American States Water Company - Q1 2024
May 8, 2024
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call, discussing the company's first quarter of 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 P.M. Eastern Time and run through Wednesday, May 15th, 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 in 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 risk 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.
Bob Sprowls (President and CEO)
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-$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.
Eva Tang (SVP in Finance and CFO)
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 rates 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 the 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 was subsequently reversed in June 2023 upon receiving the final decision in the cost of capital proceedings that made all 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 Water Company, reported earnings were $0.48 per share as compared to $0.74 per share for the first quarter of 2023.
Both items just discussed impacted earnings at the 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 1, 2024. So the $0.07 per share increase in 2024 largely represents increases in water revenue and other income from gains generated from investment held for a retirement plan, partially offset by increases in operating and interest expense.
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 rates in effect as we await the pending electric GRC that will set new rates for 2023-2026, while also experiencing continued increases in overall operating expenses and interest costs. When the decision is issued in the electric GRC, new rates are expected to be retroactive to January of 2023, and a 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 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 an increase in interest expense. Moving on to slide eight. Consolidated revenue for the first quarter decreased by $26.1 million as compared to the same period in 2023.
Revenue for the water 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 rates for the full year of 2022 as a result of the proposed decision issued by the CPUC in April of last year on Golden State Water's general rate cases at the time, partially offset by increases in water revenue in 2024 due to the third-year rate increases. Electric revenue decreased slightly as we await a decision on the electric general rate case, while there was a decrease in revenue from ASUS of $3 million, largely due to timing differences in performing construction work. Turning to slide nine 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 gains recorded on investment held to fund one of company's retirement plans 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 increase in 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, 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 contractors. 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-$200 million this year. In February, American States Water entered into an equity distribution agreement to sell common shares through an at-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 issuing 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 A+ stable rating with S&P and an A2 stable rating with Moody's Investors Service. These are some of the highest credit ratings in the U.S. investor-owned water utility industry. With that, I'll turn the call back to Bob.
Bob Sprowls (President and CEO)
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 2025-2027. 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 1st, 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 maintained an authorized return on rate base of 7.91% for the first 7 months of 2023, and 7.53% for the remaining 5 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 1st, 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%. Excuse me.
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 1st, 2024, for the years 2025-2027. 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 2nd 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 1st, 2025, to set the cost of debt, return on equity, and capital structure starting January 1st, 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 30th, 2022, for new rates for the period 2023-2026. 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 plan.
The new rates, once approved, will be retroactive to January 1st, 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 established maximum contaminant levels for PFAS substances in drinking water. The regulation established maximum contaminant levels that range from 4-10 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 levels.
Currently, there are more than 40 wells at Golden State Water Company that have exceeded one or more of the PFAS maximum contaminant levels. Assuming $2 million-$5 million per well, that results in approximately $80 million-$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 these rules. 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 adopted average water rate base for 2018-2024. Golden State Water's authorized average rate base increased from $752.2 million in 2018 to $1,357,500,000 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.
Largely offset by an increase in management fee revenue resulting from the resolution of various economic price adjustments. Previously highlighted, ASUS successfully transitioned the water and wastewater systems at two new military bases in April. Under the contract with Joint Base Cape Cod, ASUS will perform work through the annual issuance of task orders by the U.S. government over a 15-year period. After completion of the transition at Joint Base Cape Cod, U.S. 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-$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 would 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 2018-2023. These increases are consistent with our policy to achieve a compound annual growth rate and a 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 will now turn the call over to the operator for questions.
Operator (participant)
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Jonathan Reeder with Wells Fargo. Please go ahead.
Jonathan Reeder (Equities Research Associate Analyst)
Hey, Bob and Eva, how are you doing today?
Bob Sprowls (President and CEO)
Good, Jonathan.
Eva Tang (SVP in Finance and CFO)
Very good, thank you.
Bob Sprowls (President and CEO)
Thanks. How about you?
Jonathan Reeder (Equities Research Associate Analyst)
Not too bad. Not too bad at all. Towards the end of earnings season, so always a good thing. Couple questions I, I wouldn't mind going through. First off, how large was the third year rate increase from the 2022-2024 GRC? I don't believe I saw that in the K or the Q, but I think the settlement you had reached outlined like $13.2 million.
Bob Sprowls (President and CEO)
You know,
Eva Tang (SVP in Finance and CFO)
So you're, you're Jonathan, so you are asking the rate increases for this year?
Bob Sprowls (President and CEO)
2024 over 2023.
Eva Tang (SVP in Finance and CFO)
Three.
Jonathan Reeder (Equities Research Associate Analyst)
Yeah.
Eva Tang (SVP in Finance and CFO)
I think, you know, first quarter, our increases-
Bob Sprowls (President and CEO)
I think, aren't you asking for the entire year, Jonathan, or?
Jonathan Reeder (Equities Research Associate Analyst)
Yeah, yeah. What, what's the annual amount? I mean, I think the settlement, you know, had outlined $13.2 million, but I know that's always, you know, subject to adjustment for, you know, inflationary factors, the earnings test, stuff like that.
Bob Sprowls (President and CEO)
We may need to get back to you, Jonathan, on that.
Eva Tang (SVP in Finance and CFO)
Yeah, I think first quarter is about $3.5 million. So we'll get back to you on that one, Jonathan, for the full year.
Jonathan Reeder (Equities Research Associate Analyst)
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?
Bob Sprowls (President and CEO)
All the work in the case has been done. We're waiting for a PD. You know, settlement discussions continue, but, you know, one of the issues we have with Bear Valley Electric is we're so small, it's sometimes difficult to get the attention of the Public Advocates Office. They, you know, they, Bear Valley is so small relative to the big electrics. So, although they've, you know, 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.
Jonathan Reeder (Equities Research Associate Analyst)
Okay. I mean, are you optimistic that it... I mean, I think, I think the statutory deadline's been extended a couple times now, and, you know, the latest is the September thirtieth. Are you optimistic that it actually gets done by then? Or, you know, since settlement discussions are potentially still taking place, you know, is it likely to, you know, even extend beyond?
Bob Sprowls (President and CEO)
Well, they have assigned a second ALJ to the case, so I think there's a pretty good chance it'll get done by then. Unless, you know, if we were to reach a settlement, that may be something that slows the case down a little bit. But, so it's, you know, it's hard to say. Again, the size of the company is part of the factor here, so,
Jonathan Reeder (Equities Research Associate Analyst)
Yeah, but it's, I mean, for the size of the company, it's a pretty significant case though, 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, you know, challenges reaching settlement?
Bob Sprowls (President and CEO)
Yeah, I, I think it's, I think it's a fair statement, Jonathan, that 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. You know, we have north of $23 million of unrecovered wildfire mitigation capital expenditures. So I, so I think that's, that's part of the difficulty. And, and because we're the last one, there's more, I would say there's more years accumulated in the wildfire mitigation plan, unrecovered, CapEx than perhaps the bigger companies.
Jonathan Reeder (Equities Research Associate Analyst)
Okay.
Bob Sprowls (President and CEO)
So I think that's, that's part of the delay. We've had delays on the Bear Valley Electric case in the past, too, of pre-wildfire mitigation plan expenditures. So I'd say some of it is because it's, you know, it's that first year is fairly significant, and then part of it is just, you know, in some cases we're, you know, we're having to compete with the big electric companies for the attention of Public Advocates on settlement discussions.
Jonathan Reeder (Equities Research Associate Analyst)
Yeah. No, in some respects, it's good to not be on the PAO's radar, though, right?
Bob Sprowls (President and CEO)
No, right. It's, it's always, I would say it's always been a little bit of an advantage for Bear Valley Electric.
Jonathan Reeder (Equities Research Associate Analyst)
Yeah. Right. Right.
Bob Sprowls (President and CEO)
So we're just gonna have to be patient. They, you know, that group has got a lot of work to do, and we feel for them, and, you know, we're very understanding of what they have to deal with, so.
Jonathan Reeder (Equities Research Associate Analyst)
Yeah.
Bob Sprowls (President and CEO)
You know, we have a good working relationship with them. It's just, there's only so much time to do so many things, I think.
Jonathan Reeder (Equities Research Associate Analyst)
Yep. Okay, in terms of PFAS. Does the pending Golden State Water case include any of that $80 million-$200 million of anticipated PFAS-related CapEx?
Bob Sprowls (President and CEO)
It does not, Jonathan, although we have it—we have requested to expand. We have a memo account established to track O&M 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.
Jonathan Reeder (Equities Research Associate Analyst)
The capital request, I guess, in the memo account, it would just track the financing costs or whatever related to PFAS. Is that right?
Eva Tang (SVP in Finance and CFO)
Yeah, financing costs or operating, you know, if we have to buy material to maintain the wells, chemical costs, those kinds of things, in addition to what we are having authorized in rate.
Jonathan Reeder (Equities Research Associate Analyst)
Okay. I'm trying to remember, 'cause I know Cal Water is trying to get theirs expanded to capital costs. That request was denied, but their, their request was outside of the general rate case, so-
Bob Sprowls (President and CEO)
Right.
Jonathan Reeder (Equities Research Associate Analyst)
Is this something that the commission is more likely to approve as part of the rate case, do you think?
Bob Sprowls (President and CEO)
Well, you know, the big trigger point in a lot of regulatory jurisdictions is whether there's an MCL out there.
Jonathan Reeder (Equities Research Associate Analyst)
Yeah.
Bob Sprowls (President and CEO)
Now that we have one, although it's, you know, it's pretty far along in the rate case process, hopefully, we can get the carrying costs recovered.
Eva Tang (SVP in Finance and CFO)
Jonathan, most of the costs right now we track in the memo account, which we have already for the O&M are testing related costs. You know, we have to test all the wells to determine how many wells are over the MCL level. So we're tracking those incremental costs in our memo account right now.
Jonathan Reeder (Equities Research Associate Analyst)
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 gonna drive, you know, more work than what we've seen over the past, you know, five years?
Bob Sprowls (President and CEO)
Yeah. So, so right now, I think we have PFAS-related issues at only one military base.
Jonathan Reeder (Equities Research Associate Analyst)
Okay.
Bob Sprowls (President and CEO)
Yeah. So, so I wouldn't, I wouldn't think it's a needle mover at this point, but-
Jonathan Reeder (Equities Research Associate Analyst)
Yeah. Okay, that's a misunderstanding on my part. For some reason, I was thinking that, you know, military bases was somewhere where this, this was kind of common. So, last question, more of a clerical. The Joint Base Cape Cod contract, did that get up to the $75 million level? I was thinking the initial announcement only indicated it was $45 million.
Bob Sprowls (President and CEO)
Your memory is very good, Jonathan. Yes, it got moved up, yes. We're glad to see it.
Jonathan Reeder (Equities Research Associate Analyst)
Okay, and that was just one of those, not the economic price adjustment, but the equitable adjustment or something like that?
Bob Sprowls (President and CEO)
I think there was a sort of better understanding of the work that will need to be done.
Jonathan Reeder (Equities Research Associate Analyst)
Okay. All right. Well, great. Thank you so much for taking the time to answer my questions.
Eva Tang (SVP in Finance and CFO)
I want to get back to you, Jonathan, on your first question about third-year rate increases.
Jonathan Reeder (Equities Research Associate Analyst)
Okay.
Eva Tang (SVP in Finance and CFO)
So if you look at our explanation, 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 the annual basis, I think that top number, revenue number is about $24 million increase compared to 2023, but that's including the higher ROE. You know, recall that we have a 10.06 ROE this year compared to 9.36. So overall, the revenue increase for both third year rate increases and the higher ROE is about $24 million. But you know, we also have higher supply costs, too, associated with it, so.
Jonathan Reeder (Equities Research Associate Analyst)
Okay. That's, that's helpful. Yeah, I mean, I can back into the, the difference between the ROE one and to get to that $24 million. So thank you. Thank you for that, Eva.
Bob Sprowls (President and CEO)
I think Eva was referring to the 10-Q-
Eva Tang (SVP in Finance and CFO)
Yes, sir. 10-Q.
Bob Sprowls (President and CEO)
Not the press release.
Jonathan Reeder (Equities Research Associate Analyst)
Gotcha.
Operator (participant)
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.
Bob Sprowls (President and CEO)
Thank you, Chuck. I just wanted to say to everyone, thank you all for your participation today, and we look forward to speaking with you next quarter. Thank you, all.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.