American States Water Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 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 Q2 2024 Results. The call is being recorded. If you would like to listen to a replay of this call, we'll begin this afternoon at 5 p. M.

Operator

Eastern Time and run through Wednesday, August 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. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Today's call will be limited to 1 hour. Presenting today from American States Water Company are Bob Sprouse, President and Chief Executive Officer and Eva Tang, Senior Vice President of Finance and Chief Financial Officer.

Operator

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. 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 are not presented in our financial statements that are in accordance with GAAP. For more details, please refer to the press release.

Operator

At this time, I'd like to turn the floor over to Bob Sprouse, President and Chief Executive Officer of American States Water Company.

Speaker 1

Thank you, Jamie. 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. 2nd quarter was notably productive for the company as our largest subsidiary, Golden State Water, reached a settlement in principle with the Public Advocates Office of the California Public Utilities Commission or CAL Advocates for short, in connection with Golden State Water's general rate case that will set new water rates for the years 2025 to 2027.

Speaker 1

As a result of these efforts, on July 12, the company and Cal Advocates filed a joint motion to adopt the settlement agreement with California Public Utilities Commission or CPUC. Proposed settlement agreement, if approved by the CPUC, resolves most of the issues related to the 2025 annual revenue requirement, leaving only 2 unresolved issues, which will be discussed later. Among other items, the settlement authorized Golden State Water to invest approximately $573,100,000 in capital infrastructure over the 3 year capital cycle. This allows the company to continue to provide safe and reliable water utility service to our customers. We're also very pleased that our contracted services segment commenced management of the water and wastewater systems on our 2 military bases on 2 new military bases in April, as we successfully completed our transitions at Naval Air Station Patuxent River, also known as PAX River and Joint Base Cape Cod.

Speaker 1

For the systems at PAX River, we have a 50 year firm fixed price contract with an initial estimated value at $349,000,000 which was increased to $378,000,000 in July upon completion of a joint inventory adjustment. Contract to serve Joint Base Cape Cod is for 15 years with a maximum firm fixed price value of $75,000,000 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. This was a unique quarter where recorded earnings for the 2nd quarter were lower compared to the recorded and adjusted earnings for the Q2 of last year. As the unfavorable effects of higher operating expenses, some of which is due to timing, higher interest costs, favorable non recurring water regulatory adjustments recorded in the Q2 of 2023 and a delay in receiving a decision in the pending electric general rate case were partially offset by an increase in 3rd year 2024 water rates and higher earnings at ASUS.

Speaker 1

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 $170,000,000 to $200,000,000 on capital expenditures this year at our regulated utilities. I'm also pleased to report that last week, our Board approved another sizable dividend increase. By increasing the company's 3rd quarter cash dividend to $0.46 $0.55 per share from $0.43 per share.

Speaker 1

The annualized dividend rate after this increase is $1.86.02 per share, which represents an 8.3% increase from the current annualized dividend rate of $1.72 per share. The significant dividend increase reflects our Board's confidence and the company's ability to achieve long term sustainable earnings growth. We believe a growing dividend allows the company to attract capital for investments in its infrastructure that enable us to provide safe and reliable service to our customers and return value to our shareholders. American States Water has paid dividends every year since 1931, increasing the dividends received by shareholders each calendar year now for 70 consecutive years, which places it in an exclusive group of companies on the New York Stock Exchange that have achieved that result. With that, I will turn the call over to Eva to discuss earnings and liquidity.

Speaker 2

Thank you, Bob. Hello, everyone. Let me start with our 2nd quarter results. Consolidated earnings as recorded were $0.85 per share for the 2nd quarter as compared to $1.04 per share for the Q2 of 2023. Included in the results of last year's Q2 was $0.18 per share related to the impact of the final cost of capital decision for the water segment that made all adjustments to rates prospective.

Speaker 2

The cost of capital decision resulted in the reversal in June of 2023 of revenues subject to refunds of $9,300,000 or $0.18 per share recorded during 2022 and the Q1 of 2023. During this item, adjusted consolidated earnings for the Q2 of 2023 were $0.86 per share as compared to recorded earnings of $0.85 per share for the 2nd quarter, a decrease of $0.01 per share. For our water utility, Golden State Water reported earnings were $0.67 per share as compared to $0.91 per share for the Q2 of 2023. Factoring in the same effect from the adjusted items for 20 20 3, earnings for the Q2 of 2024 at Golden State Water were $0.67 per share, a decrease of $0.06 per share as compared to adjusted earnings of $0.73 per share for the Q2 of last year. The $0.06 per share decrease was largely due to favorable nonrecurring regulatory adjustments recorded during the Q2 of last year that did not recurred this year.

Speaker 2

Higher operating and interest expenses and lower other income with less gains generated from investment held for a retirement plan, partially offset by an increase in 3rd year water rates in 2024. Lastly, there was also a decrease in earnings of approximately $0.01 per share due to the dilutive effect from the issuance of equity on the AWR's end market offering program. Our Electric segment's earnings were $0.01 per share for the quarter as compared to $0.03 per share for the same period in 2023, largely resulting from not having new rates in effect as we await the pending electric TRC that will set new rates for 2023 through 2026, while also experiencing continued increases in overall operating expenses and interest costs. When a decision is issued in the electric GRC, new rates are expected to be retroactive to January 2023 and cumulative adjustments will be recorded at that time. Earnings from ASUS increased $0.07 per share for the quarter, largely from higher management fee revenues, resulting from the resolution of various economic price adjustments, timing of when construction work was performed compared to the same period last year and the commencement of operation at the 2 new bases, which Bob will discuss further.

Speaker 2

Consolidated revenue for the 2nd quarter decreased by $2,100,000 as compared to 2023. Revenues for the Water segment decreased by $6,500,000 mainly due to the reversal of previously recorded estimated revenues subject to refunds as a result of final cost capital decision of $9,300,000 recorded in the Q2 of 2023 and favorable non recurring regulatory adjustment of approximately $2,000,000 also recorded during the Q2 of last year, partially offset by an increase in water revenues, largely due to 3rd year rate increases for this year. Electric revenues decreased slightly as we await a decision on the electric generate case, while there was an increase in revenues from ASUS of $4,500,000 largely due to higher management fee revenues resulting from the resolution of various economic price adjustments and the commencement of operations at the 2 new bases and timing differences in performing construction work. Turning to Slide 10 and looking at total operating expenses other than supply costs. Consolidated expenses increased $4,400,000 as compared to the Q2 of 2023.

Speaker 2

The increase was largely attributable to an increase in other operating expenses, largely related to the commencement of operations at a new basis, an increase to property and other taxes due in large part to favorable property tax adjustments recorded in the Q2 of 2023 with no such adjustments this year and higher administrative and general expenses due mostly to higher outside services costs related to the pending water generators, proceedings and other regulatory filings. In addition, there was an increase in expenses that have corresponding and offsetting increases in surcharges revenues to recover previously incurred costs, resulting in no impact to earnings. Interest expense, net of interest income, increased by $2,100,000 due to increases in average interest rates and overall borrowing levels during the quarter. Other income, net of other expenses, decreased by $200,000 largely because of lower gains recorded on investment held to fund a retirement plan in this quarter. Slide 11 shows the EPS bridge comparing recorded and adjusted EPS for the Q2 of 2024 against adjusted EPS for 2023.

Speaker 2

Consolidated year to date earnings as recorded were $1.47 per share as compared to $1.97 per share for the same period of 2023. Included in the results of the Q1 of last year was $0.38 per share related to the impact of retroactive rates from the final decision in the wallet GRC for the full year of 2022 and the reversal of $0.13 per share for revenue subject to refunds recorded in 2022 as a result of the final cost of capital decision in June last year. Excluding these two items mentioned above from the year to date 2023 earnings, recorded and adjusted consolidated earnings for the 6 months ended June 30, 2024 were $1.47 per share as compared to adjusted earnings of $1.46 per share for the same period in 2023, an increase of $0.01 per share. Turning to liquidity on Slide 13. Net cash provided by operating activities was $70,500,000 for the first half of twenty twenty four as compared to $17,800,000 for the same period of 2023.

Speaker 2

The increase in operating cash flow was largely as a result of Golden State Water having implemented new rates in 2023 2024, as well as the collection of surcharge to recover retroactive revenues from 2022 through July 30, 2023. The increase in cash flows from operating activity also resulted from differences in timing of billing and cash receipts for construction work at military bases at ASUS and the timing of its vendor payment. For investing activities, our regulated utility invested $105,100,000 on company funded capital projects during the first half of twenty twenty four, and we project company funded capital expenditures at our regulated utilities to be $170,000,000 to $200,000,000 this year. American State Water's ad market offering program to sell common shares remain ongoing as this program allows us at its sole discretion to sell up to $200,000,000 over a 3 year period. During the first half of twenty twenty four, AWR raised proceeds of approximately $32,000,000 net of issuing costs.

Speaker 2

In June, Gozy State Water issued $65,000,000 in unsecured private placement notes with a coupon rate of 5.5 percent maturing in June of 2027. American State Water currently maintain a credit rating of 8 stable with Standard and Poor's Global Ratings or S and Ps, while Golden State Water maintains A plus stable ratings with S and P and A2 stable rating with Moody's Investors Service. Each of these ratings has been affirmed during 2024. These are some of the highest credit ratings in

Speaker 1

the U. S. Investor owned water utility industry. With that, I'll turn the call back to Bob. Thank you, Eva.

Speaker 1

I will start with Golden State Water's settlement agreement with Cal Advocates on Golden State's general rate case. As I mentioned earlier, Golden State Water and Cal Advocates filed a joint motion in July to adopt a settlement agreement between the 2 parties in connection with the general rate case that determines water rates for the years 2025 through 2027. If approved, the settlement resolves most of the issues related to the 2025 annual revenue requirement. The settlement authorizes Golden State Water to invest approximately 570 $3,100,000 in capital infrastructure over the 3 year capital cycle. 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.

Speaker 1

In addition, the settlement agreement authorizes Advice Letter 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. Also, there are potential additional revenue increases of approximately $20,000,000 for each of the years 20262027 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. In addition, there were 4 regulatory mechanisms that Golden State Water requested and are being litigated.

Speaker 1

1st, a full sales and revenue decoupling mechanism and full cost balancing account for water supply 2nd, the sales reconciliation mechanism 3rd, a supply mix adjustment mechanism and 4th, a request to modify the existing PFAS memorandum account to track carrying costs on capital investments needed to comply with the new PFAS regulations. The decision in the water general rate case is scheduled to be issued by the end of 2024 with new rates become effective January 1, 2025. As you may know, in 2020, the CPUC issued a decision that mandated the discontinuation of existing full revenue decoupling mechanisms, also known as the water revenue adjustment mechanism and the modified cost balancing account. Modified cost balancing account allows Golden State Water to recover costs from the supply mix and rate changes from wholesale suppliers. In response to the procedures the CPUC followed in arriving at this decision, Golden State Water and 3 other investor owned water utilities and the California Water Association, each filed a petition in 2021 with the California Supreme Court to review the CPUC's decision making processes that resulted in discontinuing the use of the water revenue adjustment mechanism and modified cost balancing count.

Speaker 1

Last month, the court issued a ruling that set aside the previously issued order by the CPUC and vacated portions of the CPUC's decision related to the discontinued use of both mechanisms. As mentioned, Golden State Water has continued to request the use of both mechanisms in this general rate case application, which is subject to CPUC approval. Our electric utility subsidiary filed its general rate The application includes additional capital expenditures, The application includes additional capital expenditures of $68,200,000 for the 4 year rate cycle and a new cost of capital. We have also requested the recovery of more than $23,500,000 in capital already spent related to the wildfire mitigation plans. The new rates once approved will be retroactive to January 1, 2023.

Speaker 1

Decision on the electric general rate case is scheduled to be issued in 2024. Turning our attention to Slide 17, we present the growth in Golden State Water's adopted average water rate base from 2018 to 2024. Golden State Water's authorized average rate base increased from $752,200,000 in 20.18 to 1,357 point $5,000,000 in 20.24. That is a compound annual growth rate of 10.3% for the 6 year period. Olmsted Water anticipates a robust and sustained growth in its rate base in the next few years.

Speaker 1

Let's continue to ASUS. I'm pleased to announce that ASUS contributed earnings of $0.19 per share for the Q2 of 2024 as compared to 0 point 12 3. The increase was largely due to higher management fee revenue resulting from the resolution of various economic price adjustments and the commencement of operations at the new bases and an increase in construction activity from timing differences of when construction work was performed in 2024 as compared to the same period of 2023, partially offset by higher overall operating expenses, excluding construction expenses and higher interest costs. For the year to date June 2024, ASUS's earnings were $0.32 per share as compared to $0.27 per share for the same period in 2023. We continue to project ASUS to contribute $0.50 to $0.54 per share this year, And we remain confident that we can effectively compete for new military base contract awards based on our proven track record of managing water and wastewater related services for military bases since 2004.

Speaker 1

I would like to turn our attention to dividends, which I touched on earlier. Last week, we announced an 8.3 percent increase in the 3rd quarter dividend. This increase is 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 continued asset to our shareholders. This strong track record has allowed us to achieve an 8.8% compound annual growth rate in our quarterly dividend rate to shareholders over the last 5 years since the Q3 of 2019.

Speaker 1

I'd like to conclude our prepared remarks by thanking you for your interest in American States Water. I will now turn the call over to the operator for questions.

Operator

And our first question today comes from Jonathan Reeder from Wells Fargo. Please go ahead with your question.

Speaker 3

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

Speaker 1

Good, Jonathan. How about you? Yes.

Speaker 3

Not too bad at all. Just about the earnings.

Speaker 2

So Almost done.

Speaker 3

Yes. Wanted to ask you like what do you believe the prospects are of the CPUC reauthorizing fully decoupled rates? Has there been any indication of how commissioners might be leaning following the California Supreme Court's decision? And do you expect that California rate case will be the first indication of how the CPUC is thinking?

Speaker 1

Yes. So we don't really know how the PUC is leaning at this point. We do have the Governor Newsom signing the bill to allow us to ask for full decoupling. We do have the Supreme Court case that came back in the utilities favor. So those are sort of 2 things on the plus side.

Speaker 1

But it's still I think a question mark at this point. I believe the PUC can still possibly deny the use of the PUC use of full decoupling. I do think it will be instructive to hear where they come out on the Cal American case. They're a year ahead of us in that case. I can just sort of speak a little bit about our case, Jonathan, but just a comment or 2.

Speaker 1

When the Public Advocates Office denied our request for the full RAM in their report, they almost singularly cited to the 2020 lira case decision. The company our company has now filed a motion to strike that because the LIRA decision with regard to removing the RAM has been, I guess, eliminated or pushed back to the PUC. So what we struggle with is what's in the record at this point to say that we don't deserve to get the full RAM. But the PDUC will do I mean, they'll follow the rules, but it's just we're kind of in a little bit of new territory, I would say.

Speaker 3

Yes. No, I think the and not surprising, I guess, PAO's testimony is obviously pretty consistent with Cal Americans citing that 2020 order that is no longer valid. So it does make it interesting. Switching to your other GRC for bare value, any update on the timing of that? I know after Q1, you mentioned how it's tough to kind of even get PAO to engage in settlement discussions, just given the small size and PAO being stretched thin with some of the larger electrics.

Speaker 3

Any kind of updates on what's going on there?

Speaker 1

Yes. So a decision has to be under PUC rules, a decision has to be issued in September. However, as you know, Jonathan, they do have the ability to move that date out. So I don't really know. We aren't getting a strong feeling that there's a proposed decision in the offing.

Speaker 1

But I think the size of the company there relative to what the commission has to deal with probably works against us in terms of getting a decision more quickly than what we hope to get a decision by the end of the year, but I doubt if it will be in the next month or 2.

Speaker 3

Yes. Is that kind of a similar situation with trying to engage in settlement discussions still haven't been able to really get PAO's attention there for similar reasons?

Speaker 1

Yes. We struggled We've been working on this for quite some time. And we do get the sense we're clearly not on the top of their to do list. Yes. It just whenever one of the bigger companies file something, it's, hey, we got to do they got to deal with those things.

Speaker 1

And we understand that. We understand they don't have enough people and they the electrics are so much the 3 big electrics are so much bigger than Bear Valley Electric. It's all pretty logical, to be honest. And we've been very, I would say, understanding. And they're a good group to work with.

Speaker 1

It's just we understand they get pulled in a lot of different directions.

Speaker 3

Yes. No, I mean, it's logical, but at the same time, I mean, it does impact not just your business, but then your customers and then the pancaking of rates and everything like that when a decision is finally kind of handed to them.

Speaker 1

That's right, Josh. And we make that argument with them a lot and they understand it and don't push back on that argument. It's just Yes. They can only do what they can do, I think, is probably the way to look at it.

Speaker 3

Preaching to the choir here. So, yes, any sense of like how big of an impact like the delayed Bear Valley GRC has had on like your first half twenty twenty four EPS. I know the recovery of the wildfire mitigation costs made this case larger than it has been in the past. Obviously, it depends on like what the outcome would be. So maybe ask the different way if the case was approved as filed, like how big of a bump would it be or would it have been to the first half twenty twenty four EPS or full year twenty twenty four EPS?

Speaker 1

Well, another thing to throw into the mix relative to prior rate cases, just the interest costs are higher these days than they were. And so we're having to cover significant amount of rate base that's in the ground that isn't we aren't getting recovery of. Yes, we really are not we've really not gone public with how big the impact might be. It just probably a bit a little bit dangerous to do that given that the requested increase is pretty significant and there's just sort of have to wait and see what the proposed and final decisions look like in this case, I think.

Speaker 3

Right. I mean, Bear Valley, it's $0.03 lower on a year to date basis. And had you had the relief, I would assume you would expect Bear Valley to be large last year. So just trying to get a sense when we hopefully do get an order by year end and we get that retroactive component, how helpful that would be. I mean, it's not immaterial at this point, I don't think.

Speaker 1

Oh, no, it's very significant. It's very significant for Bear Valley Electric, I would say.

Speaker 2

Yes. And we're putting another wildfire mitigation plan under the based on the PUC regulation and we're funding that ourselves at this point until the final decision comes about. Yes. And think about it,

Speaker 1

there's well, if you're looking at the 2024 effect, of course, let's say we could go all the way to the end of September, that's 21 months delay. So you're going to get 21 months' worth of increase that I mean, we think it will be an increase. I'm sure it will be an increase. It's just how large it is. And we are a bit surprised that it's taking this long given that the way I think about it and I haven't studied the big electrics, but I believe we are one of the last companies to come in for a rate case since the wildfire mitigation activities started in a big way.

Speaker 1

So one would think that a commission would have dealt with this for 3 or 4 or 5 companies prior to us coming forward. I think that's an advantage for us in that, certainly they're going to expect that that 1st year increase is going to be very sizable. And we've made the arguments that, listen, it's potentially going to be higher for us than other companies because we've gone the longest without that increase. But again, I'm the commission will do what they're going to do and they have I do have great respect for all the things they have to deal with there in at the commission. It's a big state with a lot of issues to regulate and there's only 5 commissioners to deal with it.

Speaker 3

Yes. Okay. Last question for me here then. Any insight into potential new base additions at ASUS? I mean, I think the Cape Cod award, which is the 15 year variety kind of snuck up on us.

Speaker 1

Well, yes, I can talk a little bit about that. We have a sense that the Army and the Air Force had sort of taken this strategic pause to evaluate whether this whether the typical utility privatization contract, the 50 year variety is something they want to continue to do. We have a sense from meetings that have been held, public meetings that they're both interested in moving forward on utility privatizations. With that said, I don't think we have a belief that there'll be a new privatization from either the Army or the Air Force on the street this year, but we would look to next year to see some new utility privatizations there. As we've talked in the past, the Navy has embraced the 50 year utility privatization activities and they are although it isn't going to be a bunch, they are very interested in continuing that process.

Speaker 1

At this point, I don't believe there's a single 50 year utility privatization contract on the street. Now there is talk there is potentially these one offs like the JBCC contract, but I don't think there'll be any personally, I don't think there'll be any contract awards in 2024 by any of the big three. And of course JVCC is Air National Guard, so it would be sort of a 4th arm of the Department of Defense. That's I don't know if that's helpful, Jonathan, but

Speaker 3

Yes, no, it is. So do the 15 year ones, do those potentially come quicker than the 50 year in terms of the lead up and the way that they're kind of competitively bid and all that?

Speaker 1

Well, I'll just say the first one did not. We worked on that for years years. But we were we felt like we were the pioneer and we and our partner developed the template for that. Now the template is out there and it's possible these will be done more quickly, but more quickly than they had been done, not more quickly than your standard utility privatization.

Speaker 3

Okay.

Speaker 1

Okay. One other thing, the standard utility privatization typically runs through the events logistics agency energy. They're sort of the one group that manages the standard 50 year utility privatization. On these exchange agreements or the one we did, it's sort of based on who's doing it and it typically doesn't roll through the DLAE. So there's always a little bit of reinventing the wheel, I guess, that will go on.

Speaker 1

So but like I said, we've worked with our partner to establish the template, and it should be quicker to do the second one than the first one. To a degree, there's an appetite for that.

Speaker 3

Okay. But it doesn't sound like anything imminent though, so okay.

Speaker 1

Yes. I would say that's a good assessment.

Speaker 3

Yes. All right. Thanks for the additional color and looking forward to seeing you in San Diego here in a month or so.

Speaker 1

As are we, Jonathan.

Speaker 3

All right. Thanks.

Speaker 2

Thank you.

Operator

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the floor back over to Bob Sprowls for any closing comments.

Speaker 1

Yes. Thank you, Jamie. And I just want to thank everyone for their participation today and let you know we look forward to speaking with you next quarter.

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