Q3 2021 American States Water Co Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the American States Water Company Conference call discussing the company's third quarter 2021 results.
The call is being recorded.
You'd like to listen to the replay of this call. It will begin this afternoon at five o'clock P. M. Eastern time and run through Tuesday November 19, 2021 on the company's website www a S water dot com.
The slides that the company will be referring to are also available on the website.
This call will be limited to an 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 1095.
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 discussion of certain measures that are not prepared in accordance with generally accepted accounting principles or GAAP.
In the United States.
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 call over to Bob Sprowls President.
And Chief Executive Officer of American States water company.
Okay.
Thank you Anthony and welcome everyone and thank you for joining us today.
Again 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.
And dividends.
We will take your questions.
For the third quarter, we achieved consolidated earnings of 76 per share versus 72 cents last year.
An increase of <unk> <unk> per share or five 6%.
Included in the results for the third quarter of 2021.
Were minimal gains on investments held to fund one of the company's retirement plans as.
Compared to <unk> <unk> per share gains included in the third quarter of 2020.
Excluding these gains from both periods.
Adjusted diluted earnings for the third quarter of 2021 were <unk> 76 per share as compared to adjusted earnings of 70 cents per share for the third quarter of 2020.
An increase of <unk> <unk> per share or eight 6%.
Eva will discuss the quarter in more detail.
The third quarter and contributed to a strong 2021 year to date.
Where we've achieved 11, 7% earnings per share growth over last year.
Or 10, 7% on an adjusted basis.
Regarding the pending general rate case covering rates for the years 2022 through 2024 at our water utility subsidiary Golden State water company.
We're pleased to report that we have reached a settlement in principle with the public advocates office of the California Public Utilities Commission or CPUC for short.
Nearly all of the items in the case.
I'll touch on this a little more after ive as updates.
On the electric side of the business. We were pleased that in September CPUC approved Bear Valley Electric services. Most recent wildfire mitigation plan.
Well also in September the office of energy infrastructure safety under the California Natural Resources Agency approved Bear Valley Electric services latest safety certification filing.
The company remains in a strong position, we have successfully navigated the pandemic by continuing to deliver excellent service to our customers, while prioritizing the health and safety of our workforce and compliance with existing government guidelines.
We continue to invest in needed infrastructure.
That results in high water quality reliable delivery.
Safety.
And our commitment to preserving our precious resources that are in our care.
I will now turn the call over to Eva to review the financial results for the quarter.
Thank you, Bob and Hello, everyone.
Let me go ahead without Covid corner financially that look like.
This slide.
Presents our reported results before I guess right.
Consolidated army for the third quarter up 21, six cents per share as compared to 72 cents per share.
Nathan it's going.
And the gains on investments held by one of our retirement plans.
Period.
Just a guy who's going in for the third quarter was 76 cents per share as compared to I guess 70 says yes.
All right.
Exactly.
The increase of six cents per share.
Or eight 6% compared to that.
Yeah.
Our wireless segment reported earnings.
Two cents per share as compared to 57 cents per share.
Yeah.
Excluding the gains on investment in coking coal there I guess at the army what is that what you're saying here if I can call. It that's compared to I guess the army.
55.
Quarter of last year.
Adjusted increase of seven cents per share it was largely due to higher water operating revenue less supply costs as a result of new rates for 'twenty trying to widen authorized by the public by the California Public Utilities Commission.
Our electric segment. The army is like four cents per share for both periods.
And in critical electric operating revenue less electric supply cost.
But largely offset by higher operating expenses.
I mean from our contracted services segment increased one cents per share for the quarter due to like increase operating expenses.
Yeah, I mean, I'll take up you are pairing.
<unk> per share due to changes in.
Unitary taxes.
Back to the same period.
Right.
Consolidated revenue for the quarter increased by 34 $1 million does that cause I think 2021.
While the revenues increased $4 $1 million.
So yes that increases for 2021 I think we thought was a passing fad.
The increase in electric revenues is.
New Jersey, PUC approved rate increases for 2020 one.
Contracted services revenue increased $1.3 million largely due to lower construction activity, partially offset by increases in management fee.
That's how the resolution.
Piper Jaffray.
Turning to slide 10.
Our water and electric supply costs was $3 $3 million for the quarter, an increase of $1 million last year.
Any changes in supply costs for both the water and electric Beckman as compared to the adopted supply costs are tracked in balancing accounts.
Looking at total operating expenses other supply costs.
Consolidated expenses increased $800000.
Compared to the third quarter of last year.
It was primarily due to a decrease in construction costs at our contracted services segment.
Interest expense net of interest income and other increased by $600000.
Due to lower gains generated investment held them for retirement plan here and there.
Caught it.
Thank you Scott.
That lower investment gains were partially offset by a decrease in interest expense.
She didn't due to the early redemption of private placement notes with the highest coupon rate.
Yeah.
Slide 11 shows the EPS bridge, comparing the third quarter I was trying to trying to one with a lot here.
Got it.
This slide reflects our year to date earnings per share by segment as reported.
Diluted earnings for the nine months ended September 32021, what $2, that's compared to $1 79 for same period in 2020.
Included in these results were gains on investments held to fund a retirement plan.
Which increased by four cents per share in two cents per share for the nine months ended September 32021, and 2020, respectively.
Excluding these gains from both periods.
Adjusted yesterday earnings for 2021.
96 per share as compared to adjusted year to date earnings of $1 77 per share for 2020.
This results in a 10, 7% increase in adjusted EPS.
For more details please refer to yesterday's press release and Form 10-Q.
Turning to liquidity.
Net cash provided by operating activities or was $81 $9 million for the first nine months of trying to trying to one as compared to $87.8 million in 2020.
The decrease was partially due to different timing of income tax installment payments between the two periods.
In addition, there was a decrease in surcharges to recover on the collection recorded in Golden State Water's water revenue adjustment mechanism.
The final cost balancing accounts.
The decrease in operating cash flow was also due to the timing of billing off and cash receipts for construction work at military bases.
This was partially offset by an improvement in cash accounts receivable related to utility customers.
Theory in part to improved economic conditions as compared to the first nine months of 2020 because of the COVID-19 pandemic.
Our regulated utility invested.
Under $5.4 million in company funded capital projects during the nine months first nine months this year and we estimate that our full year 'twenty one company funded capital expenditures to be 130 $240 million.
At this time, we do not expect American states water to issue additional equity for at least the next three years to fund its current business.
Yes.
With that I'll turn the call back to Bob.
Thank you Eva.
I will now provide updates on the California drought and our recent regulatory activity.
Currently the majority of California is considered to be an extreme drought.
The Governor of California is now proclaimed a state of emergency for all 58 counties within the state.
And signed an executive order asking all californians to voluntarily reduce water usage by 15% as compared to 2020.
CPUC has called on all California, Investor owned water utilities to implement voluntary conservation measures to meet this goal.
In response Golden State water has increased its communication with customers regarding the need for conservation.
Implemented voluntary conservation efforts in nearly all of its ratemaking areas.
And mandatory water reduction and a few.
Paul.
A few small customer service areas on the coast.
We have also established a CPUC approved water conservation memorandum account to track incremental drought related costs for future recovery.
Okay.
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 in July 2020.
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 another $11 $4 million of capital projects to be filed for revenue recovery through.
Through advice letters when those projects are completed.
Golden State water and the public advocates office of the CPUC have reached a settlement agreement in principle.
The majority of the items in this general rate case application.
Unsubtle matters, our Golden State water's request for.
One medical medical cost balancing account to general liability insurance cost balancing account.
And three the consolidation of two Golden State water's customer service areas.
The date to file a joint motion for approval of a settlement agreement to the CPUC has been proposed for November 23rd 2021.
As a result of this proposed timing.
A final decision in the case from the CPUC is now expected in 2022.
When a final decision is issued in 2022.
The new rates adopted in the final decision will be effective retroactive to January one 2022.
Since we are still in the process of drafting the settlement agreement with the public advocates office.
Cannot share any further details at this time.
As a reminder, the administrative law judge assigned to this rate case has previously clarified that Golden state water can continue using the water revenue adjustment mechanism or Ram.
And the modified cost balancing account also known as the M CBA.
Until our next general rate case application covering the years 2025 through 2027.
Regarding our cost of capital application, which was filed in may of this year.
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 our return on rate base of 8.1.
One 8%.
There was a pre hearing conference held in September.
But the scoping memo with an official schedule has not been published.
Final decision is expected in the first half of 2022 with an effective date retroactive to January one 2022.
As part of the response to the COVID-19 pandemic Golden State water and Bear Valley Electric service.
Have suspended service Disconnections for nonpayment.
Pursuant to CPUC orders.
On July 15th of this year, the CPUC issued a final decision on the second phase of the water utility low income affordability rulemaking.
Which among other things extended the existing moratorium on water service Disconnections due to nonpayment.
Until the earlier of February one 2022 or pursuant to further CPUC guidance on the matter.
On June 24th of this year, the CPUC issued a final decision to extend the moratorium on electric Disconnections until September 30.
Of this year.
Under the terms of CPUC adopted payment plans.
Actual electric service Disconnections for nonpayment will not occur until approximately December one of this year.
For Golden State water and Bear Valley Electric service, we are tracking incremental costs, including bad debt expense in excess of what is included in their respective revenue requirements.
Incurred as a result of the pandemic and CPUC approved COVID-19 related memorandum accounts.
Which are to be filed with the CPUC for future recovery.
CPUC requires that amounts tracked in the Companys COVID-19 memorandum accounts for unpaid customer bills be offset by any federal and state relief for water utility build debt.
And customer payments through payment plan arrangements prior to receiving recovery.
Customers.
On July 12 for this year, the Governor of California approved almost $1 billion in relief funding for overdue overdue water customer bills.
And almost $1 billion in relief funding for overdue electric customer bills.
Both Golden State water and Bear Valley Electric service intend to seek recovery of overdue amount from all available funding sources.
Funds for both water and electric utility relief are expected to be distributed to utilities during the fourth quarter of 2021.
For the first quarter of 2000 for the first quarter of 2022.
Turning our attention to slide 18. This slide presents the growth in Golden State water's rate base as authorized by the CPUC for 2018 through 2021.
The adopted weighted average water rate base has grown from $752 $2 million in 2000 $18 million to $984 million in 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 19.
<unk> is earnings contribution increased by <unk> <unk> per share to <unk> 11.
During the third quarter of 2021 as compared to the same quarter last year largely due to a decrease in overall operating expenses.
For the year to date September 32021.
<unk> earnings contribution is <unk> <unk> per share higher than last year, primarily due to an overall increase in construction activity.
Management fee revenue.
As well as a decrease in overall operating expenses, including lower legal and other outside services costs labor costs and maintenance expense.
The increase in construction activity was largely due to timing differences.
When work was performed as compared to the first nine months of 2020.
We reaffirm our projection that <unk> will contribute 45 to <unk> 49 per share for 2021.
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.
However, the continuing volatility of prices for materials and slower than anticipated recovery in the supply of materials from the COVID-19 pandemic could cause delays in construction activity for existing projects.
And are likely to result in deferrals of government procurement to award new capital upgrade projects.
Given the uncertainties, we project <unk> to contribute the same range of earnings 45 to <unk> 49 per share for 2022.
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 expertise in.
In managing water and wastewater systems on military basis.
And we are we believe we are well positioned to compete for these new contracts.
I would like to turn our attention to dividends.
Which is a compelling part of the company's investment story.
Last week the board of directors approved a fourth quarter dividend of <unk> 36, and a half cents per common share.
If you recall last quarter the board of directors approved a 9% increase in the annual dividend.
From $1 34 per share to $1 46 per share.
Currently our dividend policy is to provide a compound annual growth rate of more than 7% over the long term.
Compound annual dividend growth rate for the quarterly dividend is 9% over the last five years and.
Nearly 10% over the last 10 years.
Yeah.
Our long and consistent history of dividend payment dates back to $19 31.
In addition to an unbroken 67 year history of annual Cal.
Our calendar year dividend increases.
I'd like to conclude our prepared remarks by thanking you for your interest in American States water and I will now turn the call over to the operator for questions.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
Youre 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.
Yeah.
We will begin with Angie <unk> with Macquarie.
When you May go ahead.
Thank you, it's actually much cheaper, but anyway. Okay. So firstly wanted to ask a question about inflation.
Material.
And other expenses, you've mentioned that in connection to the a S. U S. How how do you see that for your regulated operations.
And is it in any way reflect it.
He or she filing.
Yeah, So for Golden State first of all Hi, Angie Thanks for joining the call.
Yeah. So for Golden State, we are seeing some price increases there as well.
Those price increases are not necessarily.
Included in the <unk> given that that was filed in July of 2020.
So we're working to spend the dollars on the on the projects that are.
You know we have filed in the in the <unk>.
Of course, it's kind of in that Linda.
Limbaugh, if you will.
Where the case has not been approved but we're.
We're having having to spend dollars because 2021 and it's one of the one of the years and the Capex program.
But I you know I think we're managing it very well and <unk>.
Our belief is if some of the projects end up costing you a little more.
We will be able to.
Present that to the PUC and our next our next rate case I think they typically are pretty understanding about such things. So so we're starting we're seeing higher costs on the utility side as well.
If I may add Angie when we filed a settlement with the CPUC end of November as Bob mentioned the.
The inflation rate won't be updated our files, so well use the most current patient base published by the Commission.
Uh huh.
And for 'twenty, two 'twenty three before that second and third tests, yet when we filed the step increases will also use the most updated information vague feeling that card. So so it will be somewhat cover all fighting.
Okay, and secondly, the Tucson.
Our year over year or higher.
Higher unitary state taxes.
I know you don't provide guidance, but.
What I mean is this something you or is it just something that you always expect it to show up in there.
This years result, and it's just more about timing.
I think we havent unitary taxes and he I think corner he got the I pad, because that's impacted by the consolidation and the proportion of business that we're doing in California, So what change a little bit year over year, but I think generally what are you pointing to one cents.
They got the I call. It a so so it won't be too much off that so.
So for you for California. It is a union can we say.
And for state taxes that means the state taxes imposed a portion of our consolidated pretax income on the basis of the revenue generated by go to stay MTBE. So it doesn't get to look at the pre tax income of Golden State BD, but I look at the consolidated a player.
Pushing that out of that so like changed a little bit over a year over year, but won't be material I would say.
Okay, and my last question and I understand you have.
Our pending settlements or pending filing of the settlement just.
Just one portion that that the settlement doesn't cover the consolidation of those two service territories.
I mean, just from the modeling perspective, if that were to happen is that.
I don't know if its not a driver of some additional O&M efficiencies.
I mean, what.
And why you would want to do it I'm talking about financially more than 90 operational benefits.
Right is that the consolidation is purely for ratemaking purposes.
Now we have eight eight rate making areas.
And we were looking to go down to seven to improve the efficiencies with regard to filing these.
Rate cases as well as.
Yeah.
Some of these smaller ratemaking areas get burdened if they have significant.
Water supply challenges.
It then helps to sort of spread that to more customers. If you can consolidate the the ratemaking area.
Okay understood. Thank you.
Thank you Andrew Thank you.
Again, if you have a question. Please press Star then one on.
Our next question comes from Jonathan Reeder with Wells Fargo. You May go ahead.
Hey, Bob and Eva how are you all today.
Hey, Jonathan how about you think oh, not too bad yeah. Thanks.
So pretty straightforward clean quarter.
Congrats on that just wanted to.
Make sure I was clear the flat, yes U S guidance range for 'twenty two that is inclusive of your accident your expectations at some project construction project work could be delayed or deferred due to the supply change of cost pressures is that right Bob.
It is yes.
Okay. So absent that we might have seen a bump up in the range is what we I guess should conclude.
Yeah, I would say that that's a fair statement.
I would say.
We were kind of working through Covid and the effects of it in and.
It has had a bit of an impact there.
But yeah, I'd say that I'd say that's accurate.
Okay, and then on the regulated side what is your understanding of Washington, just taken so long to issue the official scoping memo on the cost of capital I mean, it just seems so odd since.
Not all of those dates were hashed out and the pre hearing conference in you know basically will be heading up to that.
Evidentiary hearings and a couple of weeks.
As you know we would've been adhering.
Adhering to that schedule, what what's going on there.
Yeah, I would I could just speculate Jonathan it probably wouldn't be helpful.
The Commission has got a lot on their plate I think can.
You know.
The water side of things is sort of it takes a back seat to other things as you know given the just the sheer size of the electric utilities versus the water utilities that that would just that would be my my speculation and that's purely purely that we don't think there's anything else, causing the delay here.
Okay, and then I mean once the intervenor testimony.
He has filed remind us so do you have a chance to kind of.
Refresh the numbers in your case, if you want to for.
Current interest rate environment and stuff like that or is it you know.
More and more historical looking you know taken Oh.
A three year average or something like that how should we be viewing the ability I guess to.
More swings in.
And interest rates to kind of impact how that eventually settles out you know, particularly particularly as I guess the preceding falls further and further behind.
Hey, Jonathan it's Eva.
I haven't experienced any cost of capital proceeding that was I think all it quit and parents of interest.
Yeah, we can argue that the training is going up and therefore, that's at midnight Eastern Cape Cod, but I don't believe we'll have a chance to update all the you know that cost and he was right.
Okay.
So we'll have to speak to I always kind of testimony and articulate that point and if O. R. E. O P. E issue. Their report we can't we bought it was there.
Item by item I shall be more cutting formation.
I don't know if we can.
The question I'm sorry.
Got it Okay I know, it's just a.
It's just mind boggling.
You know, how how long some things.
Take on that side, so hopefully hopefully get some movement here soon and.
You know hopefully things trend in your direction, but I appreciate the time today.
Thank you Jonathan.
This concludes our question and answer session I would like to turn the conference back over to Bob Sprowls for any closing remarks.
Yeah, I just would like to wrap it up today by thanking you all for your participation and we look forward to speaking with you next quarter wish you.
You know a good good holiday season, as we move through those so.
Thank you all very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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