Welcome to the American States Water Company Conference Call discussing the Company's 3rd Quarter 2020 Results. This call is being recorded. If you would like to listen to a replay of the call, it will begin this afternoon at approximately 5 pm Eastern Time and run through Tuesday, November 10, 2020, on the company's website, www.aswater.com. The slides of the company you'll be referring to are also available on this website. This call will be limited to 1 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 ks 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 would like to turn the conference over to Bob Sprowls, President and Chief Executive Officer of American States Water Company.
Thank you, Keith. Welcome everyone and thank you for joining us today. I'll begin with a few highlights for the quarter, Eva will review some financial details, and then I'll wrap it up with some updates on regulatory activity, ASUS and dividends, and then we will take your questions. I would like to start by thanking our employees. Through these uncertain times, the employees of American States Water once again delivered solid results.
Our consolidated results for the Q3 were $0.72 per share as compared to adjusted earnings of $0.69 per share for the Q3 of 2019, an increase of $0.03 per share or 4.3%. The adjusted earnings for the Q3 of 2019 exclude a $0.07 per share retroactive adjustment booked in that quarter for the August 2019 electric general rate case decision for periods prior to the Q3 of 2019. I'm pleased to report that in July of this year, the company's Board of Directors approved a 9.8% increase in the quarterly cash dividend from $0.305 per share to 0 point 3 Along with providing essential services and assistance to our customers and communities to get through the pandemic, we are working our way through some regulatory processes with the California Public Utilities Commission or CPUC, which I'll discuss later on. In addition, we continue to pursue new military based contracts and our service levels remain high for all three of our subsidiaries. Now that we're going on month 8 of the COVID-nineteen pandemic, I wanted to reflect on the achievements of our personnel across the United States, both customer facing and those who provide support in a remote working environment.
Since March, our field personnel have worked tirelessly to keep the water, electricity and wastewater services operating smoothly for over 1,000,000 customers, including 11 military bases. They've embraced more stringent safety protocols as we look to keep our employees and customers healthy. While doing this, we've kept our commitments to strengthen our infrastructure for the short and long term benefit of our customers. For the 9 months ended September 30, 2020, our water and electric utility segments spent $82,300,000 in company funded capital expenditures, on track to spend $105,000,000 to $120,000,000 for the year, barring any scheduling delays resulting from COVID-nineteen. This would be about 3.5 times our expected annual depreciation expense.
While we hope for a return to normal sooner rather than later, I'm proud of the resiliency that our people have shown. I will now turn the call over to Eva review the financial results for the quarter.
Thank you, Bob. Hello, everyone. Let me start with a more detailed look at our 3rd quarter financial results on Slide 7. As Bob mentioned, consolidated earnings for the quarter were $0.72 per share compared to $0.69 per share as adjusted for the same period in 2019. Earnings at our Water segment increased $0.04 per share for the quarter.
There continues to be volatility in the financial markets due at least in part to COVID-nineteen pandemic. This volatility resulted in an increase in gains on investments held to fund 1 of Golden State Water's retirement plans, contributing a $0.02 per share increase in the water segment's earnings for the quarter. The remaining increase in the water segment's earnings for Q3 of 2020 was due to a higher water gross margin from new water rates, partially offset by an increase in operating expenses, interest expense and the effective income tax rate as well as lower interest income earned on regulatory assets. Excluding the $0.07 per share retroactive impact from August 2019 CPUC decision, our electric segment's earnings for the 3rd quarter were $0.04 per share as compared to $0.03 per share as adjusted for the Q3 of 2019, largely due to an increase in the electric gross margin resulting from new rates authorized by the CPUC, partially offset by increases in legal and other outside service costs. The final August 2019 decision also approved the recovery of previously incurred incremental tree trimming costs totaling $302,000 which resulted in a reduction in maintenance expense that was recorded in the Q3 of last year.
There was no equivalent item in 2020. Earnings from our contracted services segment were $0.10 per share for 3rd quarter of 2020 as compared to $0.12 per share for the same period in 2019. There was an overall decrease in construction activity resulting from weather delays and slowdowns in permitting for construction projects and government funding for new capital upgrades, caused in part by the impact of COVID-nineteen. The company expects construction activity to pick up during the Q4 relative to the 1st 3 quarters, barring any further delays due to the weather conditions. This decrease was partially offset by an increase in management fee revenue and lower travel related costs.
Water revenues increased $3,500,000 during the Q3 of 2020 due to full second year of debt increases for 2020 as a result of passing earnings tests. The decrease in electric revenues were largely due to $3,700,000 in retroactive revenues recorded in the Q3 of 2019 for periods prior to that. Contracted services revenue for the quarter decreased $500,000 for reasons previously discussed. The decrease was partially offset by increases in management fees due to the successful resolution of various economic price adjustments. Looking at Slide 9, our water and electric supply costs were 32 $300,000 for the Q3 of 2020 as compared to $31,800,000 for the Q3 of 2019.
Any changes in the supply cost as compared to the adopted supply cost are tracked in balancing accounts for both the water and electric segments. Total operating expenses, excluding supply costs, increased $1,500,000 versus the Q3 of 2019. There was an increase in construction costs at our contracted services business, American State Utilities Services, or ASUS, due to higher costs incurred on certain projects, as well as increases in depreciation expense and property and other taxes as a result of additions of utility plant and fixed assets at all of our business segments. There was also a $302,000 reduction costs to reflect CPU's disapproval in August of 2019 for recovery of previously incurred tree trimming costs as previously mentioned. There was no similar reductions in 2020.
Interest expense, net of interest income and other, including investments held in a trust to fund a retirement benefit plan, decreased $1,100,000 due to higher gains because of the recent market conditions. This was partially offset by lower interest income on regulatory assets and lower interest income earned on certain U. S. Construction projects. Slide 10 shows the EPS bridge comparing the Q3 of 2020 with the Q3 of 2019.
The slides reflect our year to date earnings per share by segment. Fully diluted earnings for the 1st 9 months of 2020 were $1.79 per share as compared to $1.79 per share as adjusted for the same period of 2019. The 2019 adjusted earnings exclude a $0.04 per share retroactive impact booked last year resulting from August 2019 electric GRC decision for the full year of 2018, which is shown on a separate line in the table on this slide. For more details, please refer to yesterday's press release and our Form 10 Q. In terms of the company's liquidity, net cash provided by operating activities for the 1st 9 months of 2020 was $87,800,000 as compared to $84,300,000 for the same period in 2019.
The increase was largely due to a $7,200,000 refund to the water customers in 2019 related to the 2017 tax law changes, partially offset by a decrease in cash flow from higher accounts receivable from utility customers due to the economic impact of COVID-nineteen and the suspension of service disconnections of customers for non payment. Our regulated utilities invested $82,300,000 in company funded capital projects during the 1st 9 months of 2020. The water utilities capital program has been somewhat affected by COVID-nineteen, resulting in certain project delays. However, our regulated utilities still plan to spend $105,000,000 to $120,000,000 in company funded capital expenditures for the year, borrowing further delays due to the pandemic. As we mentioned in the last quarter, Golden State Water issued unsecured private placement notes totaling $116,000,000 in July and repaid a large portion of its intercompany note issued to AWR parent.
Currently, American States Water has a credit facility of $200,000,000 to support water and contracted services operations. We also put in place a separate 3 year $35,000,000 revolving credit facility for the electric segment that is not guaranteed by the parent. At this time, we do not expect American States Water to issue additional equity. With that, I'll turn the call back to Brock.
Thank you, Eva. I'd like to provide an update on our recent regulatory activity. In July, Golden State Water filed a general rate case application for all of its water regions and the general office. This general rate case will determine new water rates for the years 2022, 2023 2024. Among other things, Golden State Water requested capital budgets in this application of approximately $450,600,000 for the 3 year rate cycle and another $11,400,000 of capital projects to be filed for revenue recovery through advice letters when those projects are completed.
A decision in the water general rate case is scheduled for the Q4 of 2021 with new rates to become effective January 1, 2022. On August 27, 2020, the CPUC issued a final decision in the first phase of the CPUC's order instituting rulemaking, evaluating the low income rate payer assistance and affordability objectives contained in the CPUC's 2010 Water Action Plan, which also addressed other issues, including matters associated with the continued use of the Water Revenue Adjustment Mechanism or RAM by California Water Utilities. The final decision also eliminates the modified supply cost balancing account or MCBA, which is a full cost balancing account used to track the difference between adopted and actual water supply costs, including the effects of changes in both rates and volume. Based on the language in the final decision, any general rate case application filed by Golden State Water and the other California water utilities after the August 27, 2020 effective date of the decision may not include a proposal to continue the use of the RAM or MCBA, but may instead include a proposal to use a limited price adjustment mechanism called the Monterey style Ram and an incremental supply cost balancing account.
This decision will not have any impact on Golden State Water's RAM or MCBA balances during the current rate cycle, which runs from 2019 through 2021. In addition, the language in the decision supports Golden State Water's position that it does not apply to its general rate case application filed in July of this year, which will set new rates for the years 2022 through 2024. At this time, we cannot predict the potential impact of this decision, if any, on the pending water general rate case. On or prior to October 5, 2020, Golden State Water, 3 other California water utilities and the California Water Association filed separate applications for rehearing on the decision in the low income proceeding. As you know, there are water utilities in the state that have been under the Monterey style RAM and incremental supply cost balancing account since 2,008, and they seem to be able to successfully manage the effects of these mechanisms.
While we are disappointed by this PUC decision, we believe we are well positioned to strategize and adapt to the new requirements. As you'll see from this slide, the weighted average water rate base as adopted by the CPUC has grown from $717,000,000 in 2017 to $916,000,000 in 20.20, which is a compound annual growth rate of 8.5%. The rate base amounts for 2020 do not include the $20,400,000 of advice letter projects approved in Golden State Water's last general rate case. Let's move on to ASUS on slide 17. ASUS's earnings contribution for the quarter was $0.10 per share versus $0.12 per share in the year prior.
The decrease was mainly due to a reduction in construction activity due to weather delays, as well as slowdowns in permitting for construction projects and in government funding for new capital upgrades that has occurred throughout 2020. Company expects construction activity to be stronger in the 4th quarter relative to the 1st 3 quarters, barring any further delays due to weather conditions. But because of the previous delays, we now estimate ASUS's 2020 earnings contribution to be at the low end of the $0.46 to $0.50 per share range we have previously provided. In light of continued uncertainty associated with the effects of COVID-nineteen, we project ASUS to contribute $0.45 to $0.49 per share for 2021. 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. While we are disappointed that ASUS was not awarded with the most recent military base water and wastewater privatization contract, we are confident that we will win a fair share of the future awards. I would like to turn our attention to dividends outlined on slide 18.
We believe achieving strong and consistent financial results along with providing a growing dividend allows the company to continue to attract capital to make necessary investments in the utility infrastructure for the communities and military bases that we serve and return value to our shareholders. American States Water has paid dividends to shareholders every year since 1931, increasing the dividends received by shareholders each calendar year for 66 consecutive years, which places it in an exclusive group of companies on the New York Stock Exchange that have achieved that result. 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'd like to conclude our prepared remarks by thanking you for your interest in American States Water. I'll now turn the call over to the operator for questions.
Yes. Thank you. We will now begin the question and answer session. And the first question comes from Angie Storozynski with Seaport Global.
Thank you. So first a
question about the military services business. So I understand the slowdown associated with COVID and permitting for this year. I'm a little bit surprised that you currently expect it to have a negative impact on 'twenty one as well because I would have thought there's going to be like a catch up of those projects, which have which were delayed in 2020. So do you basically assume that COVID persists beyond the end of this year and has a negative impact and hence that low guidance?
Yes. I mean, we do think it will continue past the end of this year and will continue to impact somewhat our ability to get new capital upgrades as well as permitting on effective permitting on our jobs that we would like to do. Not sure, I mean, it's difficult to look into the crystal ball and see when this will all end, but we're not really back to normal yet.
But does it mean that there will be a year like just for some 2022 where you are where you have a disproportionate number of those upgrades and so then the step up in earnings would be above the trend for that business in 2022?
It's difficult to predict. It's possible. I mean, it's because we have a number of projects in front of the government to do on the basis we currently serve. And just the funding of these projects has slowed down a bit from what we've seen in the past years. Does that mean that in the future years we'll make that up?
It's possible, but we're kind of in uncharted territory at this point. So it's hard to really predict.
Great. And then on the change to the decoupling mechanism and the request for rehearing, So could you give us a sense when we will know if the commission will rehear the case and or decision on the case?
And then what are the other options if the commission denies those requests?
Yes. I think
flexibility in terms of deciding whether the decision needs to be reheard. So it's don't know if there's any hard and fast deadlines that they have to decide by. In terms of the second part of your question, the company has the company or companies, the water utilities have the ability to take this issue directly to the California Supreme Court. Currently in the legislation, we do not have the ability to go to the appellate court on this, but we do have the ability to go to the California Supreme Court. The California Supreme Court has to first decide whether they're willing to hear the case.
Okay. And you are in a sense hedging on potential changes to the full RAM in your current pending rate case because you're being conservative? Or is it because you have heard something from the commission that might suggest that they would enact those changes earlier than the decision would require, meaning the decision would suggest that on the cases following the, I think, the August 2020, the filing after August 2020 would be impacted by that RAM change. But I'm just wondering why you're being so cautious about the potential impact on your pending rate case?
Well, Angie, you know we're pretty conservative around here. So this is really just we're just being cautious. In the proposed decision in the low income proceeding, public advocates put forth comments suggesting that it should apply to our rate case. In their protest of our rate case filing, they did put forth comments that it should apply to the rate case. But I will tell you that their comments on the proposed decision, I think the language in the final decision was actually clear that it doesn't apply than it was in the proposed decision.
So that was an improvement. At this point, we don't have anything further than that to sort of base our caution on. We understand that California Water received a proposed decision that said that the ruling in the low income decision did not apply to their rate case. So that's a good fact. Another good fact is we have not had a pre hearing conference yet in the rate case.
It would be quite difficult for our company to have to pull our rate case filing and refile it. We've already noticed our customers on the proposed rate increase. So there's a number of things that are stacking up in favor of yet not applying to the 2022 through 2024 rate case. But there is still a chance and so we wanted to make sure the folks that we speak to know that.
Very good. Thank you.
Thank you, Angie. Thank you.
And the next question comes from Ryan Connors with Wednesdays and Scattergood.
Hey, thanks. Thanks for taking my questions this afternoon. So at risk of hello. At risk of beating the dead horse here, obviously, it's a hot topic with the decoupling, but wanted to get your take on the other side of this, which is cost of capital and ROE. I mean, obviously, the ORA has strenuously argued over the years that decoupling reduces risk and that's why they argue for a lower ROE.
Seems based on the ROEs that they have successfully argued that. You kind of more or less affirm that concept when you say you think your earnings will be more volatile going forward. So how do you see this all impacting the cost of capital side going forward?
Well, I think we and maybe the other RAM companies will make an argument for the fact that it perhaps increases the risk of the utility in future cost of capital proceedings. Now for us, just to sort of line up the periods a little bit here, we are we and the 3 other large water utilities in California are required to file our next cost of capital on May 1, 2021. And that's for the that is typically for the period 2022 through 2024 given that it's a year cost of capital. We don't think that the elimination of the RAM applies to our 2022 through 2024 rate cycle. So it makes it little difficult for us to then use it in the cost of capital proceeding, because it really the period doesn't fit.
However, I'm sure that others will think about it as well in terms of it being something that we perhaps could argue in the cost of capital proceeding.
Okay. Okay. Well, I mean, I think you could maybe educate them that we and others are going to value your stock based on the long term volatility profile of the earnings. So it actually is relevant to the day it takes hold, right? But anyway, the other question I had was, you noted that the peer companies that do use the Monterrey style RAM have adapted pretty well to that, so it can be done.
And so my question is, even if there's a chance that you could enhance your negotiating position on the cost of capital side, Why would you not welcome the elimination of decoupling if in fact you do believe as you said that ultimately Monterrey is workable? And especially why would you choose to you're talking about California Supreme Court. I mean these are some pretty nuclear options in terms of spending political capital taking it that far. Why would you want
to do that if in fact
you think the system is workable and do get a little bump on the ROE?
Well, first of all, I didn't say we were going to take it to the California Supreme Court. It is an option. We'd have to think through that depending upon how the commission decides. I think for us, we're just used to the full RAM at this point. The Monterey RAM, like we said, other companies have done well with that.
And we're just a bit unfamiliar, but we have plenty of years to get our arms around it. And I'm sure we'll do as well with it as we have with the full There potentially could be a little more volatility is what we're saying.
Got it. Okay. Very helpful comments. I appreciate it. Thanks for your time.
Thank you.
Thank you. And the next question comes from Jonathan Reeder with Wells Fargo.
Hey, good morning, Bob and Eva. How are you all doing?
Good, Jonathan. Doing okay, Jonathan.
How about you? Not too bad. Not too bad at all things considered. Finally got a little summer weather and yes.
Good presentation at CWA though.
Thanks. Yes, that was a curveball thrown in there and stuck out some time. So, I haven't gotten a chance to dig as deep in your earnings as I want. So I got 2 softballs for you. You'll like that.
That's true. That's the whole purpose.
Can you all comment how Q3 Utility results compared to your internal expectations heading into the quarter? Were there any like headwinds perhaps COVID related that prevented quarterly EPS growth from being higher than you anticipated, but perhaps are not expected to impact your longer term EPS growth trajectory at the regulated segments?
Yes, I know it was not I mean, we weren't taken by surprise or anything, if that's what you're asking about.
Yes. No, I mean, just trying to get a sense of where things came in for the quarter on the regulated side. Obviously, excluding the market gains, the benefit plan, like if everything else was kind of right where you were expecting it to be or were there some COVID expense pressures or anything like that that maybe shaved a couple of pennies off?
I don't believe so for the regulated utilities. They're pretty much on target on their expenses to the expenses that's incremental due to the COVID-nineteen or to book to the FEMA account. So not much impact to the utility side of it. We do incur some more treatment costs, but as the other expenses decreases offset each other. So I don't think there are surprises to our utilities earnings for the quarter.
Okay. And then I know it's kind of already brought up earlier, but when and how do you expect to gain the clarity with regards to whether that August decoupling order will be applied to the 2022, 2024 GRC. Obviously, it'd be going against the date specified in the order. Does the ALJ respond specifically to PAO's protests that were filed like when the ALJ issues the scoping order? Is there a specific date or does it just kind of linger out there until you get a proposed decision?
We believe that we'll get some clarity on this when there's a pre hearing conference and when a scoping memo is issued by the administrative law judge.
He has not done that yet.
Right. We haven't had the pre hearing conference yet. I will tell you we do have the same administrative law judge that Cal Water has in their case. And that case has been assigned to Commissioner Shiroma.
Okay. When is the pre hearing conference and scoping memo due? Is there like a due date on that or when do you expect it?
Well, it is behind schedule.
You're already behind schedule?
Well, the pre hearing conference, I mean, I believe it's behind schedule. I mean, I think we were thinking it was going to perhaps it's not significantly behind schedule, but I think we were perhaps expecting it in October and the commission, of course, has got their hands full with a lot of issues these days.
Sure. Okay. So but something perhaps later this month or certainly by the end of the year, you would hope to have the clarity to figure out whether or not you need to kind of pull the case and refile it or something like that?
That? That's my understanding. It's likely to happen before year end.
And this concludes our question and answer session. So I'd like to return the conference back to Bob Sprowls for any closing remarks.
Thank you, Keith. Well, I just want to thank you all for your participation today and let you know we look forward to speaking with you next quarter and just want to wish everyone a happy holiday season. Well, thank you very much.
Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.