Q1 2021 American States Water Co Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the American States Water Company Conference call discussing the company's first quarter 2021 results.
The call is being recorded if you would like to listen to the replay of this call will begin this afternoon at five P. M. Eastern time and run through Tuesday May 11, 2021 on the company's website Www dot, yes water dot com.
The slides that the company will be referring to will also be available on the website.
All participants are currently in a listen only mode.
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After today's presentation, we will have a question and answer session to ask a question you May press star and one.
Please note todays conference will also 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.
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 the generally accepted accounting principles or GAAP in the United States and constitute non-GAAP financial measures under SEC rules.
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 turn the conference call over to Bob Sprowls, President and Chief Executive Officer of American States water company.
Thank you Jamie welcome everyone and thank you for joining us today I'll.
I'll begin with some brief comments on the quarter. Eva will then discuss some financial details and then I'll wrap it up with some updates on regulatory filings.
She is.
On dividends and then we'll take your questions.
And this year's first quarter, we achieved consolidated earnings of 52 per share versus <unk> 38 per share during the first quarter of 2020.
The 37% increase.
Or a 21% increase on an adjusted basis.
You can see from this slide that each of our three operating segments contributed to the year over year earnings per share growth.
The results of our regulated utilities were driven by CPUC approved rate increases.
Well, our contracted services segment performed well a higher level of construction work during the quarter compared to last year.
Eva will discuss his slides in more detail.
We continue to execute on our business strategies in the quarter.
Provide high quality water wastewater and electric services to over 1 million people.
And make timely investment in our systems.
All while keeping our unwavering commitment to reliability and safety.
Our capital investments allow us to replace and upgrade critical infrastructure.
As well as ensure we can meet our customers needs for generations to come.
We also remain committed to conservation environmental stewardship employee safety and wellbeing diversity and inclusion.
And sound governance practices.
While these issues have always been at the core of our company.
We created an environmental social responsibility and governance section also known as ESG on our web site to more clearly make our disclosures available in these areas.
The website includes our corporate social responsibility report.
DCF D and sales be disclosures.
And other relevant documents.
We will continue to focus on our ESG commitments.
Which benefit our customers suppliers employees broader communities and ultimately our shareholders.
In addition to producing strong first quarter results and all of our business segments. We filed the cost of capital application for the water segment yesterday.
So on new water and electric rates go into effect, starting in January which generate additional gross margin.
And on a longer term scale.
We continue to invest in infrastructure at our regulated utilities.
Contracted services business to provide quality services to our customers prefer.
Perform more work on the military bases, we serve compete.
Compete for new military base contracts.
And deliver consistent dividend growth to our shareholders.
I'll touch on these in greater detail later on in the call.
I will now turn the call over to Eva to review the financial results for the quarter.
Thank you Bob Hello, everyone.
Let me start with our first quarter financial results on slide eight.
I'm pleased to reported that the company had a great quarter with consolidated earnings of 52 cents per share as compared to 38 cents per share.
Excluding the five cents per share loss on investment is trying to price.
Quarter of last year.
For the first quarter of 2021 increased by nine cents per share.
29%.
As compared to that yeah.
Well water subsidiary Golden State water company.
Earnings were 33 cents per share as compared to 29 cents per share.
Got it.
If by chance they see like all our investments in Florida.
Florida out of line yet.
The increase in earnings.
<unk> hired a waterfall its margin general agents on new rates authorized by the California Public Utilities Commission.
Partially offset by increase in depreciation expense and property taxes.
Our electric segment's earnings like first quarter was 21 line seven cents per share as compared to six cents per share from if I caught out of 2020.
Three increasing electric rate in a day.
Interest expense.
Are these from our contracted services segment increased four cents per share from the core there.
What do you largely due to an increase in construction activity as a result of timing differences of when what what what performed as compared to the first quarter of last year.
That's well on as well as low wage expenses for legal.
Okay.
The timing differences were expected to EBITDA over the remainder of 2020 one.
We expect the contract services segment to contribute 45 cents.
We're here for this year.
Okay.
On a consolidated revenues for the first quarter increased by $8 million as compared to the same period in the 'twenty to 'twenty one.
While the revenue increased to $3 $6 million during the quarter.
So your debt increases for 2021.
So we felt on passing pet.
Pat.
The increase in electric revenues, what was largely due to CPUC approved rate increases effective January one this year.
That's a new thing.
As compared to the first quarter 2020.
Contracted services revenue for the quarter increased $3 $8 million.
Largely due to an increase.
And construction activity, resulting from timing differences.
When construction activity was performed.
Through the first quarter of last year.
In addition, there were increases in management fee.
The successful resolution of various economic price accounts.
Turning to slide 10.
Our water and electric supply costs were $22 $6 million for the quarter.
The increase of $1.6 million from the same period last year.
Yeah.
Any changes in supply costs for both the water and the like.
Segment EBITDA.
Compared to the adopted supply costs are tracked in balancing accounts.
Looking at total operating expenses other than supply costs.
Consolidated expenses increased $1 $7 million as compared to the price quote out of 2020.
This was primarily due to increase in construction costs at if you ask me.
He tells me I'm, sorry increased construction activity.
Partially offset by unplanned maintenance cost at the water segment.
And a decrease in untreated and general expense.
Because of lower vehicle on effective cost.
Interest expense net of interest income and other decreased by $2 $5 million.
Primarily to gains on investments held for a retirement benefit plan.
Compared to losses incurred during the first quarter of last year.
This guidance.
Slide 11 shows the EPS bridge, comparing comparing the first quarter of 2021.
GAAP first quarter.
Turning to liquidity on slide 12.
Net cash provided by operating activities was $24 $7 million, that's compared to $15 $7 million in 2020.
This was largely due to recent improvement in cash flow from accounts receivable balance.
You couldn't be customized.
Which were negatively impacted by the COVID-19 pandemic throughout 2020.
The timing of cash receipts.
Disbursements related to other working capital items.
So affected the change in net cash provided by operating activities.
Our regulated utility invested $35 $8 million in company funded capital projects during the quarter.
We estimate full year 2021 company funded capital expenditures to be $120 million to $135 million.
In addition, we intended to prepaid and tired of 28 million of Golden State water, 956% note.
Here's a 1991 and during 'twenty. One later this month.
The early redemption will included a premier upstream percentage of par value or $840000. If you redeemed before may 15 2022.
So we didn't say water recovery redemption premiums.
In fact, its cost of capital that's filed in the cost of capital proceeding well.
What are the cost savings from.
Redeeming high interest rate debt are passed on to customer.
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.
As you May know the water segment has an earnings test it must meet before implementing the second and third year step increases in the three year rate cycle.
As we reported in our last call we have timely invested in our capital projects and achieved capital spending consistent with the amount authorized by the CPUC.
As a result rate increases are expected to generate an additional $11 $1 million in the adopted water gross margin for 2021 as compared to the adopted water gross margin for 2020.
We continue to make prudent and timely capital investments.
Golden State water filed its cost of capital application yesterday.
We requested a capital structure of 57% equity and 43% debt.
Which is our currently adopted capital structure.
A return on equity of 10, 5% and.
And our return on rate base of 818%.
A final decision on this proceeding is scheduled for the fourth quarter of 2021 with an effective date of January one 2022.
As we discussed in our prior calls Golden State water filed a general rate case application for all of its water regions and the General office last July.
This general rate case will determine new water rates for the years 2022 through 2024.
Among other things Golden State water requested capital budgets of approximately $456 million for the three year rate cycle.
And then another $11 4 million of capital projects to be filed for revenue recovery through advice letters when those projects are completed.
We are pleased that the administrative law judge assigned to this rate case has clarified that golden state water can continue using the water revenue adjustment mechanism.
For Ram and the modified cost balancing accounts also known as the M. CBA.
Until our next general rate case application covering the years 2025 through 2027.
In February 2021, the CPUC adopted a resolution that extended the existing emergency customer protections previously established by the CPUC through June 32021 <unk>.
Including the suspension of service Disconnections for Nonpayment electric utility customers in response to the ongoing COVID-19 pandemic.
For water utilities, the moratorium on service Disconnections was implemented in response to an order by the Governor of California.
Which we believe would require another action by the governor to cease the moratorium on service Disconnections for our water customers.
It is expected that the CPUC will work with the Governor's office to coordinate the lifting of the moratorium for water utility customers.
Consistent with the electric customers.
The Cpuc's February resolution did extend the COVID-19 related memorandum accounts established by Golden State water and by Bear Valley Electric service to track incremental costs associated with complying with the resolution.
In addition, the resolution required utilities in California to file transition plans to address the eventual discontinuance of the emergency customer protections.
Well, let's say water memorandum account is being addressed and it's pending water general rate case.
Well Bear Valley Electric service.
Intends to include the memorandum accounts.
Its next general rate case application expected to be filed in 2022.
Golden State water and Bear Valley electric filed their transition plans with the PUC on April one of this year.
Turning our attention to slide 16. This slide presents the growth in 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 in 2000 $18 million to $984 million in 2021.
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 17.
<unk> earnings contribution increased by <unk> <unk> per share.
Versus last year's first quarter.
To 12 <unk> per share due.
Due to an overall increase in construction activity, resulting from timing differences of when work was performed.
As compared to the first quarter of last year.
And lower legal fees and outside services expenses.
We reaffirm our projection that <unk> will contribute 45 to <unk> 49 per share for 2021.
Thus far the COVID-19 pandemic has not had a material impact on <unk> operations.
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.
In addition 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 in dollar margin.
The U S government is expected to release additional bases for bidding over the next several years.
We are actively involved in various stages of the proposal process at a number of bases.
Currently considering privatization.
Continue to have a good relationship with the U S government as well as the strong history and experience in managing water and wastewater systems at bases.
And believe we are well positioned to compete for these new contracts.
I'd like to turn our attention to dividends.
Each quarter I would like to remind everyone of our long and consistent history of dividend payments dating back to $19 31.
In addition to our unbroken 66 year history of annual dividend increases.
Which places us in an exclusive group of companies on the New York Stock Exchange.
In the past decade, our board of directors has raised the dividend at a compound annual growth rate of nine 4%.
In line with our dividend policy, providing a compound annual growth rate 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.
And we will now turn the call over to the operator for questions.
Ladies and gentlemen at this point, we will begin the question and answer session.
To ask a question you May press Star and then one using a touchtone telephone.
So withdraw your question you May press star and two.
If you are using a speaker phone we do as you. Please pickup your handset before pressing on the numbers to ensure the best sound quality.
Once again that is star and then one to ask a question.
We'll pause momentarily to assemble the roster.
And our first question today comes from <unk> Chopra from Evercore ISI. Please go ahead with your question.
Hey, Bob and Eva Thanks for the update today.
Just wanted to start on the rate case.
Just.
Anything that you can share with us in terms of where your most recent thoughts on timing on.
Obviously, the you know you're ache eastern European water utility rate cases have dragged on for a while.
Any color there what are you seeing on the ground in terms of just getting getting a resolution on the final decision.
Well, we're optimistic we are currently on schedule on the rate case.
We're working through it.
A lot of times during cash as you know.
It will be a function of.
Whether there is a settlement in the case and how many issues are settled.
We have not started.
Settlement discussion process, yet so it's really hard to kind of handicap.
How long, it's going to take to do this.
The.
Hearings are scheduled now for <unk>.
Late June early July.
And then after that we'll see how it goes.
Understood. So next step for us to watch is just the hearing process you said June July.
And that'll get sort of a more tighter handle on.
What the process moving forward it looks like on the time line.
That's correct.
Two rate cases ago, we litigated the entire capital budget. The last rate case, we settled every items. So there werent any hearings so hard to say where this one is headed but if I had to guess.
Suspect, we're probably going to have hearings on something.
Understood. Thanks.
And then just maybe in light of the Biden American jobs plan calls for.
On the investment in led and water wastewater assets, just maybe how does that impact your regulated assets.
And then also.
Does it mean that more military bases get prioritized here.
In the near term and in the long term for your U S business.
Yeah. So.
We'll be following this very closely there's a.
A lot to happen yet on the infrastructure package.
Before we see how much of it sort of works its way through to to our customers.
<unk>.
Although lead led issues are not a big issue for us in California.
So to the degree of debt.
Some of the funding is directed to.
We're in pretty good shape there.
In terms of the military bases.
Really difficult to handicap that as well as to.
To see kind of where the various.
Departments of defense are various.
Services groups are headed.
The Army the Air Force and the Navy all sort of have their own view on how to move things forward and so we're working with each of them, but it's.
Fair to say that the.
<unk>.
There is no two of those that move in lockstep.
We are seeing the navy put out privatizations, which is really good to see.
Because they appear to four hadn't really done that so it's an exciting it's exciting for us.
The army is.
<unk> taken a bit of a strategic pause to to look at some things. It will do that from time to time, we're not we're not worried about the future prospects. So.
So it just really is an example of how each each branch.
<unk> does its own thing.
Okay, Gosh, I think what positive news from.
Oh it is.
I think the federal government recognized.
You know the needed investment income shop carry on.
I think that the important point to make to that topic.
And money will be flowing to investor owned water utilities, just difficult to say how much will as you know day dash, 885% of the country's water is run by.
Municipalities.
But I mean, we'll obviously be pushing for our share.
Sure sure. Thanks for that color and just one quick if I can really quickly the guidance the <unk> guidance for this year.
That does not the numbers that debt.
The 45 to 49 cents I believe the range that does not include any new basins right, but because any new bases awarded this year.
You won't be earning on them until most likely 'twenty two am I right about that.
Yes.
Pretty correct is really on your traditional military privatization theres, a nine or 10 months transition plan. After the award is announced so yes, that's a good way to look at it.
Okay. Thanks for the time guys. Thank you <unk>.
Once again, if you would like to ask a question. Please press Star then one.
And our next question comes from Angie <unk> from Seaport Global. Please go ahead with your question.
Thank you guys. So I was just wondering.
Given the changes that will impact your water.
Business admittedly on the 2025, but I'm just wondering.
If there is.
But you've seen it up at our California water utilities that they're trying to expand their geographic footprint beyond California by adding some.
Yeah, either neighboring states or again.
Trying to diversify away from California is this something you would consider.
We definitely would we would be looking for.
Utilities are that are for sale with <unk>.
Areas that have fair regulation.
We already have.
Critically 20% to 25% of our business.
Consolidated businesses out of California to date through.
But.
Yeah, we still like California regulation I know.
I know folks, California regulations on sometimes gets a bad rap but.
We think.
Water utilities.
We're able to earn their authorized returns if they manage things really well and.
I understand that there is a lot of drama, we always coach analyst that ignore the drama and look through to the orders and the orders are generally very good so but I mean, we would look outside of California, If theres systems for sale, we definitely be in there in their bidding.
Okay. Thank you and then secondly, again, you'll have plenty of time to file. Your next did you see him.
But and but given the changed of amyloid removal and given the volatility that we're seeing at San Jose water.
Do you think that the changes in <unk> that you were planning.
In essence mitigate those.
Water supply issues, though changes on the water supply mix.
It's a forward looking but I'm just wondering if there are any lessons learned from what we're seeing.
Hey, Duffy.
Right I mean, we would look to try to reduce the risk to the company through our next filing.
On one advantage we may have over the other two companies that are working through it through this as they have to go first [laughter] and.
And we will be.
And in this particular case, we're lucky in that we're the the last one to have to file their new rate case, so we'll be watching.
California water in California, American very carefully and see.
What they are able to do on how all of their structuring things and just trying to learn from.
Things that go really well for them or learn from things maybe that don't go so well in terms of sort of getting the rate case through the commission.
We're I think we've got plenty of time to plan for this.
So we think it's.
Yes.
I have a lot of confidence on our management team that we're going to be able.
To manage through.
On Monterey style Ram and the incremental cost balancing accounts.
Okay.
I think I think also just supply mix for each company is different.
You know we are we have about 55% to 60%.
Oh, well water story.
And the other four E <unk> coming from the Metropolitan area.
Hotel agency.
We only have five 5% surface water so low.
The Olympic different situations supply mix among the three companies atopic changes in California.
I don't know how we can compare why don't we see out there in the supply cost mix deterioration there.
Okay. Okay, and then just one follow up on it so.
So you've maintained the range of earnings for this year, despite some stronger.
Net earnings year over year, and I know that there was some timing differences, but I think that last years earnings from other services was somewhat suppressed by COVID-19. So assuming that there is you know that.
You say, it's going away, but there is some improvement isn't been COVID-19 related restrictions wouldn't that actually translate automatically into higher earnings.
It's possible that it would it's just.
You go through a number of.
You kind of have to stage things we've requested.
Additional work on the bases we serve.
Hugh.
On typically do the engineering for I want to say about 30% to 35% of those projects when you submit them if they then.
Get.
Looked at more carefully you need to sort of complete the engineering on it. So there is a bit of a lead time on this particular work if in fact, the new capital upgrade work, we saw a big jump in.
The amounts that get awarded to us net.
Mt was down a bit in 2020.
From the prior years.
And we haven't seen.
Standard change in that in 2021 from 2020 in terms of the MCU jobs that have been awarded.
Alright, new capital upgrades, Marc I understand okay. Thank you. Thank you.
Okay.
Once again, if you would like to ask a question. Please press star and one.
And it's showing no additional questions I'd like to turn on the conference call back over to Mr. Sprowls for any closing remarks.
Yes. Thank you Jamie just wanted to wrap up today by thanking you all for your participation today on your attention and your coverage. We look forward to speaking with you next quarter. So thank you.
Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for your participation you may now disconnect your line.
Okay.
Yeah.
Yeah.