Q1 2022 American States Water Co Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the American States Water Company Conference call discussing the company's first quarter 2022 results. This.
This call is being recorded and if you would like to listen to the replay of this call. It will begin this afternoon at five P. M. Eastern time and run through until Tuesday may 10th 2022 on the Companys website at Www Dot Aes water Dot com.
The slides that the company will be referring to are also available on this website.
After today's presentation there'll be time for a question and answer session to ask a question you May Press Star then one to remove a question you May Press Star then two should you need any assistance. Please signal a conference specialist by pressing the star key followed by zero.
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 maybe forward looking statements intended to qualify for the safe Harbor from liability established by the private Securities Litigation Reform Act of $19 95.
Please review a description of the company's risks and uncertainties in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission. In addition, this conference call will include a discussion of certain measures that are not prepared in accordance with generally accepted accounting principles or GAAP in the United States.
And constitute non-GAAP financial financial measures under the 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.
Thank you, Joe and welcome everyone and thank you for joining us today.
I'll begin with some brief comments on the quarter EBIT will then discuss some financial details.
And then I'll wrap it up with some further thoughts on the quarter.
Updates on regulatory filings California's drought condition.
U S.
Dividend and then we'll take your questions.
This was a unique quarter with earnings per share coming in lower than the first quarter last year due to timing issues with receiving a final decision from the California Public Utilities Commission or CPUC.
On our water general rate case at Golden State water.
Steven will discuss these results in detail.
We continued to deliver high quality water wastewater and electric services to customers during the quarter.
We are making good progress on our goal to spend the $140 million to $160 million this year.
In infrastructure investment at our regulated utilities.
We discussed during the year end call.
Strengthening the pipes, well hydrants tanks.
Our lines and more.
Customers need for the long term.
Along with awaiting a decision from the CPUC in Golden State Water's General rate case.
We are also actively involved in processing our cost of capital application.
In fact hearings begin today in that application.
We also strengthened the leadership that <unk> with the.
The addition of Chris Connor, who joined the company as senior Vice President.
And was previously at Jacobs Engineering.
Chris brings a strong leadership background and among other things proven business development sales track record working with the department of defense.
I will now turn the call over to Eva.
Thank you Bob Hello, everyone.
Our second quarter financial outlook.
Consolidated earnings.
Jason It's Chris here.
Yeah.
The delay in receiving a final assays are pending.
IC.
As mentioned by Bob.
While the revenue scale.
Yes, Thanks Cornell.
To date <unk>.
Adopted.
As a new way.
Okay.
On January one.
We didn't know what it looked like you tried to one settlement agreement.
You can go to the state water and the public advocates office.
I'm going to say what it would have been recorded to additional revenue of approximately.
$6 $3 million.
Like 12 cents, a share and additional water supply costs of $1 6 million.
Alright.
Yes.
Thanks Claudia.
Thank you.
Including the additional revenues that water supply cost.
Adjusted diluted earnings for the first quarter ended March 31, 2000, just trying to get to what 47 cents per share.
Well what it is.
Golden State water company.
I'm trying to <unk> <unk> per share as compared to 33 per share last year.
Included in the results for the first quarter of 2022 losses of $1 $7 million or <unk> <unk> per share.
Investments held to fund to fund one of the company's retirement plan.
Compared to gains of $608000 or one cents per share for the same.
Period, Thank you Juan.
Excluding the gains and losses on investments on both periods.
Adjusted diluted earnings at the water segment for the quarter were 26 cents per share as compared to I guess it yourself.
Yeah.
Curious in 'twenty.
Like what.
That is adjusted decrease of six cents per share.
Also included in the rig count for the first quarter of this year.
Yeah.
$1 4 million dollar reduction in revenue.
<unk> per share to reflect the estimate the impact of a lower cost of debt.
It didn't go in and say what it had been cost of capital application.
And we're also increasing operating expenses and the effective income tax rate, partially offset by lower interest expense.
Our electric segment earnings for three months period ended ending March 31, 2022, and 'twenty, one or seven cents per share and it could be electric revenue was offset by higher operating expenses.
Our contracted services segment decreased four cents per share for the quarter largely due to a decrease in construction activity.
As a result of timing differences.
Partially offset by increasing management fees and lower overall operating expenses.
Consolidated revenue for the first quarter of 2022 decreased by $8 $5 million as compared to the same period in 2021.
The increase was mostly due to lower construction activity at our contracted services segment due to timing.
Timing as discussed.
And the cost of debt adjustment expected from the cost of capital proceeding at the water segment.
The increase in electric revenues was largely due to CPUC approved rate increases.
Effective January 2022, as well as an increase in customer usage as compared to the first quarter up 21.
Turning to slide nine.
Our water and electric supply costs were $23 $3 million for the quarter.
$700000 constant curious that year.
Changes in supply costs for both the water and electric segments as compared to the adopted supply costs are.
Tracked in balancing accounts.
Looking at total operating expenses other than supply costs.
Holiday expenses decreased $3 $2 million as compared to the first quarter of 2021.
Was primary due to a decrease in construction costs at our contracted services segment.
Dosing for a lower construction activity.
Partially offset by increased administrative.
Fences, depreciation and other operating and maintenance costs.
Interest expense net of interest income, but excluding the losses and gains.
Lynn.
Decreased by $566000 due to the early redemption of Golden State water 95, 6% trying to $8 million private placement notes.
In may of 'twenty one.
Partially offset by an overall increase in total borrowing levels to support our capital program.
Slide 10 shows the EPS bridge, comparing the first quarter of 2022 with last years first quarter.
Turning to liquidity on slide 11, net cash provided by operating activities was 30.
$8 million as compared to $24 $7 million in 2021.
During the first quarter of 2020.
Two oh.
Our regulated utility to receive a total of $9 $8 million in Covid relief funds from the state of California to provide assistance to customers for delinquent water electric customer bills.
During the COVID-19 pandemic.
The increase in operating cash flow was also due to differences in the timing of vendor payments.
As well as differences in the timing.
Going off and cash receipts for construction work at military.
Military basis.
Our regulated utility invested $35 $5 million on company funded capital projects during the quarter.
And we estimate our full year 2022 capital expenditure to be $142 million.
Barring any unexpected delays that retailers and fast supply chain issues or the effects of the pandemic.
In April 2022.
American States water's credit facility was amended to increase the borrowing capacity from $200 million to $280 million.
The exploration of the credit facility in May of next year.
Overall this overall increase in total borrowing capacity.
Support among other things the capital program at Golden State water.
With that I'll turn the call back to box.
Thank you Eva.
Before I get into regulatory matters I would just like to reiterate a few factors impacting our first quarter's earnings.
The 2022 water rates been approved consistent with the settlement agreement and implemented on January one 2022.
Gordon State waters earnings contribution for the quarter would have been <unk> <unk> per share higher.
Once the final decision is issued by the CPUC in the general rate case the.
The new rates will be retroactive to January one 2022.
Therefore, we will record the retroactive impact at the time of decision is issued.
So we view this as a timing difference for the year.
We also adjusted the water revenues to reflect the lower cost of debt and Golden state waters pending cost of capital application.
Which decreased the quarterly earnings by <unk> <unk> per share.
The investment loss of <unk> <unk> per share on one of our retirement plans during the first quarter of this year negatively impacted earnings by <unk>.
As compared to last year's first quarter.
We also expect Aes <unk> to catch up on its construction activity during the remaining three quarters.
And we reaffirm our projection that <unk> will contribute 45 to <unk> 49 per share for 2022.
I will now discuss our water general rate case filed in July 2020 to set new rates for the years 2022, 2023 and 2024.
As I mentioned in our last earnings call. We reached a settlement agreement with the public advocates office in November of last year on this general rate case.
Only three issues were not settled.
Let me briefly recap some of the key points in the settlement.
The settlement among other things authorizes Golden state water to invest approximately $404 8 million in capital infrastructure for their three year rate cycle.
The amounts included in the settlement agreement if approved.
Would increase the 2022 adopted revenues.
By approximately $333 million.
As compared to the 2021 adopted revenues.
An increase of 2022 adopted supply costs by $9 $7 million.
As compared to the 2021 adopted supply costs.
The three issues not included in the settlement agreement were contested through the briefing process.
Rather than hearings.
That include Golden State water company's request for medical cost balancing account.
General liability insurance cost balancing account.
And consolidation of two other companies smaller customer services areas for ratemaking purposes.
We are disappointed that we have not seen a proposed decision.
As we mentioned the delay negatively impacted our earnings by a net <unk> <unk> per share for the quarter.
But since the new water rates will be effective January one 2022.
We will record the retroactive revenues and expenses during the quarter in which the final decision is issued by the CPUC.
A proposed decision is expected in mid 2022.
Furthermore, Golden State water completed $9 $4 million of capital projects from the prior rate case recently approved by the CPUC for revenue recovery through advice letters.
Also included in the pending general rate case.
The additional annual revenue requirements generated from these advice letter capital investments.
Our $1 $2 million and became effective February 15th of this year.
Next I will discuss the cost of capital case Golden State water filed their cost of capital application with the CPUC in may of 2021.
Requesting a capital structure of 57% equity and 43% debt.
A return on equity of 10, 5%.
And embedded cost of debt of five 1%.
And our return on rate base of $8 one 8%.
Hearings are set to start today.
The cost of capital will be effective for the years 2022 through 2024.
Once approved by the CPUC that revenues will be reset based on the new cost of capital, which will be retroactive to January one of this year.
The proposed decision is expected in the second half of 2022.
In the first quarter, we recorded a reduction to revenues of $1 $4 million or <unk> <unk> per share.
To reflect the estimated revenue impact of a lower cost of debt of five 1% as requested in our cost of capital application.
As compared to six 6% included in 2021 rates.
Currently build to water customers.
They're really electric is scheduled to file its general rate case in June to set new rates for the years 2023 through 2026.
I will now discuss the drought situation in California.
As of April 26.
The U S drought monitor reported that 41% of California was considered an extreme drought.
Now the Formula is experiencing a record drought in calendar 2022 with precipitation from January to March.
Is the driest on record for this three month period.
Due to deteriorating conditions, the California Department of water resources reduce the allocation of state water project water from 15% to 5% on March 18th.
On April 26th the Metropolitan Water District of Southern California, where MW D declared a water supply emergency condition for the state water project dependent areas.
This will impact Golden State Water's Simi Valley, and Claremont service areas.
Which utilize a portion of their supply from the state water project.
This action also includes a phased emergency conservation program.
Limits outdoor watering in those areas to one day per week.
Should necessary demand reductions not be realized.
M. W. D will move to zero outdoor watering days later in the summer.
In addition on March 28, the Governor of California issued an executive order, calling on all urban water suppliers to reduce water use by 20% to 30% compared to water use in 2020.
Golden State water will be working with its local suppliers to assess water supply conditions and water use restrictions in its service areas and intends to make appropriate adjustments as needed.
In 2021, the CPUC authorized Golden state water to track incremental drought related costs and a <unk>.
Memorandum account for future recovery.
Turning our attention to slide 16.
We present the growth in Golden State Water's average rate base as authorized by the CPUC for 2018 through 2021.
The weighted average rate base has grown from $752 $2 million in 2000 $18 million to $984 million in 2021.
Based on the general rate case settlement agreement.
The 2022 rate base amount is $1 billion $152 $3 million.
Which if approved.
It would result in a compound annual growth rate in rate base.
11, 3% since 2018.
The rate base amounts shown for 2021 and 2022 do not include any rate recovery for advice letter projects.
Let's move on to <unk>, which had earnings of <unk> <unk> per share for the first quarter of 2022 as compared to <unk> 12 per share.
For the same period in 2021.
The decrease was largely due to timing differences and construction and activity between the two periods.
Partially offset by increased management fees and lower overall operating expenses.
Again, we reaffirm our projection that <unk> will contribute 45 to <unk> 49 per share.
For 2022.
The completion of filings for economic price adjustments requests for equitable adjustment asset transfers.
And contract modifications awarded for new projects provide.
<unk> provides <unk> with additional revenues in dollar margin.
We remain confident that we can effectively compete for new military base contract awards in the future.
Based on our proven track record of managing water and wastewater related services for military basis since 2004.
We're actively involved in various stages of the proposal process at a number of other bases considering privatization.
In the U S government is expected to release additional bases for bidding over the next several years.
I would like to turn our attention to dividends.
Last week, our board of directors approved a second quarter dividend of $36.05 per common share.
In 2021, our board increased the annual dividend from $1 34 per share to $1 46 per share.
An increase of 9%.
Over the last 10 years our.
Our dividend compound annual growth rate of nearly 10%.
<unk> with our policy to achieve a compound annual growth rate in the dividend of more than 7%.
Over the long term.
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 67 year history of annual dividend increases.
Which places us in an exclusive group of companies on the New York Stock Exchange.
Which have achieved that result.
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.
We will now take your questions to ask a question you May Press Star then one on your telephone keypad.
If 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 the roster.
We will begin with a question from Angie <unk> with Seaport. Please go ahead.
Thank you.
Okay. So maybe starting with the cost of capital proceeding so you've lowered your Oh, you lowered your first quarter earnings teleconference at a lower cost of debt.
Can you comment about.
Your comment on the the equity layer and the potential increase in ROE. So maybe like a rule of thumb any every 10 bips of an increase in the ROE how big an earnings impact it could have and also how the separate question is just 7% equity layer.
Compares to the actual equity that you currently have.
Okay, well I'll start with the equity piece.
I mean, we were requested 57% equity in the case, that's what our actuals have shown historically.
Public Advocate's report recommends equity layer of $56 eight 5%. So we're.
Pretty close on that.
Okay, and then every candidate of an increase in the ROE how big of an earnings impact that would have.
I think Angie.
If there are changes by 10 basis point, we're thinking about either the over one set oh.
Pat for everything.
At this point.
Okay, Okay, because cause you guys again, maybe I'm just.
Too optimistic who knows but yeah.
You lowered your numbers with a lower cost of equity, but without any.
Central offset that comes from.
You know that the hypertension high are we I know that that's more and more conservative approach, but but again that's sort of.
States your earnings versus those of your peers that the stats on Susquehanna is concerned so may I am going to say about that.
That sub debt.
That's even though it is difficult to predict the final outcome of the pending sale.
Fishing, and however, given the significant increasing our cost of debt component alone.
Decreased six 6% to five 1% this proceeding and we're pretty close to all of our HR compensation. So that the 150 basis point difference in that and in a high probability that piece being approved and we will have to refund to customers. That's why it was quite at what point.
$4 million for the lower cost of debt piece only in Q1, because it's pretty it's fairly certain.
No at this point.
And you know it will be retroactive to January but that's why we booked it in the first quarter.
With regard to the other items.
And catch up to it.
We cannot predict the outcome of the ILD, especially.
The cap structure.
At close we think or when that piece, but let's say the final decision. So.
So some information become more available or revised estimate along the way Oh.
I think we are booked at cost of debt, which is great.
Uh huh.
Okay. Okay, that's fine and then secondly.
On the electric side, so I understand that you're going to file a rate case in June .
There was no growth in earnings in the first quarter can you talk about your expectations for the entire 2022 given that it's the last year of the current rate cycle would you.
<unk>.
Some earnings growth for the electric segment year over year.
Yeah.
Accurately point out that it.
It is the last year the rate cycle. So you wouldn't expect as much growth I would say in this.
In this case you are five as you would see in earlier years.
The other part of that is we are spending money on wildfire mitigation expenditures and those have.
So we're spending them in advance of getting them in and rate recovery. So.
Those will be included in the general rate case that we file.
And in.
Jude.
Okay, and then the last thing.
The earnings.
The pension.
The performance of.
Parts of your pension funds.
<unk>, that's a year over year heads, but can you see how.
That compares to for instance.
Your annual expectations I know that you don't issue guidance, but.
How does that.
Look versus what you had hoped for or 'twenty to 'twenty two.
Well you know what it was starting out the year, we didn't expect.
What's happened in the stock market over the course of the first three months of the year. So we did.
No we generally typically expect a.
Net positive from the assets there.
And these things this is a timing difference we hope.
Maybe you know better than we are.
What's the prospects for the S&P 500.
But.
Yeah. So this is a timing last year 2021, we had a very nice gain on those assets. So these things are.
They do bounce around from year to year.
And then just circling back to the cost of capital in California.
You mentioned the hearings are starting.
Typically settlement happens happen before those hearings begin.
Now given that the.
The record in this case was based on.
On a completely different interest rate environments, all dimension valuations of water stocks I mean is it fair to say that you might be actually better off having this case will be litigated.
That is more reflective of the current interest rate environment.
It's Angie it's difficult to handicap that to be honest.
First of all you do have an opportunity to continue to work on settlement.
I think the way the rules are written you have up until 30 days after the completion of the hearings to settle the case so.
Continue continued discussions are ongoing.
Yeah. So it's.
So you've got a relatively new commission with a couple a couple of new commissioners there. So.
Again really difficult to handicap, whether the.
Whether it will get a better outcome by litigating it but it.
You do make a very valid point that interest rates have moved up since we've filed our testimony.
And that should help.
I think didn't get a positive outcome here I'm, not saying, we will do better than the $8 nine but.
I think the rising interest rate environment can always help the utilities in this case.
Yep.
Thank you.
Thank you Angie.
Our next question comes from Jonathan Reeder with Wells Fargo. Please go ahead.
Hey, Bob and Eva how are you all today.
Okay. Thank you Jonathan.
Thank you.
Oh not too bad.
On the <unk> it sounds like Youre not expecting a final decision until Q3 at earliest just wondering if you have a sense of what the impact.
The second quarter might be presumably it's greater than Q1 <unk>.
Yes.
I think well.
Well, we don't have to go to have a number do we Eva but yes, I think youre right in terms of it will be greater than nine cents because.
More usage in.
Q2 than Q1 right.
Okay, and then just my other question Couldnt adverse outcome and the cost of capital proceeding.
Namely around the ROE.
Impact that goal of 7% plus.
Dividend CAGR over the long term or do you think the board would.
It would be comfortable letting the dividend payout ratio increase a bit, especially given the strength of the balance sheet.
Having external equity needs.
Yeah, I would think Jonathan that the board would.
Take into account our payout ratio is real solid and theirs.
We look we look at other water utilities, we look at the electrics that are highly regulated and the highly regulated gas companies.
We as an industry in the water space are at the lower end of those payout ratios. So.
I would think that.
If we got a negative outcome, we would still be pretty focused on meeting our dividend target of more than 7% and theirs.
Quite a bit of headroom in that payout ratio.
Right, Okay, well, hopefully hopefully it doesn't come to that hopefully this rising interest rate environment does help you guys. So good luck is the hearings continue on today and in the rest of the week.
Look forward to seeing what comes out of it.
Thank you John .
Again, if you have a question. Please press Star then one.
This concludes our question and answer session I would like to turn the conference back over to Bob.
Ross for any closing remarks.
Thank you Joe I, just wanted to wrap it up today by thanking all of you for your participation today and letting you know that we look forward to speaking with you and then.
For the next quarterly earnings call.
Thank you all very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
[music].
Ladies and.
Gentlemen, thank you for standing by and welcome to the American States Water Company Conference call discussing the company's first quarter 2022 results.
This call is being recorded and if you would like to listen to the replay of this call. It will begin this afternoon at five P. M. Eastern time and run through until Tuesday may 10th 2022 on the company's website at Www Dot a S water dot com.
Slides that the company will be referring to are also available on this website.
After today's presentation there'll be time for a question and answer session to ask a question you May Press Star then one to remove a question you May Press Star then two should you need any assistance. Please signal a conference specialist by pressing the star key followed by zero.
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 maybe forward looking statements intended to qualify for the safe Harbor from liability established by the private Securities Litigation Reform Act of $19 95.
Please review a description of the company's risks and uncertainties in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission. In addition, this conference call will include a discussion of certain measures that are not prepared in accordance with generally accepted accounting principles or GAAP in the United States.
And constitute non-GAAP financial financial measures under the 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.
Thank you Joe.
Welcome everyone and thank you for joining us today.
I'll begin with some brief comments on the quarter.
Bill will then discuss some financial details.
And then I'll wrap it up with some further thoughts on the quarter.
Dates on regulatory filings California's drought condition.
U S.
Dividend and then we will take your questions.
This was a unique quarter with earnings per share coming in lower than the first quarter last year due to timing issues with receiving a final decision from the California Public Utilities Commission or CPUC Hunter.
On our water general rate case at Golden State water.
Eva will discuss these results in detail.
We continue to deliver high quality water wastewater and electric services to customers during the quarter.
We are making good progress on our goal to spend the $140 million to $160 million this year.
On infrastructure investment at our regulated utilities that.
That we discussed during the year end call.
<unk>, the pipes, well hydrants tanks power lines and more that our customers need for the long term.
Along with awaiting a decision from the CPUC in Golden State Water's General rate case.
We are also actively involved in processing our cost of capital application.
In fact hearings begin today in that application.
We also strengthened the leadership at <unk> with the addition of Chris Connor, who joined the company as senior Vice President.
And was previously at Jacobs Engineering.
Chris brings a strong leadership background and among other things proven business development and sales track record working with the department of defense.
I will now turn the call over to Eva.
Thank you Bob Hello, everyone.
Let me start with our first quarter financial and talent.
Consolidated earnings.
<unk> per share as compared to 52.
Yeah.
The delay in receiving a final decision, depending what NTIC mentioned by Bob revenue, while the revenue tailwind recorded first quarter of 'twenty two.
'twenty one adopted.
Has it.
In apparel.
On January one this year.
Okay.
With the November 'twenty, one settlement agreement.
We can go let's say water and the topic advocate office at the CPUC.
Go ahead, and say why there would have been recorded.
Avenue.
$6 3 million electron.
Sure.
In addition, a lot of the supply cost of $1 6 million alright. Thank.
Thank you for that.
First quarter of 2009 period.
Included including the additional revenues that water supply costs consolidated adjusted guidance.
Nice quarter.
I can tell you why <unk> tanker two or 47 per share.
Well, what I attribute that CBOE Golden State water company, and <unk> <unk> per share as compared to <unk> <unk> per share last year.
Included in the results for the first quarter of 2022.
Losses of $1 7 million dollar plus <unk> <unk> per share.
Hello.
One of the company's retirement plan assets.
Compared to gains of $628000 or <unk> 10 per share for the same period in 2021.
Excluding the gains and losses on investments on both periods.
Diluted earnings at the water segment for the quarter were 26 cents per share as compared to adjusted earnings.
<unk> per share for the same period in 2000.
Right.
Adjusted increase of six cents per share.
Also included in the rig count for the first quarter of this year like a $1 4 million gallon reduction in revenue.
Or <unk> <unk> per share to reflect the estimated impact of a lower cost of debt, including Golden state water handling cost of capital application.
There were also increases in operating expenses and the effective income tax rate, partially offset by lower interest expense.
Our electric segment earnings for three months period ended ending March 31, 2022, and 'twenty one.
<unk> per share an increase in electric revenue.
Offset by higher operating expenses.
Okay.
Contracted services segment increased to four <unk> per share for the quarter largely due to a decrease in construction activity.
As a result of timing differences.
Partially offset by an increase in management fee and no way over our operating expenses.
Consolidated revenue for the first quarter of 2022 decreased by $8 $5 million as compared to the same period in 2021.
The decrease was mostly due to lower contracting activity at our contracted services segment.
As discussed.
And the cost of debt I guess may expected from the cost of capital proceeding at the water segment.
The increase in electric revenues was largely due to CPUC approved rate increases.
Effective January 2022, as well as an increase in customer usage as compared to the first quarter up 21.
Turning to slide nine.
Oh, Wow and electric supply costs were $23.
The $8 million for the quarter, an increase of $700000 constant curious last year.
Changes in supply costs for both the water and electric segments as compared to the adopted supply costs are.
Tracked in balancing accounts.
Looking at total operating expenses other than supply costs.
Validate expenses decreased $3 2 million.
Compared to the first quarter of 2021. This was primarily due to a decrease in construction costs at our contracted services segment, resulting from lower construction activity.
Partially offset by increase in administrative and general expenses, depreciation and other operating and maintenance costs.
Interest expense net of interest income, but excluding the losses and gains.
Excellent.
Decreased by $566000 due to the early redemption of Golden State water 95, 6% trying to $8 million private placement note.
In may of 'twenty one.
Partially offset by an overall increase in total borrowing level to support our capital program.
Slide 10 shows the EPS bridge, comparing the first quarter of 2022 with last year's first quarter.
Turning to liquidity on slide 11, net cash provided by operating activities was $38 million as compared to $24 $7 million in 2021.
During the first quarter of 2022.
Our regulated utility to receive a total of $9 $8 million in Covid.
But from the state of California to provide assistance to customers for the linked clinic water electric customer bills incurred during the COVID-19 pandemic.
The increase in operating cash flow was also due to the differences in the timing of vendor payments.
Well as differences in the timing of selling off.
And cash receipts for construction work at military bases.
Our regulated utility invested $35 $5 million on company funded capital projects during the quarter.
We estimate our full year 2022 capital expenditure to be $148 million.
Barring any unexpected delays retailers and fast supply chain issues or the effects of the pandemic.
In April 2022.
American States water's credit facility was amended to increase the borrowing capacity from $200 million to $280 million to the exploration of the credit facility in may of next year.
This overall increase in total borrowing capacity.
Support among other things the capital program at Golden State water.
With that I'll turn the call back to Bob.
Thank you Eva.
Before I get into regulatory matters I would just like to reiterate a few factors impacting our first quarter's earnings.
In 2022 water rates been approved consistent with the settlement agreement and implemented on January one 2022.
Golden State waters earnings contribution for the quarter would have been <unk> <unk> per share higher.
Once the final decision is issued by the CPUC in the general rate case.
The new rates will be retroactive to January one 2022.
Therefore, we will record the retroactive impact at the time of decision is issued.
So we view this as a timing difference for the year.
We also adjusted the water revenues to reflect the lower cost of debt and Golden state waters pending cost of capital application.
Which decreased the quarterly earnings by <unk> <unk> per share.
The investment loss of <unk> <unk> per share on one of our retirement plans during the first quarter of this year negatively impacted earnings by <unk> as compared to last year's first quarter.
We also expect Aes <unk> to catch up on its construction activity during the remaining three quarters.
And we reaffirm our projection that <unk> will contribute 45 to <unk> 49 per share for 2022.
I will now discuss our water general rate case filed in July 2020 to set new rates for the years 2022, 2023 and 2024.
As I mentioned in our last earnings call.
We reached a settlement agreement with the public advocates office in November of last year on this general rate case.
Only three issues were not settled.
Let me briefly recap some of the key points in the settlement.
The settlement among other things authorizes Golden state water to invest approximately $404 8 million in capital infrastructure further three year rate cycle.
The amounts included in the settlement agreement if approved would increase the 2022 adopted revenues.
By approximately $333 million.
As compared to the 2021 adopted revenues.
And increased the 2022 adopted supply costs by $9 $7 million.
As compared to the 2021 adopted supply costs.
The three issues not included in the settlement agreement, we are contesting through the briefing process.
Rather than hearings.
That include Golden State water company's request for a medical cost balancing account.
General liability insurance cost balancing account.
And consolidation of two of the company's smaller customer services areas for ratemaking purposes.
We are disappointed that we have not seen a proposed decision.
As we mentioned the delay negatively impacted our earnings by a net of <unk> <unk> per share for the quarter.
But since the new water rates will be effective January one 2022, we will record the retroactive revenues and expenses during the quarter in which the final decision is issued by the CPUC.
A proposed decision is expected in mid 2022.
Furthermore, Golden State water completed $9 $4 million of capital projects from the prior rate case recently approved by the CPUC for revenue recovery through advice letters.
Also included in the pending general rate case.
The additional annual revenue requirements generated from these advice letter capital investments are.
Our $1 $2 million and became effective February 15th of this year.
Next I will discuss the cost of capital case.
Golden State water filed their cost of capital application with the CPUC in May of 2021.
Requesting a capital structure of 57% equity and 43% debt.
A return on equity of 10, 5%.
And embedded cost of debt of five 1%.
And our return on rate base of $8 one 8%.
The hearings are set to start today.
The cost of capital will be effective for the years 2022 through 2024.
Once approved by the CPUC that revenues will be reset based on the new cost of capital, which will be retroactive to January one of this year.
The proposed decision is expected in the second half of 2022.
In the first quarter, we recorded a reduction to revenues of $1 $4 million or <unk> <unk> per share.
To reflect the estimated revenue impact of a lower cost of debt of five 1% as requested in our cost of capital application.
As compared to six 6% included in 2021 rates.
Currently build to water customers.
Valley Electric is scheduled to file its general rate case in June to set new rates for the years 2023 through 2026.
I will now discuss the drought situation in California.
As of April 26.
The us drought monitor reported that 41% of California was considered an extreme drought.
Now the <unk> is experiencing a record drought in calendar 2022 with precipitation from January to March is.
Is the driest on record for this three month period.
Due to deteriorating conditions, the California Department of water resources reduced the allocation of state water project water from 15% to 5% on March 18th.
On April 26, the Metropolitan water district of Southern California, where MW D declared a water supply emergency condition for the state water project dependent areas.
This will impact Golden State Water's Simi Valley Clermont service areas.
Which utilize a portion of their supply from the state water project.
This action also includes a phased emergency conservation program.
That limits outdoor watering in those areas to one day per week.
Should necessary demand reductions not be realized.
M WD will move to zero outdoor watering days later in the summer.
In addition on March 28, the Governor of California issued an executive order, calling on all urban water suppliers to reduce water use by 20% to 30% compared to water use in 2020.
Golden State water will be working with its local suppliers to assess water supply conditions and water use restrictions in its service areas and intends to make appropriate adjustments as needed.
In 2021, the CPUC authorized Golden state water to track incremental drought related costs and a memorandum account for future recovery.
Turning our attention to slide 16.
We present the growth in Golden State Water's average rate base as authorized by the CPUC for 2018 through 2021.
The weighted average rate base has grown from $752 $2 million in 2000 $18 million to $984 million in 2021.
Based on the general rate case settlement agreement the.
The 2022 rate base amount is $1 billion $152 $3 million.
Which if approved.
Would result in a compound annual growth rate in rate base.
The 11, 3% since 2018.
The rate base amounts shown for 2021 and 2022.
Do not include any rate recovery for advice letter projects.
Let's move on to <unk>, which had earnings of <unk> <unk> per share for the first quarter of 2022 as compared to <unk> 12 per share.
For the same period in 2021.
The decrease was largely due to timing differences and construction and activity between the two periods.
Partially offset by increased management fees and lower overall operating expenses.
Again, we reaffirm our projection that.
<unk> will contribute 45 to <unk> 49 per share.
For 2022.
The completion of filings for economic price adjustments requests for equitable adjustment asset transfers.
And contract modifications awarded for new projects provide.
<unk> provides <unk> with additional revenues in dollar margin.
We remain confident that we can effectively compete for new military base contract awards in the future.
Based on our proven track record of managing water and wastewater related services for military basis since 2004.
We're actively involved in various stages of the proposal process at a number of other bases considering privatization.
In the U S government is expected to release additional bases for bidding over the next several years.
I would like to turn our attention to dividends.
Last week, our board of directors approved a second quarter dividend of $36.05 per common share.
In 2021, our board increased the annual dividend from $1 34 per share to $1 46 per share and.
An increase of 9%.
Over the last 10 years our.
Our dividend compound annual growth rate of nearly 10%.
Insistent with our policy to achieve a compound annual growth rate in the dividend of more than 7%.
Over the long term.
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 67 year history of annual dividend increases.
Which places us in an exclusive group of companies on the New York Stock Exchange whichever.
Which have achieved that result.
I'd like to conclude our prepared remarks by thanking you for your interest in American States water.
And we'll now turn the call over to the operator for questions.
We will now take your questions to ask a question you May Press Star then one on your telephone keypad.
If 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 the roster.
We will begin with a question from Angie <unk> with Seaport. Please go ahead.
Thank you, okay. So maybe starting with the cost of capital proceeding so you've.
Lowered your.
You lowered your first quarter earnings teleconference at a lower cost of debt.
Can you comment about can you comment on the equity layer.
The potential increase in the ROE, So maybe like a rule of thumb.
And every 10 steps of an increase in the ROE how big an earnings impact it could have and also how the separate question is 57% equity layer compares to the actual equity that you currently have.
Okay, well I'll start with the equity piece.
We have a requested 57% equity in the case thats, what our actuals have shown historically.
Public Advocate's report recommends equity layer of 50, 685% so.
Pretty close on that.
Okay, and then every candidate of an increase in the ROE how big of an earnings impact that would have.
I think Angie.
If there are any changes by 10 basis point, we're thinking about either the overweight.
No earnings impact for every change of 10 basis points.
Okay, Okay, because because you guys again, maybe.
Too optimistic who knows but yeah.
Our Q1 numbers for the lower cost of equity, but without any.
A potential offset that comes from.
Potentially.
I know that that's more a more conservative approach.
And that's sort of understates your earnings versus those of your peers that have signs that Susquehanna is concerned so may I going to pay down debt.
Yes Angie.
As you know it's difficult to predict the final outcome of the pending.
Efficient and.
Given the significant increase in our cost of debt component alone.
<unk> decreased six 6% to five 1% in this proceeding and we're pretty close to all of our HR compensation. So that's 150 basis point difference there.
And in a high probability that piece being approved and we will have to refund to customers and that's why I quoted at $1.4 million.
For the lower cost of debt.
Only in Q1, because it's pretty it's fairly.
No at this point.
And you know it.
It will be retroactive to January that's why I went positive in the first quarter.
With regard to the other items.
And catch up to you at this time, we cannot predict the outcome of the ILD essentially.
The cap structure.
Pretty close we think.
With that piece.
But let's say the final decision so.
So some information become more available or revised estimate along the way.
I think we are booked at cost of debt, which is at this time.
Okay. Okay. That's fine and then secondly on the electric side, so I understand that you're going to file a rate case in June .
There was no growth in earnings in the first quarter can you talk about your expectations for the entire 2022 given that it's the last year of the current rate cycle would you expect.
Some earnings growth for the electric segment year over year.
Yeah.
Accurately point out that.
It is the last year the rate cycle. So there.
Didn't expect as much growth I would say in <unk>.
This case year five as you would see in earlier years.
The other part of that is we are spending money on wildfire mitigation expenditures and those have.
So we're spending a minute advance of getting them in and rate recovery. So those will be included in the general rate case that we file.
In June .
Okay, and then the last thing.
The earnings from the kitchen.
The performance of.
Parts of your pension funds.
<unk>, that's a year over year heads, but can you say how.
That compares to for instance.
Our annual expectations I know that you don't issue guidance, but how.
How does that.
You know look versus what you had hoped for for 2022.
Well you know what it was starting out the year, we didn't expect.
As happened in the stock market over the course of the first three months of the year. So.
We generally typically expect.
For a net positive from the assets there.
<unk>.
And these things this is a timing difference we hope.
Maybe you know better than we are.
What's the prospects for the S&P 500, our [laughter], but.
Yes.
Timing last year 2021, we had a very nice gain on those assets. So these things are.
They do bounce around from year to year.
And then just circling back to the cost of capital in California.
No.
You mentioned the hearings are starting.
Typically settlement happens happen before those hearings begin.
Now given that.
The record in this case was based on.
On a completely different interest rate environment, Bob mentioned valuations of Warner stocks I mean is it safe to say that you might be actually better off having this case will be mitigated because it's going to be.
<unk> been more reflective of the current interest rate environment.
Angie, it's difficult to handicap that to be honest.
First of all you do have an opportunity to continue to work on settlement.
I think the way the rules are written you have up until 30 days after the completion of the hearings to settle the case so.
Continuous continued discussions are ongoing.
Yes.
So you've got a relatively new commission with a couple a couple of new commissioners there. So.
Again really difficult to handicap, whether the.
Whether it will get a better outcome by litigating it but.
You do make a very valid point that interest rates have moved up since we filed our testimony.
And that should help.
I think didn't get a positive outcome here I'm, not saying, we will do better than the $8 nine but.
I think the rising interest rate environment can always help the utilities in this case.
Yeah.
Thank you.
Thank you Angie.
Our next question comes from Jonathan Reeder with Wells Fargo. Please go ahead.
Hey, Bob and Eva how are you all today.
Okay. Thank you Jonathan how are you.
Oh not too bad.
So on the <unk> and it sounds like Youre not expecting a final decision until Q3 at earliest just wondering if you have a sense of what the impact.
The second quarter might be presumably it's greater than Q1 <unk>.
I think.
Well, we don't have to go to have a number do Eva but yes, I think youre right in terms of it will be greater than nine because.
More usage in.
Q2 than Q1 right.
Okay, and then just my other question Couldnt adverse outcome and the cost of capital proceeding.
Namely around the ROE.
Impact that goal of 7% plus.
Dividend CAGR over the long term or do you think the board would.
It would be comfortable letting the dividend payout ratio increase a bit, especially given the strength of the balance sheet.
Having external equity needs.
Yes, I would think Jonathan that the board would.
Take into account our payout ratio is real solid and theirs.
We look we look at the other water utilities, we look at the electrics that are highly regulated and.
Highly regulated gas companies.
We as an industry in the water space are at the lower end of those payout ratios. So.
I would think that.
If we if we got a negative outcome, we would still be pretty focused on meeting our dividend target of more than 7% and there is.
Quite a bit of headroom in that payout ratio.
Right Okay.
Hopefully hopefully.
Hopefully it doesn't come to that hopefully this rising interest rate environment does help you guys. So good luck is the hearings continue on today.
Rest of the week.
Look forward to.
And what comes out of it thank.
Thank you Jonathan.
Again, if you have a question. Please press Star then one.
This concludes our question and answer session I would like to turn the conference back over to bumps.
<unk> for any closing remarks.
Thank you Joe I, just wanted to wrap it up today by thanking all of you for your participation today and letting you know that we look forward to speaking with you.
For the next quarterly earnings call.
Thank you all very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.