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American States Water Co (NYSE:AWR)
Q1 2020 Earnings Call
May 5, 2020, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the American states water company conference call discussing the company's first quarter 2020 results. [Operator Instructions].

If you would like to listen to a replay of this call, it will begin this afternoon at 5:00 p.m. Eastern Time and run through Tuesday, May 12, 2020, on the company's website, www.aswater.com. The slides that the company will be referring to are also available on the website. This call will be limited to one 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 Security litigation Reform Act of 1995.

Please review a description of the company's risks and uncertainty in our most recent Form 10-K and Form 10-Q on file in the Security and Exchange Commission. In addition, this conference will 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 on this SEC rules. These non-GAAP financial measures are derived from consolidated financial information but are not presented in our financial statements that are prepared in accordance with GAAP. For more details, please refer to the press release.

At this time, I will turn the call over to Rob Sprowls, President and Chief Executive Officer of American States Water Company.

Robert J. Sprowls -- President and Chief Executive Officer

Thank you, Kate. Welcome, everyone, and thank you for joining us today. I'll begin with an update on our COVID-19 response, then discuss some highlights for the quarter. Eva will review some financial details, and then I'll wrap it up with some updates on regulatory filings, American States Utility Services, or ASUS and dividends. And then we'll take your questions. As the United States has responded to the COVID-19 pandemic and despite shelter and place requirements, customers of Golden State Water and ASUS continue to receive the same high quality, uninterrupted water, electric and wastewater services. The health and safety of our customers and employees is, as ever, our first priority during this unprecedented time, and we have taken the necessary steps to protect both. In terms of the effects on our business, like many utilities, we are making special accommodations for our customers in this uncertain time, including suspending service disconnections for nonpayment through April 2021 and waiving fees and deposit requirements for affected customers.

Through our emergency response planning, we were well prepared to enable many of our employees to work remotely and have made other adjustments as needed until restrictions begin to ease. In terms of the financial impact of COVID-19 on the company, the California Public Utilities Commission, or CPUC, has authorized Golden State Water Company to activate a catastrophic event, memorandum account, to track incremental costs incurred as a result of our COVID-19 response for future recovery. So at this point, we don't expect a significant earnings impact on Golden State Water. Eva will discuss the company's liquidity later in the call. Similar to our regulated businesses, our water and wastewater services performed on military basis by ASUS are deemed essential services. And as such, ASUS has not experienced any significant disruptions to operations. As a result, we do not expect there to be a meaningful impact to its earnings either. Regarding our first quarter results, I'm pleased to report that the company had another solid quarter of earnings. Consolidated earnings were $0.38 per share, a $0.03 per share increase over last year or 8.6%, despite an $0.08 per share reduction in earnings from the company's investments held to fund a retirement plan due to the volatility in the financial markets during this pandemic time.

For our utility subsidiary, Golden State Water Company, both the water and electric segments earnings increased $0.03 per share. One of the many effects of the COVID-19 pandemic has been increased volatility in the financial markets, which for the company resulted in a $2.4 million pre-tax loss incurred during the first quarter of 2020, on investments held to fund one of the company's retirement benefit plans compared to a pre-tax gain of $1.5 million during the first quarter of 2019. Decreasing earnings by $0.08 per share as compared to the same period in 2019. Excluding this item, the water segment's earnings would have increased $0.11 per share as compared to the first quarter of 2019, due largely to new rates authorized by the CPUC. In May 2019, the CPUC issued a final decision on Golden State Water's water general rate case, which determined new rates for the years 2019 through 2021, with rates retroactive to January 1, 2019. As a result, Golden State Water recorded the impact of the final decision in the second quarter of 2019, including earnings of $0.08 per share that related to the first quarter of 2019.

We continue to invest in the reliability of our water and electric systems. During the first quarter, we spent $23.2 million in company-funded capital expenditures. The water utility segment continues with its construction program. However, we have tried to avoid construction projects that would temporarily shut off water to customers. The construction programs for Golden State Water's electric segment have not been negatively impacted. We estimate we'll spend $115 million to $130 million for the year, following any delays resulting from changes in Golden State Water's capital improvement schedule due to the COVID-19 pandemic. This would be about 3.5 times our expected annual depreciation expense.

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

Eva G. Tang -- Senior Vice President-Finance, Chief Financial Officer, Corporate Secretary and Treasurer

Thank you, Bob. Hello, everyone. Let me start with our first quarter financial results on slide eight. Consolidated earnings for the quarter were $0.38 per share compared to $0.35 per share for the same period in 2019. As Bob mentioned, the first quarter results included a $2.4 million pre-tax loss on investments held to fund a retirement plan as compared to $1.5 million in pre-tax gains in Q1 of last year, resulting in a decrease in earnings of $0.08 per share compared to the same period the last year. In addition, water and electric revenues for the first quarter of 2019 were based on 2018 and 2017 authorized rate, respectively, due to delays in receiving final decisions on both the water and electric general rate cases. The final decision for the water rate case was received in May 2019. And as a result, we recorded the impact of the final decision for the water segment in the second quarter of 2019, which included earnings of $0.08 per share that's related to the first quarter of 2019.

Similarly, the final decision for the electric rate case was received in August last year. And we record the impact of this final decision for the electric segment in the third quarter of 2019, including earnings of $0.02 per share that related to the first quarter of 2019. The decrease in earnings for the quarter at ASUS was due to higher costs incurred on certain capital projects as well as higher legal and outside service costs, which tends to fluctuate from period-to-period. Consolidated revenue for the first quarter increased by $7.4 million as compared to the same period in 2019, while the revenues increased $6.7 million due in part to new water rates approved by the CPUC, which became effective January 2020. Golden State Water received a full second year step increase for 2020 as a result of passing the earnings test. Also, as mentioned earlier, while the revenues for the first quarter of 2019 were based on 2018 adopted rates, due to the delay in receiving a final decision on the water general rate case. There were also revenue increases related to CPUC approved surcharges to recover previously incurred costs.

Electric revenue were $400,000 higher due to new rates approved by the CPUC effective January 1, 2020. In addition, revenues for the first quarter of 2019 were based on 2017 adopted electric rate also due to CPUC's delay in issuing the final decision. The $300,000 increase in contracted services revenue for the first quarter was largely due to increases in construction work performed as compared to the same period in 2019. Turning to slide 10. Our water electric supply costs were $21 million for the quarter, a slight increase of $200,000 from the same period last year. Any change in supply costs, as we mentioned before, for both the water and electric segments as compared to the adopted supply costs are tracked in balancing accounts. Looking at total operating expenses, excluding supply costs and surcharges, consolidated expenses increased $1.3 million as compared to the first quarter of 2019, due to an increase in administrative and general expenses because of higher labor and outside service costs, and maintenance expense due to unplanned maintenance activities at the water segment.

Maintenance expense is expected to level off during the remainder of this year. These increases were partially offset by a decrease in depreciation expense, which was due to lower composite rates at the water segment approved in the May 2019 CPUC decision on the water general rate case. The lower new composite rates were not recorded during the first quarter of 2019, pending receipt of the final decision. Interest expense, net of interest income and other, increased by $3.7 million due primarily to losses incurred on investments held in a trust to fund a retirement benefit plan as a result of recent market condition. As compared to gains generated during the first quarter of last year, as we mentioned earlier. Slide 11 shows the EPS bridge comparing the first quarter this year with the same quarter of 2019. Turning to liquidity on this slide. Net cash provided by operating activities was $15.7 million as compared to $29.4 million in 2019. There was a decrease in cash flow from accounts receivable from utility customers. Due to the suspension of service disconnection to customer for nonpayment during this special time.

Any better expense incurred in access of what is in our water electric revenue requirements as a result of the impact caused by the COVID-19 response is tracked in a CPUC-approved catastrophic event memorandum account for future recovery. As a result of this catastrophic event memorandum accounts, costs incurred in response to the COVID-19 pandemic, including bad debt expense, are not expected to materially impact water and electric earnings. There were also decrease in cash flow, resulting from the timing in billings of a cash receipt for construction work at military bases during the first quarter. Golden State Water invested $23.2 million in company-funded capital projects during the first three months of 2020. As Bob mentioned, we still anticipate Golden State water's company-funded capital expenditure to be at the range of $115 million to $130 million, barring any delay caused by COVID-19. In March of 2020, American States Water amended its credit facility, increasing the borrowing capacity to $260 million through the end of 2020, at which point, the borrowing capacity will revert to $200 million. We plan to issue long-term debt at Golden State Water later in 2020. In addition, we have entered into a commitment letter with a bank to establish a revolving credit facility up to $50 million for our electric segment effective June of 2020 for a period of three years. At this time, we do not expect American States Water to issue additional equity.

With that, I'll turn the call back to Rob.

Robert J. Sprowls -- President and Chief Executive Officer

Thank you, Eva. I'd like to provide an update on our recent regulatory activity. Golden State Water has a financing application on file with the CPUC. A proposed decision was received last week authorizing Golden State Water's request to issue and sell additional debt and equity securities of up to $465 million to support our water operations. We expect a final decision in the second quarter. As Eva mentioned, we intend to issue long-term debt at Golden State Water later in 2020 once it is approved. In March of this year, the CPUC approved a request to defer Golden State Water's cost of capital application by one year, which was scheduled to be filed on May 1, 2020. In January 2020, Golden State Water, along with three other investor-owned California water utilities, requested an extension of the date by which each of them must file its 2020 cost of capital application. The CPUC's approval postpone this filing date by one year until May 1, 2021, with a corresponding effective date of January 1, 2022. The CPUC also approved the joint party's request to leave the current water cost of capital mechanism in place, but there'll be no changes to the company's rate of return on rate base during the one year extension, regardless of what the mechanism might otherwise indicate.

Golden State Water's current authorized rate of return on rate base is 7.91%, based on its weighted cost of capital, which will continue in effect through December 31, and 2021. The 7.91% return on rate base includes a capital structure with 57% equity and 43% debt. We are currently preparing our next water general rate case, which will be filed in July of this year for new rates beginning in 2022. As you'll see from this slide, the weighted average water rate base as authorized by the CPUC has grown from $717 million in 2017 to $916 million in 2020, a compound annual growth rate of 8.5%. Rate base amounts for 2020 do not include the $20.4 million of advice letter projects approved in Golden State Water's last general rate case. Let's move on to ASUS on slide 15. ASUS' earnings contribution for the quarter was $0.08 per share, a decrease of $0.03 per share versus last year. The decrease is a result of retroactive revenues of approximately $0.01 per share in the results for the first quarter of 2019, with no similar retroactive revenues during the first quarter of 2020. Excluding this retroactive amount, diluted earnings per share from the contracted services segment decreased by $0.02 per share, largely due to higher-than-expected construction costs incurred on several projects as well as higher outside service cost, which tend to fluctuate from period-to-period.

These decreases to earnings were partially offset by an increase in management fee revenues. As we look ahead to the full year, we reaffirm our previous guidance of $0.46 to $0.50 per share for ASUS' 2020 earnings contribution. We are still involved in various stages of the proposal process at a number of military bases considering privatization of their water and wastewater systems. The U.S. government is expected to release additional bases for bidding over the next several years. Due to our strong relationship with the U.S. government as well as our expertise and experience in managing bases, we are well positioned to compete for these new contracts. I'd like to turn our attention to dividends outlined on slide 16. The Board of Directors last week approved a second quarter dividend of $0.305 per share on the common shares of the company, reflecting the 10.9% annual dividend increase in 2019. American States Water Company has paid dividends to shareholders every year since 1931, increasing the dividends received by shareholders each calendar year for 65 consecutive years, which places it in an exclusive group of companies on the New York Stock Exchange that have achieved that result. The company's current dividend policy is to achieve a compound annual growth rate in the dividend of more than 7% over the long term. I'd like to conclude our prepared remarks by thanking you all for your interest in American States Water. We wish the investment community, our shareholders, customers and employees the best during this historic time.

I'll now turn the call over to the operator for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Durgesh Chopra from Evercore. Go ahead.

Durgesh Chopra -- Evercore -- Analyst

Thank you, Rob. In the Eagle full year through well and safe and thank you for the, for the slides and prepared commentary this morning.

Robert J. Sprowls -- President and Chief Executive Officer

Yeah, thanks.

Durgesh Chopra -- Evercore -- Analyst

Great.I just wanted to kind of maybe can you give us any color on April demand trends that you might have seen in your service territory? If you have that information. I'm just wondering, like most of the utilities your electric and gas peers have talked about, I mean a substantial declines in their commercial, industrial classes and then offset in the residential class. I was just hoping to get any color that you may be able to provide on that front?

Robert J. Sprowls -- President and Chief Executive Officer

Sure, Durgesh, I'd be happy to. And I hope you and your family are safe. Yes, I'd be happy to talk about that. As you know, we have both the water revenue adjustment mechanism and the base rate revenue adjustment mechanism on our electric business. So volumes don't impact our P&L. And I think you also know that our company is largely nine more than 90% is residential commercial. So we really haven't seen a drop in demand either on our water side or electric side.

Eva G. Tang -- Senior Vice President-Finance, Chief Financial Officer, Corporate Secretary and Treasurer

As a matter of fact, our billed water consumption for the first quarter of 2020 increased by about 11% compared to the first quarter last year. Of course, as Bob mentioned, we do have a rent accounts. So it doesn't impact revenue as much, but consumption actually went up in the first quarter that.

Robert J. Sprowls -- President and Chief Executive Officer

We have fairly dry first quarter, which created being largely responsible for the increase in the water demand.

Durgesh Chopra -- Evercore -- Analyst

Got it. Got it. So you but specifically, for April, you're not seeing any material drop in load or for that matter, any pickup in load? Being that most of your electric and gas peers who are seeing a pickup in the residential load. You're not seeing anything material. I'm focused just on the month of April. I get the first quarter increase, but I mean, really, the impacts of the pandemic started like mid-March, somewhere around that time frame. So it sounds like April, you guys didn't see a material impact either way?

Eva G. Tang -- Senior Vice President-Finance, Chief Financial Officer, Corporate Secretary and Treasurer

I don't think so. We'll look into more.

Robert J. Sprowls -- President and Chief Executive Officer

Right. We haven't noticed any drop, I would say.

Durgesh Chopra -- Evercore -- Analyst

Got it. And then just sort of high-level, appreciate that you guys don't have forward-looking EPS projections. And but when I think about the sort of the Bob, just rate base growth rate of 8.5% last few years. Is that would you say is that a good proxy going forward? Is there a reason to think that the rate of capital investment or rate base growth would slow down going forward? If anything, I think some of your peers have talked about just as commodity oil and gas prices have come down, and more room in the customer bill. And if anything, the rate base growth maybe accelerate going forward over the long term. Is that fair? Where do you see perhaps capex rate base growth next few years out?

Robert J. Sprowls -- President and Chief Executive Officer

Well, we're in the process of putting together our rate case for 2022 through 2024. Really difficult to say whether the 8.5% is a good proxy for going forward. We I wouldn't say that we're going to see an appreciable increase there. Because I think when you talk about electric and gas, you might see some commodity price reduction there. We're I mean, we're not seeing that on the water side, of course. So and we are very mindful of what sort of rate base growth kind of does to our customers. We know we've got to keep our systems reliable, and we are pretty aggressive about putting a pipe in the ground, but we also recognize there's a sort of customer at the end of the line here that has to pay for all this. So we really try to reach a balance.

Durgesh Chopra -- Evercore -- Analyst

Got it. Perfect, thank you. Thanks, Rob and Eva extraordinary day.

Robert J. Sprowls -- President and Chief Executive Officer

Yeah.

Operator

Our next question is from Richard Verdi from Coker & Palmer, go ahead.

Richard Verdi -- Coker & Palmer -- Analyst

Hi, Rob. And even, thank you for taking my call. Here I just have a quick question surrounding the military business. Durgesh did a good job and asked a couple of my questions for me. With the shutdowns in place, how does that impact new base award potential? I mean, are these people working from home, where decisions could be made and awards announced as soon as it shutdowns end? Or is the process being entirely ignored until the shutdowns are over. And things pick up from where they left off in March before shutdowns went into effect?

Robert J. Sprowls -- President and Chief Executive Officer

Yes. I'll just give you my perspective on that. We don't necessarily see any slowdown going forward because of COVID-19, in terms of folks working from home or telecommuting, etc. What sort of pushes the pushes this along for the government is whether they have funds to award for privatizations? And that's what potentially a slowdown might be is if the government's taking those funds and using it for other things. The sense we get from the government at this point is that there's a few awards that will be made in 2020. And that's really sort of been the history in the last few years. So I wouldn't characterize that as a slowdown. So the latest is there's a couple of awards, I think, that are being planned on being made this year.

Richard Verdi -- Coker & Palmer -- Analyst

Okay, that's great color. Thank you for that. Rob and and Eva I'll reach out to you yourself and set up something for offline. Thanks a lot. I see.

Robert J. Sprowls -- President and Chief Executive Officer

Thank you. Yeah,

Operator

Our next question is from Michael Gaugler from Janney. Go ahead.

Michael Gaugler -- Janney -- Analyst

Good morning, everyone.

Robert J. Sprowls -- President and Chief Executive Officer

Thank, Michael.

Michael Gaugler -- Janney -- Analyst

Just a quick question. Bob, maybe this is one for you. That the retirement plan impacts on the quarter. Wondering if that could be smoothed out or hedged in a cost-effective manner going forward, given the size of the impact that you saw?

Robert J. Sprowls -- President and Chief Executive Officer

Yes, it's a valid question. So it speaks to how do you have those dollars invested. And we're obviously seeing quite a bit of volatility in the market, and that does affect the returns on that retirement plan. We have that that plan is traditionally financed. So it's we want to sort of do well with our funds there. But given the volatility, I understand, it's a it makes our analysts and company management wring their hands a bit. So I we'll be looking at the possibility there, but we're not ready to sort of commit at this point that we're going to be doing anything different than we currently are. However, we do understand how it does cloud the numbers a little bit, particularly when you got a $0.08 per share swing.

Michael Gaugler -- Janney -- Analyst

Okay. Also I have, thank you.

Robert J. Sprowls -- President and Chief Executive Officer

Thanks, Michael.

Operator

[Operator Instructions] Our next question is from Jonathan Reeder from Wells Fargo. Go ahead.

Jonathan Reeder -- Wells Fargo -- Analyst

Hey Rob and Eva, Either way, I just have a couple of housekeeping kind of questions. Eva, did I hear you correctly that you said the higher maintenance expenses at Golden State Water in Q1 that you expect that to kind of be offset or balanced out through the course of the year?

Eva G. Tang -- Senior Vice President-Finance, Chief Financial Officer, Corporate Secretary and Treasurer

Yes. I think in the first quarter, we saw a few unplanned maintenance came out and kind of put us higher than last year. But I we don't expect that to continue throughout the year. So I think that will level off.

Jonathan Reeder -- Wells Fargo -- Analyst

Okay. And then in ASUS, it seems like there are maybe some headwinds there during Q1, including hiccups on capital projects. Do you expect to offset those over the course of year? Or might it imply that results for ASUS were trending toward the lower end of that $0.46 to $0.50 range?

Robert J. Sprowls -- President and Chief Executive Officer

Well, right now, Jonathan, we do expect to offset the results for the first quarter. We did have a couple of construction projects that we had some unforeseen conditions on some projects. But the team is working hard to sort of make that up.

Jonathan Reeder -- Wells Fargo -- Analyst

Okay. And then did that like is that related to some of the projects being delayed? I think there's something saying some of the ASUS projects were delayed?

Robert J. Sprowls -- President and Chief Executive Officer

No, it was more work on a few of the construction projects than what we had anticipated. So because of their site conditions.

Jonathan Reeder -- Wells Fargo -- Analyst

Okay. But were there some ASUS construction projects that got delayed in Q1? Or am I.

Eva G. Tang -- Senior Vice President-Finance, Chief Financial Officer, Corporate Secretary and Treasurer

We don't think so.

Robert J. Sprowls -- President and Chief Executive Officer

No, not really.

Jonathan Reeder -- Wells Fargo -- Analyst

Okay. I must. We think in a couple of Nelson. Okay, that's all as all I had.

Robert J. Sprowls -- President and Chief Executive Officer

Thank you. Okay. Take care.

Operator

At this time, this concludes our question-and-answer session. I would now like to turn the conference back over to Bob Sprowls for closing remarks.

Robert J. Sprowls -- President and Chief Executive Officer

Thank you, Kate. I just wanted to close today by thanking everyone for their participation, and letting you know, we look forward to speaking with you the next quarter. So thank you very much. Bye-bye

Operator

`[Operator Closing Remarks].

Duration: 34 minutes

Call participants:

Robert J. Sprowls -- President and Chief Executive Officer

Eva G. Tang -- Senior Vice President-Finance, Chief Financial Officer, Corporate Secretary and Treasurer

Durgesh Chopra -- Evercore -- Analyst

Richard Verdi -- Coker & Palmer -- Analyst

Michael Gaugler -- Janney -- Analyst

Jonathan Reeder -- Wells Fargo -- Analyst

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