Q1 2024 American States Water Co Earnings Call

Participants

Robert Sprowls; President, Chief Executive Officer, Director; American States Water Co

Eva Tang; Chief Financial Officer, Senior Vice President - Finance, Chief Accounting Officer, Secretary; American States Water Co

Jonathan Reeder; Analyst; Wells Fargo Securities, LLC

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing the company's first-quarter 2024 results. The call is being recorded.
If you would like to listen to the replay of this call, it will begin this afternoon at 5:00 PM Eastern Time and run through Wednesday, May 15 of 2024 on the company's website at www.aswater.com. The slides that the company will be referring to are also on the website. This call will be limited to one hour.
Presenting today from American States Water Company are Mr. Bob Sprowls, President and Chief Executive Officer; and Ms. Eva Tang, Senior Vice President and Finance and Chief Financial Officer.
As a reminder, certain matters discussed during this conference call may be forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. Please review a description of the company's risks and uncertainties in our most recent 10-K and Form 10-Q on file with the Securities and Exchange Commission.
In addition, this conference call will include 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 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 Mr. Bob Sprowls, President and Chief Executive Officer of American States Water Company. Please go ahead, sir.

Robert Sprowls

Thank you, Chuck. 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 updates on regulatory activity, ASUS dividends, and then we'll take your questions.
It was a solid quarter for the company as we continued to invest in our regulated utilities and began water and wastewater operations at two new military bases in April.
Let's first briefly discuss our earnings for the first quarter of 2024. Recorded diluted earnings for the quarter decreased by $0.31 per share from the same period in 2023, or a $0.02 per share increase as adjusted. The $0.02 per share higher adjusted earnings were largely from the third year 2024 water rates approved in the final decision in Golden State Water's general rate case, partially offset by lower construction activities at ASUS due to timing differences in performing work and the delay in the electric general rate case decision. Eva will discuss the adjusted results in more detail.
At the regulated utilities, we continue to invest in our infrastructure to strengthen our water and electric systems and remain focused on operating the water and electric businesses safely, efficiently, and for the long term. We are committed to the goal of spending $160 million to $200 million this year at our regulated utilities.
We very pleased to have begun operations of the water and wastewater systems on two new military bases in April, as we successfully completed our transitions at Naval Air Station Patuxent River, or Pax River, located in Maryland and Joint Base Cape Cod in Massachusetts. Pax River provides our contracted services segment with a 50-year firm fixed price contract estimated at $349 million, while Joint Base Cape Cod is a 15-year contract of up to a maximum firm fixed price value of $75 million through the issuance of annual task orders.
We look forward to supporting both installations and consider it a privilege to leverage our broad utility expertise to make significant contributions to the military and their respective missions at these location.
With that, I'll turn the call over to Eva to discuss the quarterly earnings and liquidity.

Eva Tang

Thank you, Bob. Hello, everyone. Let me start with our first-quarter financial results. Consolidated earnings as recorded were $0.62 per share for the first quarter as compared to $0.93 per share for the first quarter of 2023. Included in the results of last year's first quarter was $0.38 per share related to the recording of retroactive rate from the proposed decision in the water general rate case for the full year of 2022.
In addition, during the first quarter of last year, we recorded a loss of $0.05 per share associated with revenue subject to refund as a result of the lower cost of debt related to the pending cost of capital proceeding at the time, which were subsequently reversed in June 2023, upon receiving the final decision in the cost of capital proceedings that made our adjustments to rates perspective.
Excluding these two items, adjusted consolidated earnings for the first quarter of 2023 were $0.60 per share as compared to recorded earnings of $0.62 per share this year, an increase of $0.02 per share. For our water utility Golden State Company, reported earnings were $0.48 per share as compared to $0.74 per share for the first quarter of 2003. Both items just discussed impacted earnings at our water segment last year.
So factoring the same effect from the two adjusted items for 2023, earnings for the first quarter of 2024 at Golden State Water were $0.48 per share, which was an increase of $0.07 per share as compared to adjusted earnings of $0.41 per share for the first quarter of last year.
Since 2024 is the third year of the GRC rate cycle, Golden State Water received [] third year rate increases effective January first, 2024. So the $0.07 per share increase in 2024 largely represents increases in water revenue and other income from gains generated from investment held for retirement plan, partially offset by increases in operating and interest.
Yes.
Electric segment earnings were $0.05 per share for the first quarter as compared to $0.06 per share for the same period in 2023, largely resulting from not having new rate effects as we await to pay the electric GRC. It will set new rates for 2023 to 2026, while also experiencing continued increases in overall operating expenses and interest costs when a decision issued in the electric GRC new rate, I expect it to retroactive to January of 2023 and cumulative adjustment will be recorded at that time.
Earnings from the US decreased $0.02 per share for the quarter, largely from timing differences of when construction work was performed when comparing to the first quarter of this year with the same period of time three, Bob will discuss in more detail later.
Losses from parent company were $0.03 per share for the quarter as compared to losses of $0.02 per share for the same period in 2023, largely due to increased interest.
Thanks.
Moving on slide 8, consolidated revenue for the first quarter decreased by $26.1 million as compared to the same period in 2023.
Revenue for the wireless segment decreased by 22.4 million, mainly due to 30.3 million recorded in the first quarter of 2023, which represented the impact of retroactive new rate for the full year of 2002. As a result of the proposed decision issued by the CPUC in April of last year and Golden State Water's general rate cases at the time, partially offset by increases in water revenue in 2020.
For the 3rd year rate increases. Electric revenue decreased slightly as we await a decision on the electric general rate case. While there were a decrease in revenue from ASUS. of 3 million, largely due to timing differences in performing construction work.
Turning to Slide 9 and looking at total operating expenses other than supply costs, consolidated expenses decreased $2.2 million as compared to the first quarter of 2023. The decrease was largely attributable to a decrease in construction costs at SUS. resulting from lower construction activity due to timing differences of when construction work was performed in 2024 as compared to Q1 of 2023, partially offset by higher administrative and general expenses.
Interest expense, net of interest income increased by 3.2 million due to higher interest rates during the quarter and increases in overall borrowing levels. Other income net of other expenses increased by $700,000 largely because of higher gain recorded to our investment to fund one of CO2 we haven't planned in the first quarter.
Slide 10 shows the EPS bridge comparing recorded and adjusted EPS for the first quarter of 2024 against adjusted EPS for 2023.
Turning to liquidity. Net cash provided by operating activity was $45.8 million as compared to $7 million for the first quarter of 2023. The increasing operating cash flow was largely as a result of Golden State Water, having implemented new rates in 2023 and 2024 and the collection of surcharges to recover retroactive revenue from 2022 through July sorry, 2023. In addition, cash used for construction related activity at US decreased this year due to timing differences actually increased this year, a decrease this year I'm sorry, due to timing differences of when the construction work is being performed and when payments are made to our contractor for investing activities, our regulated utility invested $47.6 million on company-funded capital projects during the first quarter, and we project company-funded capital expenditure at our regulated utility to be 160 to 100 to $200 million this year. In February, American States Water entered into an equity distribution agreement to sell common shares through an at-the-market offering program. This program allows the company at its sole discretion to sell up to $200 million over a three year period. During the first quarter, a WERE raised proceeds of approximately $16 million net of issuance costs. American States Water currently maintain a credit rating of AA stable with Standard & Poor's Global Ratings, O S & P's while ago good seawater maintain AA plus stable rating with S&P and A. and A2 stable rating with Moody's Investor Service. These are some of the highest credit ratings in the U.S. investor owned by the utility industry.
With that, I'll turn the call back to Bob.

Robert Sprowls

Thank you, Eva. I'll discuss a few key regulatory matters. In August 2023, Golden State Water filed its general rate case for water rates for the years 2025 through 2027. Among other things, Golden State Water requested capital budgets in this application of 611.4 million. Over the rate side, we also requested the continuation of mechanisms to accommodate fully decoupled revenues and sales and track differences between recorded and CPUC authorized supply related expenses. A proposed decision in the water general rate case is scheduled for the fourth quarter of 2024 with new rates to become effective January first, 2025. In June of last year, the CPUC adopted a final decision in Golden State Water's cost of capital proceeding for all changes to rates were to be implemented prospectively as a result of Golden State Water maintain an authorized return on rate base of 7.91% for the first seven months of 2023 and 7.53% for the remaining five months of the year, reflecting an authorized return on equity of 9.36% and cost of debt of 5.1%, which was a reduction from 6.6% effective January first, 2024. The authorized return on equity was increased to 10.06% as a result of the water cost of capital mechanism being triggered for 2024. And the authorized return on rate base increased to 7.93%. As many of you know, investor-owned water utilities serving in California are required to file their cost of capital applications on a triennial basis, which means Golden State Water's next cost of capital application was scheduled to be filed on May first, 2024 for the years 2025 through 2027. However, Golden State Water, along with three other Class A. investor-owned water utilities filed a joint request with the CPUC to postpone the cost of capital applications by one year, which was approved by the PUC on February.
2nd of this year, joint request asked that the utilities keep the cost of capital currently authorized for 2024 in effect through 2025 and to file new cost of capital applications by May first, 2025 to set the cost of debt return on equity and capital structure starting January first, 2026. Additionally, Golden State Water's water cost of capital mechanism will remain active through the one year for all periods. Our electric utility subsidiary filed its general rate case application on August 30th, 2022 for new rates for the period 2023 through 2026. The application includes additional capital expenditures of $68.2 million for the four-year rate cycle and a new cost of capital. We have also requested recovery of more than 23.5 million in capital already spent related to the wildfire mitigation plans for new rates once approved will be retroactive to January first, 2023. The decision on the general rate case is scheduled to be issued by the end of the third quarter of this year. As many of you know, the US EPA recently announced the final national primary drinking water regulation and establish maximum contaminant levels for PFAS substances and drinking water regulation establishes MAC established maximum contaminant levels that range from four to 10 parts per trillion. Final Rule rule will require public water systems to implement P phos monitoring and reporting by April of 2027 and where exceedances are identified to implement solutions within five years by April of 2029 to reduce P. five levels to below regulated contaminant level. Currently, there are more than 40 wells at Golden State Water Company that have exceeded one or more of the P. five maximum contaminant level, assuming 2 to 5 million per well, that results in approximately 80 to $200 million of capital expenditures. With these new regulations, we expect to see an increase to Golden State Water's capital investments as well as operations and maintenance expenses over the next five years to comply with the rule. Cpuc rate-making process provides Golden State Water with the opportunity to recover prudently incurred capital and operating costs in future filings associated with achieving water quality standards. We believe that's such incurred and expected future costs should be authorized for recovery by the CPUC.
Turning our attention to slide 14, we present the growth in Golden State Water's adapted average water rate base for 2018 through 2024 from State Water's authorized average rate base increase from $752.2 million in 2018 $1,000,000,357.5 million in 20 $0.24 and compound annual growth rate of 10.3% for the six year period ASUS contributed earnings of $0.13 per share for the first quarter of this year as compared to $0.15 per share for the same period last year. The decrease was largely due to a decrease in construction activity resulting from the timing difference of when construction work was performed in 2024 as the same compared to the same period in 2023, partially offset by an increase in management fee revenue resulting from the resolution of various economic price adjustments. Previously highlighted ASUS. successfully excuse me, just second previously highlighted, ASUS. successfully transitioned water and wastewater systems at to move to new military bases. In April. Under the contract, the Joint Base Cape Cod issuance will perform and work through the annual issuance of task orders by the US government over a 15-year period. After completion of the transition at Joint Base, Cape Cod US government awarded a task order valued at $4.1 million to ASUS. for the 1st year of operations, maintenance and renewal and replacement services of the water and wastewater systems. It increased the estimated maximum value of the contract to 75 million, subject to further adjustments as task orders are issued, we continue to project ASUS. to contribute 50 to $0.54 per share this year. And we remain confident that we can effectively compete for new military base contract awards based on our proven track record of managing water and wastewater related services for military bases since 2004. And we'd like to turn our attention to dividends, which remains a compelling part of our investment story. Our quarterly dividend rate has grown at a compound annual growth rate for a taker of 9.4% over the last five years from 2018 through 2023. 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. It is a continuing asset to our shareholders. I'd like to conclude our prepared remarks by thanking you for your interest in American States Water, and we'll now turn the call over to the operator for questions.
Thank you.

Question and Answer Session

Operator

(Operator Instructions) Jonathan Reeder, Wells Fargo.

Jonathan Reeder

Hey, Bob, and either you don't have a good chance the thinking and how are you not too bad? Not too bad at all on towards the end of earnings season is always a good thing. A couple of questions, though.
I wouldn't mind going through first off how large was the 3rd year rate increase from the 2022 to 2024 GRC?
I don't believe I saw that in the K or the Q, but I in the settlement, you had reach outlined like EUR13.2 million, right?

Eva Tang

Yeah, Jonathan. So you are adding them any increases for this year,

Robert Sprowls

24 over 2023 now?

Eva Tang

Well, I think first quarter increases

Robert Sprowls

for the IRU. S and for the entire year Jonathan?

Jonathan Reeder

Yes, yes. What's the annual amount? I mean, I think the settlement you had outlined 13.2 million, but I know that's always, you know, subject to adjustment for inflationary factors, the earnings test, stuff like that, we may need to get back to you, Jonathan, on that.

Eva Tang

Yes, I think the first quarter is about 3.5 million. So we'll get back to you on that one for the full year.
Okay.

Jonathan Reeder

Thank you. And then where exactly do things stand with like the electric GRC? Are you just waiting for a PD. at this point.

Robert Sprowls

And we are all the all the work in the case has been done for waiting for IPD., Al, we are in settlement discussions, continue but yes, it's one of the issues we have with their Valley Electric is we're so small. It's tough. Sometimes it's difficult to get the attention of the Public Advocates Office, the fair value. So small relative to the big electrics. So although they are, they've been nice to work with, but we continue to work through that. It's possible we could get to a settlement. It's also possible as a proposed decision will come out.

Jonathan Reeder

Okay. I mean, are you optimistic that I mean, I think I think the statutory deadline has been extended a couple of times now the latest as of September 30th, are you optimistic that it actually gets done by then or since settlement discussions are potentially still taking place? Or is it likely to even extend beyond?

Robert Sprowls

Well, they have assigned a second ALJ to the case. So I think there's a pretty good chance. It will be it will get done by them unless before you reach a settlement, that may be something that slows the case down a little bit. But so it's hard to say again, the size of the company is part of the factor here so far?

Jonathan Reeder

Yes, but it's I mean, for the size of the company, it's a pretty significant case, though. Correct.
I mean, there's a lot of capital between the wildfire mitigation stuff and everything it's kind of in there where I mean is that if you're able to kind of go into it all, is that what is perhaps making the case more drawn out or, you know, challenges regional element?

Robert Sprowls

Yes, I think it's I think it's a fair statement, Jonathan, that so we're basically as far as I know kind of our last electric utility to file its rate case after wildfire mitigation plans got put in place, Tom. And so that 1st year increase is fairly significant because there's a significant amount of unrecovered costs. We have north of $23 million of unrecovered wildfire mitigation capital expenditures on site. So I think that's that's part of the difficulty for us and because we're in the last one, there's more I would say there's more years accumulated in the wildfire mitigation plan for unrecovered CapEx, then perhaps the bigger companies?

Jonathan Reeder

Yes. Okay.

Robert Sprowls

I just want to take that. That's part of the delay. We've had delays on the fair-value electric case in the past, too, of pre Wildfire Mitigation Plan expenditures. So I'd say some of it is because it it's the 1st year is fairly significant. And then part of it is just a in some cases, we're having to compete with the big electric companies for the attention of some public advocates on settlement discussions?

Jonathan Reeder

Yes, I know in some respects, it's good to not be on the POs radar demographic, not right.

Robert Sprowls

It's always I would say it's always been a little bit of an advantage for Durel.
Yes, right, right. Just going to have we're just going to have to be patient on the ag group has got a lot of work to do and we feel form and we're very understanding of them what they have to deal with. So yes, we have a good working relationship with them it's just knowing only so many so much time to do so many things. Thanks.

Jonathan Reeder

Yes, that's okay. In terms of P. fast, does the pending Golden State Water case include any of that 80 to 200 million of anticipated P phos related CapEx.

Robert Sprowls

It does not, Jonathan, although we have it, we have requested to expand them a memo account established to track O & M costs associated with P. five in our water general rate case, we're requesting to expand the memo account to include carrying costs for capital projects as well.
So there is that in the rate case, although there aren't specific key facts related CapEx, so the capital request, I guess in the memo account, it would just track the financing costs were never really the people there are, yes, financing causal operating yields.

Eva Tang

We have to buy materials to maintain to Wales chemical costs, those kinds of things in addition to what we are having authorized in rates.

Jonathan Reeder

Okay. I'm trying to remember because I know Cal Water is trying to get there expanded the capital costs that request was denied, but their request was outside of the general rate case. So right, is there something that the commission is more likely to approve as part of the rate case?

Robert Sprowls

Thanks. Well, I think the big trigger point in London to regulatory jurisdictions is whether there's an MCL out there.

Jonathan Reeder

Yes.

Robert Sprowls

And now that we have one, although it's you know, it's pretty far along in the rate case process, some hopefully we can get the carrying cost recovery.

Eva Tang

And Jonathan, both of the cost right now would charge in a memo account, which we have already for the low end our test testing related costs. You know, we have to test all the wells to determine how many wells are over the MCR level. So we are tracking those incremental costs in our memo account right now.

Jonathan Reeder

Right. Okay.
And then just kind of curious how the final P fossil fuel might impact a SUS. construction or going forward. Is that something that's going to drive some more work than than what we've seen over the past five years.

Robert Sprowls

Yes. So for right now, I think we have five related issues and only one military base, August?

Jonathan Reeder

Yes.

Robert Sprowls

So so I wouldn't I wouldn't think it's a needle mover at this point.

Jonathan Reeder

But yes, again, to misunderstand my partner, somebody that I was thinking that you know, military bases was somewhere where the kind of comments on last question, more of a clerical, the Joint Base Cape Cod contract, did that get up to the $75 million level I was seeing in the initial announcement only indicated it was 45 million.

Robert Sprowls

Your memory is very good, Jonathan. Yes, yes, got it got moved up the asset and glad to see us for that.

Jonathan Reeder

And now it's just one of those, not the economic price adjustment, but sorry, the equitable adjustment or something like that.

Robert Sprowls

I think there was a better understanding of the work that will need to be done.

Jonathan Reeder

Okay, great. Thank you so much for taking the time to answer my questions.

Eva Tang

I wanted to get back to you Jonathan, on your first question about your rate increases.
Okay. And you know, if you look at our explanation in the press release, the first quarter rate increases, while the revenue increased by about $5.2 million, mostly due to the 30-year rate increases. So on an annual basis, I think that top number revenue number is about 24 million increase compared to 2023, but that including the higher ROE., recall that we have a 10.06 ROE this year compared to 9.36. So overall their own increase for both three year rate increases and the higher is about $24 million. But we also have higher supply costs to associate with it.

Jonathan Reeder

So okay, that's that's helpful. I can back into the difference between the ROE you on and to get to that 24. So thank you. Thank you for that, Eva.

Robert Sprowls

I think Eva was referring to the 10 Q yet taking on the press release.

Jonathan Reeder

Got you.

Operator

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

Robert Sprowls

Thank you, Chuck. I just want to say to everyone thank you all for your participation today, and we look forward to speaking with you next quarter. Thank you all.

Operator

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