Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing the company's Q2 2022 results. The call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at 5 P.M. Eastern Time and run through Tuesday, August 9, 2022 on the company's website, www.aswater.com. The slides that the company will be referring to are also available on the website. After today's presentation, there'll be an opportunity to ask questions. To ask a question, you may press Star then one on your touch-tone phone. 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 Robert J. Sprowls, President and Chief Executive Officer and Eva G. 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 the 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 would like to turn the call over to Rob Sprowls, President and Chief Executive Officer of American States Water Company. Sir, you may begin.
Thank you, Chad. 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, ASUS, dividends, and then we'll take your questions. Before I provide some highlights on the second quarter results, I'm pleased to report that last week our board approved another sizable dividend increase. The annualized dividend rate after this increase is $1.59 per share, which represents nearly a 9% increase from the current annualized dividend rate of $1.46 per share. This action marks the 345th consecutive dividend payment by the company.
American States has paid dividends every year since 1931, increasing the dividends received by shareholders each calendar year now for 68 consecutive years. Now on to the second quarter results. Like the first quarter of this year, this was a unique quarter, with earnings per share decreasing from the prior year's second quarter. 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 from the California Public Utilities Commission, or CPUC on our water general rate case at Golden State Water.
Excluding 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 second quarter results, adjusted consolidated diluted earnings for the second quarter of 2022 were $0.71 per share, as compared to adjusted diluted earnings of $0.69 per share for the same period in 2021, an adjusted increase of $0.02 per share. Eva will discuss these results in detail. We continued to deliver high-quality water, wastewater, and electric services to customers during the quarter. We're making good progress on our goal to spend $140 million-$160 million this year in infrastructure investments at our regulated utilities that we discussed during previous calls, strengthening the critical infrastructure that our customers require for the long term.
Along with awaiting a decision from the CPUC and Golden State Water's general rate case, we are also actively involved in processing our cost of capital application. Hearings on this proceeding occurred in May of this year, and briefs were filed one month later in June. Also in June, Standard & Poor's affirmed its A+ credit rating for both American States Water Company and Golden State Water Company. Although both ratings continue to carry a negative outlook. With the company's sound capital structure and A+ credit ratings, it will enable us to continue accessing debt financing on reasonable terms, which we expect to do over the next year. Eva will provide an update on our financing plans, and I'll now turn the call over to her.
Thank you, Bob. Hello everyone! Again, thank you for joining us today. Let me start with our second quarter financial results. Consolidated earnings recorded were $0.54 per share compared to $0.72 per share last year, a decrease of $0.18 per share. This included losses of $3.5 million or $0.07 per share on investment held to fund a retirement plan, as compared to the gains of $1.6 million or $0.03 per share for Q2 last year. This item alone resulting in unfavorable variance of $0.10 per share. Furthermore, due to the delay in receiving a final decision on the pending water general rate case, water revenues for 2022 were based on 2021 adopted rates.
Had the new rates been approved and implemented on January 1, 2022 consistent with November 21, 2021 settlement agreement reached between Golden State Water and the Public Advocates Office of the CPUC. We would have recorded additional revenues and the water supply costs that would have resulted in higher earnings of 10 cents per share for the second quarter of 2022. Excluding the gains and losses on investments from both periods and including the additional revenues and water supply costs caused by the delays in the water GRC, in the results, adjusted consolidated earnings for the second quarter of 2022 were 71 cents per share as compared to adjusted earnings of 59 cents per share for Q2 of 2021. That's an increase of 2 cents per share.
For our water utility subsidiary, Golden State Water Company, earnings were $0.40 per share as compared to $0.57 per share last year, a $0.14 decrease. Both items as discussed affected earnings at the water segment. Factoring the same effect from the two items, adjusted earnings for the second quarter at the water segment were $0.57 per share, which was an increase of $0.03 per share as compared to adjusted earnings of $0.54 per share for the same period in 2021. Also included in the water segment results for the quarter were a $1.7 million reduction in revenues or $0.03 per share to reflect our best estimate at this time of revenue subject to refunds from Golden State Water's pending cost of capital application, which includes the impact of a lower cost of debt requested in this application.
We cannot predict the ultimate outcome of the cost of capital application and associated impact on 2022 revenues. Any changes in estimate will be made if necessary, as more information in this proceeding becomes available. There were also increases in operating expenses and in effective income tax rate, partially offset by increasing the other income net of other expenses. Our electric segment earnings for three-month periods ending June 30, 2022 and 2021 were $0.04 per share. An increase in electric revenues and lower effective income tax rates we're offset by higher interest expense. Earnings from our contracted services segment decreased $0.01 per share for the quarter, which Bob will discuss later in the call. Consolidated revenue for the second quarter of 2022 decreased by $5.2 million as compared to the same period in 2021.
The decrease was mostly due to lower construction activities at our contracted services segment due to timing and other delays, as well as the cost of debt adjustment expected from the cost of capital proceeding at the water segment. Also, as mentioned previously, water revenue for the second quarter of 2022 were based on 2021 adopted revenue due to the CPUC's delay on the pending water general rate case. The increase in the electric revenues we're largely due to CPUC-approved rate increases effective January 1, 2022, partially offset by a decrease in customer usage as compared to the same period in 2021. Turning to slide 9. Our water and electric supply costs were $28.6 million for the quarter, an increase of $600,000 from same period last year.
Any changes in supply costs for both the water and electric segments as compared to the adopted supply costs are tracked in balancing accounts. Looking at total operating expenses other than supply costs, consolidated expenses decreased $2.9 million as compared to the second quarter of 2021. This was primarily due to a decrease in construction costs at our contracted services segment, resulting from lower construction activity, partially offset by increase in other operations and maintenance costs and depreciation expense. Other income net of other expenses decreased by $4.2 million due to losses on investments held for our retirement benefit plan, as discussed. This was partially offset by a decrease in the non-service cost component related to Golden State Water's benefit plan, resulting from lower actuarial losses recognized for the second quarter of 2022.
Slide 10 shows the EPS bridge comparing the second quarter of 2022 with last year's second quarter. Moving on to slide 11. This slide reflects our year-to-date earnings per share by segment as reported. Fully diluted earnings for the six months ended June 30, 2022, were $0.92 compared to $1.24 for the same period in 2021, a decrease of $0.32 per share. Again, an unfavorable variance of $0.14 per share was due to losses of $5.2 million on its retirement plan investments this year, as compared to gains of $2.2 million for the same period of last year. In addition, as previously discussed, had the new water rates in the GRC settlement had been approved by the CPUC and implemented on January 1, 2022, our earnings would have increased by $0.19 per share.
Excluding the gains and losses on the retirement plan investments from both periods and including the result of the new water rates from the settlement agreement for the first half of 2022, adjusted consolidated earnings for the six months ended June 30, 2022 were $1.21 per share, which were higher than the adjusted earnings of $1.20 per share for the same period last year. For more details on the year-to-date results, please refer to yesterday's press release and Form 10-Q. Turning to liquidity on slide 12. Net cash provided by operating activities was $56.9 million for the first six months of the year, as compared to $41.1 million for the same period in 2021.
In early this year, our regulated utility 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 and water customer bills incurred during the COVID-19 pandemic. The increase in operating cash was also due to differences in the timing of income tax installment payments between the two periods and the timing of billing offset and cash receipts for construction work at military bases. Our regulated utility invested $78.3 million on company-funded capital projects during the first half of 2022, and we are on target to meet $140 million-$160 million of capital expenditures for the year. In April 2022, AWR's credit facility was amended and increased the borrowing capacity from $200 million to $280 million.
The overall increase in total borrowing capacity will support, among other things, the capital expenditure program at Golden State Water. This credit facility expires in May next year 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 as of June 30, 2022. We expect to renew an extended credit facility prior to expiration date. In addition, we expect to issue long-term debts through Golden State Water prior to May 2023 and use the debt proceeds to pay off a portion of the outstanding borrowing under this facility. We believe the company's sound capital structure and A-plus credit rating, combined with its financial discipline, will enable us to access the debt market and put in place a new credit facility with reasonable terms before May 2023.
At this time, we do not expect American States Water to issue additional equity for the next 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 second quarter and year-to-date earnings. 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 second quarter would have been $0.10 per share higher and $0.19 per share higher for the first half of 2022. Once a final decision is issued by the CPUC in the general rate case, the new rates will be retroactive to January 1, 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 also recorded a reduction to water revenues, which decreased the quarterly and year-to-date per share earnings by $0.03 and $0.06, 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 primarily 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.
The investment losses on one of our retirement plans during the second quarter and year-to-date periods of 2022 negatively impacted earnings per share by $0.10 and $0.14 respectively as compared to the same period last year. We also expect ASUS to catch up on its construction activity during the second half of 2022, and we reaffirm our projection that ASUS will contribute $0.45-$0.49 per share for 2022. 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 Advocates 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 we have not seen a proposed decision from the CPUC. As we mentioned, the delay negatively impacted our earnings by a net of $0.10 per share for the quarter. Since the new water rates will be effective January 1, 2022, we 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 second half of this year. 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 also included in the pending general rate case.
The additional annual revenue requirements generated from these capital investments of $1.2 million and became effective February fifteenth of this year. Next, I'll 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. Once approved by the CPUC, the revenues will be reset based on the new cost of capital. Hearings on this proceeding occurred in May of this year, and briefs were filed in June.
A proposed decision is expected in the second half of 2022. In the second quarter, we recorded a reduction to revenues of $1.7 million, or $0.03 per share, and $3.1 million, or $0.06 per share, for the year-to-date 2022 to primarily reflect the estimated revenue impact of a lower cost of debt of 5.1% as requested in our cost of capital application as compared to 6.6% included in 2021 rates currently being billed to water customers. Our electric utility subsidiary is scheduled to file its general rate case in August to set new rates for the years 2023 through 2026. I will now discuss the drought situation in California.
As of July 26th of last month, the U.S. Drought Monitor reported that 60% of California was in extreme drought as compared to 89% one year ago, and 90% of California was in severe drought as compared to 95% 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 last earnings call, due to deteriorating conditions, the California Department of Water Resources reduced the allocation of State Water Project or SWP water from 15% to 5% on March 18th of this year.
In April, the Metropolitan Water District of Southern California, or MWD, declared a water supply emergency condition for the State Water Project dependent areas that impacts Golden State Water's, Simi Valley, and Claremont service areas, which utilize a portion of their supply from the State Water Project. This action also includes a phased emergency conservation program that limits outdoor watering in those areas to one day per week. In June, Golden State Water moved all the other water systems to the second stage of its water rationing plan that limits outdoor watering to two days per week. 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 17, we present the growth in Golden State Water's average rate base as authorized by the CPUC for 2018 through 2021. The 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 base amount is $1,152.3 million, which, if approved, would result in a compound annual growth rate of 11.3% since 2018. The rate base amounts shown for 2021 and 2022 do not include any rate recovery for advice letter projects.
Let's move on to ASUS, which had earnings of $0.10 per share for the second quarter of 2022, as compared to $0.11 per share for the same period in 2021. The decrease was largely due to timing differences in construction activity between the two periods, as well as the slowdown caused by longer material supply lead times, weather conditions, and other delays, partially offset by increased management fees. Again, we reaffirm our projection that ASUS will contribute $0.45-$0.49 per share for 2022. 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 margins.
We are disappointed that we didn't win the award for operating the wastewater system at Naval Station Mayport recently issued, but we remain confident that we can effectively compete for new military-based 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 I already touched on earlier in the call. Last week, we announced an 8.9% increase in the third quarter dividend. Our quarterly dividend rate has grown at a compound annual growth rate 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 9.2% growth rate 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, and will now turn the call over to the operator for questions.
Thank you. We'll now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question will come from Angie Storozynski from Seaport. Please go ahead.
Thank you. Just wondering, I mean, what do you think is the reason why you haven't heard from the CPUC yet, either on the settlement for your rate case or the cost of capital proceeding? I appreciate that you'd still expect decisions in both cases, in the second half. Well, you know, the time is running out. Again, I'm just wondering if you have an idea what's been going on.
Sure, Angie and Hello. With regard to the general rate case, we were told earlier this year that the assigned administrative law judge was involved in several weeks of evidentiary hearings in another general rate case proceeding. Fortunately, those hearings are now over, and we understand that the ALJ is now focused on preparing the proposed decision in our water general rate case. That covers the general rate case. The cost of capital is a little harder to understand, although, you know, we just completed the hearings in May and the briefing in June. We'll just have to see how long it takes for the commission to get out a proposed decision in that hearing.
I appreciate your comments. Do you think that there could be some link between, on the cost of capital side, between when the commission plans to issue or the ALJ plans to issue a proposed decision and that's, you know, end of September, October first mark for the cost of capital adjustment mechanism on the water side? I mean, is it possible that the commission is waiting to see if an adjustment, upward adjustment could happen and based on that rule in this pending cost of capital proceeding?
Yeah. It, Angie, I think it is possible that they may wait till after September 13th to see where the adjustment mechanism comes out, cause it's pretty close as to whether it's going to trigger or not. You know, the general rate case, they're behind on that, so I think they're just behind too. Although you could craft some strategy behind why they might wanna wait till after September 13th.
Yes. Could you remind us what is the benchmark against which I'm measuring that 100 basis points band for that adjustment?
Yeah.
I mean, okay.
AA utility bond rate.
Yeah.
Yeah.
The benchmark right now is at 2.89%, Angie. You have to be-
2.89?
Yeah, 2.89%.
Okay.
You have to be 100 basis point and over-
Yeah
In order to trigger 50% of that change.
It is an average.
Yeah.
For the period.
12-month average.
Yeah, 12-month average.
Yes. Well, lately the pullback in rates is not helpful, right? To hit that mark. I mean, it's as you said, it's a close call at this point.
It is a close call.
Yeah.
Yes.
It's gonna be close.
Yeah. Okay.
And-
Okay.
Just to clarify.
Power impact only rates in 2023, right?
Correct.
In a sense, if they were to lower the base ROE in anticipation of that 50 basis points increase that would happen in 2023, you know, 2022 is still being impacted downwards, no?
Correct. Yeah.
Okay
The ROE and the decision, you know, covers the period 2022 through 2024, but the adjustment mechanism would apply to 2023.
Yes.
And so-
Okay
Theoretically, they need to establish the proper ROE for 2022, and then let the adjustment mechanism do what it's going to do.
Yes. Okay. Basically, just assuming that this cost of capital proceeding is just the adjustment of the cost of debt, as you're currently reflecting in your results, and assuming that ASUS does catch up to, you know, for the remainder of the year to have, say, flat earnings year-over-year. You know, given this drag that you were seeing from the pension accounts, I mean, is there any chance you could actually get to flat earnings year-over-year? I mean, I've been actually looking at it. I mean, it's, I understand that you have no control over the performance of your pension funds, but then again, you did account for benefits from those pension funds in prior earnings.
I'm kind of torn if that drag should be excluded. Again, knowing of the drag that we see thus far, any way you can be flat year-over-year in earnings?
Well, you know, so far, as you know, the Rabbi trust retirement plan is $0.10 under, $0.10 of losses to date. I don't recall what the gain was last year in the $2 and, what was it? $2.55 last year.
The whole year.
Yeah. We'd have to not only make up the loss of the $0.10, we'd also have to make up the gain that we had last year, which, you know, I think the S&P was up 30% in 2021. The rest of the businesses would need to make up for that difference for us to get back there. I mean, it's possible. The market's been better lately. These are June 30 numbers, of course. It's possible. I mean, we think ASUS will make up some ground, and we think, you know, both of our utilities are doing fine, but for the delay in the various proceedings.
Okay. I understand. Thank you. Thank you both.
Thank you, Angie.
Again, if you have a question, please press star then one. The next question will come from Jonathan Reeder from Wells Fargo. Please go ahead.
Hey, Bob and Eva. Hope you guys are well today.
Hi, Jonathan.
Hi, Jonathan.
Thank you.
You too.
Yeah. Just to clarify one of your earlier comments, Bob, do you believe, like a proposed decision from the ALJ and the GRC is imminent then, or did the ALJ just kind of start working on it? What's kind of the timing of how far into this drafting of the PD the ALJ is?
Yeah, I don't think we've heard the word imminent. You know, it always seems to take longer than what one would expect. You know, not to get on my soapbox, but there's two parties in this general rate case, and the two parties have signed a settlement agreement. Sort of frustrating as to, okay, where's the difficulty here? Hopefully, you know, we can see something in the next few months, I would say. I don't think we're talking about days. I think perhaps we're talking a couple of months.
Okay. I mean, it sounds like it's probably not gonna be approved in Q3, but assuming that's the case, do you know, like how much of an EPS divot it would be to, you know, the Q3 EPS, you know, along the lines of, you know, the $0.09 in Q1 and $0.10 in Q2, like how that distribution goes?
Yeah. Typically, third quarter is higher.
Yeah, it's higher.
than second quarter.
A-a-annual-
Usage.
Right. Annual impact, Jonathan, you know, the GRC is about $0.40 higher compared to our current, but then you have to decrease that by $0.15 of cost of debt adjustment. The annual impact is about $0.25, a net impact. We already incurred, you know, $0.19 minus $0.06, so $0.13. We have about another $0.12-$0.13 for the third and fourth quarter.
Another $0.12-$0.13 for the back half of the year from
Right. Right
from GRC.
This is, you know, net of the cost of debt adjustment.
Right. The $0.19 is not net. The $0.19 is.
Right.
Yeah.
Right. I guess we should be looking at it as $0.21 still for the second half of the year, just purely from the GRC.
Yeah. Correct.
You know.
More than cost of debt.
The bulk of that being Q3 or, you know, maybe 75% or something of it. Okay.
Yeah. Third quarter is typically greater than second quarter.
Right.
In terms of usage, so.
Okay. Yeah, no, just, like you, am hopeful, I guess, the settlement is approved by the end of the year and, you know, then the full year number kinda is what it is. In the meantime, just trying to figure out how to adjust Q3. Appreciate that. Then, my last question, shifting over to ASUS. You know, I think the construction activity during the first six months was only, like, two-thirds of what it was during the same period last year, you know, due to the delays. I know you reiterated the guidance range, you know, 45-49, and last year, ASUS contributed $0.48. It just kind of seems like potentially a lot of ground to make up in 2022 on the construction side.
Like, should we be thinking, you know, more, you know, the low end of the range for this year just due to those delays?
Well, just a couple comments on that. The first quarter of 2021, that was a very strong quarter from a construction activity standpoint relative to other first quarters. When we look forward versus last year, that strong first quarter last year was a hard benchmark to hit. The other point I'll make is we have had strong construction in the third and fourth quarter historically. You know, we're looking at making up the difference here in the last two quarters. Although the world is a bit different than it was last year, given material pricing and lead times, et cetera. I mean, we're gonna try to bang out as much construction as we can here in the last two quarters.
Don't know where that's gonna put us in that $0.45-$0.49 range.
Okay. I mean, if things.
Yeah.
Sorry.
We will certainly provide an update in Q3 to you, Jonathan.
Yeah.
How we do there.
Right. I guess the way you're seeing it today, I mean, if things go well, you got, you know, the materials ordered, stuff like that, like you could still execute as you were anticipating for the full year.
Yes.
I guess is fair. Yeah. Okay. All right. Cool. Well, good luck, you know, getting some proposed decisions and constructive ones out of the CPUC. We're eagerly awaiting them.
Thank you. Thank you.
Thank you, Jonathan.
Once again, if you have a question, please press star then one. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Bob Sprowls for any closing remarks.
Thank you, Chad. I just wanna wrap it up today by thanking everyone for their participation and let you know that we look forward to speaking with you the next quarter. Thanks, everybody.
Thank you, sir.
Have a good rest of your summer.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.