Q2 2023 American States Water Company Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the American States Water Company Conference call discussing the company's second quarter 2023 results. This call is being recorded if you would like to listen to the replay of this call. It will begin this afternoon at five P M Eastern time and run through Tuesday August 15th.
<unk> 20th twenty-three on the company's website www dot a S water dotcom the slides that the company will be referring to are also available on the website.
This call will be limited to one hour 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 Touchtone phone pres.
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 intended to qualify for the safe Harbor from liability established by private Securities Litigation Reform Act of 1995. Please review a description of the company's risks and uncertainties in our most recent Form 10-K and form.
<unk> 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 S. E. C 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.
Thank you Alan.
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.
Dividends and then we'll take your questions.
It was a productive and positive quarter for the company.
Very pleased that in late June the California, Public Utilities Commission or CPUC adopted the decisions for Golden State water company's water general rate case, or JRC to set rates for 2022 through 2024 and.
And the cost of capital proceeding.
Both decisions can be viewed as constructive and they enable us to continue investing in the utility infrastructure to provide safe and well.
Reliable water services for the communities we serve.
The cost of capital decision adopted the authorized return on equity.
Capital structure embedded cost of debt prospectively.
And allows for continuation of the water cost of capital mechanism for adjusting that return on equity.
As a result Golden state water's cost of capital reflects a $9 three 6% return on equity with a 57% equity ratio and a debt cost of five 1% effective July 31.
We started billing customers the new 2023 rates on July 31.
And we will seek recovery of the retroactive rates from January one 2022.
The July 32023.
Within 90 days of implementing the new rates.
Let's briefly discuss our quarterly earnings.
Recorded diluted earnings per share for the quarter.
Increased 50 cents from last year.
The 2023 second quarter results.
Included a favorable variance of 21 per share that.
That is made up of 18 <unk> per share from the reversal of revenue subject to refund.
That was previously recorded in 2022 through the first quarter of 2023.
Of which <unk> <unk> per share had been recorded during the second quarter of last year.
This reversal was as a result of receiving the final decision in the cost of capital proceeding in June .
It sets the cost of capital prospectively.
Second quarter results also reflect a net favorable variance of <unk> 10 per share from gains on investments held to fund a retirement plan compared to losses for the second quarter of last year.
Excluding these two favorable impacts consolidated earnings as adjusted for the second quarter of 2023 reflect an increase of <unk> 19 per share.
As compared to adjusted earnings for the second quarter of 2022.
Higher adjusted earnings were largely due to the new 2023 water rates.
Proven Golden State Water's final Trc decision.
In addition, higher construction activity at our contracted services business.
I reckon states utility services or <unk>.
Also contributed to the higher earnings for the second quarter of 2023.
And a S. U S is on track to meet its targeted earnings contribution for the year.
I'm also pleased to report that last week, our board approved another sizable dividend increase.
The annualized dividend rate. After this increase is $1 72 per share.
Which represents an eight 2% increase from the current annualized dividend rate of $1 59 per share.
This significant dividend increase reflects our board's confidence in the company's ability to achieve long term sustainable earnings growth.
This action also marks the 349th consecutive dividend payment by the company.
American States water has paid dividends every year since 1931 inch.
Increasing the dividends received by shareholders each calendar year.
Now for 69 consecutive years.
Eva will discuss the quarterly earnings and liquidity and I'll turn the call over to her.
Thank you Bob Hello, everyone, Let me Sky, regardless second quarterly outlook.
Oh God.
Corrugated.
And four cents per share for the quarter as compared to 54 cents per share for the second quarter of trying to trying to be true.
Increase of 50 cents per share.
And could they Didnt go down for the second quarter.
Yeah.
So revenue subject to refund of 18 cents per share.
David Miller.
Cost of debt estimate that had been recorded during 'twenty two.
Thanks, Courtney I'm trying to trying to clean.
Some wage pressure had been recorded in the second quarter of last year.
The 50 cents per share increase also included a favorable okay.
Thanks, Yeah, sorry, that's a hell of a fact that we have in fact.
We recorded against that.
That's moved up $1.5 million for the quarter.
To losses of $3 $5 million in twice.
Excluding these two items against that consolidated earnings for the quarter was 83 cents per share that compared to I guess.
Before I say, okay for the second quarter of last year.
I'll kick off and I can't say for sure.
Well why do you think that's a very stable.
They want it.
Paul you got anything.
Like 91 cents per share as compared to 40 cents per share for the second quarter quite frankly too.
51 cents per share equally.
So I guess, he's got affected any exit what exactly so.
Factoring in the same impact Cockatoo Island.
I guess on your front.
Concord has like a lot of Sacramento at 70 cents per share, which was a click up 20 cents per share as compared to I guess it got it.
50 cents per share for the same period last year.
It's trying to kind of get to me is the second year they vacate cycle.
N D. A rate increase effective January one 'twenty <unk> three has been accounted for in this quarter as well.
<unk> <unk> cents per share increasing 23 I guess.
No actually we're presenting a different town trying to trying to widely adopted wait and try and train three.
Yeah.
Partially offset by increases.
And interest expense.
Our electric segment, I mean electric and Christiana for second quarter.
Okay four cents per share that's okay got it.
Hey, Craig.
That relates to not having to wait in fact, the excellent trying train three as well.
Oh wait.
Yeah that was exactly right before 'twenty three.
Thanks.
Okay.
10 years of increases.
Operating expenses in check.
Uh huh.
Well I guess this is Eric electric T. I see you're right I expect it to be retroactive to January of this year and cumulative I guess Manuel gave me a.
At that time.
I mean from our contracted services segment.
<unk> per share for the quarter due to higher construction activity.
Slide eight shows that consolidated revenue for the second quarter increased by $34 $8 million as kind of kicked consent period trying to kind of true.
Revenue for the water segment increased by $26 million, which encourage it.
So rather than your subcategory of $9 $3 million activates that without the cost of capital.
Got it.
Well no.
While recording a second Cornell trying to trying to 1.7 got it got it.
Golly, I think estimate of whether you're subject to the fact that the attack.
The additional increases up revenue, that's compared to the same period, but didn't quite trying to actually looks like that.
Different from the time, she tried to widely adopted ways and I'm trying to think of three Peggy or increase it.
The increase let's take Latin America, what part what type of attributes of Bullock here, if I'd, rather fighting and expense allocation true up I think we've got the underwater.
Sure.
The increase in general office expenses allocated to the electric segment also includes a corresponding offsetting.
We've adopted electric 11 years.
That would be no impact.
In addition, there was an increase in revenue of $8 $2 million from our contracted services.
Andrew Hi.
Hey.
Turning to slide nine.
Looking at total operating expenses, either as a supply cost.
Consolidated expenses increased seven point to me I didn't go there as compared to last years second quarter.
The increase was allowed to be related to an increase in construction cost at our contracted services.
Beckman.
Hi, good construction activity timing due to timing differences.
In conjunction work was performed this year when compared to 2022.
Oh, so higher administrative and general expenses across all segments during the second quarter.
Interest expense net of interest income increased by $3 million into higher average interest rate during the quarter and increases our borrowing level.
Other income net.
Expenses increased by $4 million due primarily to gains got investments held for a retirement benefit plan, partially offset by increased non service.
Cost component I'm going to say why that benefit plan.
When he tells me find changes in actuarial assumptions.
Hey, Matt.
Slide 10 shows adjusted EPS bridge, comparing the second quarters of 2023 and 22.
It's like the fact that you have today and it's quite scared by segment, that's really pointed to pay that kind of pet food and guys, who they're going to use that to employees for the six months ended June E train train $3.
97.
That's compared to 92 cents for the same period in <unk>.
An increase of $1.05 per share.
Included in year to date, so I couldn't tell you lease out what.
<unk> per share related to the impact of that tracks the way targeted phishing into water and tea I see.
For yeah.
Two.
Of which 19 cents per share related to the first half of 'twenty two.
In addition, we felt that was the final cost of capital decision, they're trying to trying to three year to date. We don't include their two cents per share related to the reversal of the estimate the impact of a lower cost of debt recorded in trying to trying to cure.
Which makes sense when they call you during the six months ended June .
Are you trying to say.
But the other five cents per share increase also included a favorable variance F 16 cents per share, but investments held to fund every time the attack.
Excluding the items mentioned above I.
Adjusted consolidated earnings for the six months ended June 38, 23 was a California push here.
Compared to I guess, I mean, I've got like eight cents per share for the same period last year.
An increase of two cents per share.
Turning to liquidity.
Net cash provided by operating activities was $17 $8 million joint throughout this year as compared to $56 9 million in four years to date trying to trying to true.
During the first half of last year, our regulated utility received $98 million in COVID-19 relief fund.
Of California to provide assistance to customers for delinquent water electric cut.
Customer billing and coke during the pandemic.
There have been no refunds received thus far in 2023.
The decrease in operating cash so and also due to a 17% decrease in Paraguay to consumption.
And the Lady everything and get Y T I find that decision.
I find that a decision has to be received Golden state water filed for implementation of new 2020 day rate.
Increases that took effect on July one 2010.
Monday and will file a surcharges to recover attractive amounts accumulated in the fact that they are implementing a new rate.
Sure.
For investing activities.
On track to spend 148 right.
This year in company funded capital expenditure at that regulated utility.
During this past quarter, we also finalized a new five year agreements for both American states water angle they want it.
The new credit facility will bring borrowing capacity that was $190 for Mexican American states water and $200 million for Golden State water for a combined capacity of $350 million.
Each credit facility has the ability to expand the borrowing capacity for an additional $75 million subject to lender approval.
Our electric utility Oh, so amended its credit facility to increase its borrowing capacity by additional $15 million.
American States why are they likely to start issuing additional equity in the next 12 to 18 months to raise capital over time to find it.
Okay.
As we mentioned it before.
I'd say theyre doing an at the market offering back in April eight that'd be hard to control the timing and the size obviously, it's become a share over time.
With that I'll turn the call Goodbye.
Thank you Eva.
I will discuss a few key regulatory matters.
Earlier I discussed the adoption of the final decision we received in the water general rate case.
Final decision issued on June 29, 2023.
The settlement agreement between Golden State water.
And the public advocates office at the CPUC and it is consistent in all material respects with the proposed decision issued in April .
The decision sets new water rates for the years 2022 through 2024.
To provide you with a recap of the key points in the decision.
Among other things the decision authorizes Golden state water to invest $404 $8 million and capital infrastructure.
Infrastructure over the three year cycle.
Plus $9 $4 million of capital projects.
Have been completed and filed an advice letter projects.
The revenue for which was in effect February 15th of 2022.
It increases Golden State water's adopted operating revenues for 2022.
$33 million.
Which includes an increase for higher adopted supply costs are.
$9 $6 million.
As compared to the 2021 adopted revenues.
Excluding the advice letter project revenues.
Did adopt new operating expense levels for 2022, including higher depreciation expense, resulting from overall higher composite depreciation rates based on a new depreciation study adopted in the final decision.
And it allows for additional increases and adopted revenues for 2023 and 2024.
Subject to an earnings test and changes to the forecasted inflationary index values.
We are now in the process of preparing our next water general rate case for the years 2025 through 2027 to.
To be filed in the third quarter of this year.
Also during the quarter the CPUC adopt the final decision on the cost of capital proceeding to set the new cost of capital for 2022 through 2024.
The decision adopts our requested capital structure of 57% equity and 43% debt.
Adopts the cost of debt of five 1% as filed in the application.
Adopts a return on equity of 885%.
It allows for the continuation of the water cost of capital mechanism.
In addition, based on the Companys assessment of the final decision all adjustments to rates ought to be prospective and not retroactive.
As discussed on prior calls and all of 2022 and through the first quarter of 2023.
We recorded a reduction to water revenues to reflect the estimated revenue impact of a lower cost of debt.
A five 1%.
As requested in our cost of capital application.
As compared to six 6% included in 2021 race that.
That were billed water customers before their cost of capital decision was issued.
As a result of receiving the final cost of capital decision, which again since rates prospectively not retroactively.
Water segment recorded an increase to water revenues $9 $3 million or <unk> 18 per share.
To reverse its regulatory liability for revenue subject to refund that we recorded in 2022.
Through the first quarter of 2023 as.
As a change in estimate and circumstances.
As previously mentioned the decision allows for the continuation of the water cost of capital mechanism.
For the period from October one 2021 through September 32022.
Moody's double AA utility bond rate increased by 102 eight basis points from the benchmark.
Which increases the adopted return on equity by one half the change or 51 basis points.
885% is adopted in the decision.
As a result effective July 31 of this year Golden State water has an authorized return on equity of 936%.
Our capital structure of 57% equity and 43% debt.
And our return on rate base of 753%.
Moving on to slide 15.
Electric utility subsidiary filed its general rate case on.
On August 30 of last year for new rates for the period 2023 through 2026.
In addition to new rates there are a number of items that are requested.
Such as additional capital expenditures as part of a four year rate cycle.
And our new capital structure.
We have also requested recovery of more than $22 million in capital.
Already spent related to the wildfire mitigation plans.
CPUC has approved the decision for a general rate case memorandum account that will make new rates once approved and the CPUC final decision.
Effective January one 2023.
Yeah.
Turning our attention to slide 16, we present, the actual growth in Golden State Water's average rate base from 2018 through 2021.
And the forecasted growth from 2022 through 2024 as authorized by the CPUC.
Yeah.
Based on the final decision in the general rate case Golden State Water's average rate base is forecasted to grow from $752 $2 million in 2018.
Two an authorized level of 1 billion 366 $9 million in 2024.
That's a compound annual growth rate of 10, 5% for the six year period.
Let's continue to S U S.
I'm pleased to announce that <unk> contributed earnings of <unk> 12 per share for the second quarter as compared to <unk> 10 per share for the same period last year.
An increase of <unk> <unk> per share.
The increase was largely due to an increase in construction activity in the second quarter of 2023.
As compared to the same period in 2022.
Due to timing differences of when construction work was performed.
And an increase in management fee revenue, resulting from the resolution of various economic price adjustments.
Partially offset by higher overall operating expenses and interest cost as compared to the same period of 2022.
As mentioned earlier <unk> is on target to contribute 45 to <unk> 49 per share for the year.
We also 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 basis since 2004.
I'd like to turn our attention to dividends, which I already touched on earlier in the call.
Last week, we announced an eight 2% increase in the third 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 of something that the company is proud of.
And as a continuing asset to our shareholders.
This strong track record has allowed us to achieve a nine 4% compound annual growth rate in our quarterly dividend payments to shareholders over the last five years from 2018 through 2023.
I'd like to conclude our prepared remarks by thanking you for your interest in American States water.
And I'll now turn the call over to the operator for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Sure.
Our first question comes from Angie stores in ski from Seaport.
Ahead.
Thank you.
[laughter] Theres just so many moving pieces for the second half of this year as far as your earnings.
I'm just just helped me out [laughter], maybe so for US first of all the cost of capital and the Chi.
And our cost of debt versus increased cost of equity.
The return on rate base is still falling slightly is that is that fair.
Yeah.
Yes.
The current rate of return going forward, 753% right.
Previously we had seven point night, what extent.
Okay. So yeah.
Okay.
So that has some marginal detrimental impact on earnings for the remainder of the year is that fair.
That's correct August huh.
Okay.
Sorry, Angie, but you I'm sure you are on top of all of this but you know in 2022, we were booking to the 5.1.
No.
But the incremental step up in revenue for 2023. So so the the G. R. C was that 40 cents pick up and then how much on an annualized basis, you know our net revenue increase would be 23 step up.
Yeah, Hi, you're comparing 'twenty three 2022.
Yeah.
Yes, [laughter], Oh, well no no I'm, just saying what was that.
Yeah, Yeah, well, what's the incremental revenue increase basically associated with this inflationary adjustment right that you have embedded into your C.
What is the step change in addition to that 40 cents increase Oh, that's something that you ever see.
But first of all it's like trying to kind of get to interrogate our ink.
In clean.
Names like 2023 I think we know it today I believe we have that.
Oh, a rate increase on his thought.
It's about 16%.
Okay. Thanks, a lot.
So that's the question you're trying to screen increase contract tried to sell it.
Okay.
Yeah, Yeah, yeah, so for six months.
Okay, Okay, and then I'm just thinking about anything else.
Then the the weakness in the on the electric side will be true that bumpy with it you see resolved, which we don't expect still until 'twenty 'twenty four right.
I mean, it's possible, we'll get it in 2023, but unlikely I would say.
Okay, and then as you were getting ready to file the next year see and I promise My last question.
Will you embed the full Ram in this upcoming filing.
Yes, we plan to request it yes.
Okay. That's all I have thank you.
Thanks.
[laughter].
Our next question comes from Jonathan Reeder of Wells Fargo. Please go ahead.
Hey, good morning, Bob and Eva.
Thanks for taking my question.
Quarter, I think things are generally in line with Ah.
Where were expecting them, but.
One thing you mentioned is that the new G. R. C has not been filed yet I think he normally file.
Your G R sees in July so.
Is the delay in this filing just related to the delayed outcome in the last year and then you know do you think this means.
Another timely decision by the CPUC when we are when we look out to 2020 five.
The delay is related to the delay in the we call. It the 2020 general rate case.
And then do we do.
Do we think it will affect the processing of this case, we do not.
Okay, no that that'd be great if somehow they can get back on track to get more timely decision.
In terms of a S U S a.
You know, obviously your firm where where he thought full year EPS would come at it Andy.
Any update there around like the pursuit of new bases.
What might be up for grabs or or you know near term.
Basis that might get awarded.
Yeah. So there's one privatization out there that's been out there a while called the <unk>.
Pax River privatization as the Navy prioritization.
And I think all the competitors who are waiting to hear [laughter].
Who wanted I'm unclear when that announcement will be made so.
We're very interested in that we do think we have a.
Sure.
We think we have a great reputation with the military there's something called a contractor performance assessment.
Rating, where they rate you at each of the bases and our ratings are very strong I'm sure. Our competitor would say the same thing about themselves but.
So we you know we.
We are in their bidding and <unk>.
We hope to get push one across the finish line here.
I don't I don't know when that.
Particular, prioritization will be announced I think it perhaps is a little bit behind schedule at this point.
Okay. So that that's the only kind of nearer term ish one.
Oh right. That's the only I would say typical privatization that's out.
Hold on the Street I guess for bidding.
Oh, that's the only actual open RFP in general on the military side right now.
Yeah, I don't know Jonathan previously I've talked a little bit about there's other ways of perhaps taking over assets.
But the standard process is so worked through the 50 year privatization and.
So we're.
We're interested.
Yes.
We are working on additional projects, but they're not the standard privatization.
Gotcha, Okay, alright, well congrats on a good quarter and finally getting.
There are two big California regulatory items.
Now put to bed what would you say in general I mean cost of Cabo outcome you know.
With the adjustments in mind, so to the allowed ROE.
Was it you.
You know, where you were expecting it to shake out you know maybe a little better you know, particularly keeping in mind that it looks like 'twenty 'twenty four and we'll get another.
The upward adjustment in the army.
Yeah, I mean, I've got a lot of scar tissue.
The prior cost of capital to be honest so it.
It seems like the commission is.
They've been pretty pretty reasonable here relative to where they were in 2018.
So we feel good about the outcome, particularly given that the adjustment mechanism triggered and perhaps.
Perhaps we will trigger again.
So yeah, I think I think we feel we.
We feel okay. I mean, I can give you reasons why it's should've been higher but.
It's going to keep out 57% equity layer.
That's very good.
What I'll call kind of a thing.
Yeah, it's kind of interesting I mean, you you obviously kept your dual layer, but then they also increase the layers or you know some of your peers and didn't take one of your other peers.
Down, which I guess, they they could've done so that's that's certainly constructive given I know at least in the past.
Consumer advocate position has been that you know those equity layers are too high.
And should come down.
Right right I mean, I think I mean.
I can't speak for the industry, but.
You've talked to the other folks there.
I don't know what they said, but they probably are generally okay with what were things landed.
That's what they said.
Yeah, Yeah yeah.
Ones, Okay with it so yeah.
But it's not retroactive you know.
Certainly hope so.
Alright, I agree with that.
Okay, well thanks for the time today on the call and looking forward to it.
See you guys next month.
Thank you Jonathan.
Yeah.
As a reminder, if you have a question. Please press Star then one we will pause momentarily for any further questions.
This concludes our question and answer session I would like to turn the conference back over to Bob Sprowls for any closing remarks.
Yes, I just wanted to wrap up today, just thanking everyone for their participation today.
And let them know that we look forward to speaking with everyone next quarter.
Thank you all and have a good rest of your summer.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Hum.
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Hum.
Okay.
Yeah.
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Yeah.
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Right.
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