American States Water Co Q1 FY2024 Earnings Call

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 p.m. Eastern Time and run through Wednesday, May 15, 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 1 hour presenting today from American States Water Company are Mr. Bob Sprowls, President and Chief Executive Officer; and Ms. Eva Tang, Senior Vice President in 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.

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 continue to invest in our regulated utilities and began water and wastewater operations at 2 new military bases in April. Let's first briefly discuss our earnings for the first quarter of 2024. Reported 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 are very pleased to have begun operations of the water and wastewater systems on 2 new military bases in April as we successfully completed our transition at Naval Air Station Patuxent River or Pax River, located in Maryland, and Joint-based 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 locations. With that, I'll turn the call over to Eva to discuss the quarterly earnings and liquidity.

Thank you, Bob, and hello, everyone. Let me begin with our first quarter financial results. Consolidated earnings were $0.62 per share for the first quarter, compared to $0.93 per share in the first quarter of 2023. Last year's results included $0.38 per share from retroactive rates related to the water general rate case for 2022. Additionally, we recorded a loss of $0.05 per share during the first quarter of last year due to revenue subject to refund from the lower cost of debt linked to the pending cost of capital proceedings, which were reversed in June 2023 after receiving the final decision. Excluding these two items, adjusted consolidated earnings for the first quarter of 2023 were $0.60 per share, up from recorded earnings of $0.62 per share this year, an increase of $0.02 per share. For our water utility, Golden State Water Company, reported earnings were $0.48 per share compared to $0.74 per share for the first quarter of 2023; both of the discussed items affected earnings in the Water segment last year. After adjusting for the same two items in 2023, earnings for the first quarter of 2024 at Golden State Water were $0.48 per share, reflecting a $0.07 per share increase compared to adjusted earnings of $0.41 per share for the first quarter of last year. Since 2024 marks the third year in the GRC rate cycle, Golden State Water received rate increases effective January 1, 2024. Thus, the $0.07 per share increase in 2024 primarily stems from higher water revenue and other income from investment gains for the retirement plan, somewhat offset by rising operating and interest expenses. Our electric segment's earnings were $0.05 per share for the first quarter, down from $0.06 per share year-over-year, mainly due to the absence of new rates as we await the pending electric rate decision for 2023 to 2026, along with ongoing increases in total operating expenses and interest costs. The decisions from the electric GRC might apply new rates retroactively to January 2023, and cumulative adjustments will be reflected then. Earnings from ASUS fell by $0.02 per share this quarter, mainly due to timing differences in construction work compared to this time last year, which Bob will elaborate on later. Losses from our parent company were $0.03 per share this quarter, compared to losses of $0.02 per share last year, primarily because of higher interest expenses. Moving on to consolidated revenue for the first quarter, there was a decrease of $26.1 million compared to the same period in 2023. Wireless segment revenue declined by $22.4 million, largely due to $30.3 million recorded in the first quarter of 2023 from the impact of retroactive new rates for 2022 resulting from the CPUC's proposed decision issued in April last year, partially offset by 2024's increases in water revenue from the 3-year rate adjustments. Electric revenue saw a slight decline as we await the outcome of the electric general rate case, and revenue from ASUS decreased by $3 million, primarily due to timing differences in construction activities. In terms of total operating expenses, excluding supply costs, consolidated expenses decreased by $2.2 million in comparison to Q1 of 2023. This reduction mainly resulted from lower construction costs at ASUS, linked to decreased construction activity due to timing differences compared to the first quarter of 2023, partially offset by higher administrative and general expenses. Interest expense, net of interest income, rose by $3.2 million due to higher rates and increased overall borrowing levels. Other income, net of expenses, increased by $700,000, mainly due to higher gains from our investment hub supporting one of the company’s retirement plans. In terms of liquidity, net cash provided by operating activities was $45.8 million compared to $7 million in the first quarter of 2023. This increase in operating cash flow was primarily due to new rates implemented by Golden State Water in 2023 and 2024, along with the collection of surcharges to recover retroactive revenue from 2022 through July 30, 2023. Moreover, cash utilized for construction-related activities at ASUS decreased this year because of timing differences in the execution of construction work and contractor payments. For investing activities, our regulated utility allocated $47.6 million to company-funded capital projects during the first quarter, and we estimate company-funded capital expenditures for this year to be between $160 million and $200 million. In February, American States Water entered into an equity distribution agreement to issue common shares via an at-the-market offering program, allowing the company discretion to sell up to $200 million over three years. During the first quarter, AWR raised around $16 million net of issuance costs. American States Water holds a stable credit rating from Standard and Poor's Global Ratings, while Golden State Water has an A plus stable rating from S&P and an A2 stable rating from Moody's Investor Service, ranking among the highest in the U.S. investor-owned water utility industry. I’ll now hand the call back to Bob.

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 cycle. 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 1, 2025. In June of last year, the CPUC adopted a final decision in Golden State Water's cost of capital proceeding where all changes to rates were to be implemented prospectively. As a result, Golden State Water maintained an authorized return on rate base of 7.91% for the first 7 months of 2023, and 7.53% for the remaining 5 months of the year, reflecting an authorized return on equity of 9.36% and a cost of debt of 5.1%, which was a reduction from 6.6%. Effective January 1, 2024, the authorized return on equity was increased to 10.06% and as a result of the water cost of capital mechanism being triggered for 2024, 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. Golden State Water's next cost of capital application was scheduled to be filed on May 1, 2024, for the years 2025 through 2027. However, Golden State Water, along with 3 other Class A investor-owned water utilities filed a joint request with the CPUC to postpone the cost of capital applications by 1 year, which was approved by the CPUC on February 2 of this year. The joint request asked that the utilities keep the cost of capital currently authorized for 2024 and in effect through 2025. Our quarterly dividend rate has grown at a compound annual growth rate or CAGR of 9.4% over the last 5 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 and 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.

We will now begin the question-and-answer session. The first question will come from Jonathan Reeder with Wells Fargo.

A couple of questions I wouldn't mind going through. First off, how large was the third year rate increase from the 2022 to 2024 GRC? I don't believe I saw that in the K or the Q. I think the settlement you had reached outlined like $13.2 million.

So you're asking the rate increases for this year?

24 over 23.

I think first quarter, our increase is...

Are you asking for the entire year, Jonathan or...

Yes. What's the annual amount? I mean I think the settlement had outlined $13.2 million, but I know that's always subject to adjustment for inflationary factors, the earnings stuff like that.

We may need to get back to you, Jonathan, on that.

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

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

We are. All the work in the case has been done; we're waiting for a PD. Settlement discussions continue, but one of the issues we have with Bear Valley Electric is we're so small, sometimes it's difficult to get the attention of the public advocates office. They, Bear Valley is so small relative to the big electrics. So although they've been nice to work with, we continue to work through that. It's possible we could get to a settlement. It's also possible a proposed decision would come out.

Are you optimistic that it will be completed by the extended deadline of September 30th? Given that settlement discussions may still be ongoing, do you think it could extend beyond that date?

Well, they have assigned a second ALJ to the case. So I think there's a pretty good chance it will get done by then, unless if we were to 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.

Yes. For a company of this size, it is indeed a significant case, right? There is a considerable amount of capital involved, particularly with the wildfire mitigation efforts and everything else related. If you can elaborate on that, could it be what’s contributing to the drawn-out nature of the case or the difficulties in reaching a settlement?

Yes, I believe it's accurate to say that we are essentially the last electric utility to submit our rate case following the implementation of wildfire mitigation plans. The increase in the first year is quite substantial due to a considerable amount of unrecovered costs. We have over $23 million in unrecovered wildfire mitigation capital expenditures, which contributes to the challenges we face. Additionally, being the last to file means we have more years of unrecovered capital expenditures associated with the wildfire mitigation plan compared to larger companies. This is part of the situation. There have also been delays in the Bear Valley Electric case related to expenses incurred before the wildfire mitigation plans. Therefore, the significant increase in that first year is partly due to these factors, and in some instances, we find ourselves competing with larger electric companies for the attention of public advocates during settlement discussions.

In some respects, it's good to not be on the POs right?

No, right. I would say it's always been a bit of an advantage for Bear Valley. We're just going to have to be patient. That group has a lot of work to do, and we sympathize with them. We have a good working relationship with them. It's just that there's only so much time to do so many things, I think.

Yes. Okay. In terms of PFAS, does the pending Golden State Water case include any of that $80 million to $200 million of anticipated PFAS related CapEx?

It does not, Jonathan, although we have requested to expand. We have a memo account established to track O&M costs associated with PFAS. 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 PFAS related CapEx.

So the capital request, I guess, in the memo account, it would just track the financing costs or whatever related to PFAS, is that right?

Yes. Financing costs or operations require the purchase of materials to maintain the wells, including chemical costs, in addition to the authorized rates we have.

Okay. I'm trying to remember because I know Cal Water is trying to get this expanded the capital cost that requests the nut, but their request was outside of the general rate case. So is this something that the commission is more likely to improve as part of the rate case, do you think?

Well, the big trigger point in a lot of regulatory jurisdictions is whether there's an MCL out there. And now that we have one, although it's pretty far along in the rate case process, hopefully, we can get the carrying costs recovered.

And Jonathan, most of the costs right now, we track in the memo account, which we have already for the O&M or testing related costs. We have to test all the wells to determine how many wells are over the MCO level. So we're tracking those incremental costs in our minor account right now.

Right. Okay. And then just kind of curious how the final PFAS rule might impact ASUS construction work going forward? Is that something that's going to drive more work than what we've seen over the past 5 years?

Yes. So right now, I think we have PFAS-related issues at only one military base. Yes. So I wouldn't think it's a needle mover at this point.

Okay. That's a misunderstanding on my part. For some reason, I was thinking that military bases were somewhere where this was kind of common. So last question, more of a clerical, the Joint Base Cape Cod contract, did that get up to the $75 million level? I was seeing the initial announcement only indicated it was $45 million.

Your memory is very good, Jonathan. Yes. It got moved up. I'm glad you see it.

Okay. And that was just one of those not the economic price adjustment, but sorry, the equitable adjustment or something like that?

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

I want to get back to you, Jonathan, on your first question about 3-year rate increases. So 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 third 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 10.06 ROE this year compared to 9.36. So overall, the revenue increase for both third year rate increases and the higher ROE is about $24 million. But we also have higher supply costs associated with this. So...

Okay. That's helpful. Yes. I mean I can back into the difference between the ROE one and to get to that 24. Thank you for that, Eva.

I think Eva was referring to the 10-Q, not the press release.

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.

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.

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