American States Water Co (AWR) 2024 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing the company's first-quarter 2024 results. The call is being recorded.

If you would like to listen to the replay of this call, it will begin this afternoon at 5:00 PM Eastern Time and run through Wednesday, May 15 of 2024 on the company's website at www.aswater.com. The slides that the company will be referring to are also on the website. This call will be limited to one hour.

Presenting today from American States Water Company are Mr. Bob Sprowls, President and Chief Executive Officer; and Ms. Eva Tang, Senior Vice President and Finance and Chief Financial Officer.

As a reminder, certain matters discussed during this conference call may be forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. Please review a description of the company's risks and uncertainties in our most recent 10-K and Form 10-Q on file with the Securities and Exchange Commission.

In addition, this conference call will include a discussion of certain measures that are not prepared in accordance with generally accepted accounting principles or GAAP in the United States and constitute non-GAAP financial measures under SEC rules. These non-GAAP financial measures are derived from consolidated financial information but not presented in our financial statements that are prepared in accordance with GAAP. For more details, please refer to the press release.

At this time, I would like to turn the call over to Mr. Bob Sprowls, President and Chief Executive Officer of American States Water Company. Please go ahead, sir.

Thank you, Chuck. Welcome, everyone, and thank you for joining us today. I'll begin with some brief comments on the quarter. Eva will then discuss some financial details, and then I'll wrap it up with updates on regulatory activity, ASUS dividends, and then we'll take your questions.

It was a solid quarter for the company as we continued to invest in our regulated utilities and began water and wastewater operations at two new military bases in April. Let's first briefly discuss our earnings for the first quarter of 2024. Recorded diluted earnings for the quarter decreased by $0.31 per share from the same period in 2023 or a $0.02 per share increase as adjusted.

The $0.02 per share higher adjusted earnings were largely from the third-year 2024 water rates approved in the final decision in Golden State Water's general rate case, partially offset by lower construction activities at ASUS due to timing differences in performing work and the delay in the electric general rate case decision. Eva will discuss the adjusted results in more detail.

At the regulated utilities, we continue to invest in our infrastructure to strengthen our water and electric systems and remain focused on operating the water and electric businesses safely, efficiently, and for the long term. We are committed to the goal of spending $160 million to $200 million this year at our regulated utilities.

We're very pleased to have begun operations of the water and wastewater systems on two new military bases in April, as we successfully completed our transitions at Naval Air Station Patuxent River or Pax River located in Maryland and Joint Base Cape Cod in Massachusetts. Pax River provides our contracted services segment with a 50-year firm fixed price contract estimated at $349 million, while Joint Base Cape Cod is a 15-year contract of up to a maximum firm fixed price value of $75 million through the issuance of annual task orders.

We look forward to supporting both installations and consider it a privilege to leverage our broad utility expertise to make significant contributions to the military and their respective missions at these locations.

With that, I'll turn the call over to Eva to discuss the quarterly earnings and liquidity.

Thank you, Bob. Hello, everyone. Let me start with our first-quarter financial results. Consolidated earnings as recorded were $0.62 per share for the first quarter as compared to $0.93 per share for the first quarter of 2023. Included in the results of last year's first quarter was $0.38 per share related to the recording of retroactive rate from the proposed decision in the water general rate case for the full year of 2022.

In addition, during the first quarter of last year, we recorded a loss of $0.05 per share associated with revenue subject to refund as a result of the lower cost of debt related to the pending cost of capital proceeding at the time, which were subsequently reversed in June 2023 upon receiving the final decision in the cost of capital proceedings that made our adjustments to rates prospective.

Excluding these two items, adjusted consolidated earnings for the first quarter of 2023 were $0.60 per share as compared to recorded earnings of $0.62 per share this year, an increase of $0.02 per share. For our water utility Golden State Company, reported earnings were $0.48 per share as compared to $0.74 per share for the first quarter of 2003. Both items just discussed impacted earnings at our water segment last year.

So factoring the same effect from the two adjusted items for 2023, earnings for the first quarter of 2024 at Golden State Water were $0.48 per share, which was an increase of $0.07 per share as compared to adjusted earnings of $0.41 per share for the first quarter of last year.

Since 2024 is the third year of the GRC rate cycle, Golden State Water received third-year rate increases effective January first, 2024. So the $0.07 per share increase in 2024 largely represent increases in water revenue and other income from gains generated from investment held for retirement plan, partially offset by increases in operating and interest.

Our electric segment earnings were $0.05 per share for the first quarter as compared to $0.06 per share for the same period in 2023, largely resulting from not having new rate in effects as we await to pay the electric GRC that will set new rates for 2023 to 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 retroactive to January of 2023 and cumulative adjustment will be recorded at that time.

Earnings from ASUS decreased $0.02 per share for the quarter, largely from timing differences of when construction work was performed when comparing to the first quarter of this year with the same period of 2023. Bob will discuss it in more detail later. Losses from our parent company were $0.03 per share for the quarter as compared to losses of $0.02 per share for the same period in 2023, largely due to increased interest.

Moving on to slide 8, consolidated revenue for the first quarter decreased by $26.1 million as compared to the same period in 2023. Revenue for the wireless segment decreased by $22.4 million, mainly due to $30.3 million recorded in the first quarter of 2023, which represented the impact of retroactive new rate for the full year of 2022 as a result of the proposed decision issued by the CPUC in April of last year and Golden State Water's general rate cases at the time, partially offset by increases in water revenue in 2024 due the third-year rate increases.

Electric revenue decreased slightly as we await a decision on the electric general rate case, while there were a decrease in revenue from ASUS of $3 million, largely due to timing differences in performing construction work.

Turning to slide 9 and looking at total operating expenses other than supply costs, consolidated expenses decreased $2.2 million as compared to the first quarter of 2023. The decrease was largely attributable to a decrease in construction costs at ASUS resulting from lower construction activity due to timing differences of when construction work was performed in 2024 as compared to Q1 of 2023, partially offset by higher administrative and general expenses.

Interest expense, net of interest income increased by $3.2 million due to higher interest rates during the quarter and increases in overall borrowing levels. Other income net of other expenses increased by $700,000 largely because of higher gain recorded to our investment to fund one of CO2 we haven't planned in the first quarter.

Slide 10 shows the EPS bridge comparing recorded and adjusted EPS for the first quarter of 2024 against adjusted EPS for 2023.

Turning to liquidity, net cash provided by operating activity was $45.8 million as compared to $7 million for the first quarter of 2023. The increasing operating cash flow was largely as a result of Golden State Water, having implemented new rates in 2023 and 2024 and the collection of surcharges to recover retroactive revenue from 2022 through July 30, 2023.

In addition, cash used for construction-related activity at ASUS decreased this year due to timing differences -- actually increased this year -- a decreased this year, I'm sorry, due to timing differences of when the construction work is being performed and when payments are made to our contractor.

For investing activities, our regulated utility invested $47.6 million on company-funded capital projects during the first quarter. And we project company-funded capital expenditure at our regulated utility to be $160 million to $200 million this year.

In February, American States Water entered into an equity distribution agreement to sell common shares through an at-the-market offering program. This program allows the company at its sole discretion to sell up to $200 million over a three-year period. During the first quarter, AWR raised proceeds of approximately $16 million net of issuance costs.

American States Water currently maintain a credit rating of A stable with Standard & Poor's Global Ratings or S&P, while Golden State Water maintains an A+ stable rating with S&P and an A2 stable rating with Moody's Investor Service. These are some of the highest credit ratings in the US investor-owned water utility industry.

With that, I'll turn the call back to Bob.

Thank you, Eva. I'll discuss a few key regulatory matters. In August 2023, Golden State Water filed its general rate case for water rates for the years 2025 through 2027. Among other things, Golden State Water requested capital budgets in this application of $611.4 million over the rate cycle.

We also requested the continuation of mechanisms to accommodate fully decoupled revenues and sales and track differences between recorded and CPUC-authorized supply-related expenses. A proposed decision in the water general rate case is scheduled for the fourth quarter of 2024 with new rates to become effective January 1, 2025.

In June of last year, the CPUC adopted a final decision in Golden State Water's cost of capital proceeding where all changes to rates were to be implemented prospectively. As a result, Golden State Water maintain an authorized return on rate base of 7.91% for the first seven months of 2023 and 7.53% for the remaining five months of the year, reflecting an authorized return on equity of 9.36% and cost of debt of 5.1%, which was a reduction from 6.6%.

Effective January 1, 2024, the authorized return on equity was increased to 10.06% as a result of the water cost of capital mechanism being triggered for 2024. And the authorized return on rate base increased to 7.93%.

As many of you know, investor-owned water utilities serving in California are required to file their cost of capital applications on a triennial basis, which means Golden State Water's next cost of capital application was scheduled to be filed on May 1, 2024, for the years 2025 through 2027. However, Golden State Water, along with three other Class A investor-owned water utilities filed a joint request with the CPUC to postpone the cost of capital applications by one year, which was approved by the PUC on February 2 of this year.

The joint request asked that the utilities keep the cost of capital currently authorized for 2024 in effect through 2025 and to file new cost of capital applications by May 1, 2025, to set the cost of debt, return on equity, and capital structure starting January 1, 2026. Additionally, Golden State Water's water cost of capital mechanism will remain active through the one-year deferral period.

Our electric utility subsidiary filed its general rate case application on August 30, 2022, for new rates for the period 2023 through 2026. The application includes additional capital expenditures of $68.2 million for the four-year rate cycle and a new cost of capital.

We have also requested recovery of more than $23.5 million in capital already spent related to the wildfire mitigation plans. The new rates, once approved, will be retroactive to January 1, 2023. The decision on the general rate case is scheduled to be issued by the end of the third quarter of this year.

As many of you know, the US EPA recently announced the final National Primary Drinking Water Regulation and establish maximum contaminant levels for PFAS substances and drinking water. The regulation established maximum contaminant levels that range from 4 to 10 parts per trillion. The final rule will require public water systems to implement PFAS monitoring and reporting by April of 2027 and where exceedances are identified to implement solutions within five years by April of 2029 to reduce PFAS levels to below regulated contaminant level.

Currently, there are more than 40 wells at Golden State Water Company that have exceeded one or more of the PFAS maximum contaminant level. Assuming $2 million to $5 million per well, that results in approximately $80 million to $200 million of capital expenditures. With these new regulations, we expect to see an increase to Golden State Water's capital investments as well as operations and maintenance expenses over the next five years to comply with the rule.

CPUC rate-making process provides Golden State Water with the opportunity to recover prudently incurred capital and operating costs in future filings associated with achieving water quality standards. We believe that such incurred and expected future costs should be authorized for recovery by the CPUC.

Turning our attention to slide 14, we present the growth in Golden State Water's adapted average water rate base for 2018 through 2024. Golden State Water's authorized average rate base increase from $752.2 million in 2018 $1.3575 billion in 2024. That's a compound annual growth rate of 10.3% for the six-year period.

ASUS contributed earnings of $0.13 per share for the first quarter of this year as compared to $0.15 per share for the same period last year. The decrease was largely due to a decrease in construction activity resulting from the timing difference of when construction work was performed in 2024 compared to the same period in 2023, partially offset by an increase in management fee revenue resulting from the resolution of various economic price adjustments.

Previously highlighted, ASUS successfully transitioned water and wastewater systems at two new military bases in April. Under the contract, at the Joint Base Cape Cod, ASUS will perform and work through the annual issuance of task orders by the US government over a 15-year period.

After completion of the transition at int Base Cape Cod, US government awarded a task order valued at $4.1 million to ASUS for the first year of operations, maintenance, and renewal and replacement services of the water and wastewater systems and increased the estimated maximum value of the contract to $75 million, subject to further adjustments as task orders are issued.

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.

I we'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 9.4% over the last five years from 2018 through 2023.

These increases are consistent with our policy to achieve a compound annual growth rate in the dividend of more than 7% over the long term. Our strong dividend history is something that the company is proud of and is a continuing asset to our shareholders.

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

(Operator Instructions) Jonathan Reeder, Wells Fargo.

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

Good, Jonathan.

Doing good, Jonathan. Thank you.

Thanks. How about you?

Not too bad. Not too bad at all. Towards the end of earnings season is always a good thing.

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

Jonathan, so you are asking the increases for this year?

'24 over '23.

Yeah.

I think first quarter increases --

Are you asking for the entire year, Jonathan?

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

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

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

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

We are. All the work in the case has been done. We're waiting for a PD. Settlement discussions continue, but one of the issues we have with Bear Valley Electric is we're so small. Sometimes it's difficult to get the attention of the Public Advocates Office. Their value is so small relative to the big electrics.

So although they've been nice to work with, but we continue to work through that. It's possible we could get to a settlement. It's also possible a proposed decision will come out.

Okay. I mean, are you optimistic that -- I mean, I think the statutory deadline has been extended a couple of times now. The latest is the September 30. Are you optimistic that it actually gets done by then? Or since settlement discussions are potentially still taking place, is it likely to even extend beyond?

Well, they have assigned a second ALJ to the case. So I think there's a pretty good chance it will get done by them unless -- before you reach a settlement, that may be something that slows the case down a little bit. So it's hard to say. Again, the size of the company is part of the factor here.

Yeah, but it's -- I mean, for the size of the company, it's a pretty significant case, correct? I mean, there's a lot of capital between the wildfire mitigation stuff and everything. It's kind of in there where -- I mean, is that -- if you're able to kind of go into it all, is that what is perhaps making the case more drawn out or challenges regional settlement?

Yes, I think it's a fair statement, Jonathan. So we're basically, as far as I know, kind of the last electric utility to file its rate case after wildfire mitigation plans got put in place. And so that first-year increase is fairly significant because there's significant amount of unrecovered costs.

We have north of $23 million of unrecovered wildfire mitigation capital expenditures. So I think that's part of the difficulty. And because we're in the last one, I would say there's more years accumulated in the wildfire mitigation plan unrecovered CapEx than perhaps the bigger companies.

So I think that's part of the delay. We've had delays on the Bear Valley Electric case in the past, too, pre-wildfire mitigation plan expenditures. So I'd say some of it is because it's the -- first year is fairly significant. And then part of it is just in some cases, we're having to compete with the big electric companies for the attention of the public advocates on settlement discussions.

Yeah. In some respects, it's good to not be on the PAOs radar, right?

No. I would say it's always been a little bit of an advantage for Bear Valley Electric. So we're just going to have to be patient. That group has got a lot of work to do, and we feel form, and we're very understanding of what they have to deal with. So we have a good working relationship with them. It's just there's only so much time to do so many things, I think.

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

It does not, Jonathan, although we have requested to expand. We have a memo account established to track OEM costs associated with PFAS. In our water general rate case, we're requesting to expand the memo account to include carrying costs for capital projects as well. So there is that in the rate case, although there aren't specific PFAS-related CapEx.

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

Yeah, financing costs, so operating. We have to buy materials to maintain to wells' chemical costs, those kinds of things in addition to what we are having authorized in rates.

Okay. I'm trying to remember because I know Cal Water is trying to get there expanded the capital costs. That request was denied, but their request was outside of the general rate case. So is that something that the commission is more likely to approve as part of the rate case?

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

And Jonathan, both of the costs right now would charge in a memo account, which we have already for the OEM our testing-related costs. We have to test all the wells to determine how many wells are over the MCL level. So we are tracking those incremental costs in our memo account right now.

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

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

Yeah. Okay, that's a misunderstanding at my part. For some reason, I was thinking that military bases were somewhere where this will kind of call in.

Last question, more of a clerical, the Joint Base Cape Cod contract, did that get up to the $75 million level? I was thinking in the initial announcement only indicated it was $45 million.

Your memory is very good, Jonathan. Yes, it got moved up, yes. We're glad to see it.

Okay. And now it's just one of those -- not the economic price adjustment, but sorry, the equitable adjustment or something like that?

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

Okay. All right. Well, great. Thank you so much for taking the time to answer my questions.

I wanted to get back to you, Jonathan, on your first question about third-year rate increases. So if you look at our explanation in the press release, the first quarter rate increases, while the revenue increased by about $5.2 million, mostly due to the third-year rate increases.

So on an annual basis, I think that top number revenue number is about $24 million increase compared to 2023, but that including the higher ROE. Recall that we have a 10.06% ROE this year compared to 9.36%. So overall, the relevant increase for both three-year rate increases and the higher ROE is about $24 million. But we also have higher supply costs to associate with it.

Okay, that's helpful. Yeah, I mean I can back into the difference between the ROE one and to get to that $24 million. So thank you. Thank you for that, Eva.

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

Yes, the 10-Q.

Got you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Bob Sprowls for any closing remarks. Please go ahead, sir.

Thank you, Chuck. I just want to say to everyone thank you all for your participation today, and we look forward to speaking with you next quarter. Thank you all.

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