American States Water Company
Q4 2020 Earnings Call Transcript

Published: 23 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call discussing the company's Fourth Quarter and Full Year 2020 Results. The call is being recorded. If you would like to listen to a replay of this call, it will begin this afternoon at approximately 5

[Bob Sprowls:]

Welcome everyone, and thank you for joining us today. I'll begin with some brief comments on the quarter, and some highlights for the year; Eva will then discuss some financial details; and then I'll wrap it up with some updates on regulatory filings, American States Utility Services or ASUS, and dividends. And then, we'll take your questions. I would like to start by commenting on our fourth quarter performance. We had a strong quarter with consolidated earnings of $0.54 per share versus $0.45 per share earned during the fourth quarter of 2019, a 20% increase. You can see from this slide that each of our three operating segments contributed to the substantially improved performance. Eva will discuss this slide in more detail in a few minutes. Now, let's turn our attention to highlights for the full year, where we also had strong financial results in addition to providing essential uninterrupted services to our customers. For the year, we reported diluted earnings per share of $2.33, as compared to $2.28 reported for 2019, or $2.24 per share after excluding the $0.04 per share retroactive impact of the electric general rate case decision from 2019 related to the full year of 2018. In 2020, American States Water achieved a consolidated return on equity of 13.9%. During the year, we also filed a new Golden State Water Company general rate case for the years 2022 through 2024, continued our capital improvement work at our regulated utilities, continued to improve water and wastewater systems on the military bases we serve, raised the dividend by nearly 10% and reached 66 consecutive years of annual dividend increases. This was a unique and challenging year as a result of the COVID-19 pandemic.

[Eva Tang:]

Thank you, Bob, and hello, everyone. Let me start with an overview of our fourth quarter financial results on slide 9. As Bob mentioned, consolidated diluted earnings for the quarter were $0.54 per share compared to $0.45 per share, again a 20% increase over the same period last year.

[Bob Sprowls:]

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 it must meet before implementing the second and third year step increases in the third year rate cycle. I'm pleased to report that we have timely invested our capital projects and achieved capital spending consistent with the amount authorized by the CPUC.

[Operator:]

We will now begin the question-and-answer session. And our first question comes from Angie Storozynski of Seaport Global. Please go ahead.

[Angie Storozynski:]

Thank you. So I wanted to start with the -- you have more visibility on the use of full WRAMs, but you've been asking for rehearing of that decision removing the full WRAMs for you beyond 2024. So, I was just wondering how this request has been proceeding?

[Bob Sprowls:]

Yes. With regard to the request for rehearing we have not heard back from the CPUC at this point on that. Hope I understood your question Agnie?

[Angie Storozynski:]

Yes exactly. Yes. So, we're basically waiting for their decision. If they decide not to rehear it, should we expect that you will challenge this decision in courts?

[Bob Sprowls:]

Yes. So that was something we and others have given a lot -- are giving a lot of thought to the -- unfortunately in California, the only option we have is to challenge it at the California Supreme Court level. And then of course, the Supreme Court will -- would need to be able to hear the case. They have to -- would have to choose to hear the case. So we're still kind of thinking through that. There's positives and potential negatives to doing that.

[Angie Storozynski:]

Okay. Thank you. And then separately given yesterday's decision and that's the requirements to file your cost of capital application by early May and the fact that then your treasury yield is almost 100 bps lower now versus where it was when the current ROEs were set, could you maybe talk us through, your thought process or your expectations what those returns are going to be like now given that you already earned or your allowed ROE is already below average for water utilities across other states?

[Bob Sprowls:]

Right. Yes, there's -- as you know, a lot that goes into the mix, when determining an appropriate cost of capital and specifically the authorized return on equity. Yes, I don't -- it's difficult to predict, how things are going to move forward there. The fact that California's ROEs are already low relative to the rest of the country, I think is -- would be an advantage to us going forward. There will also be comments about losing the WRAM and that creates perhaps some additional risk that we could make. And throughout the period where the application is filed and you go through the hearing process, we and others do keep a pretty close tab on where interest rates are and where they're headed. So, pretty difficult to speculate at this point, whether our ROE will be adjusted up or down or remain the same at this point.

[Angie Storozynski:]

And just the last question on ASUS. So I appreciate your comments that you're hoping for additional contract awards. We were hoping to see some additional contracts awards -- contract awards in late 2020. They didn't happen. I understand that the change in administration doesn't help here. So, do you have any sense, when exactly roughly in which quarter, we should hear about more contracts?

[Bob Sprowls:]

Hard to predict. I -- just to be myself, I would say, it's going to probably at least be the second quarter before we hear anything on the -- those bases where we've submitted a bid and it's gotten to the final bid process. I think, you hit the nail on the head with the change in administration always seems to delay things and it's very understandable. But that's -- yes, we're very patient in this business and you have to be. And we think, we've got good things ahead of us for that business.

[Angie Storozynski:]

Thank you.

[Bob Sprowls:]

Thank you, Angie.

[Operator:]

And the next question will come from Jonathan Reeder of Wells Fargo. Please go ahead.

[Jonathan Reeder:]

Hey, Bob and Eva, how are you all?

[Bob Sprowls:]

Okay, Jonathan.

[Eva Tang:]

Doing well, Jonathan.

[Jonathan Reeder:]

I apologize in advance for some background noise I have a little work being done at the house today. So it might be noisy. Hopefully, you can hear me, okay. Just kind of following up on that last question, how many bases Bob do you think could be awarded say in the next 12 months? Is it still -- I think like two to three is what you were kind of anticipating were in the final stage?

[Bob Sprowls:]

Yes. I would say you might think about two -- I mean that's how I think about it. There was one base in Hawaii that the government decided not to privatize ultimately. And that was sort of on the list of bases folks were bidding on. So that's why I would say two rather than three.

[Jonathan Reeder:]

Yes. And then what sort of total level of ASUS construction expenses are you anticipating for full year 2021? I know you were running in the $50 million to $55 million range before this bump up in 2020. But I did -- the $15 million award is a little lower than the $23 million to $24 million I think you've gotten in the past two years. So should we expect it kind of gets back down to that $50 million to $55 million range in 2021?

[Bob Sprowls:]

Well, we do expect to -- we think the $15.5 million was outlier. I mean it was -- we think it was a function of COVID-19 largely. And we do expect that number to improve in 2021. I don't know Eva you...

[Eva Tang:]

Yes. I think, Jonathan, it all depends on construction activity and what kind of work we do. If we can -- if we have as Bob said get more awarded on our new capital upgrade then I think we'll continue to incur construction expenses. So to us if the higher construction expenses may be implied for a higher revenue as well if everything goes well. So I wouldn't look at construction expenses as one of our benchmarks for your projections.

[Bob Sprowls:]

Jonathan, I will point out we have some new leadership at ASUS in the form of Stuart Harrison, who joined us in July of last year and he is someone that's had a real strong history working with the Department of Defense. And so our strategy on some of these things are changing a bit. We're trying some different angles to try to get more projects approved. How successful we will be on that in 2021 is a bit of a question mark at this point given the kind of the long runway it takes to go through the process with the federal government. So we're optimistic, but the new administration of course just getting people in the right chairs et cetera it takes time for the federal government. We understand that. And then we'll see, but we are optimistic about 2021, although our -- the earnings contribution of $0.45 to $0.49 is pretty close to what we did in 2020. So we -- our company has always been one that doesn't want to get too far out in front of its skis on what it talks to the market about. So we're expecting a really good year in 2021. And -- but it is the -- I would say the landscape is probably more difficult to predict this year than it's probably been in the last few years because of new administration COVID-19 et cetera.

[Jonathan Reeder:]

Okay. So I mean when you say this is your guidance based on the COVID uncertainties like if things kind of clear up and maybe you are able to get some more of the construction work that's where we could see either something above the midpoint of that range or something like that for ASUS? That's where the uncertainties are not kind of on the expense side of the equation. It's more on the construction activity.

[Bob Sprowls:]

It is.

[Eva Tang:]

Yes.

[Bob Sprowls:]

Yes. That's a fair statement. If things clear up, we could be more on the higher end of that range than around the midpoint.

[Jonathan Reeder:]

Okay. And then, I haven't seen that the CPUC denied the extension, so sorry to hear that. Did they give any rationale as to why it was denied, or was it just pretty much -- pretty been only just no luck filed application?

[Bob Sprowls:]

So, I'm just going to read to you the paragraph from the letter. It says, with the one-year extension that you've already received, it has been four years since your last cost of capital filings. During that period interest rates have fallen significantly, a development that should be reflected in your authorized cost of capital and the rates ultimately adopted in your general rate cases. That was -- it's a very short letter. That was the most important paragraph, the other paragraph talked about, denying the deferral.

[Jonathan Reeder:]

Okay. So they do cite the fact that interest rates are lower now, okay. That's interesting. Had you -- in your attempts to get the extension did you have or engaged like the PAO and any sort of like potential settlement discussions, or did you kind of filed -- you filed they submitted their opposition. And you kind of -- it was left in the hands of the CPUC?

[Bob Sprowls:]

Yeah. So it's kind of an industry effort. I mean, it was interesting public advocates their opposition to the deferral request was largely a function of gee you're getting money and rates to file this application. And therefore, you should. So it wasn't a very strong opposition. But I know other companies have done things in terms of working to try to meet with the PUC. I'm not sure if there was reaching out to the public advocates to get them to change their view. It is a little surprising, given that the commission can't seem to get anything done on time. And then, -- but you want to add one more thing to the plate. But I don't know.

[Jonathan Reeder:]

Yeah. I just wasn't sure like, in the past on the electric side there was some precedent where they got together with the consumer advocate and proposed a two-year extension, but then it did include, like a little bit of a step-down in the ROE. I know you guys -- if the water is trying to broker any sort of deal like that. And just couldn't get there with the public advocates as opposed to going through the full process but it, sounds like, maybe not.

[Bob Sprowls:]

Yeah. Historically we haven't -- we've kind of done things differently than the electric. Electric usually would try to get public advocates or turn -- involve in the initial request of the deferral. We in the water space haven't historically done that.

[Jonathan Reeder:]

Okay. And then, Eva maybe this one is for you. What kind of consolidated tax rate do you expect in 2021? I think 2018 and 2019 were closer to 22%, before jumping up to like 24% this year.

[Eva Tang:]

I think, we'll be -- probably go back to a lower effective tax rate. There are certain things impacted this year on the income tax rate. So if you look at not 2020, but 2019 and prior year it's probably a better benchmark for your projection.

[Jonathan Reeder:]

Okay. And then, finally, the comment about not seeing the need to issue equity. What kind of period does that cover? Is that like a three-year forward outlook? Is it five years?

[Eva Tang:]

It is three years, I would say, Jonathan.

[Jonathan Reeder:]

Okay. Okay, great. All right. Thank you. That's all the questions I have. I appreciate you taken them and congrats on a good year and I hope it was a challenging year.

[Bob Sprowls:]

Thanks, Jonathan.

[Eva Tang:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Bob Sprowls, for any closing remarks.

[Bob Sprowls:]

Yes. Thank you, Andrea. I just want to thank everyone for their participation today. And let them know, that we look forward to speaking with them next quarter. So thank you everyone.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. And you may now disconnect.