American States Water Company - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered consolidated diluted EPS of $0.75, up $0.20 year over year, with adjusted EPS of $0.69 excluding a $0.06 retroactive rate impact from the electric GRC; consolidated revenue rose to $143.10M versus $125.18M in Q4 2023.
• Water segment EPS rose to $0.52 on rate increases and a $5M tax benefit ($0.13/share) from the water GRC decision; electric segment EPS was $0.13, including $0.06/share from retroactive rates; contracted services EPS dipped to $0.11 on higher OpEx.
• Regulatory outcomes were constructive: CPUC authorized ~$573.1M water capex for 2025–2027 and ~$75.6M electric capex for 2023–2026, plus advice letter projects and ROE retention (water 10.06% through 2026; electric 10.0%).
• 2024 operating cash flow surged to $198.7M, capex reached a record $235.5M, and ASUS won $56.5M in capital upgrades; management highlighted dividend durability with a 70-year streak of annual increases and an 8.8% 5-year CAGR.

What Went Well and What Went Wrong

What Went Well

• “We finished 2024 with very strong financial results,” supported by constructive CPUC decisions that enable continued infrastructure investment.
• Water segment EPS +$0.11 YoY on third-year rate increases, higher authorized ROE, and $5M tax benefit from the water GRC decision.
• ASUS momentum: $56.5M in new capital upgrades (record), two new bases commenced, and projected 2025 contribution of $0.59–$0.63 per share.

What Went Wrong

• Higher operating expenses and interest costs across segments; Q4 “Other income” decreased by $1.6M on lower retirement plan investment gains versus prior year.
• Dilution from the ATM equity program reduced 2024 EPS by ~$0.04; Q4 water EPS impact ~($0.01) per share.
• Electric segment’s underlying adjusted EPS was flat YoY at $0.07 (excluding retroactive $0.06), reflecting wildfire mitigation-related OpEx and interest headwinds.

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing the company's fourth quarter and full year 2024 results. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. 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 February 27th on the company's website, www.aswater.com. The slides that the company will be referring to are also on the website. This call will be limited to an 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. 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-K 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, except 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 derived from consolidated financial information but are not presented in our financial statements that are prepared in accordance with GAAP. For more details, please refer to the press release. At this time, I will turn the call over to Bob Sprowls, President and Chief Executive Officer of American States Water Company.

Robert Sprowls (President and CEO)

Thank you, Michael. Welcome, everyone, and thank you for joining us today. I'll begin with a discussion of the year. Eva will then discuss some financial details for both the fourth quarter and the year, and then I'll wrap it up with updates on regulatory activity, ASUS, dividends, and then we'll take your questions. Let's first start with a look at 2024. On the regulatory front, we are very pleased to have received final decisions from the California Public Utilities Commission, or CPUC, last month for both our water and electric utility subsidiaries. Both decisions represent constructive regulatory outcomes and enable us to continue investing in our water and electric infrastructure for safe and reliable services to our customers for generations to come. I will provide more details on these decisions later in the call. We finished 2024 with very strong financial results.

While reported earnings per share for the full year of 2024 were $0.19 lower compared to the prior year, earnings per share were $0.32 higher than adjusted 2023 earnings, which exclude favorable variances related to the receipt of final decisions in the water general rate case and cost of capital proceedings in June of 2023. Excluding the 2023 adjustments, the increase in adjusted earnings for the full year of 2024 was primarily driven by rate increases in both the water and electric utilities and the commencement of water and wastewater operations at two new military bases and successful economic price adjustments in our contracted services business. Additionally, our water utility segment recorded a tax benefit following the final decision in its general rate case.

These increases were partially offset by higher operating expenses and interest costs and the dilutive effects from the issuance of equity under American States Water's At the Market offering program, which decreased consolidated earnings by approximately $0.04 per share. In 2024, we invested $235.5 million in infrastructure at our regulated utilities, reflecting our strong ability to execute our capital plans. ASUS, our contracted services business, secured $56.5 million in new capital upgrade awards with projects scheduled for completion through 2027. Both are record highs for our regulated utilities and ASUS. At ASUS, we began work under two new military contracts serving new bases on the East Coast, further expanding our footprint of managing water and wastewater systems for the U.S. government.

American States Water achieved a return on equity of 14.1% for the year, and we increased our dividend to shareholders by 8.3%, marking 70 consecutive years of annual dividend increases. The 14.1% earned return on equity was achieved despite a 14.2% increase in our average consolidated equity balance between the two years. Some of the increase in the equity balance is due to the stock issued under the At the Market program. These accomplishments compare very favorably to other utilities and we're very proud of our longstanding track record of delivering value to our shareholders. Overall, it was a productive year, which sets the stage for future growth for the entire company, and of course, we continued to deliver safe and reliable service to over 1 million people in 10 states, no small task, and one that remains a key driver for the entire organization.

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

Eva G. Tang (CFO and SVP)

Thank you, Bob, and hello, everyone. Let me start with our fourth quarter results. Recorded consolidated earnings were $0.75 per share for the quarter compared to $0.55 per share for the fourth quarter of 2023. For our water utility, Golden State Water, reported earnings were $0.52 per share as compared to $0.41 per share last year. The $0.11 per share increase in 2024 was largely due to an increase in 30-year water rates, an overall increase in the authorized rate of return on rate base, and a tax benefit recorded in the fourth quarter as a result of receiving the final decision in connection with Golden State Water's general rate case proceedings. These increases are partially offset by higher operating interest expenses and lower gains generated from investment held for retirement plans.

Lastly, there was a decrease in earnings of approximately 1 cent per share due to the dilutive effect from the issuance of equity under American States Water's At the Market offering program. Our electric segment's earnings were 13 cents per share for the quarter as compared to 7 cents per share for 2023, a 6 cents per share increase primarily due to receiving the final CPUC decision on the electric general rate case with new rates retroactive to January 1st, 2023. Earnings from ASUS decreased 1 cent per share for the quarter, largely due to an increase in operating expenses, some of which was due to timing, partially offset by an increase in management fee revenues due to commencement of operations of the water and wastewater systems at Joint Base Cape Cod and Naval Air Station Patuxent River, and successful resolution of economic price adjustments at the legacy bases.

Consolidated revenue for the quarter increased by $17.9 million as compared to 2023. Revenues for the water segment increased by $5.1 million, largely due to an increase in the 30-year water rate and an increase in authorized rate of return on rate base in 2024. Revenues for the electric segment increased by $10.6 million, mainly due to the impact of the retroactive new electric rates for the full year of 2023 and 2024. Revenues from ASUS increased $2.3 million, primarily due to higher management fee revenue, as I just mentioned. Turning to slide 10 and looking at total operating expenses other than supply costs, consolidated expenses increased by $13.1 million compared to 2023.

This increase included the impact of the electric general rate case decision recorded in the fourth quarter of 2024, which reflected an $8.2 million increase in operating expenses, primarily due to higher administrative and general and maintenance expenses, partially offset by the retroactive impact of a lower overall composite depreciation rate for both 2023 and 2024, also recorded in Q4 of 2024. These items are included in the 2023 and 2024 revenue requirements. In addition, the increase was due to higher overall labor costs, maintenance expense due to timing, and an increase in depreciation spend, largely at Golden State Water and property tax expenses, both of which are impacted by the increased capital expenditures for our regulated utilities. The increases are partially offset by a decrease in Golden State Water's other operation-related expenses resulting from receiving the recovery of previously incurred costs and lower ASUS construction expenses.

Other income net of other expenses decreased by $1.6 million in the fourth quarter compared to last year, largely due to lower gains recorded on investments held to fund a retirement plan. The decrease was partially offset by the recording of CPUC allowed returns during construction for electric segments as part of the project. Slide 11 shows the EPS bridge comparing reported EPS for the fourth quarter of 2024 against the same period for 2023. This slide reflects our full year earnings per share by segment as reported and adjusted. Consolidated earnings for the full year of 2024 as recorded were $3.17 per share compared to $3.36 per share for 2023.

However, included in the result for 2023 were $0.38 per share related to the impact of retroactive rates from the final decision in the Water GRC for the full year of 2022, and the reversal of $0.13 per share for revenue subject to refund 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 just mentioned from 2023 earnings, recorded and adjusted consolidated earnings for 2024 were $3.17 per share as compared to adjusted earnings of $2.85 per share for 2023, an increase of $0.32 per share. Please refer to our press release and the Form 10-K filed yesterday for more detail on our full year earnings.

Turning to liquidity on slide 13, net cash provided by operating activities was $198.7 million for 2024 as compared to $67.7 million for 2023. The increase in operating cash flow was primarily as a result of Golden State Water having implemented new rates in 2023 and 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 flows from operating activity also resulted from differences in the timing of billing and cash receipts for construction work at military bases at ASUS, as well as the timing of its vendor payments. For investing activities, as Bob mentioned earlier, our regulated utility invested $235.8 million on company-funded capital projects in 2024, and we project company-funded capital expenditures to reach $170-$210 million for 2025.

American States Water's At the Market offering program to sell common shares remained ongoing as this program allowed the company at its sole discretion to sell up to $200 million over a three-year period. During 2024, American States Water raised proceeds of $88.7 million net of issuing costs and legal costs incurred. American States Water currently maintains a credit rating of A stable with Standard & Poor's Global Ratings, or S&P, while Golden State Water maintains A plus stable rating with S&P and the A2 stable rating with Moody's Investors Service, each of these ratings having affirmed during 2024. These are some of the highest credit ratings in the U.S. investor-owned water utility. With that, I'll turn the call back to Bob.

Robert Sprowls (President and CEO)

Thank you, Eva. I'll begin with Golden State Water's general rate case. On January 30th of this year, the CPUC issued a final decision in connection with the general rate case. The final decision adopts the settlement agreement between Golden State Water and the Public Advocates Office at the CPUC, or Cal Advocates for short. Among other things, the decision authorizes Golden State Water to invest $573.1 million in capital infrastructure over the three-year capital cycle. This includes $17.7 million of advice letter capital projects to be filed for revenue recovery during the second and third-year attrition increases when those projects are completed. In addition, the approved settlement agreement includes $58.2 million of advice letter capital projects that began construction in 2023 that we expect to file for revenue recovery during the second and third-year attrition increases when those projects are completed.

For all of the Advice Letter projects, Golden State Water will be allowed to accrue interest during construction at the adopted cost of debt and recover the full rate of return, including all applicable components of the revenue requirement after the assets are placed in service up until the assets are included in customer rates. Excluding revenues for Advice Letter capital projects, adopted operating revenues less water supply costs for 2025 are projected to increase by approximately $23 million when compared to 2024. In addition, there are potential additional revenue increases of approximately $20 million for each of the years 2026 and 2027 based on inflation factors without factoring in the revenues from those Advice Letter capital projects.

The final decision also adopts Golden State Water's recommended sales forecast, a supply mix that splits the difference between Golden State Water's and Cal Advocates' forecasts, and accepts the sales reconciliation mechanism proposed by the company. In addition, there were three other regulatory mechanisms that Golden State Water requested that were litigated and addressed in the decision. The decision, however, rejected a full sales and revenue decoupling mechanism and a full supply cost balancing account and instead ordered the transition to a modified rate adjustment mechanism for sales and an incremental cost balancing account for supply costs. The decision also rejected a supply mix adjustment mechanism and a request to modify the existing PFOS memorandum account to track carrying costs on capital investments needed to comply with the new PFOS regulations. The new mechanisms authorized in the decision are effective January 1st, 2025.

The final decision approved Golden State Water's proposed rate design associated with the modified rate adjustment mechanism, which moved more revenue recovery into the fixed service charge than under the rate design associated with the company's full revenue decoupling mechanism. On January 14th of this year, the CPUC approved a request to defer the cost of capital application by one year to May 1st, 2026. With the deferral, Golden State Water will retain its authorized return on equity of 10.06% and a 57% equity ratio through the end of 2026. On January 16th of this year, our electric utility subsidiary received a final CPUC decision in its general rate case that approves the settlement agreement between Bear Valley Electric, Cal Advocates, and the other intervenor in the proceeding in its entirety. The proceeding sets rates retroactive to January 1st, 2023, and determines electric rates for the years 2023 through 2026.

The decision, among other things, allows Bear Valley Electric to invest $75.6 million in capital infrastructure, including at least $23.1 million of advice letter projects over the four-year rate cycle. It adopts a return on equity of 10.0% and a 57% equity ratio, and it approves recovery of requested capital expenditures and incremental operating costs incurred prior to 2023 in connection with its wildfire mitigation plans. These costs were not previously included in customer rates. In addition, the settlement provides increases in the adopted operating revenues of $2.2 million for 2025 and $3.3 million in 2026. The rate increases for 2024 through 2026 are not subject to an earnings test. The previously mentioned advice letter projects of at least $23.1 million are expected to generate additional annual operating revenues of approximately $3 million when the respective projects are completed, placed in service, and filed for recovery in customer rate.

These projects also accrue allowance for funds used during construction that will further increase the revenue requirement. Turning our attention to slide 17, we present the growth in Golden State Water's adopted average water rate base for 2018 through 2024, which increased from $752.2 million in 2018 to $1,357.5 million in 2024. That is a compound annual growth rate of 10.3% for the six-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 as a result of receiving its recent general rate case decision that again authorizes it to invest $573.1 million in capital infrastructure, including $17.7 million of advice letter capital investments to be filed for revenue recovery during the second and third-year attrition increases when those projects are completed.

In addition, it authorizes investment on certain other capital projects already under construction beginning in 2023, the recovery of which will also be handled through advice letter filings upon project completion. All advice letter capital projects will contribute to further growth in rate base in the second and third years of this cycle. Let's continue to ASUS, which contributed earnings of $0.55 per share for the full year of 2024 as compared to $0.50 per share for 2023. The increase was mainly due to an increase in management fee revenues resulting from the commencement of operations at the two new bases and the resolution of various economic price adjustments, partially offset by higher overall operating expenses from the new bases and a decrease in earnings of approximately $0.01 per share due to the dilutive effects from the issuance of equity under the company's At the Market offering program.

We're also very pleased that ASUS has received a significant increase in new capital upgrade awards in 2024 of $56.5 million in total as compared to $25.2 million for 2023. In addition to continued work on the existing bases we serve, we remain confident that we can effectively compete for new military-based contract awards. With a solid performance expected for ASUS in 2025, we project that subsidiary to contribute $0.59-$0.63 per share this year. 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 8.8% over the last five years through 2024, and we have achieved a 10-year CAGR of 8% in the calendar year dividend payments through 2024.

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 this morning by thanking you for your interest in American States Water, and we'll now turn the call over to the operator for questions.

Operator (participant)

We will now take your questions. To ask a question, you may press star, then one on your telephone keypad. If you are 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 will pause momentarily to assemble our roster. We will begin with Jonathan Reeder with Wells Fargo. Please go ahead.

Jonathan Reeder (Director and Senior Equity Analyst)

Hey, Bob and Eva. Hope you guys are well.

Eva G. Tang (CFO and SVP)

Thank you, John.

Robert Sprowls (President and CEO)

Hi, Jonathan. Hope you are as well.

Jonathan Reeder (Director and Senior Equity Analyst)

Yeah, hanging in there. Could you help me reconcile how much of the $0.06 electric GRC retroactive EPS benefit that was recorded in Q4 is solely related to 2023? I saw the 10-K mentions like $9.8 million of retroactive revenues for both 2023 and 2024, but it seems like some of that is offset by corresponding operating expense increases related to those years as well.

Robert Sprowls (President and CEO)

Yeah, I would say more of it's related to 2024 than 2023, Jonathan. As you know, I think you know, and it's interesting we sort of had this situation on both settlements, the Bear Valley settlement and the Golden State settlement. The Public Advocates was very interested in trying to move out that first-year increase, and that's why you sort of see these Advice Letter Projects in both cases.

Eva G. Tang (CFO and SVP)

So, Jonathan, we had a substantial amount of unrecovered costs, both capital and OM, from implementing our wildfire mitigation plan. So we were requesting recovery of amount of our projected capital and OM for 2023 and 2026. So on top of what we need to do for this current rate case cycle, we also request those dollars to be included in base rate for this rate case cycle. The unrecovered historical cost is about $24 million of CapEx related to the wildfire mitigation plan, along with the increases in cost to recover the tree trimming costs and all the wildfire mitigation operating-related expenses. So our first year's request was quite significant when we filed the case in 2022. So during the settlement agreement, we agreed to move certain capital projects to 2024 and beyond and file some projects as advice letter projects, which will earn an AFUDC while construction.

So that's why the first-year increase seems small compared to 2024. We believe this is how we can reach a settlement and mitigate the first-year increase to customers, kind of pancake two rate cases in one. So that's why most of the increase you see probably is for 2024.

Robert Sprowls (President and CEO)

As a reminder, the last rate cycle we had at Bear Valley was a five-year rate cycle. Our decision came out in that particular case just as things were being put in place for the requirements associated with filing wildfire mitigation plans. I don't know if this is completely accurate, but I think we, because of just how the rate cycles lined up, we had probably gone the longest of any of the electrics in terms of starting the wildfire mitigation plan activities before our next rate case where we would then seek recovery of those expenditures. So that put, I would say, a little more pressure on that first-year rate increase because we had several years of wildfire mitigation plan activities that we hadn't recovered from customers but needed to be then included in the rate cycle for 2023 through 2026.

Jonathan Reeder (Director and Senior Equity Analyst)

Okay, so would you say any of that $0.06 of the retroactive EPS benefit is related to 2023, or 2023 was pretty neutral in all the $0.06 in Q1 through Q3 of 2024?

Robert Sprowls (President and CEO)

I think the way to think about it is the majority is for 2024. I can't really give you a precise split on the $0.06, but I think the way to think about it is the majority of it was for 2024.

Jonathan Reeder (Director and Senior Equity Analyst)

Okay. All right. And then, Eva, as you noted, in 2024, we saw a huge increase in consolidated operating cash flows to nearly $200 million. Is that a good proxy for your 2025 expectations, given you'll still be collecting the retroactive revenues from the delayed 2022 to 2024 water GRC decision plus some of the retroactive revenues from the electric GRC?

Eva G. Tang (CFO and SVP)

I think so, Jonathan. It's more aligned with what's going forward in 2023, I would say.

Jonathan Reeder (Director and Senior Equity Analyst)

Okay, and then last question for me. How much of the remaining, roughly $110 million of equity under the ATM program do you anticipate issuing in 2025?

Eva G. Tang (CFO and SVP)

$60 million-ish, Jonathan. So we like to even it out for two years, but if we need a little more, so I would say probably $60 million for this year.

Jonathan Reeder (Director and Senior Equity Analyst)

Okay. Perfect. Thank you so much for taking my questions.

Eva G. Tang (CFO and SVP)

Thank you.

Operator (participant)

Again, if you have a question, please press star, then one. Seeing no further questions in the queue, this concludes our question-and-answer session. I would like to turn the conference back over to Bob Sprowls for any closing remarks.

Robert Sprowls (President and CEO)

Yes. I'd just like to wrap up the call today by thanking everyone for their continued interest in American States. We appreciate your interest and have a good start to your year. Thank you.

Operator (participant)

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