American States Water Company (AWR) CEO Bob Sprowls on Q2 2021 Results - Earnings Call Transcript

American States Water Company (NYSE:AWR) Q2 2021 Earnings Conference Call August 3, 2021 2:00 PM ET

Company Participants

Bob Sprowls - President and Chief Executive Officer

Eva Tang - Senior Vice President of Finance and Chief Financial Officer

Conference Call Participants

Angie Storozynski - Seaport

Jonathan Reeder - Wells Fargo

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call discussing the company’s Second Quarter 2021 Results. The call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at 5:00 p.m. Eastern Time and run through Tuesday, August 10, 2021 on the company’s website, www.aswater.com. The slides that the company will be referring to are also available on the website. [Operator Instructions] Please note that today’s event is being recorded and also that today’s call will be limited to 1 hour.

Presenting today from American States Water Company is Bob Sprowls, President and Chief Executive Officer and Eva Tang, Senior Vice President of Finance and Chief Financial Officer.

As a reminder, certain matters discussed during this conference call may be forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. Please review a description of the company’s risks and uncertainties in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission.

In addition, this conference call will include a discussion of certain measures that are not prepared in accordance with 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 would like to turn the conference call over to Bob Sprowls, President and Chief Executive Officer of American States Water Company.

Bob Sprowls

Thank you, Jamie. Welcome, everyone and thank you for joining us today. I will begin with some brief comments on the quarter, Eva will then discuss some financial details, and then I’ll wrap it up with some updates on regulatory filings, ASUS and dividends, and then we will take your questions.

For the second quarter, we achieved consolidated earnings of $0.72 per share versus $0.69 last year. After excluding from both periods, gains on investments held to fund one of the company’s retirement plans, earnings per share increased by 7.8% on an adjusted basis. The second quarter contributed to a strong 2021 year-to-date, where we have achieved 12.1% earnings growth over last year on an adjusted earnings per share basis. In addition, we announced a 9% increase in the quarterly dividend last week, marking our 67th consecutive calendar year of dividend increases.

While we await some key decisions from the California Public Utilities Commission, or CPUC, we continue to execute on our business strategies, provide high-quality water, wastewater and electric services to over 1 million people and make timely investment in our systems, all while keeping our unwavering commitment to reliability and safety. Our capital investments allow us to replace and upgrade critical infrastructure, so that we can meet our customers’ needs for generations to come.

While our focus remains on strong financial results, excellent customer service and maintaining a strong infrastructure, we remain committed to ESG initiatives, including conservation, environmental stewardship, employee safety and well-being, diversity and inclusion and sound governance practices. We will continue to focus on our ESG commitments, which benefit our customers, the communities we serve, our employees, our suppliers and ultimately, our shareholders.

I will now turn the call over to Eva to review the financial results for the quarter.

Eva Tang

Thank you, Bob. Hello, everyone. Let me start with our second quarter financial results on Slide 8. Excluding gains earned on investments of $0.03 per share and $0.05 per share from the second quarter of 2021 and 2020 respectively, adjusted earnings for the second quarter increased by $0.05 per share or 7.8% as compared to adjusted earnings last year. This slide presents our reported results before adjustments. Our water segment’s earnings were $0.57 per share as compared to $0.54 per share. Adjusting for the gains on the investments incurred in both quarters, earnings at water segment increased by $0.05 per share due to a higher water gross margin generated from new rates authorized by the California Public Utilities Commission and a lower effective income tax rate due to certain flow-through and permanent tax items. These increases in earnings were partially offset by increase in water treatment costs, depreciation expense and interest expense.

Our electric segment’s earnings for the quarter were $0.04 per share as compared to $0.03 per share for the same period in 2020 due to an increase in electric gross margins resulting from higher rates as approved by the CPUC. Earnings from our contracted services segment decreased $0.01 per share for the quarter due to higher construction costs incurred on certain projects.

Our consolidated revenue for the quarter increased by $7.1 million as compared to the same period in 2020. Water revenues increased $4.5 million due to full third year step increases for 2021 as a result of passing earnings tax. The increase in electric revenues was largely due to CPUC-approved rate increases for 2021 and an increase in usage as compared to the second quarter of 2020. Contracted services revenue increased $2.2 million largely due to increases in construction activities and increases in management fees due to the successful resolution of various economic prices.

Turning to Slide 10, our water and electric supply costs were $28 million for the quarter, an increase of $1.7 million from the same period last year. Any changes in supply costs for both the water and electric segments as compared to the adopted supply costs are tracking balance income. Looking at total operating expenses other than supply costs, consolidated expenses increased to $3.5 million as compared to the second quarter of 2020. This was primarily due to an increase in construction costs at our contracted services segment resulting from increased construction activity. Interest expense, net of interest income and other increased by $2 million due in part to higher interest expense resulting from overall increase in borrowings and lower gains generated on investments held for retirement plans during the second quarter as compared to last year, as previously discussed.

Slide 11 shows the EPS bridge comparing the second quarter of this year with last year’s second quarter. This slide reflects our year-to-date earnings per share by segment as reported fully diluted earnings for the 6 months ended June 30, 2021, were $1.24 as compared to $1.07 for the same period in 2020. When the $0.04 per share gain on investments held to fund a retirement plan is removed from 2021 year-to-date earnings. This resulted in a 12.1% increase in the adjusted EPS. For more details, please refer to yesterday’s press release and Form 10-Q.

Turning to liquidity, net cash provided by operating activities was $41.1 million for the first 6 months of 2021 as compared to $46.3 million in 2020. This decrease was largely due to timing differences of income and payroll tax payments, which were deferred during the second quarter of 2020 as a result of COVID-19 relief legislation effect in 2020, but not for this year. This was partially offset by an improvement in cash from accounts receivable related to nonresidential customers due in part to improved economic conditions as compared to the first 6 months of 2020 because of the pandemic.

Our regulated utility invested $75 million in the company-funded capital projects during the first 6 months. We estimated our full year 2020 company-funded capital expenditures to be $125 million to $135 million. At this time, we do not expect American States Water to issue additional equity for at least the next 3 years to fund its current businesses.

With that, I’ll turn the call back to Bob.

Bob Sprowls

Thank you, Eva. I will now provide updates on the drought in California and on our recent regulatory activity. Currently, the majority of California is considered to be an extreme drought. The Governor of California has proclaimed the state of emergency for 50 of the 58 counties within the state and signed an executive order asking all Californians to voluntarily reduce water usage by 15% as compared to 2020. The CPUC has called on all California investor-owned water utilities to implement voluntary conservation measures to meet this goal. In response, Golden State Water has increased its communication with customers regarding the need for conservation and intends to implement voluntary conservation efforts in all of its ratemaking areas and has filed with the CPUC to request authority to establish a water conservation memorandum account to track incremental drought-related costs for future recovery.

Regarding our current rate cycle, the water segment has an earnings test it must meet before implementing the second and third year step increases in the 3-year rate cycle. As we have previously reported, we have tightly invested in our capital projects and achieved capital spending consistent with the amount authorized by the CPUC. As a result, rate increases are expected to generate an additional $11.1 million in the adopted water gross margin for 2021 as compared to the adopted water gross margin in 2020. Regarding our cost of capital proceeding, which was filed in May of this year, we requested a capital structure of 57% equity and 43% debt, which is our currently adopted capital structure, a return on equity of 10.5% and a return on rate base of 8.18%. A final decision is originally scheduled for the fourth quarter of this year with an effective date of January 1, 2022.

As we discussed in our prior calls, Golden State Water filed a general rate case application for all its water regions in the general office during July 2020. This general rate case will determine new water rates for the years 2022 through 2024. Among other things, Golden State Water requested capital budgets of approximately $450.6 million for the 3-year rate cycle and another $11.4 million of capital projects to be filed for revenue recovery through advice letters when those projects are completed. We are pleased that the administrative law judge assigned to this rate case has clarified that Golden State Water can continue to use the water revenue adjustment mechanism or RAM and the Modified Cost Balancing Account, also known as the MCBA until our next general rate case application covering the years 2025 through 2027.

As part of the response to the COVID-19 pandemic, Golden State Water and Bear Valley Electric Service, app suspended service disconnections for non-payment pursuant to CPUC orders. On July 15 of this year, the CPUC issued a final decision on the second phase of the water utility low income affordability rulemaking, which, among other things, extended the existing moratorium on water service disconnections due to non-payment until further CPUC guidance is issued or February 1, 2022, whichever occurs first. On June 24 of this year, the CPUC issued a final decision to extend the moratorium on electric disconnections until September 30 of this year. Under the terms of the CPUC adopted payment plans, actual electric service disconnections for non-payment will not incur until approximately December 1.

Turning our attention to Slide 18, this slide presents the growth in Golden State Water’s rate base as authorized by the CPUC for 2018 through 2021. The weighted average water rate base has grown from $752.2 million in 2018 to $980.4 million in 2021, a compound annual growth rate of 9.2%. The rate base amounts for 2021 do not include any rate recovery for advice letter projects.

Let’s move on to ASUS on Slide 19. ASUS’ earnings contribution decreased by $0.01 per share to $0.11 during the second quarter of 2021 as compared to the same quarter last year, largely due to higher construction costs incurred on certain projects. For the year-to-date June 30, 2021, and ASUS’ earnings contribution is $0.04 per share higher than last year due to an overall increase in construction activity and management fee revenue as well as a decrease in overall operating expenses. The increase in construction activity for the year-to-date was largely due to timing differences of when work was performed as compared to the first 6 months of 2020. We reaffirm our projection that ASUS will contribute $0.45 to $0.49 per share for 2021. Thus far, the COVID-19 pandemic has not had a material impact on ASUS’ operations.

We continue to work closely with the U.S. government for contract modifications relating to potential capital upgrade work for improvement of the water and wastewater infrastructure at the military bases we serve. In addition, completion of filings for economic price adjustments, requests for equitable adjustment, asset transfers and contract modifications awarded for new projects provide ASUS with additional revenues and dollar margin. The U.S. government is expected to release additional bases for bidding over the next several years. We are actively involved in various stages of the proposal process at a number of bases currently considering privatization. We continue to have a good relationship with the U.S. government as well as a strong history and expertise in managing water and wastewater systems on military bases, and we believe we are well positioned to compete for these new contracts.

I would like to turn our attention to dividends. Board of Directors last week approved a 9% increase in the dividend increasing the annual dividend from $1.34 per share to $1.46 per share. This increase is comparable to the compound annual growth rate of 9% achieved by the company in its quarterly dividend over the last 5 years. Our long and consistent history of dividend payment date back to 1931, in addition to an unbroken 67-year history of annual calendar year dividend increases. Currently, our dividend policy is to provide a compound annual growth rate of more than 7% over the long-term.

I’d like to conclude our prepared remarks by thanking you for your interest in American States Water, and we will now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from Angie Storozynski from Seaport. Please go ahead with your question.

Angie Storozynski

Thank you. So I wanted to talk about any feedback you’ve received to the cost of capital filing and if you had a chance to review Cal Waters GRC filing? And if there are any takeaways or lessons learned that you might be able to apply to your future GRC filing?

Bob Sprowls

Okay. So Angie, a couple of questions there. Yes. So not much is going on the cost of capital proceeding at this point. We haven’t had a pre-hearing conference at this point. And so we’re waiting for it to actually get started. So not much to not much to update you on there with regard to the cost of capital proceeding. Yes. So we are going through California Waters filing with the commission, and we find it very interesting. It appears that they have flattened the tiers a bit in their filing, and we will be very interested to see how that goes through the process. We’re – I think they are a sophisticated company, and we expect them to do well. And – but we will be watching how this plays out because we will be having to make a similar filing in June of 2023 – or sorry, July of 2023.

Angie Storozynski

Okay. And then separately on ASUS, so I appreciate that you’re going to be within the stated earnings guidance for this year. But we were, I think, hoping that there would be some catch-up in the level of activity. I mean, I thought that last year’s earnings were heavily impacted by COVID this year or largely flattish versus the last year. Maybe it was my misunderstanding, but I thought that there were some projects that were either delayed or not pursued because of COVID and then they would happen at a later date. But you mentioned that you continue to be engaged in discussions about some additional scope of work. So does that mean that basically the government would first need to sign off on some new projects and without that, the earnings trajectory is largely flattish for this segment?

Bob Sprowls

Yes. So the part of our revenue stream is for new capital work that’s being done on the bases. And that was part of what was slowed a bit in 2020. We haven’t completely come out of that at this point, the new capital upgrade work although a bit better this year than last year in terms of the awards, we aren’t seeing that there is a substantial increase in the awards to this point that would suggest that, gee, we missed out on some of this in 2020. So we’re going to get not only the 2021 new capital upgrade work, but some of the 2020 that didn’t get awarded. We’re still hopeful the fiscal year ends on September 30, and sometimes we will pick up some projects in the last couple of months of the government’s fiscal year. We will just have to see. But things are better than they were last year somewhat, although it’s not – we’re not quite back to the level I would say that we were prior to COVID.

Angie Storozynski

Great. Thank you.

Bob Sprowls

Thank you, Angie.

Operator

[Operator Instructions] Our next question comes from Jonathan Reeder from Wells Fargo. Please go ahead with your question.

Jonathan Reeder

Hey, Bob and Eva. Wanted to ask quickly on the GRC, your pending GRC. How is the timing for final decision looking? And how would you characterize the prospects of reaching a settlement, whether that’s in full or just on part of the items?

Bob Sprowls

Sure, Jonathan. I’d be happy to address that question, and how are you doing? So the judge in the general rate case has moved the hearings from late June, July to late September, early October and not exactly sure why he did that. But what that has done is allowed us more time to work on a settlement with public advocates, which we have been working on since May. So we are very much engaged in the settlement process. I’m not sure what else I can tell you other than we’re working really hard to get a settlement. I’m not sure if we can get one, but we’ve made some real good progress, although it’s unclear at this point whether we’re going to going to have a settlement.

Eva Tang

And Jonathan, as a result of ALJs ruling deferred the [indiscernible] hearings the CPUC may not be able to issue a final decision by end of the year because here, it will be in October timeframe. And so probably will push out beyond this year. But we have retroactive rate was to be effective January 1, 2022, when the final decision is issued.

Jonathan Reeder

Right, right. Yes. So I mean, Bob, based on your comments, I mean, it sounds like the discussion as they are being productive. So I mean whether you get to a full settlement maybe that’s challenging, but I know in the past at times, you’ve reached at least kind of a partial settlement to kind of streamline at least some of what the hearing asset cover is. Is that at least kind of a minimum expectation at this point, would you say?

Bob Sprowls

Yes. Perhaps, I’d just go back to the last two cases that we had filed. 3 years ago, we had a full settlement of the GRC. And then case prior to that, we fully litigated the capital budget. So those are kind of end ends of the spectrum, I guess. Yes, if we’re not able to get a full settlement, it’s possible we could get a partial settlement and just sort of focus on those issues that were quite a distance apart that would take to the evidentiary hearings.

Jonathan Reeder

Got it. Alright. Well, good luck on that, certainly. Certainly, good luck on the cost of capital finally gets going. If I could just shift quickly on ASUS, it sounded based on your prepared remarks, and maybe I’m putting more in your mouth, but were there some inflationary pressures that like impacted the segment by $0.01 in Q2. Is that accurate? Do you expect similar headwinds to persist during the rest of ‘21 and even into ‘22, potentially compressing with the typical margins achieved on the construction projects are for you?

Bob Sprowls

Yes. I mean we did have higher construction expenses perhaps we will see a little bit of that going forward, but we don’t think it will be very pervasive in the future quarters.

Jonathan Reeder

Okay. So I mean when we see those things, lumber is up 400% or stuff like that for instruction that you’re undertaking based on, I guess, contracts, relationships you have with suppliers, kind of stuff like that. The pressures are much more manageable in regard.

Bob Sprowls

Yes, I would say that’s accurate, Jonathan. We’ve got our arms around it. We did it did move the needle a little bit in the second quarter, but we don’t – we’re not wringing our hands about it going into Q3 and Q4.

Jonathan Reeder

Great. That’s perfect. Alright, that’s all for me. Thanks for taking my question today. Appreciate it.

Bob Sprowls

Yes. Thanks, Jonathan.

Operator

And ladies and gentlemen, at this time, I’m showing no additional questions, I’d like to turn the floor back over to Mr. Sprowls for any closing remarks.

Bob Sprowls

Yes. Thank you. Jamie. I just want to wrap up today just again by thanking everyone for their participation today. And letting you know, we look forward to speaking with you again next quarter. So thank you.

Operator

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending, you may now disconnect your lines.