Q3 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 third quarter 2022 results.
The call is being recorded and if you'd like to listen to the replay of this call. It will begin this afternoon at two P. M. Eastern time and run through Tuesday November 15th 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 the website.
Should you need any assistance during the call. Please ignore conference specialist by pressing the star key followed by zero on your telephone keypad.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
This call will be limited to an hour.
Yes.
Presenting today from American States water company is Bob Sprowls, President and Chief Executive Officer, and Eva Tang Senior Vice President of Finance and Chief Financial Officer.
As a reminder, certain matters discussed during this conference call may be forward looking statements intended to qualify for the safe Harbor from liability established by the private Securities Litigation Reform Act of 1995.
Please review a description of the company's risks and uncertainties in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission.
In addition, this conference call will include a discussion of certain measures that are not prepared in accordance with generally accepted accounting principles or GAAP in the United States and constitute non-GAAP financial measures under SEC rules.
These non-GAAP financial measures are derived from consolidated financial information, but are not presented in our financial statements that are prepared in accordance with GAAP for more details. Please refer to the press release.
At this time I'll turn the call over to Bob Sprowls, President and Chief Executive Officer of American States water company.
Thanks, Joe.
Welcome everyone and thank you for joining us today.
Begin with some brief comments on the quarter Eva will then discuss some financial details.
And then I'll wrap it up with some further thoughts on the quarter updates on regulatory activity caliber.
California's drought.
Dividends and then we will take your questions.
Like the first and second quarters of this year. This was a unique quarter with reported earnings per share decreasing from the prior year's comparable 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 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 third quarter results.
Adjusted consolidated diluted earnings for the third quarter of 2022, or <unk> 82 per share.
As compared to adjusted diluted earnings of 76 cents per share in the same period in 2021.
And adjusted increase of six cents per share.
Nearly 8%.
From an operations perspective, it's been business as usual for our subsidiaries provide.
Providing reliable water wastewater and electric services.
Two our regulated water and electric utility customers.
As well as on the 11 military bases we serve.
We are on pace to spend $145 million to $160 million this year.
In infrastructure investment at our regulated utilities.
On the regulatory front there are several filings pending.
We are awaiting a proposed decision from the California public Utilities Commission or CPUC.
For both Golden State Water's general rate case.
As well as a proposed decision on the pending cost of capital application.
At this time, we expect both decisions in the fourth quarter of this year.
The general rate case delay has reduced our earnings so far this year.
This new rates were to take effect on January one 2022.
In addition, our electric utility subsidiary filed its general rate case on August 30th share.
New rates for the years 2023 through 2026.
Eva will discuss the earnings results in more detail.
And I'll turn the call over to them.
Thank you Bob Hello, everyone. Let me start with our first quarter financial results you.
You can see felt like seven consolidated.
Well I think the nice thing for sure Okay.
Thanks, Bob.
Oh yeah.
Great that's helpful for sure.
Losses of $1 million or two cents.
That's for sure our investments held to fund a retirement plan.
It's a small games in 2001.
Hello.
Unfavorable variance of three cents per share.
In addition.
The delay.
A final decision on the pending water rate case, while the revenue for 'twenty to 'twenty, two what I'm trying to think while adopted rate.
Kevin you're right.
<unk> approved and implemented January say plenty of places to go assistance with that November one set.
Lehman reached between Golden state water in the topic.
I think his office.
We would have reported additional revenue and water supply costs that would have resulted in higher earnings.
That's for sure.
Third quarter.
Sure.
Excluding the gains or losses on investments.
Yes.
The impact caused by the delay in the water.
And the result.
Adjusted consolidated earnings for the quarter was 82 cents per share.
Two I guess.
<unk> six per share for Q3 F 'twenty one.
That is an increase of six cents per share.
Thanks, Paul.
Well Walter Seco Army was 54 cents per share as compared to 62.
Yeah Yeah.
Eastern equally well.
Discuss it affected our needs at the water segment, so factoring in the sense that sounds two items.
Yes.
At the same call. It at the water segment was 67 per share, which was an increase of five six year that's kept pace.
And you've got 52 cents per share for same period.
All right.
Also included in the water segment, we don't want to quote it was one $9 million recapturing revenue Oh, four cents per share to that but.
Oh revenue.
It's yet to be felt golden state water handling cost of capital application.
Which included the impact of a lower cost of debt.
Yes.
The patient.
There were also increases in operating expenses.
Interest expense, partially offset by increase in other income.
Thanks.
Our electric segment's earnings four cents per share for the third quarter.
Last year, Q3, and increased electric revenue and other ways.
Our tax rate was offset by higher operating and interest expenses.
I mean from our contracted services segment increased one cents per share for the quarter.
Which Bob will discuss later.
Consolidated revenues for the third quarter 2022 decreased by $1 $8 million. Okay. Thank you yeah, I'm just trying to what they.
The decrease was mostly due to the cost of debt I guess expected cost of capital.
The water segment.
So as mentioned previously while the revenue for the third quarter. It was based on 21 adopted rate due to a debate.
But what we see.
I see.
The decrease in electric rapidly.
Mainly due to CPUC approved rate increases for 2022, partially offset by a decrease in customer usage, that's comparing same period 2021.
Turning to slide nine.
Total operating expenses other than supply costs.
Consolidated expenses increased approximately $600000 as compared to the third quarter I'll try that one.
This was due to a decrease in construction costs at our contracted services segment, resulting from lower.
Construction activity, partially offset by increased administrative and general other O&M and depreciation expenses.
Interest expense net of interest income increased by $1 $4 million due to an increase in average interest rates during the quarter and our borrowing level.
Other income net of other expenses decreased by $200000 due primarily to losses on investments held before retirement benefits plan.
This was partially offset by a decrease in the non service cost controls related to Golden state waters benefits that we thought would be.
No absolutely losses recognized for the third quarter was twice.
Slide 10 shows the yeah.
It's page comparing the third quarter of 2022 last year.
Got it.
This slide is that our year to date I need to push it by segment, let's say Paul I guess, what are you guys at the earnings for the first nine months this year, what $1.61 cents as compared to $2 for the same period of 2021.
Equally so 39 cents per share.
A favorable variance of 17 cents per share it was due to losses of $6 $4 million on the retirement place investments this year.
Here's the gains of $2 $3 million for same period of time to try to one.
Yeah. In addition had the new rates in D C.
He said the main thing approved by the CPUC and implemented on January five so I'm just trying to Oh you were.
Where it has increased by 29%.
Yeah.
Excluding the gains and losses on the retirement plan is that suddenly fell in both periods.
And increasingly we don't I'll take the water they filed a settlement agreement for the first nine months of.
Since two.
Consolidated earnings for the nine months was $2. So you can.
So I see it.
Or how are you thinking I guess.
The $1 96 per share for the same period in 'twenty one.
For more detail on yesterday's reseller piece.
Please refer to yesterday's press release.
And all four of them. Thank you.
Turning out to be quicker T O.
On slide 12, net cash provided by operating activities was $89 $9 million for the nine months ended September 32022.
That's compared to $81 9 million for same period.
One quick one.
He already 'twenty through 'twenty two regulated utilities.
A total of $9 $8 million COVID-19 relief funds from the state of California.
To provide assistance to customers, who are delinquent, while they electric customer bills.
During the pandemic.
Since then.
They told me is all service Disconnections for nonpayment for water electric customer has ended.
And service Disconnections due to non payment patterns.
The increase in operating cash flow was also due to the.
Differences in timing of income tax installment payments between the two periods.
And the timing of filling up.
Oh and casually seek for construction work at military bases.
These increases were partially offset by a decrease in customer cash collections.
With the water consumption due to drought conditions irrational.
On the collections are being captured in IATA.
2022 counts.
Furthermore, the late in the water general rate case decision has negatively affect the cash flows from operating activities.
Year to date revenue has been phased out in places like once adopted customer right what I think.
<unk> continues to increase.
Our regulated utility invested a $122 $5 million on company funded capital projects.
It's like nine months yeah.
And we are on target to meet 145 250 million yourself capital expenditures for the year.
American States water's credit facility with a borrowing capacity of $289 expires in May 2003.
Let them a choice with a maturity of less than a year.
Outstanding borrowing has been classified as a current liability the company's consolidated balance sheet.
We tend to be new expanded facility prior to the expiration date.
In addition, we expect to issue long term debt to Golden state water in the.
Fourth quarter of 'twenty to 'twenty two.
We believe that the company sound capital structure, and eight plus credit rating combined with its financial discipline and history.
Relationship with lenders will enable us to access that market and put in place a new credit facility before may 23.
With reasonable return.
At this time, we do not expect American states water to issue additional equity for at least the next two to three years to fund its current businesses.
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 third quarter and year to date earnings.
As previously discussed the investment losses on one of our retirement plans during the third quarter.
And year to date periods of 2022.
Negatively impacted earnings per share.
<unk> 17, respectively.
As compared to the same periods last year.
Yeah.
In addition had 2022 water rates been approved consistent with the settlement agreement in the general rate case and implemented on January one 2022.
Golden State waters earnings contribution for the third quarter would have been 10 cents per share higher than.
<unk> 29 per share higher for the first nine months 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 a 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 are hopeful to receive a decision in time to record the impact from the new rates in 2022.
Finally, we also recorded a reduction to water revenues, which decreased the quarterly and year to date per share earnings by four cents and 10 cents respectively.
To reflect our best estimate at this time based on our accounting assessment of revenue subject to refund from the pending cost of capital proceeding filed in May 2021.
Which includes the impact of Golden State water's lower cost of debt requested in its application.
However at this time, we can absolutely 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 and theres more information in this proceeding becomes available.
With regard 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 remain.
For more details on the settlements please refer to yesterday's filing of our Form 10-Q.
We are disappointed that we have not seen a proposed decision from the CPUC.
As previously mentioned the delay negatively impacted our earnings by a net <unk> 10 per share for the quarter.
In 29 cents per share for the year to date.
But since the new water rates will be effective January one 2022, we'll record a retroactive revenues and expenses during the quarter in which the final decision is issued by the CPUC.
The proposed decision is expected in the fourth quarter.
Furthermore, at 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 this year.
And these projects were also included in the pending general rate case.
Although these projects are not included in the $404 $8 million and capital infrastructure has settled over this three year period.
The additional annual revenue requirements generated from these capital investments are $1 $2 million.
And became effective February 15 2022.
Next I will discuss the cost of capital case.
Golden State water filed our cost of capital application with the CPUC in May 2021.
The question of your capital structure of 57% equity and 43% debt.
The return on equity of 10, 5%.
And embedded cost of debt and 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.
Hearings on this proceeding occurred in May of this year and briefs were filed in June .
Post decision is expected in the fourth quarter of this year.
In the third quarter, we recorded a reduction to revenues of $1 $9 million or <unk> per share.
And $5 million 10 per share for the year to date 2022.
To reflect the estimated revenue impact of a lower cost of debt of five 1% as requested in our application as.
As compared to six 6% included in 2021 rates currently being built to our water customers.
In addition in the cost of capital application. The water segment has requested authorization from the CPUC to continue the water cost of capital mechanism.
For the period from October one 2021.
September 32022.
The Moody's double AA utility bond rate increased by more than 100 basis points from the benchmark.
As you know if there is a positive or negative change of 100 basis points or more.
The return on equity is adjusted by one half of the difference.
We expect this to be addressed by the CPUC in the pending proposed decision.
On September 30th of this year, the Governor of California signed Senate Bill $14 69.
Effective January one 2023.
Senate Bill 2014, 69 allows class a water utilities, including Golden State water to continue requesting your use of the water revenue adjustment mechanism or Ram in the next general rate case.
With the passage of Senate Bill of $42 69, Golden State water will be able to request. The continued use of the Ram and its next general rate case to be filed in 2023.
That will establish new customer rates for the years 2025 through 2027.
In addition, Golden state water and others have appealed the CPUC decoupling decision to the California Supreme Court and.
And the court has agreed to hear the case.
Opening briefs were filed on September one.
However, as a result of Senate Bill of $40 69.
Last month, the CPUC filed a motion to dismiss the petition.
And requested that the court suspend the proceedings schedule.
Golden State water plans to file an opposition to the Cpuc's motion.
Tissue.
The court granted the Cpuc's request to suspend the preceding schedule.
And there currently is no timeline for the court to complete their review.
I mentioned earlier, our electric utility subsidiary filed its general rate case on August 30 of this year.
In addition to new rate there are a number of items that are requesting such as additional capital expenditures.
As part of a four year rate cycle.
And our new capital structure.
Interim rates are expected to be requested in the fourth quarter of this year, which will make new rates once approved the CPUC final decision effective January one 2023.
I will now discuss the drought situation in California.
Yeah.
As of October 18th the U S drought monitor reported that 41% of California was an extreme drought.
As compared to 87% one year ago.
And 92% of California was in severe drought.
As compared to 94% a year ago.
California is experiencing a record drought in 2022, thus far.
In the calendar year is projected to end as one of the three dry as tears on record.
As I mentioned in our previous earnings calls.
Due to do.
Due to deteriorating conditions.
California Department of water resources, or DW or reduce the allocation of the state water project or S. W. P.
Water from 15% to 5% in March of this year.
Golden State water will continue to work with its local suppliers to assess water supply conditions and water use restrictions in its 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 18, we.
We present the growth in Golden State Water's average rate base as authorized by the CPUC for 2018 through 2021.
The adopted weighted average water rate base has grown from $752 $2 million in 2000 $18 million to $984 million in 2021.
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 a S. U S, which contributed earnings of <unk> 12 per share for the third quarter as compared to <unk> 11 per share for the same period last year.
The increase was largely due to an increase in management fee revenue, resulting from resolution of various economic price adjustments.
Partially offset by higher overall operating expenses as compared to the same period of 2021.
Earnings for the year to date September 30th.
2022 were 29 per share as compared to 35 per share for the same period last year.
That's the contracted services segment continues to experience challenges in its construction activity, resulting from longer materials supply chain lead times.
Weather conditions and other delays.
As a result is S. U S is expected to contribute 43 to <unk> 47 per share for 2022.
We expect the supply chain issues will improve next year and project that <unk> will contribute 45 cents to <unk> 49 per share for 2023.
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 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.
I'd like to turn our attention to dividends, which remains a compelling part of our investment story.
Our quarterly dividend rate has grown at a compound annual growth rate or CAGR 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 compound annual growth rate of nine 2%.
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.
Now I'll turn the call over to the operator for questions.
We will now take your questions.
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At this time, we will pause momentarily to assemble our roster.
There were no questions here, we will conclude our question and answer session.
I'd like to turn the conference back over to Bob Sprowls for any closing remarks.
Thank you Joe.
Yes, so I just wanted to thank everyone today for their participation.
And we look forward to speaking with you next quarter and I wish you a happy holiday season, I don't speak to you between now and then thank you all very much.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect your lines.