Q2 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 second quarter 2022 results.
The call is being recorded.
If you'd like to listen to a replay of this call. It will begin this afternoon at five PM Eastern time and run through Tuesday August nine 2010, which is on the company website Www Dot E S water dot com.
The slides that the company will be referring to are also available on the website.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one with Samsung.
Can you try your question. Please press Star then two.
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 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 liability established by the private Securities Litigation Reform Act of 1995. Please.
Please review the description of the company's risks and uncertainties in our most recent Form 10-K and Form 10-Q on file with Securities and Exchange Commission and.
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.
It states and constitute non-GAAP financial measures under SEC rules as non-GAAP financial measures are derived from consolidated financial information, but are not presented in our financial statements are prepared in accordance with GAAP.
For details please refer to the press release.
At this time I would like to turn the call over to Bob Sprowls, President and Chief Executive Officer of American States Water company, Sir you may begin.
Thank you Chad welcome everyone and thank you for joining us today.
I'll begin with some brief comments on the quarter.
Eva will then discuss some financial details.
And now I'll wrap it up with some further thoughts on the quarter.
Based on regulatory activity.
California's drought.
Yes.
Dividend and then we will take your questions.
Before I provide some highlights on the second quarter result, I am pleased to report that last week, our board approved another sizable dividend increase.
The annualized dividend rate. After this increase is $1 59 per share.
Which represents nearly a 9% increase from the current annualized dividend rate of $1 46 per share.
This action marks the 345.
Second if dividend payment by the company.
American States has paid dividends every year since $19 31.
Increasing the dividends received by shareholders each calendar year now for 68 consecutive years.
Okay.
Now onto the second quarter results.
Like the first quarter of this year this was a unique quarter with.
With the earnings per share decrease from the prior year second quarter.
This was in large part due to losses incurred on our investments to fund one of the company's retirement plans.
As compared to gains in the same period of 2021.
As well as timing issues with receiving a final decision from the California Public Utilities Commission.
The CPUC.
On our water general rate case at Golden State water.
Excluding the gains and losses on investments from both periods.
And including the additional revenues and water supply costs.
From the delay in the water general rate case.
In our second quarter results.
Adjusted consolidated diluted earnings for the second quarter of 2022 were <unk> 71 per share as compared to adjusted diluted earnings.
69 per share for the same period in 2021.
At adjusted increase of two cents per share.
Eva will discuss these results in detail.
We continue to deliver high quality water wastewater and electric services to customers during the quarter.
We're making good progress on our goal to spend the $140 million to $160 million this year and.
In infrastructure investments at our regulated utilities that we discussed during previous calls.
<unk> the critical infrastructure that our customers require for the long term.
Along with awaiting a decision from the CPUC and Golden State water General rate case.
We are also actively involved in processing our cost of capital application.
Hearings on this proceeding occurred in may of this year and.
And briefs were filed one month later in June .
Also in June standard <unk> Poors affirmed its AA plus credit rating for both American States water company and Golden State water company.
Although both ratings continue to carry a negative outlook.
With the company's sound capital structure, and a plus credit ratings.
Will enable us to continue accessing debt financing on reasonable terms.
Which we expect to do over the next year.
Eva will provide an update on our financing plans and I will now turn the call over to her.
Thank you Bob Hello, Evan Wang again, thank you for doing that.
Okay.
Starting with our second quarter financial result.
Consolidated accounting is recorded.
Four cents per share compared to 72 cents per share last year.
Chris have a N P and K.
Sure.
Including that $3 $5 million or seven cents per share.
Hello.
We can have an impact.
<unk> got $1 6 million for Q2 last year.
This item alone.
Our favorite right Yep 10 cents per share.
Yeah.
Furthermore, due to the delay in receiving a final decision on the pending water general rate case, while the revenue for 2022 were based on 21 adopted rate.
Has it their way.
Approved.
Okay.
2022, consistent with <unk>.
'twenty one 'twenty one settlement agreement reached between Golden State water and the public advocates office ethics and PUC.
Would have caused an additional avenue.
It was the black Hawk.
I believe that would be even higher.
10 cents per share.
Yeah.
Quite a tight range.
So he's screen of gains and losses on investment theory, and including that revenue that was a surprise costs caused by the delay in the water general rate case in the rig count.
Adjusted consolidated earnings for the second quarter, 2022, 71 cents per share as compared to I can't.
69 cents per share for Q2 of 2021.
That's an increase of two cents per share.
Well why do they typically subsidiary Golden State water company.
That's why 40 cents per share as compared to 57 cents per share last year.
A 14% increase.
Yeah.
Both items as discussed affected at the water segment.
Factoring in the effects founded to either I guess they are named for the second quarter added water segment.
Catherine.
Sure.
With an increase of three cents per share as compared to I guess this thing is up 50 flight answer here, but the same period in 2000.
Why.
Also included in the water segment results for the quarter.
A $1 7 million dollar reduction in revenue.
Alright, three cents per share to reflect our best estimates at this time of revenue subject to refund cargo that they want at Penguin cost of capital application.
This includes the impact of a lower cost of debt.
In this application.
We cannot predict ultimate outcome after cost of capital application and associated impact on 2022 revenues.
Any changes in estimate will be made if necessary at the more information.
Saving becomes it comes available.
There were also increases in operating expenses.
The effective income tax rate.
Okay I'll step back.
Yeah.
The income net other expenses.
Our electric segment earnings for three months period, ending June 32022, and trying to trying to one or four cents per share.
The increase in electric revenues.
Effective income tax rate.
Offset by higher interest expense.
Our needs from arc contracted services segment decreased one cents per share for the quarter, which Bob will discuss later in the call.
Consolidated revenue for the second quarter of <unk> to increase by $5 $2 million as compared to the same period in 2201.
The increase was mostly due to lower construction activities at our contracted services segment.
Timing and other delays as.
Well at that as well.
Our cost of debt at testing they expected.
Cost of capital proceeding at the wireless segment.
Also as mentioned previously while the revenue for the second quarter of 2022 based on kind of what I thought the revenue in Q2, the cpuc's delay dependent why the general rate case.
The increase in electric revenues was largely due to the PUC approved the rate increases.
Since January one 2022, partially offset by a decrease in customer usage.
Thank you it in 2020 one.
Cutting interest like nine Oh, Wow electric supply costs.
$8 $6 million for the quarter.
$600000 from same period of last year.
Any changes in supply costs for both the water and electric segments.
Care to the adopted supply costs are.
Okay.
Looking at total operating expenses other than supply cost consolidated expenses decreased $2 $9 million.
To the second quarter of 2021.
This was primarily due to a decrease in construction costs at our contracted services segment.
And finally, lower construction activities, partially offset by increased.
Other operation and maintenance costs and depreciation expense.
Other income net of other expenses increased by $4 $2 million due to losses.
Hello.
Time and benefit plan as discussed.
This was partially offset by a decrease in the non service cost components related to Golden State Water's benefit plan. Please.
<unk> found lower actuarial losses recognized for the second quarter of 2022.
Slide 10 shows the EPS bridge, comparing the second quarter of 2022 with last year's second quarter.
Moving on Slide 11. This slide reflects our year to date earnings per share by settling as reported.
Fully diluted earnings for six months ended June 32022 were 92% compared to $1 24 for extended periods in 2021.
<unk> per share.
Again, an unfavorable variance of four <unk> per share due to losses of $5 $2 million on debt retirement planning investments this year as compared to gains of $2 $2 million for the same period of last year.
In addition, let's pray.
They discussed how.
The new water rates in the GIC settlement has been approved by the CPUC and implemented on January 1st 2022.
Our earnings would have increased by 19 pence per share.
Excluding the gains and losses on the retirement planning investments from both periods.
As a result of the new water rates on the settlement agreement for the first half of 2022.
Adjusted consolidated earnings for the six months ended June 32000 tons to one dollar.
<unk> 21 per share, which were higher than adjusted earnings of $1 20 per share for the same period last year.
For more details on the year to date retail please refer to yesterday's press release and Form 10-Q.
Turning to liquidity on slide 12, net cash provided by operating activity was.
$56 9 million for the first.
Six months of the year.
Third to $41 1 million footprint period in 2020 to 21.
And already this year.
It relates to utility receive a total of $9 $8 million in COVID-19 relief funds from the state of California to provide assistance to customers for delinquent, while the electric water customer.
Customer bills incurred during the COVID-19 pandemic.
The increase in operating cash was also due to differences in the timing of income tax installment payments between the two periods.
And the timing of selling off and cash receipts for construction work at military bases.
Our regulated utility invested $78 $3 million on company funded capital projects during the first half of 2022.
We are on target to meet the $140 million to $160 million of capital expenditures for the year.
In April 2022, AWS credit facility was amended and increased the borrowing capacity from $200 million to $280 million.
Overall increase in total borrowing capacity will support among other things the capital expenditure program at Golden State water.
This credit facility expires in May of next year with a maturity of less than a year. The outstanding borrowing has been classified as current liabilities. The company consolidated balance sheet as of June 32022.
We expect to lead new extended credit facility prior to expiration date.
In addition, we expect to issue long term debt with Golden State water. Prior to May 2023, and use of that proceeds pay up portion of the outstanding borrowings under this facility.
We believe the company's balanced capital structure, and eight plus credit rating combined with its financial discipline.
To access the debt market.
And put in place a new credit facility with reasonable time before May 2023.
At this time, we do not expect American states water to issue additional equity for the next three years to fund its current businesses.
So 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 key factors impacting our second quarter and year to date earnings.
At 2022 water rates been approved consistent with the settlement agreement in the general rate case.
And implemented on January one 2020 to Golden State Water's earnings contribution for the second quarter would have been <unk> 10 per share higher.
And <unk> 19 per share higher for the first half of 2022.
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 cumulative retroactive impact at the time of decision is issued.
Well, it's unfortunate that the delay in the general rate case has negatively affected our earnings thus far in 2022.
We view this as a timing difference for the year.
We also recorded a reduction to water revenues, which decreased the quarterly and year to date per share earnings by <unk>, <unk> and <unk> respectively.
To reflect our best estimate at this time based on our accounting assessment of revenues subject to refund from the pending cost of capital proceeding filed in May 2021.
Which includes primarily the impact of Golden State water's lower cost of debt requested in its application.
However, at this time, we cannot fully predict the ultimate outcome of the cost of capital application and the associated impact on 2022 revenues.
Changes in estimates will be made if necessary as more information in this proceeding becomes available.
The investment losses on one of our retirement plans during the second quarter and year to date periods of 2022.
Negatively impacted earnings per share by <unk> 10, and.
2014, respectively.
As compared to the same period last year.
We also expect <unk> to catch up on its construction activity during the second half of 2022.
And we reaffirm our projection that <unk> will contribute 45 to <unk> 49 per share for.
For 2022.
With regards to our water general rate case as you know we filed in July 2020 to set new rates for the years 2022, 2023 and 2024.
As mentioned in previous earnings calls.
We reached a settlement agreement with the public advocates office in November of last year on this general rate case.
Only three issues remained.
For more details on this settlement please refer to yesterday's filings.
Of our Form 10-Q.
We are disappointed we have not seen a proposed decision from the CPUC.
As we mentioned the delay negatively impacted our earnings by a net of <unk> 10 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.
The proposed decision is expected in the second half of this year.
Furthermore, Golden State water completed $9 $4 million of capital projects from the prior rate case approved by the CPUC for revenue recovery through advice letters earlier.
Earlier this year.
And also included in the pending general rate case.
The additional annual revenue requirements generated from these capital investments of $1 $2 million.
And became effective February 15th of this year.
Next I'll discuss.
Discuss the cost of capital case.
Golden State water filed our cost of capital application with the CPUC in May 2021.
Requesting a capital structure of 57% equity and 43% debt.
The 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 cost of capital will be effective for the years 2022 through 2024.
Once approved by the CPUC.
The revenues will be reset based on the new cost of capital.
Hearings on this proceeding occurred in May of this year and briefs were filed in June .
The proposed decision is expected in the second half of 2022.
In the second quarter, we recorded a reduction to revenues of $1 $7 million or <unk> <unk> per share.
And $3 $1 million or <unk> <unk> per share for the year to date 2022 to.
Primarily reflects 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 being billed to water customers.
Our electric utility subsidiary is scheduled to file its general rate case in August to set new rates for the years 2023 through 2026.
I will now discuss the drought situation in California.
As of July 26 of last month.
U S drought monitor reported that 60% of California was an extreme drought.
As compared to 89% one year ago.
And 90% of California was in severe drought.
As compared to 95% a year ago.
California is experiencing a record drought in 2022, thus far and.
In the calendar year is projected to end as one of the three driest years on record.
As I mentioned in our last earnings call due to deteriorating conditions.
The California Department of water resources reduced the allocation of state water project.
Or S WP water.
From 15% to 5% on March 18th of this year.
In April the Metropolitan Water district of Southern California, where MW D C.
Declared a water supply emergency condition for the state water project dependent areas.
That impacts Golden State waters Simi Valley in Clermont service areas.
Which utilize a portion of their supply from the state water project.
This action also include a phased emergency conservation program that limits outdoor watering in those areas to one day per week.
In June Golden State water moved all of the other water systems to the second stage of its water rationing plan.
That limits outdoor watering to two days per week.
Golden State water will continue to work with its local suppliers to assess water supply conditions.
And water use restrictions in our service areas and make appropriate adjustments as needed.
Golden State water has been authorized to track incremental drought related costs and a memorandum account for future recovery.
Sure.
Turning our attention to slide 17, we present the growth in Golden State Water's average rate base as authorized by the CPUC.
For 2018 through 2021.
The weighted average water rate base has grown from $752 $2 million in 2018 to.
$984 million in 2021.
Based on the general rate case settlement agreement.
2022 rate base amount.
Is $1 billion $152 $3 million.
Which if approved would result in a compound annual growth rate of 11, 3% since 2018.
The rate base amount 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> 10 per share for the second quarter of 2022 as compared to <unk> 11 per share for the same period in 2021.
The decrease was largely due to timing differences in construction activity.
Between the two periods.
As well as the slowdown caused by longer material supplier lead times.
Weather conditions and other delays.
Partially offset by increased management fees.
Again, we refer 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.
It transfers and contract modifications awarded for new projects provide <unk> with additional revenues and margin.
We are disappointed that we didn't win the award for operating the wastewater system at Naval station Mayport recently issued.
But we remain confident that we can effectively compete for new military base contract awards in the future.
Just on our proven track record of managing water and wastewater related services for military basis since 2004.
I'd like to turn our attention to dividends, which I already touched on earlier in the call.
Last week, we announced an eight 9% increase in the third quarter dividend.
Our quarterly dividend rate has grown at a compound annual growth rate of nine 3% over the last five years.
These increases are consistent with our policy to achieve a compound annual growth rate in the dividend of more than 7% over the long term.
Our strong dividend history is something that the company is proud of.
And as a continuing asset to our shareholders.
This strong track record has allowed us to achieve a nine 2% growth rate in our calendar year dividend payments to shareholders over the last 10 years.
2012 through 2022.
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.
Thank you we will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
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 our roster.
And the first question will come from Angie <unk> from Seaport. Please go ahead.
Thank you.
Just so just wondering.
I mean, what do you think is the reason why you haven't heard from the CPUC yet either on the settlement for your rate case.
Or.
The cost of capital proceeding.
I appreciate that you still expect decisions in both cases.
In the second half as well.
The time is running out.
And again I'm just just wondering if you have an idea of what's been going on.
Sure and MGM Hello.
Yes, so with regard to the general rate case, we were told earlier this year that the assigned administrative law judge was involved in several weeks of evidentiary hearings in another general rate case proceeding.
Unfortunately, those hearings are now over and we understand that the ALJ is now focused on preparing the proposed decision in our water general rate case.
So that covers the general rate case, the cost of capital is a little harder to understand although we just completed the hearings in may in the briefing in in June .
Yeah.
And so we'll just have to see how long it takes for.
Commission to get out a proposed decision in that hearing.
Do you Okay I appreciate I appreciate your comments.
I think that there could be some link.
On the cost of capital side between the when the commission plans to issue on the LNG ALJ plans to issue a proposed decision.
And and that's you know end of September October 1st Mark for the cost of capital adjustment mechanism on the water side.
I mean is it possible that the commission is waiting to see if an adjustment upward adjustment could happen and based on that rule.
This pending cost of capital proceeding.
Yes.
I think it is possible that they may wait until after September 30 to see where the adjustment mechanism.
Comes out because it's pretty close.
As to whether it's going to trigger or not.
<unk>.
But.
The general rate case, they're behind on that so I think theyre just behind too.
Although.
You could craft some strategy behind why they might want to wait until after September 30.
Yes, and could you remind us what is the benchmark against which I'm measuring.
That's a 100 bips band.
Without the adjustment.
Yeah.
Okay.
Double AA utility bond rate, yeah, Yeah benchmark right now is at two 8%.
Yes.
Nine two.
And so you have to be 100 basis points.
I saw that trigger 15 pushed out that okay.
It's an average for the period.
Yeah, Tim it's average.
Yes, well so lately the pullback in rates is not helpful right.
Mark I mean, you said, it's a it's a close call.
Yeah, it's going to be close.
Yeah, Okay. Okay.
To clarify on the rates in 2023, right. So in a sense if they were to law, where the base Roe.
In anticipation of that 50 bps increase that would happen in 'twenty three 'twenty.
'twenty two is still being impacted downwards now correct yes.
ROE in the decision.
Covers the period too.
2022 through 2024, but the adjustment mechanism would apply to 2023.
Yes.
Okay.
Theoretically they should be.
To establish the proper ROE for 2022.
And then once the adjusted adjustment of mechanism do what it what it's going to do.
Yes, Okay and then.
Just separately from so basically just assuming that this cost of capital proceeding is just the <unk>.
Adjustments of the cost of debt.
As Youre currently reflecting in your results and assuming that I guess, you asked does cut shop.
You know for the remainder of the year to have at least well so half say flat earnings year over year.
Given this drag that you were seeing from a from the pension accounts.
Is there any chance you could actually get to flat earnings year over year, I mean, I've been actually looking at it I mean.
I understand that you have no control over the pension.
Four months of your pension funds, but.
But again you did account for benefits from those pension funds and higher earnings.
Kind of torn up.
Is that drag should be excluded and again knowing of the drag that we see thus far.
Any way you can be flat year over year in earnings.
Well, so far as you know the rabbi.
<unk>.
Retirement plan is 10 Thunder.
10 cents of losses to date.
I don't recall, what the gain was last year in the.
$2.
What was the $2 55 last year.
So so we'd have to not only make up the loss of the 10 cents.
We'd also have to make up the gain that we had last year, which I think the S&P was up.
30% in 2000.
21.
Hum.
The rest of the businesses would be to do to make up for that difference for us to get back there I mean, it's possible the market's been better lately. These are June 30 numbers of course, so it's possible.
We think.
<unk> will make up some ground and we think both of our utilities are doing fine but for the delay in the.
Various proceedings.
Okay I understand thank you. Thank you both.
Sandy.
And again, if you have a question please press star one.
The next question will come from Jonathan Reeder from Wells Fargo. Please go ahead.
Hey, Bob and Eva Hope you guys are well today, Hi, Jonathan Johnson. Thank you you too.
So just to clarify one of your earlier comments, Bob do you believe a proposed decision from the ALJ and the <unk> is imminent or do they L. J just kind of start working on it whats kind of the timing of the how far into this drag.
Drafting of the PD.
Yes.
Yeah, I don't think we've heard the word imminent [laughter] and yes. It does.
It always seems to take longer than what one would expect but there.
So there's two parties in this.
Not to get on my Soapbox, but there's two parties in this general rate case, and we have the two parties have signed a settlement agreement.
Frustrating as to okay.
Where does the difficulty here, but.
Hopefully.
We can see something in the next few months I would say.
<unk>.
I don't think we're talking about days I think perhaps we're talking a couple of months.
And so then I mean, it sounds like it's probably not going to be approved in Q3, but assuming that's the case do you know like how much of an EPS do you have it it would be.
The Q3 EPS.
Along the lines of the nine in Q1 and 10000 feet.
In Q2 like how that distribution goes.
Yeah, typically third quarter is higher yes.
Quarter end.
Right.
Pat John and that's.
Let's say that GIC is about 14 for knee high.
Compared to our current but then you'll have to decrease by 15% to 15% of cost of debt adjustment. So the annual impact of about 25.
Netting pack.
So we already incurred a night.
Incurred.
19 minus six so <unk>.
About.
About another 12 protection for that.
Third and fourth quarter.
Another 12 to 13 for the back half of the year from right.
And this is net of the net of the cause of that.
Attachment right the 19th census, not net of nine.
<unk>.
Right Yeah, right. So I guess, we should be looking at is 'twenty, one still for the second half of the year just purely from the JRC, Yes correct.
Cost of debt.
Could that be in Q3, or maybe 75% or something of it.
Okay.
Yes third quarter is typically greater than second quarter right.
So.
Okay. Okay.
I like you I'm hopeful I guess the settlement is approved by the end of the year and then the full year number kind of is what it is but.
I'm just trying to figure out how to adjust Q3. So I appreciate that and then my last question shifting over to as you asking I think the construction activities. During the first six months with only like two thirds of what it was during the same period last year due to the delays and I know you reiterated the guidance range $45.
49 in last year.
<unk> contributed 48, so just kind of seems like potentially a lot of ground to make up in 'twenty two on the construction side like should we be thinking.
More the low end of the range for this year just due to those delays.
Well just a couple of comments on that.
The first quarter of 2021 that was a very strong quarter from a construction activity standpoint relative to other first quarters.
When we look sort of versus last year with a strong first quarter.
Last year.
It was a hard benchmark to hit.
The other point I'll make is we have.
Uh huh.
We have had strong construction in the third and fourth quarter historically.
So we're looking we're looking at making up the difference here.
In the.
Last two quarters, although world is a bit different than it was last year given material.
Pricing and lead times et cetera.
Yes, so we're I mean, we're going to try to bang out as much construction as we can here in the last two quarters.
Don't know, where that's going to put us in that 45% to 49% range.
Okay.
Yeah, we will.
Alright, So you provided an update in Q3 to you Jonathan.
They're right.
But I guess the way you're seeing it today I mean, if things go well you got the materials ordered and stuff like that like you could still execute as you were anticipating for the full year.
I guess, that's fair yeah, Okay, alright, cool well good luck.
Getting some some proposed decisions and constructive ones out of the CPUC Murray, we're eagerly awaiting them.
Thank you Jonathan.
Okay.
Once again, if you have a question. Please press Star then one.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Bob Sprowls for any closing remarks.
Thank you Chad I, just want to wrap it up today by thanking everyone for their participation and let you know that we look forward to speaking with you next quarter.
Thanks, everybody.
Good rest of yourselves.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.
Okay.
Okay.
[music].
[music].
Ladies and gentlemen, thank you for standing by and welcome to the American States Water Company Conference call discussing the company's second quarter 2022 results.
The call is being recorded.
If you'd like to listen to a replay of this call. It will begin this afternoon at five PM Eastern time and run through Tuesday August nine 2022 on the company's website www Dot <unk> dot com.
The slides that the company will be referring to are also available on the website.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on you touched on shop.
Can you try your question. Please press Star then two.
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 90 95.
Please review the description of the company's risks and uncertainties in our most recent Form 10-K and Form 10-Q on file with Securities and Exchange Commission and.
In addition, this conference call will include a discussion of certain measures that are not prepared in accordance with generally accepted accounting principles of our 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 would like to turn the call over to Bob Sprowls, President and Chief Executive Officer of American States Water company, Sir you may begin.
Thank you Chad welcome everyone and thank you for joining us today.
I'll begin with some brief comments on the quarter Eva will then discuss some financial details.
And now I'll wrap it up with some further thoughts on the quarter.
Updates on regulatory activity.
California's drought.
Yes U S.
Dividend and then we will take your questions.
Before I provide some highlights on the second quarter result, I am pleased to report that last week, our board approved another sizable dividend increase.
The annualized dividend rate. After this increase is $1 59 per share.
Which represents nearly a 9% increase from the current annualized dividend rate of $1 46 per share.
This action marks the 345 consecutive dividend payment by the company.
American States has paid dividends every year since $19 31.
Increasing the dividends received by shareholders each calendar year now for 68 consecutive years.
Now onto the second quarter results.
Like the first quarter of this year this was a unique quarter.
With earnings per share decreasing from the prior year's second quarter.
This was in large part due to losses incurred on our investments to fund one of the company's retirement plans.
As compared to gains in the same period of 2021.
As well as timing issues with receiving a final decision from the California Public Utilities Commission.
We're a CPUC.
On our water general rate case at Golden State water.
Excluding the gains and losses on investments from both periods.
And including the additional revenues and water supply costs caused from the delay in the water general rate case.
In our second quarter results.
Adjusted consolidated diluted earnings for the second quarter of 2022 were <unk> 71 per share as compared to adjusted diluted earnings.
About <unk> 69 per share for the same period in 2021.
At adjusted increase of two cents per share.
Steven will discuss these results in detail.
We continued to deliver high quality water wastewater and electric services to customers during the quarter.
We're making good progress on our goal to spend the $140 million to $160 million this year.
In infrastructure investment at our regulated utilities that we discussed during previous calls.
<unk> the critical infrastructure that our customers require for the long term.
Along with awaiting a decision from the CPUC and Golden State water General rate case.
We are also actively involved in processing our cost of capital application.
Hearings on this proceeding occurred in may of this year and.
And briefs were filed one month later in June .
Also in June standard <unk> Poor's affirmed its AA plus credit rating for both American States water company and Golden State water company.
Although both ratings continue to carry a negative outlook.
With the company's sound capital structure, and a plus credit ratings. It will enable us to continue accessing debt financing on reasonable terms.
Which we expect to do over the next year.
Steven will provide an update on our financing plans and I will now turn the call over to her.
Thank you Bob Hello, everyone again, thank you for joining us today.
Let me start with our second quarter financial results.
Consolidated earnings recorded.
<unk> per share compared to 72 cents per share last year.
<unk> 10 per share.
Including assets of $3 $5 million or seven cents per share investments held to fund a retirement plan.
Compared to gains of $1 6 million for Q2 last year.
This item alone.
Unfavorable.
For sure.
Furthermore, due to the delay in receiving a final decision on the pending water general rate case, while the revenue for 2022 were based on 2000.
One adopted rate.
Has it anyway.
Approved and implemented.
Right.
'twenty two.
<unk>.
The 'twenty one 'twenty one settlement agreement reached between Golden State water and the public advocates office efficacy PUC wood and.
And quite an additional avenue.
The water supply cost that would have resulted in higher earnings of 10 cents per share for the second quarter timeframe.
So excluding the gains and losses on investments from both period and including the additional revenue to water supplies costs caused by the delayed in the water general rate case in the rig count.
Adjusted consolidated earnings for the second quarter of 2020 to $1 71 per share as compared to adjusted earnings.
<unk> 59 per.
<unk> per share for Q2 of 2021.
That's an increase of two cents per share.
What are you currently subsidiary Golden State Water company.
Why.
Per share as compared to 57 per share.
Last year.
A 14% increase.
Both items as discussed affected earnings at our water segment.
So factoring in the effect founded to either.
Our NIM for the second quarter added water segment.
<unk> per share.
With an increase of two eight per share as compared to adjusted earnings of <unk> 55 per share for the same period in 2021.
Also included in the water segment results for the quarter.
A $1 $7 million reduction in revenue.
<unk> per share.
Year to reflect our best estimates at this time of revenue subject to refund cargo that they wanted permanent cost of capital application, which includes the impact of a lower cost of debt requested in this application.
We cannot predict ultimate outcome after cost of capital application and associated impact.
Turning to revenue.
Any changes in estimated will be made if necessary at the more information it is perceiving become becomes available.
There were also increases in operating expenses and.
The effective income tax rate.
Partially offset by increases the other income net of other expenses.
Our electric segment's earnings for three months period, ending June 32022, and 2021 or four cents per share.
The increase in electric revenues.
The income tax rate was offset.
Offset by higher interest expense.
Earnings from our contracted services segment increased <unk> <unk> per share for the quarter, which Bob will discuss later in the call.
Consolidated revenue for the second quarter of 2022 increased by $5 $2 million as compared to the same period in 2021.
The increase was mostly due to lower construction activity at our contracted services segment.
<unk> and other delays.
As well as as well as well as the.
Because of that testimony expected.
Cost of capital proceeding at water segment.
Also as mentioned previously while the revenue for the second quarter of 2022 were based on 2000 kind of adopted revenue in Q2, the cpuc's delayed how independent wide agenda.
Hey.
The increase in data revenues was largely due to the PUC approved the rate increases.
Since January one 2022, partially offset by a decrease in customer usage.
Third to the same period in 2021.
Turning into slide nine our water and electric supply costs were $28 $6 million for the quarter.
<unk> thousand 600000.
From same period of last year.
Any changes in supply costs for both the water and electric segment as <unk>.
Sure could adopted supply costs are.
And balancing accounts.
Looking at total operating expenses other than supply cost consolidate expenses decreased $2 9 million as compared to the second quarter of 2021.
This was primarily due to a decrease in construction costs at our contracted services segment.
In fact, lower construction activities, partially offset by increased.
Other operation and maintenance costs and depreciation expense.
Other income net of other expenses increased by $4 $2 million due to losses on investments held for a retirement benefit plan as discussed.
This was partially offset by a decrease in the non service cost components related to Golden State water's benefit plan.
3000 client lower actuarial losses recognized for the second quarter of 2022.
Slide 10 shows the EPS bridge, comparing the second quarter of 2022 with last year's second quarter.
Moving on Slide 11. This slide reflects our year to date earnings per share by segment as reported.
Fully diluted earnings for six months ended June 32292 events compared to $1 24 for extended period in 2021.
The increase of <unk> <unk> per share.
Again, an unfavorable variance of <unk> <unk> per share due to losses of $5 $2 million on debt retirement planning investments this year as compared to gains of $2 2 million for the same period of last year.
In addition, as previously discussed.
A new water rates in the GIC settlement has been approved by the CPUC and implemented on January one 2022.
Earnings would have increased by 19 pence per share.
Excluding the gains and losses on the retirement planning investments from both periods.
And as a result of the new water rates songs settlement agreement for the first half of 2022.
Adjusted consolidated earnings for the six months ended June 32009 to one.
$1 21 per share, which were higher than adjusted earnings of $1 20 per share for the same period last year.
For more details on the year to date results. Please refer to yesterday's press release and Form 10-Q.
Turning to liquidity on slide 12, net cash provided by operating activity was.
$56 9 million for the first six months of the year as compared to $41 1 million footprint period in 2000 2021.
And earlier this year are a regulated utility received a total of $9 $8 million in COVID-19 relief funds from the state.
<unk> of California to provide assistance to customers for delinquent, while the electrical outlet customer.
Customer bills incurred during the COVID-19 pandemic.
The increase in operating cash was also due to differences in the timing of income tax settlement payments between the two periods.
And the timing of selling off and cash receipts for construction work at military bases.
Our regulated utility invested $78 $3 million on company funded capital projects during the first half of 2022.
We are on target to meet our $140 million to $160 million of capital expenditures for the year.
In April 2022, AWS credit facility was amended and increased the borrowing capacity from $200 million.
Two $280 million.
Overall increase in total borrowing capacity was support among other things the capital expenditure program at Golden State water.
This credit facility expires in May of next year with a maturity of less than a year. The outstanding borrowing has been classified as a current liability the company consolidated balance sheet as of June 32022.
We expect to lead new extended credit facility prior to exploration date.
In addition, we expect to issue long term debt with Golden State water. Prior to May 2023, and used the debt proceeds pay up portion of the outstanding borrowings under that facility.
We believe the company's balanced capital structure, and a credit rating combined with its financial discipline will enable.
Enable us to access the debt market.
And put in place at new credit facility with rates and above time before may 2023.
At this time, we do not expect American states water to issue additional equity for the next three years to fund its current businesses.
So 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 key factors impacting our second quarter and year to date earnings.
At 2022 water rates been approved consistent with the settlement agreement in the general rate case and implemented on January one 2020 to Golden State Water's earnings contribution for the second quarter would have been <unk> 10 per share higher.
<unk> 19 per share higher for the first half of 2022.
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 cumulative retroactive impact at the time of decision is issued.
Well, it's unfortunate that the delay in the general rate case has negatively affected our earnings thus far in 2022.
We view this as a timing difference for the year.
We also recorded a reduction to water revenues, which decreased the quarterly and year to date per share earnings by <unk>, <unk> and <unk> respectively.
To reflect our best estimate at this time based on our accounting assessment of revenues subject to refund from the pending cost of capital proceeding filed in May 2021.
Which includes primarily the impact of Golden State water's lower cost of debt requested in its application.
However, at this time, we cannot fully predict the ultimate outcome of the cost of capital application and the associated impact on 2022 revenues.
Changes in estimates will be made if necessary as more information in this proceeding becomes available.
The investment losses on one of our retirement plans during the second quarter and year to date periods of 2022.
Negatively impacted earnings per share by <unk> 10.
In 2014, respectively.
As compared to the same period last year.
We also expect <unk>.
To catch up on its construction activity during the second half of 2022.
And we reaffirm our projection.
<unk> will contribute 45 to <unk> 49 per share.
For 2022.
With regards to our water general rate case as you know we filed in July 2020 to set new rates for the years 2022, 2023 and 2024.
As mentioned in previous earnings calls.
We reached a settlement agreement with the public advocates office in November of last year on this general rate case.
Only three issues remained.
For more details on this settlement please refer to yesterday's filings.
Of our Form 10-Q.
We are disappointed we have not seen a proposed decision from the CPUC.
As we mentioned the delays negatively impacted our earnings by a net of <unk> 10 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.
The proposed decision is expected in the second half of this year.
Furthermore, Golden State water completed $9 $4 million of capital projects from the prior rate case approved by the CPUC for revenue recovery through advice letters earlier.
Earlier this year.
And also included in the pending general rate case.
The additional annual revenue requirements generated from these capital investments of $1 $2 million.
And became effective February 15th of this year.
Next I will discuss the cost of capital case.
Golden State water filed our cost of capital application with the CPUC in May 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 eight 8%.
The cost of capital will be effective for the years 2022 through 2024.
Once approved by the CPUC.
The revenues will be reset based on the new cost of capital.
Hearings on this proceeding occurred in May of this year and briefs were filed in June .
The proposed decision is expected in the second half of 2022.
In the second quarter, we recorded a reduction to revenues of $1 $7 million or <unk> <unk> per share.
And $3 $1 million or <unk> <unk> per share for the year to date 2022.
To primarily reflects the estimated revenue impact of a lower cost of debt of five 1%.
As requested in our cost of capital application as.
As compared to six 6% included in 2021 rates.
Currently being billed to water customers.
Our electric utility subsidiary is scheduled to file its general rate case in August to set new rates for the years 2023 through 2026.
I will now discuss the drought situation in California.
As of July 26 of last month.
The us drought monitor reported that 60% of California was an extreme drought.
As compared to 89% one year ago.
And 90% of California was in severe drought.
As compared to 95% a year ago.
California is experiencing a record drought in 2022, thus far.
And the calendar year is projected to end as one of the three driest years on record.
As I mentioned in our last earnings call due to deteriorating conditions.
The California Department of water resources reduced the allocation of state water project.
Or S WP water.
From 15% to 5% on March 18th of this year.
In April the Metropolitan Water district of Southern California, where MW D.
Declared a water supply emergency condition for the state water project dependent areas that.
That impacts Golden State waters Simi Valley in Claremont service areas.
Which utilize a portion of their supply from the state water project.
This action also include a phased emergency conservation program that limits outdoor watering in those areas to one day per week.
In June Golden State water moved all of the other water systems to the second stage of its water rationing plan.
Net limits outdoor water into two days per week.
Golden State water will continue to work with its local suppliers to assess water supply conditions.
And water use restrictions in our service areas and make appropriate adjustments as needed.
Golden State water has been authorized to track incremental drought related costs and a memorandum account for future recovery.
Turning our attention to slide 17, we present the growth in Golden State Water's average rate base as authorized by the CPUC for.
For 2018 through 2021.
The weighted average water rate base has grown from $752 $2 million in 2018 to.
$984 million in 2021.
Based on the general rate case settlement agreement.
2022 rate base amount.
Is $1 billion $152 $3 million.
Which if approved would result in a compound annual growth rate of 11, 3% since 2018.
The rate base amount 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> 10 per share for the second quarter of 2022 as compared to <unk> 11 per share for the same period in 2021.
The decrease was largely due to timing differences in construction activity.
Between the two periods.
As well as the slowdown caused by longer materials supplier lead times.
Weather conditions and other delays.
Partially offset by an increased management fees.
Again, we refer 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> with additional revenues and dollars margin.
We are disappointed that we didn't win the award for operating the wastewater system at Naval station May Port recently issued.
But 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.
I'd like to turn our attention to dividends, which I already touched on earlier in the call.
Last week, we announced an eight 9% increase in the third quarter dividend.
Our quarterly dividend rate has grown at a compound annual growth rate of nine 3% over the last five years.
These increases are consistent with our policy to achieve a compound annual growth rate in the dividend of more than 7% over the long term.
Our strong dividend history is something that the company is proud of.
And as a continuing asset to our shareholders.
This strong track record has allowed us to achieve a nine 2% growth rate in our calendar year dividend payments to shareholders over the last 10 years from 2012 through 2022.
I'd like to conclude our prepared remarks by thanking you for your interest in American States water.
I will now turn the call over to the operator for questions.
Thank you we will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
If you're using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question will come from Angie <unk> from Seaport. Please go ahead.
Thank you.
So just wondering.
I mean, what do you think is the reason why you haven't heard from the CPUC either on the settlement for a rate case.
Or the.
Our cost of capital proceeding.
I appreciate that you'd still expect decisions in both cases.
In the second half.
Yeah.
At the time this is running out.
And again I'm just just wondering if you have an idea of what's been going on.
Sure and engine Hello.
Yes, so with regard to the general rate case, we were told earlier this year that the assigned administrative law judge was involved in several weeks of evidentiary hearings in another general rate case proceeding.
Unfortunately, those hearings are now over and we understand that the ALJ is now focused on preparing the proposed decision in our water general rate case.
So that covers the general rate case, the cost of capital is a little harder to understand although we just completed the hearings in may in the briefing in June .
Yeah.
And so we'll just have to see how long it takes for.
Commission to get out a proposed decision in that hearing.
Do you Okay I appreciate I appreciate your comments.
I think that there could be some link.
On the cost of capital side between the when the commission plans to issue on the LNG ALJ plans to issue a proposed decision.
And that's in there.
September October 1st Mark for the cost of capital adjustment mechanism on the water side.
I mean is it possible that the commission is waiting to see if an adjustment upward adjustments could happen and based on that rule.
This pending cost of capital proceeding.
Yes.
I think it is possible that they may wait until after September 30 to see where the adjustment mechanism.
Comes out because it's pretty close.
As to whether it's going to trigger or not.
<unk>.
But.
The general rate case, they're behind on that so that I think theyre just behind too.
Although.
You could craft some strategy behind why they might want to wait until after September 30.
Yes, and could you remind us what is the benchmark against which I'm measuring that.
100, <unk> spanned for that.
Without the adjustment.
Yes.
Okay.
<unk> utility bond rate.
Yes, the benchmark right now is at 289%.
Yes.
<unk> got 2%.
And so you have to be a 100 basis points.
I saw that trigger 50% of that hedge.
It's an average for the period.
Yes, Tim on average.
Yes, well lately the pullback in rates is not helpful right.
Mark I mean as.
You said it.
Close call.
Discontinued ops.
It's going to be close.
Yeah, Okay. Okay.
I talked on the rates in 2023 right. So.
And if they were to law, where the base Roe.
In anticipation of that 50 bps increase that would happen in 'twenty three.
<unk> two is still being impacted downwards now correct yes.
Our OE in the decision.
Covers the period.
2022 through 2024, but the adjustment mechanism would apply to 2023.
Yes.
So okay.
Theoretically they need to establish the proper ROE for 2022.
And then.
The adjusted adjustment mechanism do what it what it's going to do.
Yes, Okay and then.
Just separately from so basically just assuming that this cost of capital proceeding is just the <unk>.
Adjustments of the cost of debt.
As Youll currently reflecting in your results and assuming that I guess, you asked does catch up.
For the remainder of the year to have at least well so half say flat earnings year over year.
Given this drag that you were seeing from a.
From the pension accounts.
Is there any chance you could actually get to flat earnings year over year, I mean, I've been actually looking at it.
I.
A stand that you have no control over the pension.
Four months of your pension funds, but then.
But again you did account for benefits from those pension funds and higher earnings.
Kind of torn up.
It is.
That drag should be excluded and again knowing of the drag that we see thus far.
Any way you can be flat year over year in earnings.
Well, so far as you know the rabbi.
Retirement plan is 10 Thunder.
Vincent's of losses to date.
I don't recall, what the gain was last year in the.
$2.
It was a $2 55 last year.
So so we'd have to not only make up the loss of the <unk>.
We'd also have to make up the gain that we had last year, which I think the S&P was up.
30% in 2000.
101.
Hum.
The rest of the businesses would be to do to make up for that difference for us to get back there I mean, it's possible the market's been better lately. These are June 30 numbers of course, so it's possible.
We think.
Asur's will make up some ground and we think both of our utilities are doing fine, but for the delay in the <unk>.
Various proceedings.
Okay I understand thank you. Thank you both.
Thanks, Andy.
And again, if you have a question please press star one.
The next question will come from Jonathan Reeder from Wells Fargo. Please go ahead.
Hey, Bob and Eva Hope you guys are well today.
Jonathan Thank you too.
Yes, so just to clarify one of your earlier comments, Bob do you believe the proposed.
The decision from the ALJ in the GIC is imminent.
Or do the ALJ, just kind of start working on it whats kind of the timing of how far into this.
Dropping of the PD.
Yes, I don't think we've heard the word imminent.
Yes.
To take longer than one would expect but.
There is two parties in this.
To get on my Soapbox, but there's two parties in this general rate case, and we have the two parties have signed a settlement agreement.
Frustrating us okay.
What is the difficulty here, but.
Hopefully.
We can see something in the next few months I would say.
<unk>.
I don't think we're talking about days I think perhaps we're talking a couple of months.
Okay, and so then I mean, it sounds like it's probably not going to be improved in Q3, but assuming that's the case do you know like how much of an EPS.
It would be.
Q3 EPS.
Along the lines of the <unk> in Q1 in 2017 and.
In Q2 like how that distribution goes.
Yes, typically third quarter is higher yes, hi, E second quarter.
Right annual impact.
Let's say that.
ISP is about 14 <unk> hi.
Compared to our current but then you have to decrease by 15 or 15% of cost of debt adjustments. So the annual impact is about 25.
Netting pack.
We already incurred.
<unk>.
Incurred 19 minus six so 13.
About.
About another 12 months detection for this.
Third and fourth quarter.
Another 12 to 13 for the back half of the year from.
And this is net of the net of the cause of that.
A testament right the 19th has not met the 19th.
Right right.
Alright, So I guess, we should be looking at those 'twenty one still for the second half of the year just purely from the JRC, Yes correct.
Cost of debt.
Could that be in Q3, or maybe 75% or something on it.
Okay.
Yes third quarter is typically greater than second quarter right.
Average so.
Okay. Okay.
I like you am hopeful I guess the settlement is approved by the end of the year and then the full year number kind of things and what it is but in.
In the meantime, just trying to figure out how to adjust Q3. So I appreciate that and then my last question shifting over to <unk> I think the construction activity during the first six months.
The only like two thirds of what it was during the same period last year due to the delays and I know you reiterated the guidance range $45 49 in last year.
<unk> contributed 48.
Just kind of seems like potentially a lot of ground to make up in 'twenty two on the construction side like should we be thinking.
More the low end of the range for this year just due to those delays.
Well just a couple of comments on that.
The first quarter of 2021 that was a very strong quarter from a construction activity standpoint relative to other first quarters.
So when we look sort of versus last year with a strong first quarter last year.
It was a hard benchmark to hit.
The other point I'll make is we have.
We have had strong construction in the third and fourth quarter historically.
So.
We're looking we're looking at making up the difference here.
<unk>.
The last two quarters, although the world is a bit different than it was last year given material.
Pricing and lead times et cetera.
So we're I mean, we're going to try to bang out as much construction as we can here in the last two quarters.
Don't know, where that's going to put us in that 45% to 49% range.
Okay.
Yeah, we will.
Alright, So you provided an update in Q3 and Jonathan.
Do there Brian .
Brian I guess the way you're seeing it today I mean, if things go well you got.
The materials ordered stuff like that like you could still execute as you were anticipating for the full year.
I guess, it's fair, yes, Okay, alright, cool well good luck.
Getting some some proposed decisions and constructive ones out of the CPUC Murray, we're eagerly awaiting them.
Okay.
Thank you Jonathan.
Okay.
Once again, if you have a question. Please press Star then one.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Bob Sprowls for any closing remarks.
Thank you Chad I, just want to wrap it up today by thanking everyone for their participation and let you know that we look forward to speaking with you next.
Quarter.
Thanks, everybody.
Good rest of your silver.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.