subsidiary.
Earnings increased year over year, largely due to new water rate.
2019.
And in August we received a final decision issued by the California Public Utilities Commission or CPC.
On our electric segments general rate case.
Resulting in retroactive revenues for 2018 and higher earnings in 2019.
As a result of these milestones and continued solid execution of our businesses.
Third quarter 2019 earnings were 76 cents per diluted share as reported.
69 cents per share excluding the retroactive impact of our electric rate case decision.
These adjusted earnings represent an increase of seven cents per share were 11% over the third quarter last year.
In addition, Golden State water company continues to invest in the reliability of our water and electric systems.
During the first nine months of 2019.
We spent $143 million in company funded capital expenditures and.
And we were on target to spend $150 million to $125 million for the year.
About three and a half times are expected annual depreciation expense.
Oh, no it was another productive and positive quarter, while laying the groundwork for continued earnings growth.
With that I'll now turn the call over to Eva to review the financial details for the quarter.
Thank you bought Hello, everyone.
Let me Starwood.
View of our third quarter financial results on slide seven.
Consolidated earnings as reported for the quarter was 76 cents per share compared to 62 cents per share listen curious Inc. 2018.
For the quarter will positively impact by the CPC final decision on the electric general rate case, with a new rate retroactive to January one 2018.
The retroactive impact of this decision was reflected in the retail for the third quarter.
After the electric Sexson Tencent earnings per share seven cents was related to the period prior to the third quarter, including three cents per here for the first six months of 2019.
Four cents per share for the full year 2018.
The seven cents per share is shown on a separate line the table.
On this slide.
Well this segment earnings for the quarter were 53 cents per share six cents per share higher than period in 2018, due largely to approval of the water generating.
Which established a new rate for 2019.
Well the electric segment after excluding the seven cents per share retroactive impacts on August generated decision.
Our new increased by one cents per share due to new electric rate.
Partially offset by higher.
Income tax rate.
Results from certain flows through taxes.
Earnings at our contracted services segments was so quality of 2019 were 12 cents per share.
Slide 13 cents per share of listen period in 2018.
TV due to differences in timing of construction work performed this year versus.
Consolidated revenue increased by $10.3 million due to increases as both the while they left to segment at both Lotta Electric segment.
While the revenues for the quarter increased by $7.6 million to $95.2 million due to that new water late.
The 4.1 million dollar increase in electric revenues reflect rate increases based on the usage Decisioning August .
Which includes $3.6 million for the for two quarters of 2019 and for the full year 2018.
Contracted services revenue for the quarter decreased $1.4 billion as compared to the third quarter last year largely due to differences in timing of construction work performed between the two period.
Looking at like nine Oh water and electric supply cost was $31.8 million for the quarter increased frequency million dollars tsongas into it stop here.
Any changes in supply costs for both the water and electric segment as compared to the adopted supply costs are tracking balancing account.
Total operating expenses, excluding supply costs decreased $1.7 million versus versus the third quarter last year.
Due to a decrease in depreciation then based on lower depreciation rate authorized in the water general rate case.
Decreasing administrative and general expenses, largely due to timing differences related to the recognition of stock based compensation expense.
And a decrease in construction expense and U.S. largely due to differences in timing of construction work performed.
During the two period.
These decreases were partially offset by higher maintenance during the quarter and property taxes.
We expect.
Since for the fourth quarter to be higher than average for the first three quarters.
Interest expense net of the interest income other income, including investment help you know trucks to file that retirement benefits increased due to lower gains on those investments.
As well as higher interesting due to increase.
Slide 10 shows the Ts rich comparing the third quarter 2019, with the same quarter for 2018.
This slide reflect our year to date earnings per share by segment 40, Dan their needs for the nine month ended September 32018, $1.83 per share compared to $1.35 per share last year.
This includes includes four cents per share recorded this year, but related to 2018 as a result.
He sees August decision on the electric general rate case.
Which was retroactive to January one 2018.
For more details please refer to yesterday's press release and Form 10-Q .
In terms of the company's liquidity net cash provided by operating activities for the first nine months of 2019 was $84.3 million compared to $108.4 million flows than here in 2018.
The decrease was primarily due to lower lot of customer usage delays in receiving decision on the water and electric general rate cases.
And we fund of $7.2 million to water customers during the third quarter 2019 related to the 2017 tax cuts in jobs.
The decrease in while the customer usage increases the on the collection balances either water revenue adjustment mechanism, but the liquid assets, which is filed annually for recovery.
So that they want to invested $129 in company funded capital projects during the first nine months since 2018.
Continuing our strong investment levels. We are tires are on target to invest a 115 $225 million this year.
Last week, we amended.
Credit facility temporary increases borrowing capacity from 200 million to $225 million.
We plan to issue long term debt. It goes seawater next year. So we do the following on this line of credit facility.
This time was denied that American state water to issue additional equity.
With that I'll turn the call back to box.
Thank you Eva.
I'd like to provide an update on our recent regulatory activity.
As discussed the water utility rate case decision issued in May two set rage for years 2019 through 2021.
As yielded positive results for Golden State water this year.
The decision also allows for potential additional water revenue increases in 2020 in 2021.
Of approximately $9.1 million and $12 million respectively.
Subject to the results of an earnings test and changes to the forecasted inflationary index values.
We are making timely infrastructure investments of $334.5 million over the rate case cycle.
And expect to meet earnings test for each of our rate, making areas for 2020 rates.
We have undergone our planning process to file or next general rate case in July 2020.
For new rates beginning 2022.
In addition, Golden state water in three other California class a water utilities are scheduled to file but next cost of capital application in the second quarter of 2020.
In August of this year, the CPC issued a final decision on our electric rate case approving the settlement agreement between the company in the Cpcs public advocates office to set electric rates for years 2018 through 2021.
The decision extends the rate cycle by one year, new rates will be effective for 2018 through 2022.
It increases the electric gross margin for 2018 by approximately $2 million compared to the 2017 adopted electric gross margin.
Adjusted for changes, resulting from the tax cuts in jobs that.
It authorizes the company to construct all the capital projects requested in this application.
And provides additional funding for the fifth year added to the rate cycle.
Which total approximately $44 million of capital projects over the five year rate cycle.
And it increases the adopted electric gross margin by $1.2 million for each of the years 2019 in 2020.
By $1.1 million in 2021.
And by $1 million in 2022.
The rate increases for 2019 through 2022 are not subject to an earnings test.
Due to the delay in finalizing the electric general rate case electric revenues in the first two quarters of 2019 were based on 2017 adopted rates.
Because of Cpcs final decision is retroactive to January one 2018.
The cumulative retroactive earnings impact of the decision is included in our third quarter results.
Including approximately three cents per share related to the first six months of 2019.
And four cents per share relating to the full year ended December 31 2018.
Let's move on to asked us on slide 14.
Yes, you asked as earnings contribution for the quarter was 12 cents per share as compared to 13 cents per share last year.
The decrease was largely due to differences in the timing of construction work performed during 2019 as compared to 2018.
For the nine months ended September Thirtyth 2019.
Earnings for issue as is 10 cents per share higher than last year due to the commencement of contract operations at Fort Riley in July 2018.
As well as revenue increases due to successful resolution of various economic price adjustments.
And an overall increase in construction activity.
We reaffirm the guidance, we have previously given to the market.
On issue EPS is expected earnings contribution.
A 43 cents to 47 cents per share for 2019.
While we're disappointed that we did not win the most recent military based contracts.
He asked us as a prime utility privatization contract provider.
We made actively involved in various stages of the proposal process at a number of other basins considering privatization.
The U.S. government is expected to release additional bases for bidding over the next several years.
And we believe we are well positioned to compete for these new contracts.
Issue as has been awarded approximately $20.5 million in new construction projects. So far during this year.
Taking this into account.
And with more expected to be awarded in the fourth quarter. We believe asked US as earnings contribution for 2020 will be in the 46 to 50 cents per share range.
I would like to turn our attention to dividends outlined on slide 15.
Our board of Directors recently approved a fourth quarter dividend of 30, and a half cents per share on a wwes native yours common shares.
Earlier this year, we increased our quarterly dividend by 10.9%.
American States water company has paid dividends to shareholders every year since 1931, increasing the dividends received by shareholders each calendar year for 65 consecutive years.
Our dividend policy is to achieve a compound annual growth rate in the dividend more than 7% over the long term.
Reflecting our boards confidence in the sustainability of the company's earnings at both our Golden State water issues subsidiaries.
As well as the prospects for our future.
Our strong an increasing dividend allows the company to continue attracting capital to make necessary investments in the systems for the communities in military bases that we serve.
I'd like to conclude our prepared remarks today by thanking you for your interest in American States water and we'll now turn the call over to the operator for questions.
We will now take your questions to ask a question you May Press Star then one on your telephone keypad, if you're using of speakerphone. Please pick up your handset before pressing monkeys.
To withdraw your question. Please press Star then too.
At a record please state your name and your company prior to asking your question at this time, we will pause momentarily to assemble our roster.
We will begin with Durgesh Chopra with Evercore ISI. Please go ahead.
Hi team. Good afternoon. This is a their guests will grow with Evercore ISI.
Hi, Durgesh.
The so first okay. Thank you for putting that.
The EPS reconciliation you guys always do it and you separated out a retroactive Jones from those who will so thank you for doing that.
I'm all going in the quarter I just wanted to go back to.
You know the California regulatory environment.
You've seen.
Some sort of in sort of a negative rhetoric would with Iran. As it relates to what we're kind of isn't involving situation with San Jose water and then kind of water in their most recent.
Ongoing weakness I was just kind of I'm wondering if you could share any color on on on how this was treated the in your more.
Most recent watery keys that that I believe we got resolved in last few months.
Right, we got our our case resolved and make a decision in may and.
We had.
We had settled all the issues in the and the water rate case and had no no hearing so very smooth sailing.
There were no major issues no major problems with the water revenue adjustment mechanism or the modified cost balancing account.
We have.
Cost Ram and have had since.
I guess 2008, yeah. So.
So we didnt really experienced any problems.
Okay. Thanks can't really comment on what what's going on at Cal water in SJ Debbie Ferre, that's fair that's for Bob.
Could you give us a sense of like.
And maybe just more for Eva is too like so.
To what extent.
Is your earnings fiber or your EPS number net income numbered margins whatever.
Our are getting the benefited the Ram as it.
It's currently.
Well.
Earning 40 reflect the full ramp in revenue. So so if we have a variance between the comes a us of consumption between the adopted the actual and were booked adopted a consumption level. So really has no impact to earnings.
Become a more receivable our liability on balance sheet, we collect phone customer to extend we all have a shortage in revenue or it will overcome cycle refund to customers. So.
So you know if you look at Alkyls marching on record as a pretty close to the adopted to close margin a in a way Kate.
So again, so what's the you what's the delta been like what's the average receivable.
Bound spend for the last few years I'm, turning I'm trying to get a sense of.
What's the delta between or historical Delta between your authorized versus the actual.
Well it depends it depends on the usage each year I think this year, we'll have a little larger then balance because the consumption with lower I think here today, our consumption was 8% lower than last year. So as a result would have a bigger on the collection Oh WRAM balance.
A typical excellent customer, but during the year aims to consumption pretty similar to the south a level. Then you know the balance of the collection will be smaller.
Generally we have an under collection, though yes generally people end up.
It's just sort of hard to keep up with.
The decline in People's consumption, but generally we have.
An under collection because adopted sales is.
Greater than what.
Customers are using.
That's fair statement and we also in this decision we have a sales adjustment mechanism so to the extent of consumption.
Greater or less than 5% loved adopt a number we can file for a base rate change. So we have certain service area, maybe getting to that level. So that lot of calendar year calendar year basis, Yes, you can find a true true it up if it's if it's 5% or greater right. So its a.
Back of than the or lower your ongoing ran balance because you have building that adjustment into your base rate.
That makes sense there that makes sense. Thank you maybe we could just follow up.
Few more detailed questions after the call you're going to.
We haven't.
Our next question comes from Richard Verdi with Coker and Palmer. Please go ahead.
Hi, Bob Hobby, Hi, Eva.
Nice quarter, Thanks for taking my call.
Hi, there.
Quick question.
To start.
Bob that the guidance you gave for pieces for 2020 to 46 cents to 50 cents.
Going.
Back in thinking about the 2019 Guardians of 43 cents to 47 cents can you just discuss a little bit about what goes into.
Your thought process or the teams thought process to to generate that's 46, just 50 cents guidance for 2020, <unk>, what's the thinking behind that.
Sure.
Well, we you know we look at a number of things one of the items, we looking at is the.
New capital upgrade work that sort of got awarded in 2019 that will you know a large part of that we'll be doing in 2020.
We also look at the continued efficiencies that we're able to kind of running out of the business on the operations and maintenance side.
And then of course, we just look generally it what our construction activity will be for 2020, both from a renewal and replacement standpoint, and as I mentioned, the new capital upgrade.
Standpoint.
Okay. Okay. That's helpful and if I may backing up to the.
Two contracts.
Most recently won I guess, no big thinking about port water, we are the ones before that as well you know who is calling to being formal guidance there.
About three to five cents positive impact from each one of these contracts each year. So I.
I mean, let's just say that you announced a contract some when tomorrow I I mean from a modeling perspective from where we sit could we maybe expecting maybe you know applied mortgage loans three to five cents.
On top of that you know 20, Twond guidance, maybe I mean, obviously it would take a 12 12 months for it to be recognized flowed through to the business, but so maybe you could add another two cents on top of got 46 existence home side or more [noise].
Oh, you know, it's just really I'd function of the size of the base for one thing.
Larger bases contribute more of course than smaller basis.
Also just wanted to mention the last two basis, we have one there was a nine month transition period from from when its announced to the world to two way okay. When we take over the base. So theres always this transition period, which is.
It's a very helpful.
Very helpful transition period, because it allows us to hire the folks to.
The field people to help run the basin and then get get.
Our analysis down of the assets that have been taken over and.
So it's really hard hard to say Richard I mean, it so if I understand be a function of the.
The bases that.
The company wins I mean, we're we're very pleased to have one the Eglin Air Force base in Florida, and Fort ROI in Kansas those are very substantial bases and so.
So we're looking forward to winning.
Putting new bases in the future.
Okay perfect. Thank you very much for the power and then just one last question as well please the.
When I when I look across numbers in very good quarter.
Obviously, and there's not a lot of noise for me it except there is a little bit of goals in one area and that is the.
The pieces construction expense Louie.
Oh My model I'm, sorry bear with me. Please okay. So if I look at the age of construction expense long.
Is that was approximately.
12, nine for the quarter.
And it's down a little bit year over year and at the same time, when we look at nine months ending 2019, it up a little bit year over year. So is that it's just that isn't just walk you know it's down this quarter, but it's up the first few quarters is that just kind of lumpiness is that what's going on there. So just kind of.
Timing it or theres that maybe can we kind of think of maybe.
What is not downtrend, but just like our growth rate for that line going forward or how should we think about that.
Yeah. This is what I would say about the construction.
Revenue line there we made a conscious effort in 2019 chase to sort of.
Improve the construction that we did in the first quarter and the second quarter.
So we're looking to more level out the construction revenues throughout the year relative to what you would have seen in 2018 in 2017.
Those years, we may be got off to a slower start in the first part of the year. There first six months of the year and and then.
You know hit really hard the last six months Weve. The goal this year was to.
Spread the construction out a little more evenly than we've seen it in the prior years.
Okay. Okay understood. Okay, great. That's it for me Hey, I appreciate the time, guys and again great quarter. Thank you very much.
Thank you Richard Thanks, Richard.
Again, if you'd like to ask a question. Please press Star then one our next question will come from Jonathan Reeder with Wells Fargo. Please go ahead.
Hey, Bob any of the how are you all doing.
Good job, Jonathan how about you.
Oh, I think that actually thanks for asking.
So with three quarters under your belt. It looks like you know utility net income very strong ethane and by you know the GRC getting approved.
But also some pretty impressive cost controls so what sort of on dollar we do you see JSW see earning this year.
Yes, we really haven't come out publicly.
Stated that so.
I don't know one can go back and look at the 12 months ended.
Our OE and use that as potentially a guide I guess, so no one would expect our fourth quarter.
Having the water rate case electric rate case in it.
Sure what one would think it would be better yes.
So we are trying to catch up a bit on some.
Some of our expenses.
So I can't really help you hope you much with that Jonathan I guess I don't.
Of the 12 months ended numbers do you even though.
Have a whitney.
Maybe you can Jonathan offline and just sort of charm delmore that is.
Okay. I mean would you say I mean, there and are we there.
These are coming in better than you guys were expecting or kind of kind of in line I mean, our expenses I know, there's going to be a little catch up you're saying in Q4, Bob but are becoming an even a little better than you're anticipating going into the year.
Yes, I mean, I would say, we're a little bit ahead of the curve on the expense control I'm very pleased with what our folks have done.
They continually just do a great job of managing our expenses and.
The shareholders benefit in the short term our customers benefit in the long term so it's really a.
It's it's a great thing to do I would say, it's one thing were particularly good at is driving costs out out of the company.
I would.
Continue to expect us to be able to do that.
Okay, and then I know you all Dunkin' consolidated EPS guidance, but.
If we take your full year 2019 years old Im just back out the 2018 retroactive portion of the electric GRC I mean does that serve as a pretty good pace.
For wishing her thoughtful.
And 20.
Yeah, I would say so I mean, we've got a lot of capital in and we have been I think we've been able to tell folks what the.
The change in the gross margin is expected for 2020, and and we expect to meet our Debbie increase 2020 . So at about $9 million that Bob talk about so that's increasing revenue. So you can kind of the.
Oh go find their Johnson.
Right right, we've been very very pleased that we've been able to execute our capital plan we've gotten.
Capital dollars from the P. you see.
And.
There is substantial and and our asset management management group has done a great job of.
Oh working through all the all the wickets to get to get permits et cetera to get the dollars get this dollar spent on the projects that we had gotten approved.
It sounds sounds much easier than it really is it's a you've got to work with a lot of parties to get all this construction work done.
All right couldn't be more pleased with the worker for asset management group has done this year.
Now I promise you on RM, we don't appreciate that.
Oh working behind the scenes there so a good job.
What about on the expense I know, we're talking about the revenues and step increases and stuff.
<unk> expenses this year.
You think you know just kind of normal growth off of that or you know because they have been lower this year my the growth being a little higher than what you are the pressure on those expenses be higher than what you've experienced in the past.
Well I mean I would see.
You look at the fourth quarter would probably going to see some plum increasing expenses over what you may be seen in the first nine months.
But then as you move into 2020.
No I would say.
<unk> expenses for the fourth quarter is largely a timing terming timing issue, but then as we get into 2020, you know I.
I expect us to continue to do a great job controlling our expenses.
Okay, and then last for me the.
7% dividend.
We're on target should we view that as being off of that new dollar 22 days.
Or you know in a step up and cool and [laughter].
But having a substantial step up this year kind of embedded are included in that 7% long term.
Yeah, I mean, I think you should just it's a long term, it's a long term, 7% so it's not a.
No it's not a five year, 7%. So the so you shouldn't look at it as well the the 11% increase that we got is going to then.
We're going to see something south is 7% in the next four years I think its a.
You know, it's up 7% as far out as we can see.
Okay, great. Thank you. So am I appreciate the time hi, Jonathan Thank you.
This concludes our question and answer session I would like to turn the conference back over to Bob Sprowls for any closing remarks.
Hi, Thank you Sarah and I, just wanted to wrap it up today by thanking everyone for their participation today and.
And wishing them a equity happy holiday season, and we look forward to speaking with you next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.