American States Water Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 4 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call discussing the Company's 3rd Quarter 2023 Results. This call is being recorded. If you'd like to listen to the replay of this call, it will begin this afternoon at 5 p. M.

Operator

Eastern Time and run through Tuesday, November 14, 2023 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 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 Form 10 ks and Form 10 Q on file with the Securities and Exchange commission.

Operator

In addition, this conference call will include a discussion of certain measures that are not prepared in accordance with General 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.

Speaker 1

Thank you, Jason. 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. Let's briefly discuss our quarterly earnings.

Speaker 1

Recorded diluted earnings for the quarter increased by $0.16 per share from last year or $0.12 per share, excluding a favorable variance of $0.04 per share, resulting from the receipt of a final decision In the cost of capital proceeding, in June 2023 at our water utility that Eva will discuss later, The higher adjusted earnings of $0.12 per share was largely due to the new 2023 water rates Approved in Golden State Water's final general rate case decision. On the regulatory front, We've had some significant events at Golden State Water. We filed a new general rate case in August for the California Public Utilities Commission or CPUC to set new rates for the years 2025 through 2027. The filing included a request for capital investment of $611,400,000 over the rate cycle. In addition, as a result of triggering our existing water cost of capital mechanism, We filed an advice letter with the CPUC to increase our authorized return on equity from 9.36% To 10.06 percent, which has been approved and will be effective on January 1, 2024.

Speaker 1

From an operations perspective, it's been business as usual for our subsidiaries, Providing reliable water, electric and wastewater services to our regulated water and electric utility customers as well as on the military bases we serve. We plan to spend $155,000,000 to 1 $1,000,000 this year in infrastructure investments at our regulated utilities. We're very pleased that ASUS was awarded 2 contracts by the U. S. Government in the 3rd quarter to Operate, maintain and provide construction management services for the water distribution and wastewater collection facilities on 2 military bases.

Speaker 1

The first was the Navy contract we were awarded for Naval Air Station Patuxent River Or PAX River, located in Maryland, which is our first Navy contract. The initial Value of the contract is estimated at $349,000,000 over a 50 year period. This contract is similar in form to our 8 other military privatization contracts. In addition, ASUS was awarded a new 15 year contract at Joint Base Cape Cod located in Massachusetts that is different than our existing 50 year contracts. Under this contract, ASUS will have the opportunity to perform work Through the periodic issuance of task orders by the U.

Speaker 1

S. Government, we're up to a maximum initial value of $45,000,000 over a 15 year period. Both new contracts are subject to annual economic price adjustments. We take great pride in our strong relationship with the U. S.

Speaker 1

Government and their continued confidence in our expertise in managing Eva will discuss the quarterly earnings and liquidity, and I'll turn the call over to her.

Speaker 2

Thank you, Bob. Hello, everyone. Let me start with our 3rd quarter results. Consolidated earnings as reported were $0.85 per share for the quarter as compared to $0.69 per share for the Q3 of 2022, an increase of $0.16 per share. In last year's Q3, Golden State Water recorded a decrease Earnings of $0.04 per share for revenue subject to refunds based on its cost of capital filing in 2021.

Speaker 2

As a result of receiving the final decision in the cost of capital proceeding in June that sets the cost of capital prospectively, The $0.04 per share recorded in Q3 2022 was reversed in the Q2 this year. Excluding this item, adjusted consolidated earnings for the Q3 of 2023 were $0.85 per share As compared to adjusted earnings of $0.73 per share for Q3 of last year, an increase of $0.12 per share. For our water utility, Golden State Water, reported earnings were $0.72 per share as compared to $0.54 Per share for the Q3 of 2022 and $0.18 per share increase. Both Aizen and I just discussed Affected earnings at the Water segment. So factoring in the same effect from the two items, Adjusted earnings for the Q3 at the Wallet segment were $0.72 per share, which was an increase of $0.14 The $0.14 per share increase in 2023 adjusted earnings largely represents The difference from the 2021 adopted rates and 2023 2nd year increases, partially offset by increases in operating and interest expenses.

Speaker 2

Our electric segment earnings for the 3rd quarter this year were $0.04 per share, which were flat compared to the same period in 2022, Largely resulting from not having new rates in effect for 2023 as we await the pending electric CRC expenses and interest costs. The increase in expenses were mostly offset by favorable changes of certain flow through income taxes. When a decision is issued in the electric TRC, New rates are expected to be retroactive to January 2023 and cumulative adjustment will be recorded at the time. Earnings from our contracted services segment were $0.12 per share for this quarter, the same as the earnings for the same period in 2022. Consolidated revenues for the 3rd quarter increased by $16,700,000 as compared to the same period in 2020 2, revenues for the water segment increased by $15,400,000 largely representing the difference from the 20 partially offset by a decrease in revenue resulting from the cost of capital decision effective July 31, 2023, which included the effect of a reduction in the cost of debt covered in rates, partially offset by higher authorized return on equity.

Speaker 2

In addition, Revenue were lower in the Q3 of 2022 by $1,900,000 due to the recording of an Estimate of revenue subject to refund at the time. Electric revenues for 3 months ended September 30, 2023 have remained flat compared to the same period in 2022 as new rates for 2023 has yet to be approved. In addition, there was an increase in revenues of $1,200,000 from our Contracted Services segment due to an increase in management fees revenue from annual economic price adjustment and higher construction activity. Turning to Slide 9 and looking at total operating expenses other than supply costs. Consolidated expenses increased $1,900,000 as compared to last year's Q3.

Speaker 2

The increase was largely related to higher construction costs at our Contracted Services segment and higher other operation and maintenance expenses across all business segments during the Q3. These increases were partially offset by lower administrative and general expenses. Interest expense, net of interest income, increased by $2,900,000 due to higher average interest rate during the quarter and increases in overall borrowing levels. Other expenses other expense, net of other income, increased by $1,400,000 Due primarily to an increase in the non service cost component for Golden State Water's benefit plan, resulting from changes in Actual area assumptions in the planned assets. However, as a result of Golden State Water's two way Balancing accounts authorized by the CPUC, changes in total net periodic pension costs related to the pension plan Have no material impact to earnings.

Speaker 2

Slide 10 So the adjusted EPS bridge compared to the 3rd quarter of 2020 comparing the 3rd quarters of 2023 and 2022. Moving on Slide 11. This slide reflects our year to date earnings per share by segment Fully diluted earnings as reported for the 9 months ended September 30, 2023 were $2.82 as compared to $1.61 for the same period in 2022, An increase of $1.21 per share. Included in year to date 2023 results It was $0.38 per share related to the impact of retroactive rates Funded decisioning the water generated for the full year of 2022, of which $0.30 per share relates to the 1st 9 months of 2022. In addition, as a result of the full cost of capital decision of The final cost of capital decision, the 2023 year to date results include $0.13 per share related to the reversal of the recording of a lower cost of debt in 2022, of which $0.10 per share was recorded during the 9 months ended September 30, 2022.

Speaker 2

A $1.21 per share increase was also included a favorable variance of $0.17 per share from investments held to fund a retirement plan. Excluding the three items mentioned above, Bethesda's consolidated earnings As compared to adjusted earnings of $1.84 per share for the same period in 2022, An increase of $0.43 per share. Turning to liquidity on Slide 12. Net cash provided by operating activities was $56,500,000 through September of this year as compared to $89,900,000 for year to date 2022. During the 1st 9 months of last year, Our regulated utilities received $9,800,000 in COVID-nineteen relief funds from the state of California There has been no relief funds received thus far in 2023.

Speaker 2

The decrease in operating cash So it was also a result of lower water consumption and the delay in receiving water GRC final decision. Golden State Water has implemented the new 2023 rate that took effect on July 31. Surcharges to recover retroactive amount accumulated through July 30 have also been implemented in October. In addition, cash flow from construction related activity at ASUS decreased this year, representing timing differences of when the work is being performed and when the cash is received for the payment of the work. For investing activities, our regulated utility invested $126,000,000 on company funded capital projects during the 1st 9 months of 2023, and we project company funded capital expenditure at our regulated utilities To be $155,000,000 to $107,000,000 this year.

Speaker 2

Yesterday, we executed It's an amendment to American State Water's credit facility that allowed for the addition of a new bank Joining the existing syndicate group, we are pleased to expand our banking group, which also increased KWR's borrowing capacity from $150,000,000 to $165,000,000 that will provide additional support to the operations of ASUS and AWR Peric. In addition, American States Water may seek additional capital of $150,000,000 to $200,000,000 Over the next 3 years, beginning in 2024, potentially through an at the market common equity program to fund business operations and take down credit facilities. I will turn the call to over to Bob now. Thank you.

Speaker 1

Thank you, Eva. I will discuss a few key regulatory matters. As discussed last quarter and to provide you a recap of key points in the decision, the water utility rate case final decision Issued on June 29 this year, set new rates for 2022 through 2024, Authorizes a capital infrastructure budget of $404,800,000 over the 3 year cycle, Adopt new operating expense levels and allows for additional increases in adopted revenues For 2023 2024, subject to an earnings test and changes to the inflation index values. As mentioned earlier, on August 14, Golden State Water filed its water general rate case for water rates for the years 2025 through 2027. Among other things, Golden State Water requested capital budgets 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.

Speaker 1

A decision in the water general rate case is scheduled for the Q4 of 2024 With new rates to become effective January 1, 2025. Also in June, the CPUC adopted the final decision in the cost of capital proceeding to set the new cost of capital For 2022 through 2024, the decision adopts our requested capital structure of 50 and an authorized return on equity of 8.85%. It also allows for In addition, based on the final decision, All adjustments to rates are prospective and not retroactive. Golden State Water filed an advice letter that implemented the new cost of capital effective July 31, 2023. As I just mentioned, the decision allowed for the continuation The water cost of capital mechanism.

Speaker 1

For the period from October 1, 2021 Through September 30, 2022, the Moody's AA utility bond rate increased by 102.8 basis from the benchmark, which triggered the water cost of capital mechanism adjustment of 51 basis points. Because the recently authorized cost of capital is prospective, Golden State Water's adopted return on equity Increased from 8.85 percent to 9.36 percent And its cost of debt decreased from 6.6 percent to 5.1 percent, both effective July 30 Additionally, for the period from October 1, 2022 Through September 30, 2023, the Moody's AA utility bond rate increased by 139.7 basis points from the benchmark, which triggered another water cost and capital mechanism adjustment. In October, Golden State Water filed an advice letter to establish the water cost of capital mechanism for 2024, Which was approved last week on November 2 to increase the 9.36 percent adopted return on equity To 10.06 percent effective January 1, 2024. Moving on to Slide 15. Our electric utilities subsidiary Filed its general rate case on August 30, 2022 for new rates for the period 2023 through 2026.

Speaker 1

The application includes additional capital expenditures for the 4 year rate cycle and a new cost of capital. We have also requested a recovery of more than $22,000,000 and capital already spent related to the wildfire mitigation plans. For a general rate case memorandum account that will make new rates once approved in a CPUC final decision effective January 1, 2023. Turning our attention to Slide 16. We present the growth in Golden State Water's adopted average water rate base Increases from $752,200,000 in 2018 to $1,357,500,000 in 20.24.

Speaker 1

That's a compound annual growth rate of 10.3 percent for the 6 year period. Let's continue to ASUS. ASU has contributed earnings of $0.12 per share for the Q3 for both 2023 2022. For the year to date 2023, ASUS's earnings were $0.38 per share, an increase of $0.09 per share compared to $0.29 per share for the same period of 2022. The year to date increase was largely due to an increase in construction activity due to timing differences of when construction work was performed and an increase in management fee revenue resulting from the resolution of various economic price adjustments, Partially offset by higher overall operating expenses and interest costs as compared to the same period of 2022.

Speaker 1

ASUS is on target to contribute $0.45 to $0.49 per share for the year. As previously highlighted, ASUS had 2 contract award wins during the quarter. With the award of the estimated $349,000,000 contract value over a 50 year period, ASUS will assume operations at Naval Air Station Pax River following the completion of a 6 month transition period. ASUS was also awarded a new 15 year contract to serve Joint Base Cape Cod. Under this contract, ASUS will have the opportunity to perform work through the periodic issuance of task orders by the U.

Speaker 1

S. Government We're up to a maximum initial value of $45,000,000 over a 15 year period, subject to annual economic price adjustments. In September, the first task order was issued with a value of scheduled for completion in 2024. We project that ASUS will contribute new military base contract awards based on our proven track record of managing water and wastewater related services For military bases since 2004, I'd like to turn our attention to dividends, which remain a compelling part of our investment story. Our quarterly dividend rate has grown at a compound annual growth rate of 9 point 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.

Speaker 1

Our strong dividend history is something that the company is proud of and is a continuing asset to 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

Operator

Our first question comes from Jonathan Reeder from Wells Fargo. Please go ahead.

Speaker 3

Hey, Bob and Eva. How are you guys today?

Speaker 1

Doing good, Jonathan. How about you?

Speaker 3

Not too bad. Thanks for asking. I want to start first the CapEx budget. I think earlier in the year, you're expecting like $140,000,000 to 160,000,000 And you've increased it to 155 to 170. Can you expand on what drove the Increase and does it at all reflect the substantially higher CapEx budget requested in the recently filed GRC?

Speaker 1

Yes, Jonathan. We're just a little bit ahead of schedule on our projects. We do have a pretty substantial step up in our request with the new rate case that we filed, and it's Real important that we continue to spend capital on time. So our team is doing a great job.

Speaker 3

Okay. Can you talk about what the annual rate increases Were that were requested under the recently filed GRC, based on that higher proposed CapEx budget and I guess just how does that interplay with Maintaining rate payer affordability, is that something that's becoming like an increasing challenge for you guys?

Speaker 1

Yes. So, Jonathan, as you know, we have 8 different rate making areas, but the overall A collective rate increase and under PUC rules, you sort of have to measure your A requested increase versus 2 years ago. So it's our requested increase For 2025 in comparison to 2023 rates is in the neighborhood of 23% to 24% For all the as an aggregate of all the eight Rate making areas. So some rate making areas will be higher and some will be lower. Yes, affordability is always Something we need to keep an eye on and have been.

Speaker 1

We do have a substantial step up in the CapEx. We're pretty comfortable we're not going to get 100% of what we asked for, but we think all of the projects are needed. And I think It's really important that we have a very reliable system, for our customers. So we do balance that with affordability. And

Speaker 2

one, Jonathan, if I may add, one of another big factor of the increase is 3 d supply costs. We expect that we may take some wells down because of meeting the new requirement of the PFAS. So we do expect supply costs will increase in the next rate case cycle. That Directly impact the revenue increase for the rate case cycle.

Speaker 3

Yes, sure. Does any of that CapEx just reflect Also like PFAS, CapEx compliance costs too or?

Speaker 1

I mean, there are some dollars in there for PFAS, but it's I would say it's not A big amount associated with the overall request. And you know, Jonathan, just the cost of everything has really increased Since the last rate request.

Speaker 3

Sure. Okay. And then, Eva, just to clarify one of your statements, was the $150,000,000 to $200,000,000 of additional capital comment, does that relate just to Potential equity needs over the 2024 to 2026 period?

Speaker 2

Yes, some small system that we're looking into. It does include that and also fund the current business because we haven't issued equity since 2,009 as you May recall, Jonathan, so it's been 14 years that we haven't gone to the market for this. And we try to We view the very strong balance sheet and we'll continue to do so. So it's important we try to maintain a certain equity ratio on a consolidated basis Well,

Speaker 1

it's all equity. The $150,000,000 to $200,000,000 is all equity.

Speaker 3

Okay. And it's over 2024 to 2026?

Speaker 2

Yes. Okay. That's right now.

Speaker 3

Okay. And then maybe help me understand the joint base Cape Cod contract and I guess how it differs from the traditional 50 year contracts, does it basically just cover construction work on the base over the next 15 years and no O and M component?

Speaker 1

No, not necessarily. It so different branches of the Department of Defense are looking for Perhaps alternatives to the 50 year privatization contract. Our company has sort of been out on the leading edge here Working to try to, I guess, create, I would say, a second model for privatization. And so we have this contract at Joint Base Cape Cod or JBCC. And as we mentioned earlier, Jonathan, it's You have these annual task orders that you get approved.

Speaker 1

And so We're working through this process, but this is a very new contract type. It's possible this could be used other places. We're very excited about this contract. It's Not perhaps as easy to understand as the standard utility privatization contract, Which we think is also just a very effective way to improve the facilities for the military bases.

Speaker 3

Okay. So are you actually though going to be on that base like operating the system in additional to doing some of these like Task orders, which are I mean, are the task orders like capital projects or?

Speaker 1

Right. So Jonathan, we're sort of in this transition phase That's the base. Although we've got it hasn't been approved yet, but the plan is for us to Operate, maintain operate and maintain the system, do capital improvements, do renewal and replacement, etcetera. But it would be one of these approaches where each year we would get sort of approval to go ahead and move forward with that year's Projects, O and M, capital improvements, etcetera. So it's I would say it's similar work to what we do under the 50 year contracts.

Speaker 1

It's just the contracting vehicle is a bit different.

Speaker 3

Okay. So each year you get like a new contractor or dollar amount and that Reflect both O and M work as well as renewal and replacement?

Speaker 1

Yes, that's how we think it will work. Although, we're again, the first one is doing this, but that's That's how we think it will work.

Speaker 3

Okay. Interesting. Do you expect to be is this going to be the model that Any new bases that come up for grabs are going to be under this 15 year versus the 50 year? Because I mean, certainly From a regulated investor kind of standpoint, I mean, the 50 year seems to provide longer term certainty around The stability of the business?

Speaker 1

I would say it's an alternative to the For those folks that are those departments that aren't completely sold on the 50 year privatization, it is an alternative.

Speaker 3

Got you. Okay.

Speaker 2

All right.

Speaker 1

I appreciate it. I should mention that The government will basically turn over the system To a different owner. And so we'll be working with that owner on this particular project. So what does that mean? Does it that means it might be I don't want you sitting there thinking, well, it's easy for the government to take this thing back.

Speaker 1

You should think that, okay, it's although not as easy to take it back as under the 50 year Version, it is it still will be difficult for them to take the system back. And they're You typically don't privatize things until it's until you need you're in need of repair and capital improvements. I mean, we're super excited about working with the folks at JBCC on this project and Consider it sort of an innovative contracting method.

Speaker 3

Got you. Okay. No, I look forward to learning a little more about it next time we get together. So Appreciate the details.

Operator

There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Bob Sprowls any closing remarks.

Speaker 1

Yes. Thank you, Jason. I just want to thank everybody today for Your participation and let you know we look forward to speaking with you the next quarter and wish you all happy holiday season. Thank you.

Operator

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

Remove Ads
Powered by Quartr
Earnings Conference Call
American States Water Q3 2023
00:00 / 00:00
Remove Ads