American States Water Co Q1 FY2025 Earnings Call

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the American States Water Company conference call discussing the company's First Quarter 2025 Results. The call is being recorded. If you would like to listen to the replay of the call, we'll begin this afternoon at 5:00 p.m. Eastern Time and run through May 15th on the company's website, www.aswater.com. The slides that the company will be referring to are also available on the website. Presenting today from American States Water Company are 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 within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees or assurances of any outcomes, financial results, levels of activity, performance, and achievements, and listeners are cautioned not to place undue reliance upon them. Forward-looking statements are subject to estimates and assumptions and known and unknown risks, uncertainties and other factors. Listeners should review the description of the company's risks and uncertainties that could affect the forward-looking statements in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission. Statements made on this conference call speak only as of the date of this call. And except as required by law, the company does not undertake any obligation to publicly update or revise any forward-looking statement. 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 that 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 floor over to Bob Sprowls, President and Chief Executive Officer of American States Water Company.

Thank you, Jamie. Welcome, everyone, and thank you for joining us today. I'll begin with a brief discussion 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. We started 2025 with strong financial results. Consolidated earnings per share for the first quarter were $0.08 higher compared to the same quarter in 2024. The favorable variance is attributable to the receipt of final decisions from the California Public Utilities Commission, or CPUC, in the water and electric general rate cases, which authorized new water rates for 2025 to 2027 and authorized new electric rates for 2023 to 2026. These favorable variances were partially offset by higher operating expenses, a $0.05 per share unfavorable variance from losses incurred on our investments to fund one of the company's retirement plans and the dilutive effects from the issuance of equity under American States Water's at-the-market offering program, which decreased consolidated earnings by $0.02 per share. Our regulated utilities are on pace to invest a combined $170 million to $210 million in infrastructure investments this year. With that, I will turn the call over to Eva to discuss earnings and liquidity.

Thank you, Rob. And hello, everyone. Let me start with our first quarter results. Recorded consolidated earnings were $0.70 per share for the quarter as compared to $0.62 per share for the first quarter of last year. For our water utility, Golden State Water reported earnings of $0.52 per share compared to $0.48 per share last year. The $0.04 per share increase in 2025 was largely due to the new 2025 water rates as a result of receiving a final decision in connection with Golden State Water's general rate case proceeding, partially offset by higher operating expenses and losses generated on investments held to fund a retirement plan as compared to gains during the same period in 2024 due to financial market conditions. Lastly, there was a decrease in earnings of $0.02 per share due to the dilutive effect from issuance of equity on the AWR's at-the-market offering program. Our Electric segment's earnings were $0.07 per share for the quarter as compared to $0.05 per share for the same quarter in 2024, a $0.02 per share increase, primarily due to receiving the final CPUC decisions on the electric general rate case with the new 2025 electric rates as compared to 2022 rates used to record revenues during the first quarter of 2024. Earnings from ASUS were $0.13 per share for the quarter, which was consistent with the same period in 2024, which Bob will discuss further. Lastly, losses from our parent company were $0.02 per share for the quarter when compared to losses of $0.03 in the same quarter due largely to a decrease in interest expense resulting from lower average interest rate and lower borrowing levels at AWR's credit facility. Consolidated revenues for the first quarter increased by $12.7 million when compared to the first quarter last year. Revenues for the Water segment increased by $11.7 million, largely due to new 2025 water rates as a result of receiving a final decision in Golden State Water's standard rate case proceeding. Effective January 1, 2025, Golden State Water transitioned from a full revenue decoupling mechanism to a modified rate adjustment mechanism known as the Monterey-style Water Revenue Adjustment Mechanism or M-WRAM. Water consumption for the first quarter of 2025 approximated consumption levels adopted in the new 2025 rate and therefore, Golden State Water's transition to the M-WRAM did not have a material impact to revenues recorded during the first quarter. Revenue for the Electric segment increased by $2.8 million, mainly due to new 2025 electric rates as compared to 2022 rates due to record revenues during the first quarter of last year. Revenues from ASUS decreased $1.8 million, primarily due to lower construction activities during the quarter as they were negatively impacted by unfavorable weather conditions, which were less impactful during Q1 in 2024. Turning to Slide 9. Supply costs increased by $4.3 million, mostly due to an increase in customer usage and higher overall per unit water supply cost. Also effective this year, Golden State Water transitioned from a full cost-supply cost balancing account to an incremental cost balancing account for supply costs. As a result, Golden State Water's earnings are now subject to favorable and unfavorable changes in the water supply source mix compared to the adopted supply source mix reflected in the revenue requirement. During the first quarter, our pumped water sources, which cost less than purchased water, were capable of meeting a greater portion of customer demand. However, the favorable supply cost experience from the favorable supply mix during the first quarter may or may not continue during the remainder of the 2025 year. Looking at total operating expenses other than supply costs, consolidated expenses increased by $2 million compared to 2024. This increase includes the impact of the electric general rate case decision issued in January, which authorized recovery of higher operating expenses, primarily for vegetation management and other wildfire mitigation efforts. These costs were previously excluded from customer rates and not expensed in the first quarter of last year as they were being tracked in memorandum accounts. They are now included in adopted Electric revenue. In addition, the increase was due to higher overall operating expenses, partially offset by lower ASUS construction expenses. Lastly, there was an overall decrease in other expenses net of other income of $2.5 million due largely to losses generated on investments held to fund a retirement plan during the quarter as compared to gains on investments during the same quarter in 2024 due to financial market conditions. This slide shows EPS bridge comparing reported EPS for the first quarter of this year against the same period for 2024. Turning to liquidity. Net cash provided by operating activity was $45.1 million for the quarter as compared to $45.8 million for the same quarter last year, with the change primarily due to tightening of working capital items and the change in water consumption. With the CPUC-approved decisions received for both regulated utilities in January, we implemented new water and electric rates during the quarter. In addition, both of our utilities have either filed or received approval of various advice letters based on previously approved regulatory mechanisms to increment surcharges for additional base rates. For investing activities, our regulated utility invested $45.5 million in company-funded capital projects in the first quarter, and we will be on target to reach $170 million to $210 million for 2025. In terms of financing activities, American States Water, under its at-the-market offering program, raised proceeds of $25.8 million during the first quarter, net of issuing costs and legal costs. In February, our Electric segment completed an issuance of $50 million in unsecured private placement notes that matured in 2030. In addition, earlier this week, American States Water and Golden State Water executed amendments to their credit agreement to extend the credit facility term from June 2028 to June 2029. As part of this amendment, American States Water also expanded its credit facility borrowing capacity from $165 million to $195 million. American States Water currently maintains a credit rating of A stable with Standard & Poor's global ratings, or S&P, while Golden State Water maintains A+ Stable ratings with S&P and A2 Stable rating with Moody's Investors Service. These are some of the highest credit ratings in the US investor and the water utility industries. With that, I'll turn the call back to Bob.

Thank you, Eva. I'll begin with Golden State Water's general rate case. On January 30th, the CPUC issued a final decision in connection with the recent general rate case covering 2025 through 2027. The final decision adopts the settlement agreement between Golden State Water and the Public Advocates Office at the CPUC, or Cal Advocates. Among other items, the decision authorizes Golden State Water to invest $573.1 million in capital infrastructure over the three-year capital cycle. This includes $17.7 million of advice letter capital investments to be filed for revenue recovery during the second and third year attrition increases when those projects are completed. In addition, the approved settlement agreement includes $58.2 million of advice letter capital investments that began construction in 2023, which we expect to file for revenue recovery during the second and third year attrition increases when those projects are completed. For all of the advice letter projects, Golden State Water is allowed to accrue interest during construction at the adopted cost of debt and recover the full rate of return, including all applicable components of the revenue requirement after the assets are placed in service up until the assets are included in customer rates. Excluding revenues for advice letter capital projects, adopted operating revenues less water supply cost for 2025 are projected to increase by approximately $23 million when compared to 2024. As we mentioned previously, the final decision ordered Golden State Water to transition from a full decoupling mechanism and a full supply cost balancing account, which we again requested in the general rate case application, to a modified rate adjustment mechanism, a Monterey-style Water Revenue Adjustment Mechanism or M-WRAM and an incremental cost balancing account for supply costs effective January 1, 2025. Without the continuation of a full revenue decoupling mechanism and a full cost balancing account for water supply, the company may be subject to future volatility in revenues and earnings as a result of fluctuations in water consumption by its customers and changes in water supply source mix. The final decision also adopted the company's M-WRAM rate design proposal, which authorized Golden State Water to increase the revenue requirement in its fixed service charges to between 45% and 48% of the revenue requirement, depending on the rate-making area, representing approximately 65% of Golden State Water's fixed costs in aggregate. As Eva mentioned earlier, billed water consumption for this first quarter was similar to consumption levels adopted in the new 2025 rates. Therefore, the transition from a full revenue decoupling mechanism to the M-WRAM did not have a material impact on revenues recorded during the first quarter. In terms of water supply costs in the first quarter, our pumped water sources, which cost less than purchased water, were capable of meeting a greater portion of customer demand. However, this favorable water supply mix experienced during the first quarter may or may not continue during the remainder of the 2025 year. Our water utility's earnings will be subject to future volatility as a result of favorable and unfavorable changes in the water supply source mix compared to the adopted mix. On March 5th of this year, Golden State Water filed an application for rehearing of the CPUC's decision in the 2025 to 2027 general rate case, asserting that the final decision's denial of Golden State Water's revenue decoupling proposal was not supported by the record. At this time, management cannot predict the outcome of this matter. On January 14th of this year, the CPUC approved a request to defer the cost of capital application by one year to May 1, 2026. With the deferral, Golden State Water will retain its authorized return on equity of 10.06% and a 57% equity ratio through the end of 2026. Turning our attention to Slide 14, we present the growth in Golden State Water's adopted average water rate base from 2018 through 2024, which increased from $752.2 million in 2018 to $1,357.5 million in 2024. That is a compound annual growth rate of 10.3% for the six-year period using 2018 as the base year for the calculation. Golden State Water anticipates robust and sustained growth in its rate base over the next few years as a result of receiving its recent general rate case decision that not only authorized it to invest $573.1 million in capital infrastructure, but in addition to that, capital investments of certain projects through advice letter filings, upon completion, will contribute to further growth in rate base in the second and third year of this cycle. On January 16th of this year, our electric utility subsidiary received a final CPUC decision in its general rate case that approves the settlement agreement between Bear Valley Electric, Cal Advocates, and the other interveners in the proceeding in its entirety. The proceeding sets rates retroactive to January 1, 2023, and determines electric rates for the years 2023 through 2026. The decision, among other things, allows Bear Valley Electric to invest $75.6 million in capital infrastructure, including at least $23.1 million of advice letter projects over the four-year rate cycle, adopts a return on equity of 10.0% and a 57% equity ratio, and approves recovery of requested capital expenditures and incremental operating costs incurred prior to 2023 in connection with its wildfire mitigation plans. These costs were not previously included in customer rates. Additionally, the settlement provides increases in the adopted operating revenues of $2.2 million for 2025 and $3.3 million in 2026. Similar to 2024, the rate increases for 2025 and 2026 will not be subject to an earnings test. The previously mentioned advice letter projects of at least $23.1 million are expected to generate additional annual operating revenues of approximately $3 million when the respective projects are completed, placed in service, and filed for recovery in customer rates. These projects also accrue allowance for funds used during construction that will further increase the revenue requirement. Lastly, in April, our electric utility implemented new base rates to recover the revenue requirement associated with $11.6 million of capital projects approved for recovery through advice letters. Let's continue to ASUS, which contributed the same earnings per share year-over-year of $0.13. There was an increase in management fee revenues resulting from the commencement of water and wastewater operations in April 2024 at the new bases, Naval Air Station Patuxent River and Joint Base Cape Cod and the resolution of various economic price adjustments at legacy bases. These increases were offset by a decrease in construction activity and higher overall operating expenses. During the quarter, construction activities were negatively impacted by unfavorable weather conditions, which we didn't experience to the same degree last year. The delays in construction activities are expected to be caught up during the remainder of 2025. During 2024, ASUS was awarded $56.5 million in new capital upgrade projects on all military bases served for completion in 2024 through 2027. This is a record high for ASUS. We continue to project ASUS to contribute $0.59 to $0.63 per share this year and remain confident that we can effectively compete for new military base contract awards. I'd like to turn our attention to dividends, which remain a compelling part of our investment story. Our Board of Directors have approved a second quarter cash dividend. Our quarterly dividend rate has grown at a compound annual growth rate, or CAGR, of 8.8% over the last five years through 2024. We continue to exceed our policy goal of achieving a CAGR 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, and we'll now turn the call over to the operator for questions.

And our first question comes from Jonathan Reeder from Wells Fargo.

Congrats on a good Q1, pretty straightforward update following the year and just two months ago. I had two quick questions for you. Eva, I know you said you raised a little more than $25 million of equity via the ATM in Q1. Are you still expecting to raise about $60 million over the full year 2025?

I think for the full year, our target is around $60 million. Currently, we have some capacity in our credit facility, so we'll reevaluate how much we need to fund the market this year. Over the three-year rate case cycle, we aim to achieve $200 million. So far, we've done about $119 million, or $117 million. This leaves us with a remaining total of $83 million to $85 million, which we are planning to utilize over the next two years.

So think of it as that $85 million now spread out over two years kind of. What about on ASUS? Bob, is there any update on new military base privatization efforts? Are there any bases that have come up for RFP that are progressing and we could get some sort of decision in the next couple of years or has, I guess, the Trump administration's efforts around DOGE or anything impacted the way you see that business evolving? Either more privatization is occurring or consolidation of bases or kind of anything like that?

On the military front, we separate the military program by branch: the Army, the Air Force, and the Navy. Currently, there are no long-term privatizations planned for 2025. Thus, we likely won't see any privatization this year. We do anticipate the Army may propose one or two privatizations later this year, but the situation is somewhat uncertain. We're trying to interpret the same signals others are observing. It's unclear whether this will lead to a slowdown or an increase. With a new administration in place, the direction of military base privatizations could change, but we're unsure at this moment. The Army is close to finalizing its assessment. About a year ago, there was optimism about reviving the privatization program, which has been paused since the end of 2020. The Air Force seems to lag behind the Army in reinstating its program, while the Navy appears to be the most enthusiastic. They've completed a few privatizations, including the Patuxent River project we won, and the JBCC contract, a 15-year agreement. There might be similar opportunities in 2025, but it's not clear. We have several potential projects in the works, including some that are not traditional and may be more challenging to finalize. The JBCC contract took considerable effort to secure, but we are pleased to have it as a new contracting option for the Department of Defense. We believe our experience in this area may give us an advantage over competitors in these types of privatizations. That was a detailed response, and I'm happy to provide more information if needed. I hope that answers your question.

No, that was a great answer, a lot more detail and good detail than I was anticipating. So I'm kind of chuckling a little bit, but I thank you for it, Bob. And just following up…

I don't expand. Well, must be a rough morning for me…

No, I mean I love when management teams give real answers to questions. It's refreshing…

Yes, that's kind of where we're at, Jonathan. I mean, there's uncertainty at the Department of Defense right now, along with various other government agencies. However, everything is going well at the bases we have, and we continue to make a lot of sales calls, which is always important.

On those nontraditional like kind of the 15-year contracts, do those like tend to be or do they necessarily have to be like kind of the smaller bases out there, whereas the larger ones would always go to the 50-year variety or not necessarily?

I think the 15-year contracts are a bit easier for the bases to manage. Fifty years is a long time. We definitely appreciate the 50-year contracts, as they are well-executed privatizations by the Defense Logistics Agency and involve efficient bidding processes in exchange for services. The project we worked on at JBCC took a significant amount of time, and we essentially developed a new roadmap for that effort. Now, this could serve as another option for the government, potentially making it simpler for them to commit to a 15-year contract rather than a 50-year one. We are exploring at least one of those opportunities. Additionally, we are noticing other unconventional privatization efforts that might take several years to materialize, if they do at all. My main point is that we're not only focused on the 50-year utility privatization model; we remain hopeful that the Army and the Air Force will resume their efforts in this area.

Well, good luck as you pursue those contracts and continue executing on the regulatory front. You can at least take a little bit of pause being between all the rate cases and the cost of capital extension. So that's good from a regulatory risk perspective. But thanks for the update and the time.

Thank you, Jonathan. There has been less activity on the regulatory front this year, which is a relief. Last year involved a lot of work, but we believe we have achieved two favorable decisions, and we need to continue putting in the effort to reach settlements. We think we have made some progress. Thank you for your questions.

Okay. Jamie, if we aren't getting any other questions, we can wrap it up. Is that okay?

Thank you, Jamie. I just want to thank everyone today for their participation, and we look forward to speaking with you next quarter. So have a good rest of your week, everybody.

And with that, ladies and gentlemen, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.