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.