American States Water Company

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 would like to listen to the replay of this call, it will begin this afternoon at 2 p.m. Eastern Time and run through Tuesday, November 15, 2022 on the company's website at www.aswater.com. The slides that the company will be referring to are also available on the website. Should you need any assistance during the call, please signal a conference specialist by pressing the star key followed by zero on your telephone keypad. 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 an 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 prepared in accordance with GAAP. For more details, please refer to the press release. At this time, I will turn the call over to Bob Sprouse, President and Chief Executive Officer of American States Water Company.

Thank you, Joe. 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 further thoughts on the quarter, updates on regulatory activity, California's drought, KSUS, dividends, and then we'll 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 quarters. 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, including 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 were 82 cents per share, as compared to adjusted diluted earnings of 76 cents per share for the same period in 2021. An adjusted increase of six cents per share, or nearly 8%. From an operations perspective, it's been business as usual for our subsidiaries, providing reliable water, wastewater, and electric services to our regulated water and electric utility customers, as well as on the 11 military bases we serve. We are on pace to spend $145 to $160 million this year in infrastructure investments 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 Waters 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, as new rates were to take effect on January 1st, 2022. In addition, our electric utility subsidiary filed its general rate case on August 30th of this year to set 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 her.

Thank you, Bob. Hello, everyone. Let me start with our third quarter financial results. As you can see from slide seven, consolidated earnings as recorded for 69 cents per share as compared to 76 cents per share last year, a decrease of seven cents per share. This included losses of $1.3 million or three cents per share on investments held to fund a retirement plan. as compared to small gains in 2021. This item alone resulted in an unfavorable variance of 3 cents per share. In addition, due to the delay in receiving a final decision on the pending water rate case, water revenues for 2022 were based on 2021 adopted rates. Had a new rate been approved and implemented on January 1, 2022, consistent with the November 2021 settlement agreement reached between Golden State Water and the Public Advocate's Office at the CGUC, we would have reported additional revenues and water supply costs that would have resulted in higher earnings of $0.10 per share for the third quarter of 2022. Excluding the gains and losses on investments from both periods, including the impact caused by the delay in the water GRC in the results. Adjusted consolidated earnings for the quarter were $0.82 per share as compared to adjusted earnings of $0.76 per share for Q3 of 2021. That is an increase of $0.06 per share or near 8%. For our water segment, Earnings were $0.54 per share as compared to $0.62 per share last year, an $0.08 decrease. Both items, as discussed, affected earnings at the water segment. So factoring the same effect from the two items, adjusted earnings for the third quarter at the water segment were $0.67 per share. which was an increase of $0.05 per share as compared to adjusted diluted earnings of $0.52 per share for the same period in 2021. Also included in the water segment results for the quarter was a $1.9 million reduction in revenue of $0.04 per share to reflect our best estimate of revenues subject to refund from Golden State Water's pending cost of capital application. which included impact of a lower cost of debt requested in its application. There were also increases in operating expenses and in interest expense, partially offset by increasing other income, net of other expenses. Our electric segment earnings were $0.04 per share for the third quarter, same as last year's Q3. An increase in electric revenue and a lower effective income tax rate were offset by higher operating interest expenses. Earnings from our contracted services segment increased one cent per share for the quarter, which Bob will discuss later. Consolidated revenues for the third quarter of 2022 decreased by $1.8 million as compared to the same period in 2021. The decrease was mostly due to the cost of debt adjustment expected from the cost of capital proceeding at the water segment. Also, as mentioned previously, water revenue for the third quarter were based on 2021 adopted rates. due to a delay in a CPUC decision on the pending water DRC. The decrease in electric revenues was mainly due to CPUC approved rate increases for 2022, partially offset by a decrease in customer usage as compared to the same period of 2021. Turning to slide nine, looking at total operating expenses other than supply costs, Consolidated expenses increased approximately $600,000 as compared to the third quarter of 2021. This was due to a decrease in construction costs at our contracted services segments, resulting from lower construction activity, partially offset by increasing 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 rate during the quarter and overall borrowing level. Other income net of other expenses decreased by $200,000 due primarily to losses on investment held for retirement benefit plan as discussed. partially offset by decrease in the non-service cost components related to Golden State Water's benefit plan resulting from lower actuary losses recognized for the third quarter of 2022. Slide 10 shows the ETS bridge comparing the third quarter of 2022 with last year's third quarter. This slide reflects our year-to-date earnings per share by segment as reported. Fully diluted earnings for the first nine months this year were $1.61 as compared to $2 for the same period of 2021, a decrease of $0.39 per share. An unfavorable variance of $0.17 per share was due to losses of $6.4 million on the retirement plan investments this year, compared to gains of $2.3 million for the same period of 2021. In addition, had the new rates in the GRC settlement been approved by the CGUC and implemented on January 1, 2022, our earnings would have increased by 29 cents per share. Excluding the gains and losses on the retirement plan investment from both periods, and including the result of the new water rate from the settlement agreement for the first nine months of 2022, adjusted consolidated earnings for the nine months were $2.03 per share, which were higher than adjusted earnings of $1.96 per share for the same period in 2021. For more detail on the year-to-date results, please refer to yesterday's press release and our form. Thank you. Turning on liquidity on slide 12, net cash provided by operating activities was $89.9 million for the nine months ended September 30, 2022, as compared to $81.9 million for the period of 2021. In early 2022, our regulated utilities received a total of $9.8 million in COVID-19 relief funds from the state of California to provide assistance to customers for delinquent water and electric customer bills incurred during the pandemic. Since then, moratoriums on service disconnection for nonpayment for water and electric customers have ended, and service disconnection due to nonpayment have resumed. The increase in operating cash flow was also due to differences in timings of income tax installment payments between the two periods and the timing of billing off and cash receipts for construction work at military bases. These increases were partially offset by a decrease in customer cash collection resulting from decreased water consumption due to drought condition and rationing. These under-collections are being captured in our 2022 RAM account. Furthermore, the delayed in-water generate case decision has negatively affected cash flows from operating activities as year-to-date yield revenue has been based on 2021's adopted customer rate, while operating expenses have continued to increase. Our regulated utility invested $122.5 million on company-funded capital projects during the first nine months this year, and we are on target to meet $145 to $160 million of capital expenditures for the year. American States Waters Credit Facility, with a borrowing capacity of $280 million, expires in May 2023. With a maturity of less than a year, the outstanding borrowing has been classified as a current liability in the company's consolidated balance sheet. We plan to renew and extend this facility prior to expiration date. In addition, we expect to issue long-term debts through Golden State Water in the fourth quarter of 2022. We believe that the company's sound capital structure and A-plus credit rating, combined with its financial discipline and history and relationship with lenders, will enable us to assess their markets and put in place a new credit facility before May 2023 with reasonable terms. At this time, we do not expect American State 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 by $0.03 and $0.17 respectively as compared to the same periods last year. In addition, had 2022 water rates been approved consistent with the settlement agreement in the general rate case and implemented on January 1, 2022, Golden State Water's earnings contribution for the third quarter would have been 10 cents per share higher and 29 cents per share higher for the first nine months of 2022. Once a final decision is issued by the CPUC in the general rate case, the new rates will be retroactive to January 1st, 2022. Therefore, we will record the cumulative retroactive impact at the time a decision is issued. While 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're 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 $0.04 and $0.10, respectively, to reflect our best estimate at this time based on our accounting assessment of revenues 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 cannot fully 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, as more information in this proceeding becomes available. With regards 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 Advocate's Office in November of last year on this general rate case. Only three issues remain. For more details on this settlement, 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 of 10 cents per share for the quarter and 29 cents per share for the year to date. But since the new water rates will be effective January 1st, 2022, will record the retroactive revenues and expenses during the quarter in which the final decision is issued by the CPUC. A proposed decision is expected in the fourth quarter. Furthermore, 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 in capital infrastructure as 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 a cost of capital application with the CPUC in May 2021, requesting a capital structure of 57% equity and 43% debt, a return on equity of 10.5%, an embedded cost of debt of 5.1%, and a return on rate base of 8.18%. 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. A proposed 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 4 cents per share, and $5 million, or 10 cents per share, for the year-to-date 2022 to reflect the estimated revenue impact of a lower cost of debt of 5.1% as requested in our application as compared to 6.6% included in 2021 rates currently being billed 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 1st, 2021 through September 30th, 2022, the Moody's 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 1469.

Effective January 1st, 2023, Senate Bill 1469 allows Class A water utilities, including Golden State Water, to continue requesting the use of the Water Revenue Adjustment Mechanism, or RAM, in the next general rate case. With the passage of Senate Bill 1469, Golden State Water will be able to request the continued use of the RAM in 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 the court has agreed to hear the case. Opening briefs were filed on September 1st. However, as a result of Senate Bill 1469, last month the CPUC filed a motion to dismiss the petition and requested that the court suspend the proceeding scheduled Golden State Water Plans to file an opposition to the CPUC's motion to dismiss the petition. The court granted the CPUC's request to suspend the proceeding schedule, and there currently is no timeline for the court to complete the review.

As mentioned earlier, our electric utility subsidiary filed its general rate case on August 30th of this year.

In addition to new rates, There are a number of items that are requested, such as additional capital expenditures as part of the four-year rate cycle and a new capital structure. Interim rates are expected to be requested in the fourth quarter of this year, which will make new rates once approved in a CPUC final decision effective January 1st, 2023.

I will now discuss the drought situation in California.

As of October 18th, the U.S. Drought Monitor reported that 41% of California was in 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. and the calendar year is projected to end as one of the three driest years on record. As I mentioned in our previous earnings calls, due to deteriorating conditions, the California Department of Water Resources, or DWR, reduced the allocation of the State Water Project, or SWP, 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 in a memorandum account for future recovery. Turning our attention to slide 18, we present the growth in Golden State Waters 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 2018 to $980.4 million in 2021. Based on the general rate case settlement agreement, The 2022 rate-based amount is $1,152.3 million, which, if approved, would result in a compound annual growth rate of 11.3% since 2018. The rate-based amounts shown for 2021 and 2022 do not include any rate recovery for advice letter projects. Let's move on to ASUS, which contributed earnings of 12 cents per share for the third quarter as compared to 11 cents 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 cents per share, as compared to 35 cents per share for the same period last year, as the contracted services segment continues to experience challenges in its construction activity, resulting from longer material supply chain lead times, weather conditions, and other delays. As a result, ASUS is expected to contribute $0.43 to $0.47 per share for 2022. We expect the supply chain issues will improve next year and project that ASUS will contribute $0.45 to $0.49 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 ASUS with additional revenues and 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 bases 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 9.3% 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 is a continuing asset to our shareholders. This strong track record has allowed us to achieve a compound annual growth rate of 9.2% in 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

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

We will now take your questions. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And with no questions here, we will conclude our question and answer session. I'd like to turn the conference back over to Bob Sprouse for any closing remarks.

Thank you, Joe. Yes, 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 is now concluded.

Thank you for attending today's presentation. You may now disconnect your lines.