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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. [Operator Instructions] After today’s presentation, we will have a question-and-answer session. [Operator Instructions] 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.
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 10-K and Form 10-Q on file with the Securities and Exchange Commission.
In addition, this conference call will include 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’ll turn the conference call over to Bob Sprowls, President and Chief Executive Officer of American States Water Company.
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.
In addition to producing strong first quarter results in all of our business segments, we filed the cost of capital application for the water segment yesterday, and saw new water and electric rates go into effect starting in January, which generate additional gross margin. And on a longer term scale, we continue to invest in infrastructure at our regulated utilities and contracted services business to provide quality services to our customers, perform more work on the military basis we serve, compete for new military-based contracts and deliver consistent dividend growth to our shareholders. I’ll touch on these in greater detail later on in the call.
I’ll 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. 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.
The increase in electric revenues was largely due to CPUC approved rate increases effective January 1 this year, as well as an increase in usage as compared to the first quarter of 2020.
Contracted services revenues for the quarter increased $3.8 million, largely due to an increase in construction activity resulting from timing differences of when construction activity was performed, as compared to the first quarter of last year. In addition, there were increases in management fees due to the successful resolution of various economic price adjustments.
Turning to slide 10, our water and electric supply costs were $22.6 million for the quarter, an increase of $1.6 million for the same period past year. Any changes in supply costs for both the water and electric segments as compared to the adopted supply costs are tracked in balancing account.
Looking at total operating expenses other than supply costs, consolidated expenses increased $1.7 million as compared to the first quarter of 2020. This was primarily due to increase in construction costs at ASUS, resulting from increased construction activity, partially offset by lower unplanned maintenance costs at the water segment and a decrease in administrative and general expense, because of lower legal and other outside service costs.
Interest expense, net of interest income and other, decreased by $2.5 million, due primarily to gains on investments held for retirement benefit plan, compared to losses incurred during the first quarter of last year, as previously discussed.
Slide 11 shows the EPS bridge comparing the first quarter of 2021 with last year’s first quarter.
Turning to liquidity on slide 12. Net cash provided by operating activities was $24.7 million, as compared to $15.7 million in 2020. This was largely due to recent improvement in cash flows from accounts receivable from utility customers, which were negatively impacted by the COVID-19 pandemic throughout 2020. The timing of cash receipts and disbursement related to other working capital items also affected the change in net cash provided by operating activities.
Our regulated utility invested $35.8 million in Company-funded capital projects during the quarter. And we estimate our full year 2021 Company-funded capital expenditures to be $120 million to $135 million.
In addition, we intended to prepay entire $28 million of Golden State Water’s 9.56% notes issued in 1991 and during 2021 later this month. The early retention will include a premium of 3% of par value or $840,000, if redeemed before May 15, 2022. Golden State Water recovers redemption premiums in its embedded cost of capital that’s filed in the cost of capital proceedings, where the cost savings from redeeming high interest rate debt are passed down to customers. At this time, we do not expect American States Water to issue additional equity.
With that. I’ll turn the call back to Bob.
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.
The CPUC’s February resolution did extend the COVID-19-related memorandum accounts established by Golden State Water and by Bear Valley Electric Service to track incremental costs associated with complying with the resolution. In addition, the resolution required utilities in California to file transition plans to address the eventual discontinuance of the emergency customer protection.
Golden State Water’s memorandum account is being addressed in its pending water general rate case, while Bear Valley Electric Service intends to include the memorandum account in its next gen rate case application expected to be filed in 2022. Golden State Water and Bear Valley Electric filed their transition plans with the PUC on April 1st of this year.
Turning our attention to slide 16. This slide presents the growth in Golden State Water’s rate base as authorized by the CPUC for 2018 through 2021. Weighted average water rate base has grown from $752.2 million in 2018 to $980.4 million in 2021, compound annual growth rate of 9.2%. The rate base amounts for 2021 do not include any rate recovery for advice letter projects.
Let’s move on to ASUS on Slide 17. ASUS’ earnings contribution increased by $0.04 per share versus last year’s first quarter to $0.12 per share, due to an overall increase in construction activity resulting from timing differences of when work was performed as compared to the first quarter of last year, and lower legal fees and outside services expenses. We reaffirm our projection that ASUS will contribute $0.45 to $0.49 per share for 2021. Thus far, the COVID-19 pandemic has not had a material impact on ASUS’ operations.
We continue to work closely with the U.S. government for contract modifications relating to potential capital upgrade work for improvement of the water and wastewater infrastructure at the military bases we serve.
In addition, 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. The U.S. government is expected to release additional basis for bidding over the next several years. We are actively involved in various stages of the proposal process at a number of bases, currently considering privatization. We continue to have a good relationship with the U.S. government, as well as strong history and experience in managing water and wastewater systems at bases, and believe we’re well positioned to compete for these new contracts.
I’d like to turn our attention to dividends. Each quarter, I like to remind everyone of our long and consistent history of dividend payments payment, dating back to 1931, in addition to our unbroken 66-year history of annual dividend increases, which places us in an exclusive group of companies on the New York Stock Exchange. In the past decade, our Board of Directors has raised the dividend at a compound annual growth rate of 9.4%, in line with our dividend policy, providing a compound annual growth rate of more than 7%, over the long-term.
I’d like to conclude our prepared remarks by thanking you for your interest in American States Water, and will now turn the call over to the operator for questions.
Ladies and gentlemen, at this point, we will begin the question-and-answer session. [Operator Instructions] And our first question today comes from Durgesh Chopra from Evercore ISI. Please go ahead with your question.
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?
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.
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?
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.
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?
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.
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.
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.
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?
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 Instructions] And our next question comes from Angie Storozynski from Seaport Global. Please go ahead with your question.
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?
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.
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?
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.
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.
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?
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 instructions] And as showing no additional questions, I’d like to turn the conference call back over to Mr. Sprowls for any closing remarks.
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.
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.