Q3 2020 American States Water Co Earnings Call
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Ladies and gentlemen, thank you for standing by.
Welcome to the American States Water Company conference call discussing the company's third quarter Twentytwenty results.
This call is being recorded.
If you'd like to listen to a replay of the call. It will begin this afternoon at approximately five P.M. eastern time and run through Tuesday November 10, 2020 on the company's website www dot A.S. water dot com.
The size of the company will be referring to are also available on this website.
When the question session begins you may ask a question I pressing star then one on your Touchtone phone Press Star then two to remove your question.
This call will be limited to one hour.
Presenting today from American States water company is 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 may be forward looking statements intended to qualify.
For the Safe Harbor from liability established by the private Securities Litigation Reform Act of 1995.
Chris You view, a description of the company's risks and uncertainties in our most recent 10-K and form 10-Q on file with the Securities and Exchange Commission.
In addition, this conference call will include discussion of certain measures that are not prepared in accordance with generally accepted accounting principles or GAAP, United States constitute non-GAAP financial measures under SEC rules. These dog <unk> majors are derived from consolidated financial information are not presented in our financial statements that are prepared an accord.
Since with gap for more details please refer to the press release.
At this time I would like some of the conference over to Bob Sprowls, President and Chief Executive Officer of American States water company.
Thank you Keith well.
Welcome everyone and thank you for joining us today.
I'll begin with a few highlights for the quarter.
Even though are you some financial details.
And then I'll wrap it up with some updates on regulatory activity here to it and dividend.
And then we will take your questions.
I would like to start by thanking our employees.
Through these uncertain times the employees of American States water.
Once again delivered.
Were result.
Our consolidated results for the third quarter were 72 cents per share as compared to adjusted earnings.
89 cents per share for the third quarter of 2019.
An increase of three cents per share or 4.3%.
The adjusted earnings for the third quarter of 2019.
Exclude a seven cents per share retroactive adjustment.
Booked in that quarter for the August 2019 electric general rate case decision.
Periods prior to the third quarter of 2019.
I'm pleased to report that in July of this year, the company's board of directors approved a 9.8% increase in the quarterly cash dividend.
I'm 30, and a half cents per share.
33, and a half since per share.
The increase in addition to dividend increases.
I've, 10.9% in 2019.
And 7.8% in 2008.
Along with providing essential services and assistance to our customers and communities to get through the pandemic.
We are working our way through some regulatory process.
With the California Public Utilities Commission or CP you see.
Which I'll discuss later on.
In addition, we continue to pursue new military base contract.
Our service levels remain high for all three of our subsidiaries.
Now that were going on month eight of the Cove It 19 pandemic.
I wanted to reflect on the achievements of our personnel across the United States.
Both customer facing and those who provide support in a remote working environment.
Since March our field personnel have worked tirelessly to keep the water electricity and wastewater services operating smoothly.
For over 1 million customers.
Including 11 military bases.
They've embraced more stringent safety protocols as.
As we look to keep our employees and customers healthy.
Well doing this we've kept our commitment to strengthen our infrastructure for the short and long term benefit of our customers.
For the nine months ended September Thirtyth 2020.
Our water and electric utility segment spent $82.3 million in company funded capital expenditures.
Well on track to spend $105 million to $120 million for the year.
Barring any scheduling delays, resulting from COVID-19.
This would be about three and a half times, our expected annual depreciation expense.
Well, we hope for a return to normal sooner rather than later.
I'm proud of the resiliency that our people have shown.
I will now turn the call over to Eva to review the financial results for the quarter.
Thank you Bob Hello, everyone.
I only got Molik, yeah, okay, Okay, Colin if I need to eke out like that.
Fascinating I'm.
Consolidated.
Well I know, what 75 or 72 cents per share compared to 69 cents per share I think that's it. Thank you.
2009.
And I don't know why that's happening here.
For the quarter.
There continues to be volatility in the financial markets.
Hi, Tim Cope at night.
Hi, good volatility vetoed the increase.
That's how it fun why of course, they say why they haven't plant.
Activity per se.
The hearing clean water segment <unk> for the quarter.
Every major increase in the water segment.
Yeah, Cornell Twentytwenty <unk> into a higher water. Both my question about new water right.
Partially offset by increased operating expenses.
Ben and that effective income tax rate.
Well as well as lower interest income and that's going to play out.
It's going to seven cents per share a retroactive impacts on August 2018, CPC decision.
Electric segment I mean.
Well there was four cents per share that's compared to three cents. The here I'd just get put into it caught out 2019.
I could eat into increasing the electric was smoking meat deli and find new ways to optimize by the CPC.
So the offset by increases in legal and other outside service costs.
The final August 2018 decision also approved recovery of previously incurred incremental tree trimming costs.
Totaling $302000.
Which we felt that resulted in a reduction in maintenance expense that went to record that didn't get caught out black yet.
There was no equipment that I didn't mean twinkie twinkie.
I mean from our contracted services segment.
10 cents per share for the quarter 20, that's.
That's compared to 12 cents per share for the same period in 2018.
There was an overall decrease in construction activity.
Foul weather delay.
And so those guys and permitting for construction pocket and government funding for new capital upgrade.
Caused in part by the impact of COVID-19.
The company expect construction activity to pick up during the fourth quarter relative to the first three quarters.
Sorry, I forgot delays due to the weather condition.
This decrease was partially offset by increasing maintenance fee revenue.
And you know were traveling I related costs.
Well I think revenue increased $3.5 million during the third quarter was 2020.
Two food second full second you know that being quick it's like 2020.
We don't have passing that Pat.
The decrease in electric revenues were largely due to $3.7 million retroactive revenue recorded in the third quarter of 2018 for periods prior to that.
Contracted services revenue for the quarter decreased $500000 leads as previously discussed.
The decrease was partially offset by increases in management team.
[laughter] full resolution of various economic price adjustment.
Looking at slide nine a water and electric supply costs were $32.3 million. So quota of 2020 as compared to $31.8 million for the third quarter of 2019.
Any changes in the supply cost as compared to the adopted supply costs are tracked in balancing account for both the water and electric segments.
Total operating expenses, excluding supply costs increased $1.5 million.
Cordell 2019.
It would increase in construction costs at our contracted services business American States utility services Boy you ask.
Due to higher costs incurred coding pocket.
As well as increases in depreciation expense and property taxes I can become a golf additions out you can see plank and fixed assets at all of our business segments.
There was also a $302000 reduction commensurate cost to like you said.
The approval in August of 2019.
For recovery of previously incurred tree trimming costs.
As previously mentioned.
There was no similar reductions in 2020.
Interest expense net of interest income.
Other including investment housing I Trust to fund the retirement benefit plan.
Create the $1.1 million due to higher again because of the weakened market conditions.
This was partially offset by lower interest income on regulatory assets.
And no interest income earned outside of <unk> and construction pocket.
Slide 10 shows the EPA think comparing the third quarter sales 2020 with the same quarter of 2019.
That's right to affect our year to date earnings per share by segment.
Diluted earnings for the first nine months of 2020 $1.79 per share.
As compared to $1.79 per share as adjusted for the same period of 2019.
2019, adjusted earnings exclude a four cents per share a retroactive impact books at <unk> you. It doesn't even found to August 2019 electric GRC decision for the full year of 2018.
Which is shown on a separate line the table on this slide.
More details please refer to yesterday's press release and our form 10-Q.
In terms of the Companys liquidity net cash provided by operating activities for the first nine months of Twentytwenty was $87.8 million as compared to $84.3 million for extended periods in 2019.
The increase was largely due to a $7.2 million refund to the water customers in 2018 related to the 2017 tax law changes.
Any offset by a decrease in cash flow from higher accounts receivable side utility customers.
So they could not make in pack of Kobe 19, and the suspension of service these connections of customer for non payment.
Our regulated utility.
I said $82.3 million in company funded capital projects.
First nine month of 20 to 20.
So why the capital program has been somewhat affected by coordinating resulting in significant project delay.
However, our record it to you because you still plan to spend hunger five $220 million in company funded capital expenditures for the year.
So I got delayed due to the pandemic.
As we mentioned that last quarter Golden state water issue with the unsecured private placement notes.
Adding $160 million in July and we paid a large pushing off the intercompany note issued to HIV our parents.
Currently.
I can state water has a credit facility of $200 million to support water and contracted services operations.
We also put in place a separate three year $35 million revolving credit facility for the electric segment that is not guaranteed by the parent.
At this time, we do not expect American states water to issue additional equity.
With that I'll turn the call back to Bob.
Thank you Eva.
I'd like to provide an update on our recent regulatory activity.
In July Golden State water filed a general rate case application for all of its water regions and the general office.
This general rate case will determine new water rates.
For the years 2022, 2023 and 2024.
Among other things Golden State water requested capital budgets in this application.
Actually $450.6 million for the three year rate cycle.
Then another $11.4 million of capital projects.
To be filed for revenue recovery through advice letters when those projects are completed.
Hey decision in the water General rate case is scheduled for the fourth quarter of 2021.
With new rigs to become effective January Onest 2022.
On August 27, 2020, the CPC issued a final decision in the first phase of the Cpcs order instituting rulemaking.
Evaluating the low income rate for your assistance and affordability object is contained in the Cpcs 2010 water action plan.
Which also addressed other issues, including matters associated with the continued use of the water revenue adjustment mechanism or WRAM like California water utilities.
The final decision also eliminates the modified supply cost balancing account or MCB.
Which is a full cost balancing account used to track the difference between adopted an actual water supply costs.
Including the effects of changes in both rate and volume.
Based on the language in the final decision in the general rate case application filed by Golden State water and the other California water utilities.
After the August 27th 2020 effective date of the decision.
We do not include a proposal to continue to use the use of the Ram or MCB.
Let me instead include a proposal to use a limited price adjustment mechanism called the Monterrey style Ram.
And the incremental supply cost balancing account.
This decision will not have any impact on Golden state water's Ram for MCB balances during the current rate cycle, which runs from 2019 through 2021.
In addition, the language in the decision supports Golden State water's position that it does not apply to its general rate case application filed in July of this year, which will set new rates for the years 2022 through 2024.
At this time, we cannot predict the potential impact of this decision if any on the pending water general rate case.
On or prior to October 2020, Golden State water, three other California water utilities, and the California Water Association filed separate applications for rehearing.
On the decision in the low income proceed.
As you know there are water utilities in the state that have been under the Monterrey style Ram and incremental supply cost balancing account since 2008.
And they seem to be able to successfully manage the effects of these mechanisms.
While we are disappointed by this PC decision.
We believe we are well positioned to strategize and adapt to the new requirements.
As you'll see from this slide the weighted average water rate base has adopted by the CPC has grown from $717 million in 2000 $17 million to $916 million in 2020, which.
Which is a compound annual growth rate of 8.5%.
The rate base amounts for 2020 do not include the $20.4 million of advice letter projects approved and Golden State waters last general rate case.
Let's move on to S.U.S. on slide 17.
Yes, you asked as earnings contribution for the quarter was 10 cents per share versus 12 cents per share in the year prior.
The decrease was mainly due to a reduction in construction activity due to weather delays as well as slowdowns in permitting for construction projects and in government funding for new capital upgrades that has occurred throughout 2020.
Company expects construction activity to be stronger in the fourth quarter relative to the first three quarters.
Barring any further delays due to weather conditions.
But because of the previous delays, we now estimate issue S. is 2020 <unk> earnings contribution.
To be at the low end of the 46 cents to 50 cents per share range. We had previously provided.
In light of continued uncertainty associated with the effects of cold in 19, we project issue as to contribute 45 cents to 49 cents per share for 2021.
We are still involved in various stages of the proposal process that a number of military bases, considering privatization of their water and wastewater systems.
The U.S. government is expected to release additional bases for bidding over the next several years.
While we are disappointed that issue as was not awarded with the most recent military base water and wastewater privatization contract.
We are confident that we will win our fair share of the future Awards.
I would like to turn our attention to dividends outlined on slide 18.
We believe achieving strong and consistent financial results, along with providing a growing dividend allows the company to continue to attract capital to make necessary investments into utility infrastructure for the communities and military bases that we serve and.
And return value to our shareholders.
American States water has paid dividends to shareholders every year since 1931.
Increasing the dividends received by shareholders each calendar year for 66 consecutive years.
Which places in an exclusive group of companies on the New York Stock exchange that have achieved that result.
Companys current dividend policy is to achieve a compound annual growth rate in the dividend of more than 7% over the long term.
I'd like to conclude our prepared remarks by thanking you for your interest in American States water I'll now turn the call over to the operator for questions.
Yes. Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you're using a speakerphone, please pick up or handset before pressing the keys to try your question. Please press Star then two time, we will pause momentarily to assemble the roster.
And the first question comes from Angie Storozynski with Seaport Global.
Thank you.
So first a question about the the military services business [noise].
So I understand the slowdown associated with coal bed and permitting this year I'm a little surprised that.
You couldn't do you expect it to have a negative effect on 21 as well because I would have thought so it's going to be like a catch up Oh sorry.
Those projects, which yet which have which were delayed in 2020. So do you basically assume that coal but persist.
Beyond the end of this year and has a negative impact and hence that LOE guidance.
Hi, Yes, I mean, we we do think it'll continue past the end of this year and will continue to impact somewhat our ability to get new capital upgrades as well as permitting on a effect of permitting on are the jobs that we would.
I would like to do.
Not totally sure I mean, it's.
It's difficult to look into the Crystal ball and see when when this will all in but we're not we're not really back to normal yet.
But does it mean that there will be a year like gift sets and some 2022, where.
You are where you have a disproportionate number of those upgrades and so then the step up in earnings would be above that trend for that business in 2022.
It's difficult to predict its it's possible I mean, it's because we.
No. We we have a number of projects in front of their government to do on the bases. We currently serve and.
Just the funding or these projects has has a slow down a bit from what we've seen in the past years does that mean that in the in the future years, we'll make that up as possible.
But you know we're kind of in unchartered territory at this point, so it's hard to really predict.
Great and then on the the change the the decoupling mechanism and a request for rehearing.
Could you give us a sense when we will know what the commission will love to hear the case and well decision not the case and then what are the other options.
In the nine sales request.
Yeah. So I believe the commission has some flexibility and in terms of deciding whether the.
Decision needs to be re heard so it's a I don't know if there's any hard and fast deadlines that they have to decide by.
In terms of the second part of your question.
The company has the company or companies the water utility water utilities have the ability to.
Take this issue directly to the California Supreme Court.
Currently in legislation weird, we do not have the ability to go to the appellate court on this but we do have the ability to go to the California Supreme Court, The California Supreme Court has the first decide whether they're willing to hear the case.
Okay, and then you are in a sense hedging on on potential changes to the to the the full bomb in your car and pending rate case, because you were being conservative or is that.
Because you have heard something from the commission that might suggest that they would not.
Those changes already are then then the decision would Uh huh.
The acquired meaning there was the decision would suggest that on me that the cases.
Following.
Following the Oh I think the August 2020 that filing after August 2020, what the impacts that site that change, but I'm just wondering why you're being so cautious about the potential impact on your pending quake.
Well as you know, we're pretty conservative around here [laughter]. So that this is really just.
You know, we're just being cautious the.
In in the proposed decision in the low income proceeding.
Public advocates put forth comments I'm, suggesting that it should apply to our rate case.
In there and there are protests of our rate case filing they did put forth comments that it should apply to the rate case.
But I will tell you that their comments on the proposed decision I think the the language in the in the final decision was actually clear.
That it doesn't apply then it was in the proposed decision. So so that was an improvement at this point, we don't have anything further than that to sort of base. Our caution on we understand that California water received a proposed decision that.
Said that the ruling in the low income decision did not apply to their rate case.
So that's a that's a good fact.
Another good factors.
We have not had a prehearing conference yet in the rate case it.
It would be quite difficult for our company to have to pull our rate case filing and re file it we've already noticed our customers on the proposed rate increase.
So there's there's a number of things that are stacking up in favor of it yes, not applying to the 2022 through 2024 rig case, but we you know there is still a chance and so we wanted to make sure that.
The folks that we speak to know that.
Very good. Thank you. Thank you Andy.
Thank you and the next question comes from Ryan Connors of Fundings Scattergood.
Hey, Thanks, Thanks for taking my questions. This afternoon, so at the risk of a hello.
Risk of beating the dead horse here, obviously, it's a hot topic with the decoupling, but wanted to get your take on on the other side of this which is cost to capital and are are we I mean, obviously the El Rey has strenuously argued over the years that decoupling reduces risk and that's why they argue for a lower are we seems based on the are always that they have.
Successfully argued that you kind of more or less affirm that concept. When you say you know you think your earnings will be more volatile going forward. So.
How do you see this all impacting the cost of capital.
Hi, just going forward.
Well I think it it.
I think we and maybe the other random companies will make an argument for the fact that it perhaps increases the risk of the utility.
In in future cost of capital proceeding.
Now for US just to sort of line up the periods a little bit here are we are we in the three other large water utilities in California, our <unk>.
Required to file our next cost of capital in our May Onest of 2021 and that's for the.
That is typically for the period 2022 through 2024, given that your cost of capital.
A we don't think that the elimination.
Elimination of the Ram applies to our 2022 through 2024 rate cycle. So it makes a little difficult for us to then.
Use it in the cost of capital proceeding.
Because it really you know the period.
Doesn't fit.
However, I'm sure that others will we'll think about I will think about it as well in terms of it being something.
Something that we perhaps could argue in the cost of capital policy.
Okay. Okay.
I think you could.
Maybe educate them.
How does it get a value your stock based on the long term.
Volatility profile the earnings so it actually is relevant.
So the day it takes hold right, but anyway. The other question I had was you noted that the peer companies that do use the Monterrey style right you don't have it.
Did pretty well to that so it can be done.
So my question is even if there is a chance that you couldn't answer your negotiating position on the cost of capital side.
Why would you not welcome due to the elimination of decoupling. If in fact, you do believe because you said that.
We bought a raise workable and especially.
Why would you.
She used to is that you're talking about California Supreme Court. If these are still pretty nuclear options in terms of spending.
Political capital taking it that far why would you want to do that if in fact, you think the citizens workable do get a little bump on the our away.
Well first of all I didn't say we were going to.
Take it to the California Supreme Court. It is it is an option we'd have to think through that depending upon how the.
How the commission decides I think for Russia, or just used as a full ram at this point the the Monterey Ram like we said the other companies have done well with that and you know it will we're just a bit on familiar but we have plenty of years to get our arms around it.
And I'm sure, we'll do do as well with it we have with the full ramp there there potentially could be a little more volatility is what we're what we're saying.
Got it okay very helpful comments I appreciate it thanks for your time, Sarah Thank you.
Thank you and once again, if you would like to ask a question. Please press Star then one on your Touchtone phone.
And the next question comes from Jonathan Reeder with Wells Fargo.
Hey, good morning, Bob and Eva how are you all doing.
Great. Okay, guys, that's how about you.
Oh, not too bad not too bad all things considered finally got a little summer weather and.
Yeah. So.
Good present day, I did see that way, though [laughter].
Oh the car.
And so I've got some time, so having gotten a chance you could deepen your earnings that they want so I got to softballs for like that [laughter].
[laughter] that's true.
[laughter].
How Q3 utility results compare to your internal.
Internal expectations heading into the corner, where there any like headwinds, perhaps token related that prevented quarterly EPS growth from being higher.
Than you anticipated, but you know perhaps are not expected to impact your longer term yes.
Gross trajectory.
Why didn't segments.
Hmm, Yeah, I know it was not a I mean, we were taken by surprise or anything it's that if that's what's your Ah you're asking about.
Yeah, No I mean, just trying to get a sense.
Where things came in for the quarter on the regulated side, obviously, you know excluding Ah the market gains.
The financing plan like everything else is kind of right, where you were expecting it to be or where there. Some you know how much expense pressures or anything like that it may be shamed, you know a couple of pennies off.
I don't believe so for the regulated utilities, there, they're pretty much on target down their expenses.
Uh huh.
You know it because I think to who they expenses that's incremental to the Cove in 19, or we can look to that see my account.
So not much impact to the utility side of that Oh, we do encourage fell more treatment caught up but you know it's a other expenses decreased sales offset each other so I don't think there's a pipe to our utilities earnings for the quarter.
Okay and.
I know, it's kind of hard he brought up earlier.
How do you expect to gain clarity with regards to weather [laughter].
Decoupling order will be applied to the 2022 24 GRC.
Obviously you'd be going against the date specified in the order does the LG.
Respond specifically to you know pianos.
Protests that were filed like when Jay you choose the scoping order or you.
You know [laughter] do you heard I was just kinda linger out there.
HM.
You know, we we believe that we'll get some clarity on this when when Theres, a prehearing conference and what a scoping memos issued by the administrative law judge.
He has not done that yet right. We haven't had the Prehearing conference yet.
I will tell you we do have the same administrative law judge that Cal water has in their case.
And the case has been assigned to commissioner she wrote.
Okay.
When or what is the Prehearing conference Scott.
I'll do it.
Due date on that or when do you expect that.
Well it is behind schedule.
Hi, [laughter] [laughter] well the pre hearing conference I mean that I believe is behind schedule. I mean, I think we were we were thinking it was going to.
You know Brad perhaps it's not a significant significantly behind schedule, but I think we were we were perhaps expecting it in in.
In October and it and.
You know the commission of course has got their hands full with a lot of issues. These days.
Sure sure, Okay, so but something.
Perhaps later this month.
Yeah.
You at home.
Clarity to figure out whether or not you need.
Okay, and re file in or something like that.
Oh, that's my understanding is likely to happen before year end.
Okay. Okay. That's it for me thanks very much for the time appreciate it okay Jonathan.
Thank you and this concludes our question and answer session. So I would like to turn the conference back to Bob Sprowls for any closing remarks.
Thank you Keith.
Well I just want to thank you all for your participation today and let you know we look forward to speaking with you next quarter and just want to wish everyone a happy holiday season.
Well, thank you very much.
Thank you. The conference also included thank you for attending today's presentation. You may now disconnect your lines.
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