American States Water Company (AWR) on Q1 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by. And welcome to the American States Water Company Conference Call discussing the Company’s First Quarter 2021 Results. The call is being recorded. If you would like to listen to a replay of this call, will begin this afternoon at 5:00 p.m. Eastern Time and run through Tuesday, May 11, 2021 on the Company’s website www.aswater.com. The slides that the Company will be referring to are also available on the website. All participants are currently in a listen-only mode. After today’s presentation, we will have a question-and-answer session. Please note, today’s conference will also 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.
Bob Sprowls: Thank you, Jaime. 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 then I’ll wrap it up with some updates on regulatory filings, ASUS and dividends, and then we’ll take your questions. In this year’s first quarter, we achieved consolidated earnings of $0.52 per share versus $0.38 per share during the first quarter of 2020. That’s a 37% increase or a 21% increase on an adjusted basis. You can see from this slide that each of our three operating segments contributed to the year-over-year earnings per share growth. The results of our regulated utilities were driven by CPUC approved rate increases, while our contracted services segment performed a higher level of construction work during the quarter, compared to last year. Eva will discuss this slide in more detail. We continued to execute on our business strategies in the quarter, 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 an upgrade critical infrastructure, as well as ensure we can meet our customers’ needs for generations to come. We also remain committed to conservation, environmental stewardship, employee safety and wellbeing, diversity and inclusion and sound governance practices. While these issues have always been at the core of our Company, we created an environmental, social responsibility and governance section, also known as ESG, on our website to more clearly make our disclosures available in these areas. The website includes our corporate social responsibility report, TCFD, and SASB disclosures and other relevant documents. We will continue to focus on our ESG commitment, which benefit our customers, suppliers, employees, broader communities and ultimately our shareholders.
Eva Tang: Thank you, Bob. Hello everyone. Let me start with our first quarter financial results on slide 8. I’m pleased to report that the Company had a great quarter with consolidated earnings of $0.52 per share, as compared to $0.38 per share last year. Excluding the $0.05 per share loss on investment items from the first quarter of last year, earnings for the first quarter of 2021 increased by $0.09 per share or 20.9% as compared to last year. For our water utility subsidiary, Golden State Water Company, earnings were $0.33 per share as compared to $0.29 per share as adjusted to exclude the $0.05 per share loss on investments incurred in the first quarter of last year. The increasing earnings were due to a higher water gross margin generated by new rates authorized by the California Public Utilities Commission partially offset by increasing depreciation expense and property taxes. Our electric sector’s earnings for first quarter of 2021 were $0.07 per share, as compared to $0.06 per share for the first quarter of 2020 due to an increase in electric rates and a decrease in interest expense. Earnings from our contracted services segment increased $0.04 per share for the quarter. This was due largely to an increase in construction activity as a result of timing differences of when work was performed, as compared to the first quarter of last year, as well as lower expenses for legal and other outside services. The timing differences were expected to emerge over the remainder of 2021, which we expect the contracted services segments to contribute $0.45 to $0.49 per share for this year. Our consolidated revenues for the first quarter increased by $8 million as compared to same period in 2020. Water revenues increased $3.6 million during the quarter, due to third-year step increases for 2021 as a result of passing earnings test.
Bob Sprowls: Thank you, Eva. I’d like to provide an update on our recent regulatory activity. As you may know, the water segment has an earnings test that must meet before implementing the second and third-year step increases in the three-year rate cycle. As we’ve reported in our last call, we have timely 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 for 2020. We continue to make prudent and timely capital investments. Golden State Water filed its cost of capital application yesterday. We’ve 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%. The final decision on this proceeding is scheduled for the fourth quarter of 2021, 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 and the general office last July. This general rate case will determine new water rates for the years 2022 through 2024. Among other things, Golden State Water requested capital budget of approximately $450.6 million for the three-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’re pleased that the administrative law judge assigned to this rate case has clarified that Golden State Water can continue using the water revenue adjustment mechanism or WRAM and the modified cost balancing account, also known as the MCBA, until our next general rate case application, covering the years 2025 through 2027. In February 2021, the CPUC adopted a resolution that extended the existing emergency customer protections previously established by the CPUC through June 30, 2021, including the suspension of service disconnections for non-payment of electric utility customers in response to the ongoing COVID-19 pandemic. For water utilities, the moratorium on service disconnections was implemented in response to an order by the Governor of California, which we believe would require another action by the Governor to cease the moratorium on service disconnections for our water customers. It is expected that the CPUC will work with the governor’s office to coordinate the lifting of the moratorium for water utility customers consistent with the electric customers.
Operator: Ladies and gentlemen, at this point, we will begin the question-and-answer session. And our first question today comes from Durgesh Chopra from Evercore ISI. Please go ahead with your question.
Durgesh Chopra: Hey, Bob and Eva. Thanks for the update today. I just wanted to start on the rate case, just anything that you can share with us in terms of your most recent thoughts on timing. Obviously, your rate cases and your peer water utility rate cases have dragged on for a while. Just any color there, what are you seeing on the ground in terms of just getting a resolution and the final decision?
Bob Sprowls: Well, we’re optimistic, we’re currently on schedule on the rate case. We’re working through it. A lot of times, Durgesh, as you know, it will be a function of whether there’s a settlement in the case and how many issues are settled. We have not started the settlement discussion process yet. So, it’s really hard to kind of handicap how long it’s going to take to do this. The hearings are scheduled now for late June, early July, so. and then, after that, we’ll see how it goes.
Durgesh Chopra: Understood. So, next step for us to watch is, just the hearing process, you said June, July. And then, we’ll get sort of a more-tighter handle on what the process moving forward looks like and the timeline?
Bob Sprowls: That’s correct. I’ll tell you, two rate cases ago, we litigated the entire capital budget the last rate case we settled every items. So, there weren’t any hearings. So, hard to say where this one’s headed. But, if I had to guess, I would suspect we’re probably going to have hearings on something.
Durgesh Chopra: Understood. Thanks. And then, just maybe in light of the Biden American Jobs Plan calls for the investment in lead and water, wastewater assets, just maybe how does that impact your regulated assets? And then, also, does it mean that more military bases get privatized here, in the near-term and in the long-term for your ASUS business?
Bob Sprowls: Yes. So, we’ll be following this very closely. There is a lot to happen yet on the infrastructure package before we see how much of it sort of works its way through to our customers, although lead issues are not a big issue for us in California. So, to the degree that’s where some of the funding is directed to, we’re in pretty good shape there. In terms of the military bases, really difficult to handicap that as well, as to see kind of where the various departments of defense or our various armed services groups are headed. The Army, the Air Force and the Navy all sort of have their own view on how to move things forward. And so, we’re working with each of them. But, fair to say that there is no two of those that move in lockstep. We are seeing the Navy put out privatizations, which is really good to see, because they heretofore hadn’t really done that. So, it’s exciting for us. The Army is taking a bit of a strategic pause to look at some things. It will do that from time to time. We’re not worried about the future prospects. So, it just really is an example of how each branch sort of does its own thing.
Eva Tang: Durgesh, I think one positive news from all of this is that, at least the federal government recognized the needed investment on infrastructure. So, I think, that’s an important point to make to the public.
Bob Sprowls: And money will be flowing to investor-owned water utilities, just difficult to say how much will. As you know, Durgesh, 85% of the country’s water is run by municipalities. But, I mean, we’ll obviously be pushing for our share.
Durgesh Chopra: Sure. Thanks for that color. And just one quick, if I can, really quickly. The guidance, the ASUS guidance for this year, that does not -- the numbers that the $0.45 to $0.49, I believe the range, that does not include any new bases, right? But because any new bases awarded this year, you won’t be earning on them until most likely 2022. Am I right about that?
Bob Sprowls: Yes. That’s pretty correct. It’s really on your traditional military privatization. There’s 9 or 10 months transition plan after the war is announced. So, yes, that’s a good way to look at it.
Operator: And our next question comes from Angie Storozynski from Seaport Global. Please go ahead with your question.
Angie Storozynski: Thank you, guys. So, I was just wondering, given the changes that will impact your water business, admittedly, I mean, 2025. But I’m just wondering if there is -- you’ve seen it at other California water utilities, so they’re trying to expand their geographic footprint beyond California by adding some either neighboring states or again, trying to diversify away from California. Is this something you would consider?
Bob Sprowls: We definitely would. We would be looking for utilities that are for sale in areas that have fair regulations. We already have theoretically 20% to 25% of our business -- consolidated businesses out of California to date through ASUS. But, we still like California regulation. I know folks -- California regulation sometimes gets a bad rap. But, we think the water utilities are able to earn their authorized returns, if they manage things really well. And it’s just -- I understand that there’s a lot of drama. We always coach analysts that ignore the drama and look through to the orders. And the orders are generally very good, so. But I mean, we would look outside of California. If there’s systems for sale, we definitely be in there bidding.
Angie Storozynski: And then, secondly, again, you have plenty of time to file your next GRC. But, given the change to WRAM or its removal, and given the volatility that we’re seeing at San Jose Water. Do you think that the changes in tearing that you were planning in a sense mitigate those water supply issues or changes in the water supply mix? Again, it’s forward-looking, but I’m just wondering, is there any lessons learned from what we’re seeing as SJW?
Bob Sprowls: Right. I mean, we would look to try to reduce the risk to the Company through our next filing. One advantage we may have over the other two companies that are working through this is they have to go first. And we will be -- in this particular case, we’re lucky and that we’re the last one to have to file their new rate case. So, we’ll be watching California Water and California American very carefully and see what they’re able to do and how they’re structuring things. And just try to learn from things that go really well for them or learn from things maybe that don’t go so well, in terms of sort of getting the rate case through the commission. We’ve got plenty of time to plan for this. So, we think it’s -- I have a lot of confidence in our management team that we’re going to be able to manage through, Monterey-Style WRAM and incremental cost balancing account.
Eva Tang: Angie, I think also, the supply mix for each company is a little different. We have about 55% to 60% come from our own groundwater source, the other 40%, coming from the metropolitan wholesale agencies. We only have 5% or less than 5% service water. So, a little bit different situation in supply mix among the three companies public traded in California. So, I don’t know how we can compare one with the other in the supply cost mix situation there.
Angie Storozynski: Okay. And then, just one follow-up on ASUS. So, you’ve maintained the range of earnings for this year, despite some stronger earnings year-over-year. And I know that there’s some timing differences. But, I felt that last year’s earnings on other services was somewhat suppressed by COVID. So, assuming that there’s that -- I won’t say going away, but there’s some improvement in COVID-related restrictions, wouldn’t that actually translate automatically into higher earnings?
Bob Sprowls: It’s possible that it would, it’s just, you go through a number of -- you kind of have to stage things we’ve requested additional work on the basis we serve. You typically do the engineering for -- when I say about 30% to 35% of those projects, when you submit them, if they then get looked at more carefully, you need to sort of complete the engineering on it. So, there is a bit of a lead time on this particular work. In fact, the new capital upgrade work, we saw a big jump in the amount that gets awarded to us. That amount was down a bit in 2020 from the prior years. And we’re -- we haven’t seen a substantial change in that in 2021 from 2020 in terms of the NCU jobs that have been awarded. Sorry, new capital upgrade work.
Operator: And as showing no additional questions, I’d like to turn the conference call back over to Mr. Sprowls for any closing remarks.
Bob Sprowls: Yes. Thank you, Jamie. I just want to wrap up today by thanking you all for your participation today and your attention and your coverage. We look forward to speaking with you next quarter. So, thank you.
Operator: And ladies and gentlemen, with that, we’ll conclude today’s conference call. We do thank you for your participation. You may now disconnect your lines.
