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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. This call is being recorded. If you would like to listen to a replay of this call, it will begin this afternoon at 5 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. [Operator Instructions] This call will be limited to an 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 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 the 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 Sprowls, President and Chief Executive Officer of American States Water Company. Please go ahead.
Thank you, Kate. Welcome, everyone and thank you for joining us today. I will 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 will wrap it up with some updates on regulatory filings, American State Utility Services, or ASUS and dividends and then we will take your questions as the United States has responded to the COVID-19 pandemic and despite shelter-in-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 non-payment 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 bases 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 am 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 segment 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 shutoff water to customers. The construction programs for Golden State Water’s electric segment have not been negatively impacted. We estimate we will spend $115 million to $130 million for the year barring any delays resulting from changes in Golden State Water’s capital improvement schedule due to the COVID-19 pandemic. This would be about 3.5x our expected annual depreciation expense.
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 first quarter financial results on Slide 8. 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 the retirement plan as compared to $1.5 million in pre-tax gains in Q1 of last year resulting in decreasing earnings of $0.08 per share compared to the same period 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 have recorded the impact on 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 will 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’s related to the first quarter of 2019. The decrease in earnings for the quarter at ASUS was due to higher cost 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 that the 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 Water Generating they were also revenue increases related to CPUC approved surcharges to recover previously incurred costs. Electric revenue was $400,000 higher due to new rates approved by 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 during 2019.
Turning to Slide 10, our water and electric supply costs, were $21 million for the quarter, a slight increase of $200,000 from the same period last year any changes in supply costs as we mentioned before for both the water and electric segments as compared to the adopted supply costs are attracting 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 expenses expect 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 rate at the water segment approved during the May 2019 CPUC decision on the water generated 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 of this year with the same quarter of 2019. Turning to liquidity on this slide, net cash provided by operating expenses 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 extracting a CPUC approved catastrophic event memorandum account for future recovery.
As a result of the catastrophic event memorandum account, costs incurred in response to the COVID-19 pandemic, including bad debt expense are not expect to materially impact while there are any electric earnings there were also decreasing cash flow resulting from the timing in building of a cash receipt for construction work at military basis during the first quarter Golden State Water invested $23.2 million in company funded capital project 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 $216 million through the end of 2020 at which point, the borrowing capacity will revert to $200 million. We are trying to issue a 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 3 years. At this time, we do not expect American States Water to issue additional equity.
With that, I turn the call back to Bob.
Thank you, Eva. I would like to provide an update on our recent regulatory activity. Golden State Water has a financing application on file with the CPUC. Our 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 request to defer Golden State Water’s cost of capital application by 1 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 postponed this filing date by 1 year until May 1, 2021 with the 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 that there will be no changes to the company’s rate to return on rate base during the 1 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, 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 will 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%. The 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’ earrings 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 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 would 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 would 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 will now turn the call over to the operator for questions.
[Operator Instructions] Our first question is from Durgesh Chopra from Evercore. Go ahead.
Thank you. Bob and Eva, I hope you are well and safe and thank you for the slides and prepared commentary this morning.
Yes.
Yes, thanks. 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 am just wondering most of the utilities – your electric and gas peers have talked about substantial declines in their commercial and industrial classes and then offset in the residential class. I was just hoping to get any color that you maybe able to provide in the front?
Sure, Durgesh, be happy to. And I hope you and your families are safe. Yes, I will 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 – more than 90% is residential commercial. So, we really haven’t seen a drop in demand either on our water side or electric side.
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 at that.
We have fairly dry first quarter, which created – being largely responsible for the increase in the water demand.
Got it. Got it. But specifically for April, you are 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, you are not seeing anything material. I am focused just on the month of April, I get the first quarter increase, but I mean really the impact for the pandemic started like mid-March somewhere in that timeframe. So it sounds like April you guys didn’t see a material impact either way.
I don't think so we are looking to more.
Alright, we do. We haven’t noticed any drop I would say.
Got it, thank you. And then just sort of high level appreciate that you guys don't have forward looking EPS projections and but when I when I think about the sort of the Bob just a rate base growth rate of 8.5% last two years is that would you say is that a good proxy going forward is there is a reason to think that the rate of capital investment or rate based growth would slow down going forward is there 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 based growth maybe accelerated going forward over the over the long term is that is that fair where do you see, perhaps CapEx rate based growth next few years out?
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 for going forward we I wouldn't say that we are going to see an appreciable increase there. Because I know I think when you talk about electric and gas you might see. Some commodity price reduction there I mean we are not seeing that on the water side of course so and we are very mindful of what the rate based growth and it does to our customers we know we've got a we've got to keep our systems reliable and we are a pretty aggressive about putting a pipe in the ground but we also recognize there's a customer at the end of the end of the line here that has to pay for all this so which, which we really try to reach a balance.
Got it. Perfect. Thank you. Thanks, Bob and Eva. Have a great day.
You too.
You too.
Our next question is from Richard Verdi from Coker & Palmer. Go ahead.
Hi Bob and Eva and 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 in words announce as soon as the shut downs 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 were in effect.
Yes I will just give you my perspective on that we don't necessarily see any slowdown going forward because of COVID-19 in terms of folks who are working from home are telecommuting etcetera what sort of 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 is taking those funds and using it for other things the sense we get from the government at this point is that there is a few awards that would be made in 2020 and that’s really sort of in the history the last few years so I wouldn’t characterize that as a slow down so the latest is there is a there are couple of awards I think that are being planned on being made this year.
Okay that’s great color thank you for that Bob and Eva I will reach out to yourself or set up something for offline? Thanks a lot guys. See you soon. Thank you.
Yes. Thanks, Richard.
Thank you, Richard.
Our next question is from Michael Gaugler from Janney. Go ahead.
Morning everyone.
Hi, Michael.
Hi Michael.
Just a quick question Bob maybe this is one for you 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.
Yes it is 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 that’s a mix to our analysts and company management wring their hands a bit. So we will be looking at the possibility there, but we are not ready to sort of commit at this point that we are 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 have got an $0.08 per share swing.
Okay. That’s all I have. Thanks.
Thanks, Michael.
[Operator Instructions] Our next question is from Jonathan Reeder from Wells Fargo. Go ahead.
Hey, Bob and Eva. How are you all?
Okay, Jonathan. How about you?
Thank you.
I am not too bad, hanging in, pretty good today, but got a job. So that’s good.
Very good, Jonathan.
Got to be mindful of questions.
Yes.
Otherwise we just stock out on the golf course all day or something longer. That’s simple. But either way, I just have a couple of housekeeping kind of questions, EBITDA, I hear you correctly that you said the higher maintenance expenses at Golden State Water in Q1, you expect that to kind of be offset or balanced out through the course of the year?
Yes. I think first quarter we saw few unplanned maintenance came out and kind of put higher than last year, but as we don’t expect that continues throughout the year. So, I think that will level off.
Okay. And then in ASUS, it seems like there maybe some headwinds there during Q1, including hiccups on capital projects, do you expect to offset those over the course of the year or I did imply that results for ASUS returning towards the lower end of that $0.46 to $0.50 range?
Well, right now, I think we do expect to offset the results from the first quarter. We did have a couple of construction projects that we hit from unforeseen conditions on some projects, but the team is working hard to sort of make that up.
Okay. And then did that spike – does that related to some of the projects being delayed, I think there is something saying some of the ASUS projects were delayed?
No, it was more work on few of the construction projects than what we had anticipated, because of the site conditions.
Okay, but were there some ASUS construction projects that got delayed in Q1 or am I…
We don’t think so.
No, not really.
Okay. I must be thinking of something else. Okay, that’s all I had. Thank you.
Thanks, Jonathan.
Thank you. Take care.
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.
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 in the next quarter. So thank you very much. Bye-bye.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.