Longeveron Q3 2024 Earnings Call Transcript

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November 7, 2024

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 Q3 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 pm Eastern Time and run through Thursday, November 14, 2024, on the company's website, www.aswater.com. The slides that the company will be referring to are also available on the website.

Operator

All participants will be in a listen only mode. This call will be limited to 1 hour. 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 or achievements, and listeners are cautioned not to place undue reliance upon them.

Operator

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 ks 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 expect 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 delivered are derived from consolidated financial information, but are not presented in our financial statements that are prepared in accordance with GAAP.

Operator

For more details, please refer to the press release. At this time, I will now turn the call over to Bob Sprowls, President and Chief Executive Officer of American States Water Company. Please go ahead.

Speaker 1

Thank you, Dave. 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. I'm pleased to report that recorded earnings per share for the Q3 were $0.10 per share higher compared to the Q3 of last year. The increase was in large part due to 3rd year rate increases in our Water segment and gains on our investments to fund a retirement plan, partially offset by higher operating expenses, some of which are due to timing, higher interest costs and a delay in receiving a decision in the pending electric general rate case.

Speaker 1

Eva will discuss the results in more detail. Our regulated utilities have invested $172,500,000 in company funded infrastructure year to date and we'll be investing a record high $210,000,000 to $230,000,000 on capital expenditures this year. As we discussed last quarter, Golden State Water and the Public Advocates Office of the California Public Utilities Commission or CAL Advocates for short, reached a settlement agreement in connection with Golden State Water's general rate case that will set new water rates for the years 2025 through 2027. Parties filed a joint motion in July to adopt the settlement agreement with the California Public Utilities Commission or CPUC. Among other items, the settlement authorizes Golden State Water to invest $573,100,000 in capital infrastructure over the 3 year capital cycle.

Speaker 1

Additionally, last week Bear Valley Electric, CAL Advocates and the other intervener in the proceeding filed a joint motion to adopt the settlement agreement between the parties resolving all issues in connection with the electric general rate case and will set new electric rates for 2023 through 2026 with new rates retroactive to January 1, 2023. Among other things, the settlement authorizes Bear Valley Electric to invest $75,600,000 in capital infrastructure over 2023 through 2026, including $23,100,000 that will be filed for revenue recovery through advice letters upon project completion. The joint settlements, if approved, enable our water and electric utilities to continue investing in their assets to strengthen the systems and ensure safety and service reliability for our customers. I will discuss these settlements in more detail later in the call. For the year to date September, ASUS is $0.06 per share ahead of last year for the same period.

Speaker 1

You'll recall that ASUS contributed $0.50 per share to consolidated earnings for the full year 2023. We now project that ASUS will contribute $0.54 to $0.57 per share this year, higher than the $0.50 to $0.54 range we provided previously. ASUS continues to enter into U. S. Government awarded contract modifications for new construction projects.

Speaker 1

$54,000,000 in new capital upgrade construction projects during the 9 months ended September 30, 2024. These newly awarded projects are expected to be completed during 2024 through 2027. With that, I'll turn the call over to Eva to discuss earnings and liquidity.

Speaker 2

Thank you, Bob, and hello, everyone. Let me start with our Q3 results. Consolidated earnings as recorded were $0.95 per share for the 3rd quarter as compared to $0.85 per share for the Q3 of 2023. For our water utility, Golden State Water, reported earnings were $0.84 per share as compared to $0.72 per share last year. The $0.12 per share increase was largely due to an increase in the 3rd year water rate.

Speaker 2

An overall increase in the authorized rate of return on rate base in 2024 gains generated from investment held for retirement plans and lower income taxes, partially offset by higher operating and interest expenses. Lastly, there was a decrease of earnings of approximately $0.01 per share due to the diluted effect from the issuance of equity under AWR's ad market offering program. Our electric segment's earnings were $0.02 per share for the quarter as compared to $0.04 per share for 2023, primarily resulting from not having new rates in effect as we await a decision on the electric CRC that will set new rates for 2023 through 2026, while also experiencing continued increases in interest costs. When the decision is issued, new electric rates are expected to be retroactive to January 2023 and cumulative adjustments will be recorded at that time. Earnings from ASUS were consistent for the quarter when compared to 2023 with a decrease of $0.01 per share mainly due to the effect of rounding.

Speaker 2

Consolidated revenue for the 3rd quarter increased by $10,000,000 as compared to last year. Revenues for the water segment increased by $7,800,000 largely due to an increase in 3rd year water rate and overall increases in authorized rate of return on rate base in 2024. Electric revenues remained consistent as we are waiting for a decision on the electric generator case. While there was an increase in revenue from SUS of $2,200,000 primarily due to higher management fee revenue resulting from resolution of various economic price adjustments and the commencement of operations of water and wastewater systems at Joint Base Cape Cod in the Naval Station, Patuxent River. Turning to Slide 10 and looking at total operating expenses other than supply costs.

Speaker 2

Consolidated expenses increased $5,300,000 as compared to the Q3 of 2023. The increase was due to an increase in other operating expenses, mainly related to the commencement of operation at the 2 new bases higher administrative and general expenses due to higher outside service costs related to the pending water general rate case proceedings and other regulatory filings and the insurance costs and an increase in depreciation and property tax expenses, both of which are impacted by the increased capital expenditures for our regulated utilities. The increases were partially offset by lower maintenance expenses. Interest expense, net of interest income, increased by $1,900,000 due to increases in average interest rates and overall borrowing levels during the quarter. Lastly, other income, net of other expenses, increased by $3,400,000 largely because of gains recorded on investments held to fund 1 of the company's retirement plans in the 3rd quarter compared to losses in the same period last year.

Speaker 2

Slide 11 shows the EPS bridge comparing reported EPS for the Q3 of 2024 against the same period last year. Consolidated year to date earnings as recorded were $2.42 per share as compared to $2.82 per share for the same period of 2023. Included in the result of the 1st 9 months of last year were $0.38 per share related to the impact of retroactive rates from the final decision in the Water General's rate case for the full year of 2022 and the reversal of $0.13 per share for revenue subject to refunds originally recorded in 2022 as a result of the final cost of capital decision in June of 2023, both items related to our water segment. Excluding the two items mentioned above from the year to date earnings, 2023 earnings recorded and adjusted consolidated earnings for the 9 months ended September 30, 2024 were $2.42 per share as compared to adjusted earnings of $2.31 per share for the same period in 2023, an increase of $0.11 per share. Turning to liquidity.

Speaker 2

Net cash provided by operating activities was $134,200,000 for the 9 months ended September 30, 2024, as compared to $56,500,000 for the same period of 2023. The increase in operating cash flow was primarily as a result of Golden State Water having implemented new rates in 2023 2024, the collection of surcharges to recover retroactive revenues from 2022 through July of 2023 and higher water consumption in 2024. The increase in cash flow from operating activities also resulted from differences in the timing of billing and cash receipts for construction work at military bases at US as well as the timing of its vendor payment. For investing activities, as Bob mentioned earlier, our regulated utility invested $172,500,000 on company funded capital projects during the 9 months ended September 30, 2024, and we project this to reach $210,000,000 to $230,000,000 for the full year of 2024. American State Water's add to market offering program to sell common shares remains ongoing as these programs allow the company at its sole discretion to sell up to $200,000,000 over a 3 year period.

Speaker 2

During the 9 months ended September 30, 2024, AWR raised proceeds of $59,300,000 net of issuing costs and legal costs incurred. American State Water currently has maintained a credit rating of 8 stable with Standard and Poor's Global Ratings or S and Ps, while Golden State Water maintained an A plus stable rating with S and P and A2 stable rating with Moody's Investor Service. Each of these ratings has been affirmed during 2024. These are some of the highest credit ratings in the U. S.

Speaker 2

Investor owned value plus industry. With that, I'll turn the call back to Bob.

Speaker 1

Thank you, Eva. I will start with Golden State Water's settlement agreement with Cal Advocates on its general rate case. As I mentioned earlier, in July of this year, Golden State Water and Cal Advocates filed a joint motion to adopt a settlement agreement in connection with the general rate case that determines water rates for the years 2025 through 2027. If approved, the proposed settlement resolves most of the issues related to the 2020 5 annual revenue requirement. The settlement authorizes Golden State Water to invest approximately $573,100,000 in capital infrastructure over the 3 year capital cycle.

Speaker 1

This amount as settled includes $17,700,000 of advice letter capital investments to be filed for revenue recovery during the 2nd and third year attrition increases when those projects are completed. In addition, the settlement agreement authorizes Advice Litter capital investments already under construction at the beginning of 2023 of $58,200,000 to be filed for revenue recovery during the 2nd and third year attrition increases when those projects are completed. Excluding revenues for advice letter capital projects, adopted operating revenues less water supply costs for 2025 are projected to increase by approximately $23,000,000 when compared to 2024. In addition, there are potential additional revenue increases of approximately $20,000,000 for each of the years 2026 2027 based on inflation factors without factoring in the revenues from those advice letter capital projects. The 2 remaining unresolved 2025 revenue requirement issues relate to the sales forecast and supply mix.

Speaker 1

In addition, there were 4 regulatory mechanisms that Golden State Water requested and will be litigated: a full sales and revenue decoupling mechanism and full cost balancing account for water supply. The sales reconciliation mechanism, a supply mix adjustment mechanism and a request to modify the existing PFAS memorandum account to track carrying costs on capital investments needed to comply with the new PFAS regulation. We requested and have been granted an oral argument in front of the administrative law judge on the unresolved issues. A proposed decision in the water general rate case is scheduled to be issued by the end of 2024, with new rates to become effective January 1, 2025. Last week, our electric utility subsidiary, Cal Advocates and the other intervener in the proceeding filed a joint motion to adopt a settlement agreement between all parties in the general rate case that determines electric rates for the years 2023 through 2026.

Speaker 1

If approved, the proposed settlement agreement resolves all issues in connection with the general rate case. Proposed settlement adopts the revenue requirements for years 2023 through 2026, authorizes the investment of $75,600,000 in capital infrastructure over the 4 year rate cycle, including $23,100,000 through advice letter capital investments that will include an allowance for funds used during construction when the projects are completed. Adopts the cost of capital that increases the adopted return on equity to 10.0 percent from 9.6%, lowers the cost of debt to 5.51% and maintains the capital structure of 57% equity and 43% debt and approved recovery of requested capital expenditures and incremental operating costs incurred prior to 2023 and in connection with its wildfire mitigation plans. These costs are not included in the current rate. Excluding the additional revenues from the Advise Litter Capital Projects just discussed, under the terms of the settlement agreement, Bear Valley Electric adopted operating revenues less electric supply costs for 2023 are projected to increase by approximately $5,100,000 as compared to the 2022 adopted and recorded operating revenues less electric supply costs.

Speaker 1

To cover, among other things, the higher incremental operating costs as settled in the revenue requirement related to Bear Valley Electric's wildfire mitigation plans that were previously not included in customer rates and not expensed because they were being tracked in memorandum accounts. In addition, the settlement provides increases in the adopted operating revenues of $2,200,000 for each of the years 2024 2025 and 2025 and by $3,300,000 in 2026. The rate increases for 2024 through 2026 are not subject to an earnings test. Previously mentioned advice letter projects of $23,100,000 plus an allowance for funds used during construction are expected to generate additional annual operating revenues of approximately $3,000,000 when the respective projects are completed, placed in service and filed for recovery in customer rates. The new rates once approved will be retroactive to January 1, 2023.

Speaker 1

CPUC has extended the statutory deadline for processing this application to January 31, 2025. Therefore, at this time, we don't expect the decision to be issued in 2024. If the decision is not issued in time to reflect the new rates in the 2024 year, cumulative adjustments for 2023 2024 related to the full impact from the terms of the settlement agreement previously discussed will be recorded at the time a decision is finally issued. Assuming the settlement agreement is approved, we estimate the impact related to 2023 2024 to be a combined $0.05 to $0.07 per share. Turning our attention to Slide 17, we present the growth in Golden State Water's adopted average water rate base from 2018 through 2024, which increased from $752,200,000 in 20.18 to $1,357,500,000 in 2024.

Speaker 1

At the compound annual growth rate of 10.3 percent for the 6 year period using 2018 as the base year for the calculation. Golden State Water anticipates a robust and sustained growth in its rate base over the next few years. Let's continue to ASUS. ASUS contributed earnings of $0.11 per share for the Q3 of 2024 as compared to $0.12 per share for the same period in 2023. The decrease was mainly due to the effects of rounding as earnings were consistent with the same period in 2023.

Speaker 1

For the year to date September, ASUS's earnings were $0.44 per share as compared to $0.38 per share for the same period in 2023. As previously mentioned, we now project ASUS will contribute $0.54 to 0 point 5 $7 per share this year. We're also very pleased that ASUS has received a significant increase in new capital upgrade awards through September of 2024 to $54,000,000 in total as compared to $25,200,000 for the full year of 2023. In addition to continued work on the existing bases we serve, we remain confident that we can effectively compete for new military base contract awards. With this in mind, as we look ahead to 2025, we project that ASUS will contribute $0.59 to $0.63 per share next year.

Speaker 1

I'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 or CAGR of 8.8 percent over the last 5 years and is on pace to achieve a 10 year CAGR of 8% in the calendar year dividend payments. 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. 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.

Operator

We will now begin the question and answer session. Our first question comes from Jonathan Reeder with Wells Fargo. Please go ahead.

Speaker 3

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

Speaker 2

Okay, Jonathan. I'm well. Thank you, Jonathan. How about you?

Speaker 1

Surprise,

Speaker 3

surprise. I literally just hopped on, so I apologize. I got a couple of questions. And if you address them in your prepared remarks, I do apologize for that. But I know year to date Bear Valley or the electric operations have contributed $0.07 of EPS versus $0.14 during the same period last year.

Speaker 3

If the proposed decision in the Bear Valley GRC would have been approved and in place at the start of 2024, what would the year to date EPS have been? I'm trying to understand just kind of what the EPS power would have looked like, obviously excluding the retroactive portion related to 2023?

Speaker 1

Okay. So Jonathan, I don't know if you heard the $0.05 to 0 point 0 $7 estimate for $0.23 $0.24 together.

Speaker 3

That would be the cumulative?

Speaker 1

Yes, both years combined.

Speaker 3

Okay. So when you get the final order, you think the full year impact of recording the retroactive would be that?

Speaker 1

Yes. For 2 years, yes.

Speaker 3

Okay.

Speaker 2

All right.

Speaker 1

Now some of the CapEx, of course, is in vice versa projects. So it's sort of been moved out in the rate cycle a bit.

Speaker 3

Okay. Okay. And then when like if you were going to be able to get that recorded in 2024 results, when do you need to get like a final order? Is it just before you report kind of year end earnings? Or is it by I think I heard you say you don't expect to get a decision until 2025, but if it's in January or early February, will you be able to book it in 2024 then, a cumulative gain?

Speaker 1

Yes. So it depends what decision we get. If it's fully if it fully adopts the settlement, we have, I would say, more flexibility to book a proposed decision into 2024. Then if it's the commission of the ALJ's proposed decision is different from the settlement agreement makes it more difficult to book the proposed decision into 2024 financial results. Eva, do you want

Speaker 2

to Okay. If we have final decision, of course, before the 10 ks, then we'll be able to book it. Yes.

Speaker 1

Takes a month, at

Speaker 2

least a

Speaker 1

month between proposed and final.

Speaker 3

So, it's possible, but Yes. So if you get a proposed decision that just fully adopts the settlement and that occurs before you got to file your 10 ks, then you might be able to you might feel comfortable booking it then as well? Yes. Okay. Got you.

Speaker 3

And then ASUS, does the big increase in capital work authorized? Does that reflect like PFOS mitigation work? Is it just a reflection of like the new bases that you've added in recent years? Or kind of what do you think drove that increase?

Speaker 1

Well, I think the government had some money to devote. Usually there's a big rush in awarding these new capital upgrades by the end of the fiscal year, which is September 30. And we continue to work really hard to build a strong relationship with the government. I also feel like I've heard that some of the contracting officers raise their hand for some of the money to be spent on water and wastewater operations. So we've taken great care to present projects that are meaningful to the government for these new capital upgrades.

Speaker 1

But we'd be lying if we thought we said we thought we were going to get $54,000,000 That's a big number for us.

Speaker 3

Okay. Yes, that kind of leads into my next kind of question. I know like well, 2 parts, I guess. Do you think that it sounds like maybe you don't believe that will be the new normal level like going forward that this could just be a little bit of a one off if there is extra money needed to be spent before the end of the year?

Speaker 2

Yes, I think

Speaker 1

it's approximately double what our average is sort of recent average has been. So I think it's too early to tell whether that's the new normal. I will say this, one of the new bases contributed to that number. And then in the future, we think those two bases will help increase the NCU awards from what the historical average has been.

Speaker 2

Sure.

Speaker 3

And as we think of it like the annual construction expense for ASUS has kind of been in that $50,000,000 to $60,000,000 range for many years, just given that award. And I know there's other ways you get projects approved and everything. What are you assuming for 2025 in the guidance range for kind of annual construction expense relative to that historical $50,000,000 to $60,000,000 kind of total?

Speaker 1

Yes. It sort of goes back to our $0.59 to $0.63 I don't know if you heard that, the $0.59 to $0.63 estimate for 2025 on the earnings side.

Speaker 3

Yes. I was wondering what's embedded in that estimate in terms of construction expense, like knowing that you've got that $54,000,000 or whatever it is kind of appropriation. And then I know there's other projects that come into the fold over the course of the year and everything. Like historically, when you've gotten more like 25, you've still had $50,000,000 to $60,000,000 in annual construction expense, right? So what might construction expense look like in 2025 given the higher awards?

Speaker 1

Well, and that $54,000,000 is for the period 2024 through 2027. The other part of construction expenses is renewal and replacement. And we have the ability to move that number up or down depending upon the efforts that need to take place on the new capital upgrade work. So we're we've got a lot to manage here, I guess, is what I'm saying. But we typically haven't given an estimate for what our construction expenses or revenues are going to be.

Speaker 3

Okay. But I mean, I guess if you can move this stuff around and maybe like we shouldn't expect a huge jump in that annual construction expense then I guess, like maybe some increase in 2025, but it's not like saying that $20,000,000 or $25,000,000 higher because of that $54,000,000 award versus $25,000,000

Speaker 1

Right. I wouldn't do that if I were you. I wouldn't move it all in there because we've got to manage all of this. I mean, it's very nice to be awarded all this, but it's we've got to manage that along with the renewal and replacement work.

Speaker 2

And usually, Jonathan, the annual NCU award has a long runway, 2 to 3 years. So we can manage and plan our CapEx better this way because we have a healthy backlog of new capital upgrades. So allow our capital programs be able to plan ahead 2, 3 years rather than bumping 1 year. And So it's just more planning involved to schedule it out.

Speaker 3

Okay. That helps. And then I guess

Speaker 1

Sorry, John. Just a little side light on the $0.59 to 0.63 dollars per share and why that's higher than what we're expecting this year. Some of that is due to having the new basis for a full year versus, call it, 8.5 or 9 months. We took over PAX River on April 1 and JBCC on April 15. So we'll have a full year of their contribution.

Speaker 1

But some of that increase is also due to higher level of new capital upgrade awards that we were given. That helps.

Speaker 3

No, that's very helpful. And then I guess what drove the increase in the 2024 guidance range? I don't know if you mentioned that because I think the midpoint was $0.52 and now you're more like $0.55 or $0.56

Speaker 1

Yes. So I would say a couple of things. One is we've had a pretty good year from a construction standpoint. We've encountered fewer unforeseen site conditions and had very cooperative weather than we anticipated. Additionally, the new operations for us at Joint Base Cape Cod and Naval Air Station Patuxent River contributed.

Speaker 1

We were perhaps a bit conservative when we were providing the range as to what these two bases were going to generate for us in 2024. And they've done a bit better. So it's a combination of better, I would say, better construction situation and then the new basis contributing better than what we had anticipated.

Speaker 2

Okay.

Speaker 1

Which is a really good sign, I would say.

Speaker 3

Yes. No, and it sounds like that would be an ongoing thing in terms of their contribution being higher than what you're thinking. So, no, that's good stuff. Okay, that's it for me. I appreciate you taking my questions.

Speaker 3

Congrats on those GRC settlements and hopefully, we'll get the approval in not too distant future.

Speaker 2

Thank you, Jonathan. Enjoy.

Operator

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

Speaker 1

Yes. As I wrap up today, I just want to thank everyone for their

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