Q4 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 fourth quarter and full year 'twenty and 'twenty results.
The call is being recorded if you would like to listen to the replay of this call. It will begin this afternoon at approximately five P. M Eastern time and run through Tuesday March 2nd 2021 on the company's website.
Www Dot a S water dot com.
The slides that the company will be referring to are also available on the website.
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After todays presentation, there will be and opportunity to ask questions.
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This call will be limited to and our.
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.
Please review a description of the company's risks and uncertainties and on 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 GAAP and the United States and constitute non-GAAP financial measures under SEC rules. These.
These non-GAAP financial measures are derived from consolidated financial information, but are not presented in our financial statements that are prepared in accordance with GAAP.
For more details please refer to the press release.
At this time I will now turn the call over to Bob Sprowls, President and Chief Executive Officer of American States Water Company. Please go ahead.
Welcome everyone and thank you for joining us today.
And begin with some brief comments on the quarter and some highlights for the year.
Eva will then discuss some financial details and.
And then I'll wrap it up with some updates on regulatory filings.
Eric and states utility services.
And dividend and.
And then we will take your questions.
I would like to start by commenting on our fourth quarter performance.
And we had a strong quarter with consolidated earnings of 54 cents per share versus <unk> 45 per share earned during the fourth quarter of 2019.
A 20% increase.
You can see from this slide that each of our three operating segments contributed to the substantially improved performance.
Peter will discuss this slide and more detail and a few minutes.
Now, let's turn our attention to highlights for the full year.
Where are we also had strong financial results. In addition to providing essential uninterrupted services to our customers.
For the year, we reported diluted earnings per share of $2.33 as compared to $2 and 28.
Reported for 2019.
Or $2 24 per share after excluding the four cents per share retroactive impact of the electric general rate case decision from 2019 related to the full year of 2018.
In 2020 American States water achieved a consolidated return on equity of 13, 9%.
During the year, we also filed a new Golden State water company General rate case for the years 2022 through 2024.
Continued our capital improvement work at our regulated utilities.
Continue to improve water and wastewater systems.
On the military bases, we serve.
Raised the dividend by nearly 10%.
And reached 66 consecutive years of annual dividend increases.
This was a unique and challenging year as a result of the COVID-19 pandemic.
First and foremost we are proud that we were able to maintain essential safe and reliable services for our regulated customers and military service personnel across the country.
In order to do this.
Starting in March of last year, we made adjustments for our field workers to keep them safe and.
And instructed our office staff to Telecommute.
At the local level, we worked closely to manage changes and delays in construction schedules.
And the needs of keeping the water wastewater and electric system is running well.
With the uncertainty and needed flexibility that the pandemic has brought two communities.
In addition, the California public Utilities Commission or CPUC has issued orders on service shut off due to non payment.
And those households, who are unable to keep up with water or electric bills. During this unprecedented time.
Recently, the CPUC extended the suspension of service shut offs due to non payment through June 30 of this year.
We continue to invest and the reliability of our systems and spending $123 $4 million and company funded infrastructure at our regulated utilities during the year.
Hi day issue as we continued to perform necessary construction work on the military bases we serve.
And are well positioned to win more contracts in the coming years.
We remain committed to our communities.
Golden State water continued to spend with diverse business enterprises.
<unk> results that were well above the cpuc's requirement for the eighth consecutive year.
In addition, he or she has continued to exceed the U S government's requirements to hire small businesses to perform work on the bases and serve.
In addition to these fiscal 2020 highlights.
We have received positive news at our water segment to start 2021 related to the continued use of the water revenue adjustment mechanism or Ram.
And as well as third year rate increases both of which I'll discuss later on during the call.
We at American States water company and continue our steadfast commitment to our customers broader communities military personnel shareholders employees and suppliers.
Our financial results are just one part of our efforts and success.
I will now turn the call over to Eva to review the financial results for the quarter.
Thank you Bob Hello, everyone and.
And they started with an overview of our fourth quarter and financially and pellet on.
On slide nine.
As Bob mentioned consolidated diluted GAAP earnings for the quarter.
And four cents per share compared to 45 cents per share and.
And trying to think over Thanksgiving and Scott Yeah.
And our water segment increased four cents per share for the quarter.
And in Crazy and get water segment.
Largely due to a higher water gross margin from new water weight.
In addition, our gateway.
Interest expense and.
And increasing day.
And how it's a fun.
And on plan.
Partially offset by the impact of a higher effective income tax rate.
Overall operating expenses other income high cost balance.
And really flat, probably a lot of Sakhalin.
Earnings from the electric segment for the fourth quarter of 'twenty and 'twenty seven cents per share as compared to five cents per share recorded net centric.
On the 19th.
The increase was Pennsylvania and cricket authorized by the CPUC and.
Well I know, we're all over all operating and interest expenses.
Earnings from the contracted services segment were 17 cents per share as compared to 12 cents per share and that's like a fourth quarter on 19.
Largely due to a increase and construction activity as well as an overall decrease in operating expenses.
Consolidated revenue for the three months ended December 31, and 2020 and increased by approximately $11 $2 million.
And that's compared to the same period in 2019 and.
And quick like two rate increases at both of our water and electric utility and increasing contrast from what at all contracted Covid.
Yes.
Turning to slide 11.
Water and electric supply costs were $24 $1 million for the quarter.
And click up $900000 from the same period last year and.
And at Tengiz income had calls from both the water and electric segments as compared to the adopted supply costs are tracked in balancing accounts.
Looking at total operating expenses.
Okay.
Validate expenses increased approximately $5 $8 million per system.
Fourth quarter on 2019.
Most of these go to and increasing construction cost and ex U S X and you're talking about higher construction activity.
And the property and other and taxes.
Partially offset by lower maintenance expenses and he tells me.
And kind of timing differences.
And a decrease in our effective and Paul.
Other income and expense for the fourth quarter of 'twenty and 'twenty was a net expense of $1 million.
What choice $1.8 million and nowhere in the same period of last year.
Two a day, where interest rate as well I think and quick and games tend to wait it out and investing how everything on track and finding a retirement benefit plan.
Slide 12 shows the EPS bridge, comparing the fourth quarter on 'twenty 'twenty, one since second quarter of 2019.
This slide shows the full year results.
Consolidated earnings for 'twenty, and 'twenty, what $2.33 per share as compared to $2 28 per share for 2019.
2019, Cpus and financing fishing all day.
Electric General rate case was retroactive to January 2018, and SME and Coke and cumulative retroactive earnings impact related to 2000.
18, a four cents per share was recorded as part of a 2019 from Intel.
Excluding this retroactive impact consolidated army for 'twenty, and 'twenty increased debt nine cents per share as compared to $2.24 per share for 2019.
Yes.
Earnings from the water segment increased by five cents per share as compared to 2019, mostly due to new water rates ethylene and tell a doc and for second year step increase effective January 1st 2000 22000 team.
Which added 10 portfolio and Dallas and water gross margin for 'twenty and 'twenty.
The increase in earnings from the higher gross margin was partially offset by and increasing operating expenses.
And a higher effective income tax rate.
Changes in flow through adjustments.
Moving on to the electric segment earnings were five cents per share higher than in 2019. After excluding the retroactive impact for 2018 from 2019 CPUC final decision.
The higher electric earnings were due to new rates authorized in the final decision.
And what that's was lower interest expense and a lower effective income tax rate due to changes in total sales and taxes.
Per the year before.
These increases.
And were partially offset by an overall increase in operating expenses.
But both 2020 and 2019 diluted earnings from Sandoz and gardening from contracted services were 47 cents per share.
Cleaning and retroactive price adjustments on one cents per share recorded in 2019 related to periods prior to 2019.
And it's from the contracted services segment for 'twenty and 'twenty increased by one cents per share.
Largely due to an increase in intimacy and construction revenue.
Oh, so overall.
Lower operating expenses.
Sandy offset by higher consumption cost.
And that would be our parents and learning.
One cents per share compared to 2019 due to higher states and until it taxes recorded at the parent level.
Turning to liquidity.
Net cash provided by operating activities or $122 $2 million as compared to $116 $9 million and 2019.
The increase was primarily due to the debt refunding of $7 $2 million per customer in 2019.
Related to the tax cuts and jobs Act.
No similar refund in 'twenty and 'twenty.
And and increasing water customer usage.
These increases were partially offset by decreases in cash flow from accounts receivable and.
Tennessee customers.
And to the economic impact of the COVID-19 pandemic and.
And the CPUC mandated suspension of service disconnection.
And from the timing of billing.
And cash receipts for construction work at military bases.
As Bob mentioned, our regulated utility and invested $123 $4 million and company funded capital projects and 'twenty and 'twenty.
And we expect to invest $120 million to $135 million and 2021.
And this time at work and I would expect American states water to issue additional equity.
And with that let me turn the call back to Bob.
Thank you Eva.
And I'd like to provide and update on our recent regulatory activity.
As you May know the water segment has an earnings test it must meet before implementing the second and third year step increases and the third year rate cycle.
And I'm pleased to report that we have timely invested our capital projects and achieved capital spending consistent with the amounts authorized by the CPUC.
And as a result.
Essentially all of the third year step increases had been authorized and effective January one 2021.
These new rates are expected to generate and an additional $11 $1 million of water gross margin.
We continue to make prudent and timely capital investments.
And July 2020, Golden State water filed a general rate case application for all of its water.
For new water rates for the years 2022, 2023 and 2024.
Golden State water requested capital budgets and this application of approximately $456 million for the three year rate cycle.
And another $11 $4 million of capital projects to be filed per revenue recovery through advice letters when those projects are completed.
And the decision and the water general rate case is scheduled for the fourth quarter of 2021 with.
And with new rates to become effective January one 2022.
And our procedural hearing held earlier this month on this pending general rate case.
The assigned administrative law judge confirmed that Golden State water has authorized to continue using the water revenue adjustment mechanism or Ram.
And the modified cost balancing accounts also known as CMS CBA.
Until its next general rate case application covering the years 2025 through 2027.
If you recall the CPUC issued a final decision and the first phase of its order instituting rulemaking and evaluating the low income ratepayer assistance and affordability objective contained in the Puc's 2010 water action plan.
This final decision among other things removes the continued use of the Ram and M CPA price.
California water utilities.
And a general rate case application filed after the August 27th 2020 effective date of this decision.
Golden State water is pending water rate case application was filed in July 2020 prior to this effective day.
As a result of this procedural here hearing we will continue using the Rams and M CBA mechanisms through the year 2024.
In January 2021, Golden State water, along with three other large, California water utilities requested a one year deferral of the date by which each of them must file their next cost of capital applications.
Just yesterday afternoon, the CPUC rejected the request for deferral.
Golden State water will file its cost of capital application by May one of this year with and effective date of January one 2022.
Turning our attention to slide 17, this slide presents the growth and Golden State water's rate base as authorized by the CPUC for 2018 through 2021.
The weighted average water rate base has grown from $752 $2 million and 2000 $18 million to $984 million and 2021.
Our compound annual growth rate of nine 2%.
The rate base amounts for 2021 do not include any rate recovery for advice letter projects.
Let's move on to <unk> on slide 18.
And after adjusting the 2019 financial results for the <unk> <unk> per share retroactive earnings impacts related to periods prior to 2019, even discussed earlier.
<unk> earnings contribution for 2020 increased by <unk> <unk> per share as compared to 2019.
This was accomplished despite weather delays and slowdowns and permitting for construction projects.
And government funding for new capital projects experienced throughout 2020.
We continue to work closely with the U S government for contract modifications relating to potential capital upgrade work.
For improvement of the water and wastewater infrastructure at the military bases we serve.
During 2000, Twenty's and U S government awarded.
$15 $5 million and new construction projects for completion in 2020 and 2021.
Completion of filings for economic price adjustments requests for equitable adjustment asset transfers and contract modifications awarded for new projects provide <unk> with additional revenues and dollar margin.
We are actively involved in various stages of the proposal process and a number of other bases considering privatization.
U S government is expected to release additional bases for bidding over the next several years.
And our strong relationship with the U S government as well as our expertise and experience and managing bases, we are well positioned to compete for these new contracts.
In light of our continued uncertainty associated with the effects of COVID-19, we reaffirm our projection.
<unk> will contribute 45 cents to <unk> 49 per share for 2021.
I would like to turn our attention to dividends outlined on slide 19.
And 2020, we increased the annual dividend by nine 8% to $1 and 34 per share.
American States water company has paid dividends to shareholders.
Every year since $19 31.
Increasing the dividends received by shareholders each calendar year for 66 consecutive years.
And places it and an exclusive group of companies on the New York Stock exchange that have achieved that result.
On February 2nd our board of Directors approved a quarterly dividend of $33 five per share.
As a reminder, our dividend policy is to achieve a compound annual growth rate and the dividend of more than 7% over the long term.
Our strength and attractiveness to customers and shareholders alike is our ability to execute on our business strategies.
Stability.
Continued timely investment and our systems and customer service and.
Our regulated operations and a constructive regulatory environment and California.
Our growing contracted services business with strong market share.
And and unwavering commitment to reliability and safety.
Our capital investment includes replacing and upgrading critical infrastructure.
As well as ensuring we can meet our customers needs for generations to come on.
All while driving operational efficiency and delivering outstanding customer service.
I'd like to conclude our prepared remarks by thanking you for your interest and American States water and we'll now turn the call over to the operator for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question comes from Ann She stores and ski of Seaport Global. Please go ahead.
Thank you so I wanted to start with the you have more visibility on the use of full Robert Buck.
[laughter] you've been asking for.
And we're hearing of that decision from them.
Moving to full ramp for you and beyond 2024. So I was just wondering how this this request has been proceeding.
Yes with regard to the request for rehearing we.
We have not heard back from the CPUC at this point on that.
Well I hope I understood. Your question, Andrew Yeah exactly yeah.
We're basically youre waiting for and that's what their decision if they decide not to rehear it.
Should we expect that you will challenge this decision and.
And courts.
Yes.
And something we and others have given on a lot are giving a lot of thought to the.
Unfortunately in California, the only.
Option, we have is too.
Challenge it at the California Supreme Court level.
And.
And then of course, the Supreme Court will would be to be able to.
And here's a case they have to have to choose to hear the case.
So we're still kind of thinking thinking through that.
There is positive and positives and potential negatives to doing that.
Okay. Thank you and then separately given yesterday's decision and that's the requirement to file your cost of capital application by early May and.
And the fact that that's a.
On your Treasury and Yelp and formal contract that's lower now versus where it was from the other kind on a lease with debt.
Thank you and maybe talk us through your thought process on your expectations you know what though.
Parents are going to be.
Like.
And given that you've already earned.
Or you're a lateral lease already below average or water utilities across other states.
Right, Yes, there's a as you know a lot and that goes into the mix when.
Determining an appropriate cost of capital and specifically the authorized return on equity.
Yeah.
Yes, it is difficult to predict how things are going to.
And things are going to move forward there.
The fact that California's Roe or already low relative to the rest of the country I think.
As would be and advantage to us going forward they'll also be comments about.
Losing the Ram and that creates perhaps some additional risk that we could make.
And throughout the throughout the period, where the application is filed and you go through the hearing process.
We and others do keep a pretty close tab on where interest rates.
And where they're headed so.
And pretty difficult to speculate at this point, whether our ROE will be adjusted up or down or remain.
And the same at this point.
And just the last question on on a S U S.
So I appreciate your comments that you're hoping for additional contract awards, we were hoping to see some additional contracts award.
Contract Awards and late 2020 day.
It didn't happen.
And I understand that the net change of administration doesn't it doesn't help here so.
Do you have any sense of when exactly are roughly and which quarter, we should hear about more contracts.
Hard to predict.
Okay.
Just just be myself I would say, it's kind of probably at least be the second quarter before we.
Before we hear anything on on the <unk>.
Those bases, where we've submitted a.
A bit and it's gotten to the final.
Final bid process.
I think you hit the nail on the head with the.
Change in administration, and always seems to delay things.
And it's very very understandable.
That's.
Yes.
We're very patient and this business and you have to be.
And we.
We think we've got good things ahead of us for that business.
Thank you.
Thank you Angie.
Again, if you would like to ask a question. Please press Star then one.
And the next question will come from Jonathan Reeder of Wells Fargo. Please go ahead.
Hey, Bob and Eva how are you all.
Okay, Jonathan well and tell me Sir.
And I apologize.
And the background noise have a little work being done at the house today, so it might be noisy.
And hopefully you can hear me, Okay, just kind of following up on that last question. How many bases. Bob do you think could be awarded say and the next 12 months or is it still I think like two to three is what you were kind of anticipating and the.
Final stage.
Yeah, I would say.
You know I might think about too.
That's how I think about it.
And there was one base and Hawaii that.
Government decided not to privatize.
Ultimately.
And that was sort of on the list.
Of basis folks we're bidding on.
And so that's why I would say two rather than three.
Oh yeah.
Yeah.
And then what sort of the total level of I guess U S.
Construction expenses are you anticipating for full year 'twenty one.
I know you were running and the $50 million to $55 million range reported this bump up and in.
2020, but did you know.
And John Ward is a little lower than the 23 to 24 million and I think you've gotten a and the past few years. So should we expect that kind of get back on to that $50 million to $55 million range and 2021.
Well, we we do expect to.
We think the $15 five was a outlier I mean it was we think it was a function of COVID-19, largely and we do expect that number to improve in 2021.
Yeah, I think John and thanks to all it depends on construction activity and what kind of work linked and.
You know if.
And if we can if we have as Bob said get more awarded on our new capital upgrade I think oil will continue to co constructing our expenses.
So to us it's the high on construction expenses, maybe imply for higher revenue as well.
If everything goes well, so Oh I would then and look at construction expenses wildly off benchmark per your protection.
So Jonathan I will point out we have some new leadership at ASU and and.
And the performance Stuart Aronson, who joined US from July of last year and.
He is someone that's had a real strong history of working with the department of defense and so our strategy on some of these things are changing a bit.
We're trying some different angles to try to get.
More projects approved.
How successful we will be on that in 2021 is.
On a bit of a question Mark at this point given the.
Kind of a long runway it takes too.
Go through the process with the federal government.
So.
And we're optimistic but.
The New administration of course just.
Getting people on the right chairs et cetera. It takes time for the for the federal government, we understand that and then and then we will see but we are optimistic about 2021.
Although our.
The earnings contribution of 45 to 49.
You know pretty pretty close to what we did in 2020 so.
Yeah.
Our company is on a spin one.
We want to get too far out in front of it skis on water talks to the market about so.
You know, we're expecting a really good year and 2021 and.
But it is.
And I would say the landscape is.
More and difficult to predict this year and it's probably been in the last few years because of new administration, and COVID-19 et cetera.
Okay. So I mean, when you say this is your guidance based on the Covid uncertainty.
And if things kind of clear up and maybe you are able to get some more of the construction work, that's where we could see either something above the midpoint of that range or something like that very issue.
That's with the uncertainties on not kind of on the expense side of the equation, it's more on the.
Construction activity is yeah, yeah, that's a fair statement if if.
If things clear up we could be more on the higher end of that range.
And then and have been around the midpoint.
Okay.
And then and I haven't seen that the CPUC denied the extension so sorry to.
Do you hear that did they give any rationale as to why it was denied.
Or was it just pretty much.
Pretty vanilla just.
No luck filed the application.
And just going to read to you.
The paragraph from the letter.
It says with the one year extension that you've already received.
It has been four years since your last cost of capital filings.
During that period interest rates have fallen significantly.
And development that should be reflected in your authorized cost of capital and.
And the rates ultimately adopted and your general rate cases.
That's that was it's a very short letter that was the.
Most important paragraph and the other paragraph talked about.
Denying the differ.
Okay. So they do cite the fact that interest rates are lower now okay.
Interesting.
Have you you know in and your attempts to get the extension did you have her engage like the co and any sort of like potential settlement.
Discussions are or did you kind of.
And what you file day.
Submitted their opposition and you kind of it was left in the hands of the CPUC.
Yeah, So you know what.
As I've kind of and industry effort.
The.
I mean, it was interesting public advocates.
Oh there.
Opposition to the deferral request was.
You know, it's largely a function of gee, you're getting money and rates to pile on this application and therefore you should.
So it wasn't a very strong opposition, but.
I know other companies have done things in terms of working to try to meet with the PUC I'm not sure if.
There was reaching out to the public advocates to get them to change their view.
It is a little surprising given that the commission can't seem to get anything done on time, and then they want to add one more thing to the plate but.
I don't know yeah, I, just wasn't sure like and the path on the electric side, there was some precedent where.
And then you got together with the consumer advocate and proposed a two year extension, but then it did include like a little bit of.
And stuff down and the ROE.
No.
You guys hit the water is trying to broker or any sort of deal like that and just couldn't.
Get there with the with the public advocates as opposed to go on through the full process, but it sounds like maybe not.
Yeah, and historically, we haven't.
We've kind of done things differently than the electric electric easily would try to get public advocates or turn involved.
And the initial request as a deferral, we and the water space haven't haven't historically done that.
Okay, and then even maybe this one's for you what kind of consolidated tax rate you expect and 2021.
18, and 19, where closer to 22% before jumping on to like 24% this year.
I think we'll be probably go back to.
Hello, and effective tax rate that sort of things that impacted this year on the income tax free.
And you look at NAV.
2020, but 2019 and fire.
Got it.
Mark sales protection.
Okay, and then finally, the comment about 19 and the need to issue equity what kind of period does that covers all three.
Three year forward outlook is it five years.
And it's great news that would say Johnson.
Okay.
Okay, Great Alright. Thank you that's all the questions I have I appreciate you taking them and congrats on a on a good a good year and what was a challenging year.
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.
Yes.
Andrea I just wanted to thank everyone for their participation today.
And let them know that we look forward to speaking with them next quarter.
Thank you everyone.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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