American States Water Company

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing the company's second quarter 2020 results. The call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 5 p.m. Eastern Time and run through Tuesday, August 11, 2020 on the company's website, www.aswater.com. The slides that the company will be referring to are also available on the website. Should you need assistance during the call, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will 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 one hour. Presenting today from American States Water Company is Bob Sprouse, 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 presented in accordance with GAAP. For more details, please refer to the press release. At this time, I will turn the call over to Bob Sprouls, President and Chief Executive Officer of American States Water Company. Please go ahead.

Thank you, Andrea. Welcome everyone and thank you for joining us today. I'll begin with some recent developments for the company. Ivo will review some financial details, and then I'll wrap it up with some updates on regulatory activity, ASUS, and dividends, and then we'll take your questions. We have had many positive recent developments, including strong financial results, the filing of our water general rate case, the spinoff of our electric utility business to a separate subsidiary of American States Water, some term debt financing at Golden State Water, a nearly 10% dividend increase, new company leadership at American States Utility Services, or ASUS for short, continued strong credit ratings, and uninterrupted service to customers despite the ongoing pandemic. Our consolidated results for the second quarter of 2020 were 69 cents per share as compared to 72 cents per share for the second quarter of 2019. Included in the results for the second quarter of 2019 was the retroactive impact from a final decision on the water general rate case issued in May 2019, which totaled approximately $0.08 per share related to the first quarter of 2019. Excluding the retroactive impact related to the first quarter of 2019, consolidated diluted earnings during the second quarter of 2020 increased by $0.05 per share, or 7.8%. compared to the second quarter of 2019. We continue to invest in the reliability of our water and electric systems. For the six months ended June 30, 2020, we spent $53.2 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 the electric segment have largely not been negatively impacted. We estimate we'll spend $105 to $120 million for the year at our regulated utilities, barring any further delays resulting from changes in Golden State Water's capital improvement schedule due to the COVID-19 pandemic. This would be about three and a half times our expected annual depreciation expense. On July 1st, 2020, Golden State Water completed the transfer of the electric assets and liabilities of its electric division to Bear Valley Electric Service Inc., or BVESI for short. a wholly owned subsidiary of American States Water. Last week, the Board of Directors announced a 9.8% increase in the quarterly cash dividend, which is the 66th consecutive calendar year with an increase in the dividend. Regarding any effects on our business, customers, and employees related to the COVID-19 pandemic, we continue to provide the same high-quality, uninterrupted water, electric, and wastewater services to our customers. We continue to make special accommodations for our customers in this uncertain time, including suspending service disconnections for nonpayment. 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. We don't expect a significant earnings impact on any of our subsidiaries. I'm pleased to announce our new Senior Vice President of ASUS, Stuart Harrison, who joined our team on July 20th. Stuart brings a wealth of experience. He has a strong leadership background and a proven business development track record working with the Department of Defense. He most recently served as Senior Vice President of Infrastructure and Engineering for Amentum, a leading contractor which provides its federal government customers with essential services and mission support and equipment sustainment, information technology, nuclear and environmental remediation, and threat mitigation along with other services. Amentum was formerly a division of AECOM, but was sold to private equity in 2020. Stuart worked with Amentum and AECOM from 2011 through 2020. Prior to Amentum and AECOM, Stuart worked for Parsons Corporation, held various positions in the U.S. Army that spanned approximately 25 years, has a Master of Arts in National Security and Strategic Studies from the US Naval War College, a Master of Science in Environmental Engineering from Pennsylvania State University, and is a graduate of the US Military Academy at West Point. Stuart will build our successful contracted services business as well as our strong reputation with the US government. Our goal remains to continue providing best in class service to the 11 military bases we currently serve and use our strong positioning to compete for new base contracts. I continue to be optimistic about our prospects going forward. That is only strengthened with the addition of Stuart. I will now turn the call over to Eva to review the financial results for the quarter.

Thank you, Bob. Hello, everyone. Let me start with our second quarter financial results on slide nine. Consolidated earnings for the quarter were $0.69 per share compared to $0.72 per share as reported for the same period in 2019. As Bob mentioned, last year's second quarter earnings at our water segment were positively impacted by the CPUC final decision on the general rate case with the new rate retroactive to January of 2019. The retroactive impact of the decision was reflected in the result for the second quarter, and of the consolidated company's $0.72 per share, $0.08 was related to the first quarter of 2019, which is shown on a separate line in the table on this slide. Further impacting the comparability of the water segment earnings between the two quarters was the recording of a $1.1 million reduction to administrative and general expense during last year's second quarter, positively impacting earnings by $0.02 per share to reflect the CPUC's May 2019 approval for recovery of costs previously expensed as incurred. There was no similar reduction in 2020. The volatility in the financial markets due to the COVID-19 pandemic has resulted in significant fluctuation in the investments held to fund one of Golden State Water's retirement plans. Gains on these investments contributed a $0.04 per share increase in the water segment earnings for the quarter. Excluding the effect of these items, Earnings for the second quarter of 2020 at the water segment increased by $0.01 per share as compared to the second quarter last year. The increase was due to a higher water growth margin from the new water rates and lower interest expense partially offset by an increase in operating expenses and effective income tax rates. Our electric segments earnings for the second quarter of 2020 were $0.03 per share compared to $0.01 per share for the second quarter of 2019, largely due to an increase in electric growth margin resulting from new rates authorized by the CPUC in its decision on the electric GRC issued in August of 2019, which were retroactive to January of 2018. Due to the delay in receiving the final decision, billed electric revenue for the first six months of 2019 were based on 2017 adopted rates. Had the new rates been implemented timely on January 1, 2018, the earning would have been $0.01 per share higher in the second quarter of 2019. Earnings from our contracted service segment were $0.12 per share for each of the second quarters of 2020 and 2019. An increase in management fee revenues and overall decrease in operating expenses were mostly offset by a decrease in construction activity during the second quarter of 2020. Water revenues on this slide were $1 million lower during the second quarter of 2020 as compared to the same period in 2019. Again, due to the delay in receiving a final decision on the water GRC as mentioned, the retroactive impact of CTUC decision was recorded during the second quarter of 2019, which included approximately $3.4 million in revenue that related to the first quarter of 2019. excluding the retroactive effect, while the revenue increased $2.4 million for the quarter due to full second-year step increases for 2020 as a result of passing the earnings test. Electric revenues for the second quarter increased $300,000 to $7.7 million due to new rates approved by the CPUC and effective January 1, 2020. In addition, billed revenue for the second quarter of 19 were based on 2017 adopted electric rates pending a CPUC final decision on the electric TRC, which was not received until August of 19 and was retroacted to January of 2018. Contracted services revenue for the quarter decreased $2.6 million to $26.5 million due primarily to a decrease in construction activity, partially offset by increases in management fees due to the successful resolution of various economic price adjustments. Looking at slide 11, our modern electric supply costs were $26.3 million for the quarter, a decrease of $2.6 million from the same period last year. The decrease was partially due to a $1.7 million increase recorded in the second quarter of 19, which related to the first quarter of 19 to reflect the new adopted supply cost and corresponding water revenue retroactive to January of 2019. The changes were part of the May 2019 CPUC's final decision on the water generate rate. Total operating expenses, excluding supply costs, increased $3 million versus Q2 of 19, partially due to a $1.1 million reduction to reflect the CPUC's approval in May of 19 for recovery of previously incurred costs that were being tracked in CPUC-authorized memorandum account, as well as a $1.7 million decrease in depreciation expense recorded in the second quarter of 19 related to the first quarter due to lower authorized composite rate authorizing the water generated. There were no similar reduction in 2020. There was also an increase in maintenance activity in all of our business segments. These increases were partially offset by a decrease in construction expense at ASUS due to an overall decrease in construction activity. Interest expense, net of interest income, and other income, including investments held in a trust to fund a retirement benefit plan, decreased $3 million for the quarter due to higher investment gains as a result of recent market conditions. There was also a decrease in interest expense due to a decrease in interest rates partially offset by higher average borrowing. Slide 12 shows the EPS bridge for the quarter comparing the second quarter of 2020 with the same quarter of 2019. This slide reflects our year-to-date earnings per share by segment. Fully diluted earnings for each of the six-month periods ended June 30, 2020 and 2019 were $1.07 per share. For more detail, please refer to yesterday's press release and form 10-Q. In terms of the company's liquidity, net cash provided by operating activities for the first six months of 2020 was $46.3 million as compared to $44.7 million for the same period in 2019. The increase in cash was due to deferrals of certain payroll income tax payments as a result of COVID-19 relief legislation. This increase was partially offset by a decrease in cash flows from accounts receivable from utility customers due to the economic impact of the pandemic and the suspension of service disconnection to customers for nonpayment. Our regulated utilities invested $53.2 million in the company-funded capital projects during the first six months of 2020. While COVID-19 has caused delays in certain projects, our regulated utilities are still planning to spend $105 million to $120 million in company-funded capital expenditure for the year, barring further delays during the pandemic. On July 8, this year, Golden State Water completed the issuance of unsecured private placement notes, totaling $160 million. Golden State Water used the proceeds to repay a large portion of its intercompany notes issued to the holding company, which allowed American States Water to pay down its short-term borrowing under its credit facilities. As a result, American States Water took action to revert its borrowing capacity back to $200 million, which was its original level when the facility was sized in 2018. We also established a separate three-year $35 million revolving credit facility for the electric segment, with the company option to increase it to $50 million. In June of 2020, Standard & Poor's global ratings affirmed an A-plus credit rating with a stable outlook on both American States Water and Golden State Water Company. Also in June, Moody Investor Service affirmed its A-2 rating with a stable outlook for Golden State Water. At this time, we do not expect American States Water to issue additional equities. With that, I'll turn the call back to Bob.