Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call Discussing the Company’s Second Quarter 2020 Results. The call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 5:00 p.m. Eastern Time and run through Tuesday, August 11, 2020 on the company’s website, www.aswater.com. The slides that the company will be referring to are also available on the website. [Operator Instructions] This call will be limited to 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 uncertainty 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 will turn the call over to Bob Sprowls, President and Chief Executive Officer of American States Water Company. Please go ahead.

Thank you, Andrea. Welcome, everyone, and thank you for joining us today. I’ll begin with some recent developments for the company, 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’ll take your questions. We have had many positive recent developments including strong financial results, the filing of our water general rate case, the spin-off of our electric utility business to a separate subsidiary of American States Water, some term debt financing at Golden State Water, a nearly 10% dividend increase, new company leadership at American States Utility Services, or ASUS, for short, continued strong credit ratings and uninterrupted service to customers despite the ongoing pandemic. Our consolidated results for the second quarter of 2020 were $0.69 per share as compared to $0.72 per share for the second quarter of 2019. Included in the results for the second quarter of 2019 was the retroactive impact from a final decision on the water general rate case issued in May 2019, which totaled approximately $0.08 per share related to the first quarter of 2019. Excluding the retroactive impact related to the first quarter of 2019, consolidated diluted earnings during the second quarter of 2020 increased by $0.05 per share or 7.8% compared to the second quarter of 2019. We continue to invest in the reliability of our water and electric systems for the six months ended June 30, 2020, we spent $53.2 million in company funded capital expenditures. The Water Utility segment continues with its construction program. However, we have tried to avoid construction projects that would temporarily shut off water to customers. The construction programs for the Electric segment have largely not been negatively impacted. We estimate we’ll spend $105 million to $120 million for the year…

Thanks, Bob. Hello, everyone. Let me start with our second quarter financial results on Slide 9. Consolidated earnings for the quarter were $0.69 per share, compared to $0.72 per share as reported for same period in 2019. As Bob mentioned, last year’s second quarter earnings at our Water segment were positively impacted by the CPUC final decision on the general rate case, with the new rates retroactive to January of 2019. The retroactive impact of the decision was reflected in the results for the second quarter. And of the consolidated company’s $0.72 per share, $0.08 was related to the first quarter of 2018, which is shown on a separate line in the table on this slide. Further impacting the comparability of the water segment’s earnings between the two quarters, was the recording of a $1.1 million reduction to administrative and general expense during last year’s second quarter, positively impacting earnings by $0.02 per share to effect the CPUC’s May 2019 approval for recovery of costs previously expensed as incurred. There was no similar reduction in 2020. The volatility in the financial markets due to the COVID-19 pandemic has resulted in significant fluctuation in the investments held to fund one of Golden State Water’s retirement plan. Gains on these investments contributed a $0.04 per share increase in the water segment’s earnings for the quarter. Excluding the effect of these items, earnings for the second quarter of 2020 at the water segment increased by $0.01 per share as compared to the second quarter last year. The increase was due to a higher water gross margin from the new water rate and lower interest expense, partially offset by an increase in operating expenses and effective income tax rate. Our electric segment’s earnings for the second quarter of 2020 were $0.03 per share compared…

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 and 2024. Among other things, Golden State Water requested capital budgets in this application 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 a letters when those projects are completed. A decision in the water general rate case is scheduled for the fourth quarter of 2021, with new rates to become effective January 1, 2022. On July 3, the CPUC issued a proposed decision in the low-income affordability rulemaking, which is related to the low-income rate payer assistance and affordability objectives contained in the CPUC’s 2010 Water Action Plan. The proposed decision also addressed other issues, including matters associated with the continued use of the water revenue adjustment mechanisms, also known as the WRAM. If approved, California water utilities that use full decoupling WRAM accounts, including Golden State Water, would be required to replace their WRAM accounts with a limited price adjustment mechanism known as the Monterey-Style WRAM in their next general rate case filing. This proposed decision was originally scheduled to be on the commission’s consent agenda for a vote this Thursday. However, it is currently on the hold list, which means it will not be decided this Thursday. The next CPUC meeting after this week is Thursday, August 27. Management believes the proposed decision, if approved, should not have any impact on Golden State Water’s WRAM balances during the current rate cycle, which includes years 2019 through 2021. Since its implementation in 2008, the WRAM…

[Operator Instructions] Our first question will come from Angie Storozynski of Seaport Global. Please go ahead.

Thank you. Okay. So I wanted to ask a question, obviously, about this potential change to your decoupling mechanism. You mentioned that there wouldn’t be any impact to your earnings through 2021, which is obvious given that that’s the duration of the current rates set up. Now you have always managed to earn your allowed ROE on the water side. Now given those changes that could happen on the decoupling side, is there anything you can do in the way you manage your business that would allow you to still hit your allowed ROEs without that WRAM mechanism in place? And also, is there anything in that filing you made in July of the next years that will allow you to have those additional, basically, levers to manage your earnings? Thank you.

Angie, and good to hear from you. So let me start with the proposed decision that’s out there. We believe the language in the proposed decision is fairly clear, first of all, that it would apply to the first general rate case filed after the date of the final decision. So we’ve filed our general rate case for 2022 through 2024. Right now, we don’t believe the language in the proposed decision would apply, but would require us to use the Monterey-Style WRAM for 2022 through 2024. However, if the decision were to get changed, then we would need to basically refile our rate case. So sort of back to your original question about, is there anything we can do on that front? Well, introducing the Monterey-Style WRAM, I think, would cause us to change our rate design a bit. We would look to probably reduce the tier structure that’s in our rates, therefore, make it a little easier for us to forecast our sales. It’s really important when you have a Monterey-Style WRAM that you are able to achieve the sales forecast that you have included in your adoptive revenue requirement. So we sort of have to start, I believe, from Square 1 on – in terms of designing our rates and perhaps, flattening the tiers so that the company is able to do a better job of forecasting sales. With the tiered rates, the significant tiered rates that we have, which, as you know, encourage conservation. It does make sales forecasting more difficult because you’re not sure how much usage is going to be used at the higher tiers. So again, perhaps flattening the tier structure. And then although we spend a great deal of time trying to get the sales forecast right, I think the tiered structure makes it more difficult.

Okay. Because I understand that the – one of the consumer advocates has already suggested not to wait until the next rate case, but instead incorporate it in current or pending GRCs. I guess, in your case, it would be easier because you’ve just made a filing, and you could actually probably make some corrections, but it’s my understanding that there are two other large water utilities with the pending GRCs or pending decisions in their GRC. So I mean, I’m assuming that at the very least, the commission would apply any rule change to all of the utilities at the same pace instead of just somewhat penalizing you but not applying the same role to say, CWT or American Water’s New Jersey – I’m sorry, California utility, would you agree?

I would agree that if they are to move – they won’t – I don’t believe they’ll move select companies to the Monterey WRAM. I think they would need to move. There’s actually four of us that have full WRAM at this point, so they would need to move all four of us. How it affects their rent currently filed rates and their outstanding rate case, I’m really not the right person to sort of comment on that. But I just want to let you know, though, that it’s not easy to go back and do rate design on our – on a rate case, it’s very, very complex. And so having to refile the GRC, if they require us to do that would be a difficult task, which we would be, of course, willing to do if we’re expected to do that. Because the current filing we have with the commission and the current rate debt design we have filed with the commission for 2022 through 2024, does not anticipate moving to a Monterey-Style WRAM.

Okay. That’s great. And then secondly, on ASUS. So I understand that you have new management in place, and we’re waiting probably for some new contract awards. Do you actually think that, that’s still possible this year, given COVID? And given the changes in leadership, are you becoming more bullish about longer-term growth expectations for that business? You never really gave us the long-term growth, you just gave us this year’s guidance. But if you comment about ASUS at all?

Sure. There’s a number of privatization awards pending. And we haven’t heard from the government that none of them are going to be awarded this year. So the expectation is still that we may see some awards before year-end. With regard to the new hire at ASUS, we’re expecting big things from him. He’s a very talented person, and we would be looking to sort of step up our game on the business development front. We’ve – we’re very good in that area, we believe. We’re just, I would say, adding a little muscle to the team at this point. So looking forward to the future at ASUS.

Great. And just last question. So we haven’t had much of a growth to date in that business, and it’s – but you did maintain the guidance range. So I’m assuming that most of the growth happens in the remainder of the year? And also, as you see it right now, let’s say, $0.03 annual growth in that business, do you think is sustainable? Or is it very lumpy depending on the – on those contract awards?

Well, yes, I think it’s a little bit lumpy because it is a bit of a function of new contract awards. Also, as you know, Angie, we’re always trying to get more work on the bases we currently serve. We’re also looking to try to get additional assets transferred to us on the basis we currently serve. And so there’s really sort of three different avenues in terms of trying to grow the revenue stream. But clearly, we had a step-up in our revenue projection through winning the Eglin Air Force Base and Fort Riley. When you get new privatizations, it does make the growth easier, I’ll have to say that.

Okay. Thank you.

[Operator Instructions] And our next question will come from Jonathan Reeder of Wells Fargo. Please go ahead.

Good morning, Bob and Eva or still good morning for you guys. I think the midpoint of the new CapEx range is like $15 million lower than what your range was at the beginning of the year. Do you expect to make that shortfall up, perhaps, in like 2021?

I think it’s $10 million.

Yes. I guess, it’s $10 million from the – it was $115 million to $130 million is now $105 million to $120 million. So $10 million. Yes, because, I mean, these are all projects that are approved, and it’s just some of the struggles we’re running into is just getting projects permitted and because of the pandemic. And then the other issue is we’ve avoided taking customers out of water. And so it would be a little bit of a function of COVID-19 and where that has. But we’re making really good progress, I would say, on our capital plan despite the pandemic. So again, we would look forward to try and make that up in 2021.

Okay. Great. And then on the WRAM MCBA, hypothetically, they went away. What kind of like net income headwind would that have created for you maybe for full year 2019?

Well, so Jonathan, I think looking back is very difficult, given that our tier rates were structured with the full WRAM in mind. In other words, they’re a lot steeper. And therefore, the forecast is sort of more difficult to forecast. So I don’t know that it’s – it would be fair to even overlay on 2019 if the WRAM went away. I mean, we did have some under collections because sales were a bit lower than what was included in the rate case. But as long as we’re able to – allowed to adjust our rate structure, I think we can control that.

Okay. So you think going to the Monterey WRAM could be manageable if you do modify them – that tier design? And I guess, you kind of push a little harder on the sales forecast to make it as reasonable as possible. You still think achieving or exceeding your allowed ROEs on a go-forward basis could be reasonable?

Yes. The PUC has always been pretty fair on these things. I don’t think removing the full WRAM is the greatest thing for conservation. It’s a real head scratcher to me in terms of public policy. But if you start needing to flatten the pricing curves are the tiered rates. Then all of a sudden, perhaps you’ll see increases in water use. But other companies that have the – there’s a few companies that have the Monteray WRAM that like it. I personally prefer the full WRAM because we’re just used to it. So – but it does come down to forecasting, and it does come down to tiered rates.

Right. And I mean, should we interpret anything in the fact that it was held that commissioners are maybe not expressing the same view as Commissioner Guzman Aceves who pen the proposed decision or is it just too early to kind of tell how receptive your efforts to get the PD modified event?

Yes. It’d be difficult to speculate at this point. I think it’s a little bit of a good sign that is being held. What caused that, I really don’t know. I know perhaps some of the environmentalists are not fans of getting rid of the full WRAM. But it’s a bit of a head scratcher to some of the folks as to what’s driving this? It really doesn’t help low income customers because it basically reduces – if you reduce the trio rates, the folks with the biggest property end up paying less. And for the same revenue requirement, that means others pay more. So I just – I just don’t understand it. But anyway, enough about that.

All right. Another question I had, completely unrelated, on the electric side, has the CPUC acted on Bear Valley’s solar project application, I think a Q2 2020 decision had been expected?

They have not. We’re working through that at this point. They are asking a number of questions about the solar facility. And so we’re answering those questions and working through it. As you know, we have a settlement with public advocates on that particular project. But there’s a few moving parts to it. So we’ll just continue to work through that.

I didn’t realize you did have a public advocate. I mean, was that for the project to move forward? Or how did that compare to your proposal?

Give me the last part of your question, Jonathan, sorry.

Just how does the settlement compare to your proposal? I wasn’t aware that there was a settlement.

Yes. We have a settlement on it. Yes, it’s – we’re fine with the settlement. The administrative law judge is asking questions and has – he or she or their staff have a bit of a background in the solar area. So we’re happy to answer any of their questions. It’s just – it’s taking a bit of a while. And as you know, Jonathan, PUC is pretty focused on PG&E, wildfire, mitigation efforts, et cetera. So we’re continuing to work with the PUC on the solar project. I mean, it’s a long-term project, and we’re very patient. So we’re working hard to try to push it across the goal line here.

Right. But the public advocate is in support of you guys going forward with that project? I mean, is that what the settlement does say? And just trying to get the ALJ to support it at this juncture?

Yes. I mean, we have a settlement to move the project forward with public advocates.

Okay. And it’s like the size contemplated roughly or?

Yes. That’s kind of what we submitted.

Okay. Sorry, I wasn’t aware of the settlement. Just – yes, I didn’t know if it was kind of an agreement with what you kind of submit it, which it sounds like it is.

Well, so – okay. So there is a bit of a wrinkle, Jonathan, there. We had filed a solar facility where we were going to sell some of the power to the Big Bear area wastewater facility and the government entity that does wastewater up at Big Bear. And they do their own generation at this point, but they were going to come on as part of this. And they had a specified rate that they were willing to pay to become part of the project. Ultimately, public advocates did not like that rate. And therefore, the acronym is bar a lot, Big Bear area, regional wastewater authority. Yes, so they got taken out of the project because the price that was in the filing was sort of their price and public advocates wanted to increase the price to them. And so they backed out of the project, and then we were able to adjust the project and still get a settlement with the public advocates. Once borrower backed out of the project or because of that, we were able to get a settlement with public advocates. So it did incur a bit of a wrinkle along the way.

So it’s a little smaller than what you’re thinking, but. Yes, okay.

Actually, it’s still the same size.

Same size, about $14 million.

Yes, $14 million, yes.

Perfect. Well, good news there. Okay. Thanks. You don’t have time on that issue. Thank you.

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

Yes. I just want to wrap it up today by thanking all of you for your participation. And we look forward to speaking with you next quarter. And thank you very much for your participation.

The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.