Q3 2024 American States Water Co Earnings Call
Speaker Change: Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing the company's third 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 p.m. Eastern Time.
and run through Thursday, November 14, 2024 on the company's website, www.aswater.com. The slides that the company will be referring to are also available on the website.
All participants will be in a listen-only mode. 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.
Speaker Change: To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. This call will be limited to one 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.
Speaker Change: 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,
Speaker Change: Levels of activity, performance, or achievements and listeners are cautioned not to place undue reliance upon them.
in 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 the this call and expect 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 FCC rules.
Speaker Change: 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.
Speaker Change: At this time, I will now turn the call over to Bob Sprowls, President and Chief Executive Officer of American States Water Company. Please go ahead.
Thank you, Dave.
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.
I'm pleased to report that we're...
Increase was in large part due to third year rate increases in our water segment.
and gains on our investments to fund a retirement plan.
Parsley Offset by Higher Operating Expenses
Some of which are due to timing.
Higher interest costs.
and a delay in receiving a decision in the pending electric general rate case.
Eva will discuss the results in more detail.
Eva: Our regulated utilities have invested $172.5 million in company-funded infrastructure year-to-date.
and we'll be investing a record-high $210 to $230 million on capital expenditures this year.
Eva: As we discussed last quarter, Golden State Water and the Public Advocates Office of the California Public Utilities Commission, or CAL Advocates for short,
Eva: reached a settlement agreement in connection with Golden State Water's general rate case that will set new water rates for the years 2025 through 2027.
Eva: Parties filed a joint motion in July to adopt the settlement agreement with the California Public Utilities Commission, or CPUC.
Eva: Among other items, the settlement authorizes Golden State Water to invest $573.1 million in capital infrastructure over the three-year capital cycle.
Eva: Additionally, last week Bear Valley Electric, Cal Advocates, and the other intervener in the proceeding filed a joint motion to adopt the settlement agreement between the parties resolving all issues in connection with the electric general rate case.
with new rates retroactive to January 1st, 2023.
Eva: Among other things, the settlement authorizes Bear Valley Electric to invest $75.6 million
and Capital Infrastructure over 2023 through 2026.
Eva: including $23.1 million that will be filed for revenue recovery through advice letters upon project completion.
Eva: The joint settlements, if approved, enable our water and electric utilities to continue investing in their assets to strengthen the systems and ensure safety and service reliability for our customers.
I will discuss these settlements in more detail later in the call.
Eva: For the year-to-date September, ASUS is six cents per share ahead of last year for the same period.
You'll recall that AASU has contributed $0.50 per share.
Consolidated earnings for the full year 2023.
Speaker Change: We now project that ASUS will contribute $0.54 to $0.57 per share this year.
higher than the $0.50 to $0.54 range we provided previously.
Speaker Change: ASUS continues to enter into U.S. government-awarded contract modifications for new construction projects.
I'm very pleased to announce that ASUS has been awarded
Eva: a record-high $54 million in new capital upgrade construction projects during the nine months ended September 30, 2024.
These newly awarded projects are expected to be completed during 2024 through 2027.
Eva: With that, I'll turn the call over to Eva to discuss earnings and liquidity.
Eva Tang: Thank you, Bob. And hello, everyone. Let me start with our third quarter results.
Eva Tang: Consolidated earnings as recorded were $0.95 per share for the third quarter as compared to $0.85 per share for the third quarter of 2023.
For our water utility, Golden State Water, reported earnings were $0.84 per share as compared to $0.72 per share last year.
Eva Tang: The $0.12 per share increase was largely due to an increase in the third-year water rate.
Eva Tang: An overall increase in the authorized rate of return on rebates in 2024.
Eva: Gains generated from investment health for retirement plans and lower income taxes.
Partially offset by higher operating and interest expenses.
Eva: Lastly, there was a decrease of earnings of approximately $0.01 per share due to the diluted effects from the insurance of equity under AWR's AdMark offering program.
Eva: Our electric segments earnings were $0.02 per share for the quarter as compared to $0.04 per share for 2023.
Eva: When the decision is issued, new electric rates are expected to be retroactive to January 2023, and cumulative adjustments will be recorded at that time.
Eva: Earnings from SUS were consistent for the quarter when compared to 2023 with a decrease of 1 cent per share, mainly due to the effect of rounding.
Eva: Consolidated revenue for the third quarter increased by $10 million as compared to last year.
Eva: Revenues for the water segment increased by $7.8 million, largely due to an increase in third-year water rates and overall increases in authorized rate of return on rate base in 2024.
Eva: Electric revenues remain consistent as we are waiting for a decision on the electric generator case.
Eva: Well, there was an increase in revenue from S.U.S. of $2.2 million, primarily due to higher management fee revenue resulting from resolution of various economic price adjustments.
Eva: in the commencement of operations of Water and Wastewater Systems at Joint Base Cape Cod and the Naval Station Protection River.
Eva: Turning to slide 10 and looking at total operating expenses other than supply cost. Consolidated expenses increased 5.3 million dollars as compared to the third quarter of 2023.
Eva: The increase was due to an increase in other operating expenses, mainly related to the commencement of operations at the two new bases.
Eva: Higher administrative and general expenses due to higher outside service costs related to the pending Wilder General A case proceeding and other regulatory findings and the insurance costs.
Eva: and an increase in depreciation and property tax expenses, both of which are impacted by the increased capital expenditures for our regulated utilities.
The increases were partially offset by lower maintenance expenses.
Eva: Interest expense, net of interest income, increased by $1.9 million due to increases in average interest rate and overall borrowing level during the quarter.
Eva: Lastly, other income, net of other expenses, increased by $3.4 million.
Eva: largely because of gains recorded on investment held to fund one of the company's retirement plans in the third quarter, compared to losses in the same period the last year.
Eva: Slide 11 shows the EPS bridge comparing reported EPS for 3rd quarter of 2024 against the same period last year.
Eva: included in the result of the first nine months of last year were 38 cents per share related to the impact of retroactive rates from the final decision in the water general rate case for the full year of 2022.
Eva: 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 mentioned above from the year-to-date earnings.
for his three earnings.
Eva: recorded and adjusted consolidated earnings for the nine months ended September 30, 2024 were $2.42 per share as compared to adjusted earnings of $2.31 per share for the same period in 2023.
an increase of $0.11 per share.
Turning to liquidity
Eva: The cash provided by operating activities was $134.2 million for the nine months ended September 30, 2024, as compared to $56.5 million for the same period of 2023.
Eva: The increase in operating cap flow was primarily as a result of Golden State Water having implemented new rates in 2023 and 2024.
Eva: The increase in cash flow from operating activities also resulted from differences in the timing of billing and cash receipts for construction work at military bases at US, as well as the timing of expenditure payment.
Speaker Change: For investing activities, as Bob mentioned earlier, our regulated utility invested $172.5 million on company-funded capital projects during the nine months ended September 30, 2024.
Eva: And we project this to reach $210 to $230 million for the full year of 2024.
Eva: American State Water's at-the-market offering program to sell common shares remains ongoing as this program allows the company at its sole discretion to sell up to 200 million dollars over a three-year period.
Eva: During the nine-month end of September 30, 2024, AWR raised proceeds of $59.3 million net of insurance costs and legal costs incurred.
American State Water
Eva: currently maintain a credit rating of A-Stable with Standard & Poor's Global Ratings or S&P, while Golden State Water maintains an A-plus stable rating with S&P and A-2 stable rating with Moody's Investor Service.
Each of these ratings has been affirmed during 2074.
Eva: These are some of the highest credit ratings in the U.S. investor-owned wild utility industry.
With that, I'll turn the call back to Bob.
Thank you, Eva.
Bob Sprowls: I will start with Golden State Water's settlement agreement with Cal Advocates on its general rate case.
If approved...
Eva: The proposed settlement resolves most of the issues related to the 2025 annual revenue requirement.
Eva: The settlement authorizes Golden State Water to invest approximately $573.1 million.
and Capital Infrastructure over the three-year capital cycle.
Eva: This amount, as settled, includes $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,
Eva: The Settlement Agreement authorizes advice for capital investments already under construction.
Eva: of $58.2 million to be filed for revenue recovery during the second and third year attrition increases when those projects are completed.
Excluding Revenues for Advice Letter Capital Projects
Adopted operating revenues, less water supply costs.
when compared to 2024.
In addition, there are potential additional revenue increases.
Eva: of approximately $20 million for each of the years 2026 and 2027 based on inflation factors.
Eva: without factoring in the revenues from those advice letter capital projects.
Eva: The two remaining unresolved 2025 revenue requirement issues relate to the sales forecast and supply mix.
Eva: In addition, there were four regulatory mechanisms that Golden State Water requested.
and will be litigated.
Eva: A full sales and revenue decoupling mechanism and full cost balancing account for water supply.
A sales reconciliation mechanism.
A Supply Mix Adjustment Mechanism.
Eva: And a request to modify the existing PFAS memorandum account to track carrying costs on capital investments needed to comply
with the new PFAS regulation.
Eva: We requested and have been granted an oral argument in front of the Administrative Law Judge on the unresolved issues.
A proposed decision in the Water General Rate case...
with new rates to become effective January 1st, 2025.
Eva: Last week our electric utility subsidiary Cal Advocates and the other intervener in the proceeding filed a joint motion to adopt a settlement agreement between all parties in the general rate case
Eva: If approved, the proposed settlement agreement resolves all issues in connection with the general rate case.
Proposed settlement
authorizes the investment of $75.6 million
Eva: and Capital Infrastructure over the four-year rate cycle, including $23.1 million.
Eva: through advice letter capital investments that will include an allowance for funds used during construction.
when the projects are completed.
Eva: Adopts a cost to capital that increases the adopted return on equity to 10.0% from 9.6%.
Lowers the cost of debt to 5.51%.
Eva: and maintains the capital structure of 57% equity and 43% debt.
Eva: and approves recovery of requested capital expenditures and incremental operating costs incurred prior to 2023 and in connection with its wildfire mitigation plans.
Eva: including the additional revenues from the advice that our capital projects just discussed
Under the terms of the Settlement Agreement,
Eva: Bear Valley Electrics adopted Operating Revenues Less Electric Supply Costs for 2023.
Eva: are projected to increase by approximately $5.1 million as compared to the 2022 adopted and recorded operating revenues less electric supply costs.
Eva: To cover, among other things, the higher incremental operating costs as settled in the revenue requirement related to Bear Valley Electric's wildfire mitigation plans.
Eva: that were previously not included in customer rates and not expensed.
because they were being tracked in memorandum accounts.
Eva: In addition, the settlement provides increases in the adopted operating revenues.
Eva: of $2.2 million for each of the years 2024 and 2025.
and by 3.3 million dollars.
in 2026.
Eva: The rate increases for 2024 through 2026 are not subject to an earnings test.
Thanks for watching!
Eva: Previously mentioned advice letter projects of $23.1 million plus an allowance for funds used during construction are expected to generate additional annual operating revenues of approximately $3 million.
Eva: when the respective projects are completed, placed in service, and filed for recovery in customer rates.
Eva: The new rates, once approved, will be retroactive to January 1st, 2023.
TPUC has extended the statutory deadline for processing this application.
to January 31st, 2025.
Eva: If the decision is not issued in time to reflect the new rates in the 2024 year
Eva: cumulative adjustments for 2023 and 2024 related to the full impact from the terms of the settlement agreement previously discussed.
Eva: will be recorded at the time a decision is finally issued.
Eva: Assuming the settlement agreement is approved, we estimate the impact related to 2023 and 2024 to be a combined $0.05 to $0.07 per share.
Eva: Turning our attention to slide 17, we present the growth in Golden State Water's adopted average water rate base from 2018 through 2024.
which increased from $752.2 million
in 2018 to $1,357,500,000 in 2024.
Eva: That's a compound annual growth rate of 10.3% for the six-year period, using 2018 as the base year for the calculation.
Eva: Golden State Water anticipates a robust and sustained growth in its rate base over the next few years.
Let's continue to ASUS.
Eva: ASU has contributed earnings of $0.11 per share for the third quarter of 2024 as compared to $0.12 per share for the same period in 2023.
Eva: As previously mentioned, we now project ASUS will contribute $0.54 to $0.57 per share this year.
Eva: We're also very pleased that ASUS has received a significant increase in new capital upgrade awards through September of 2024.
to $54.0 million.
Eva: In total, as compared to $25.2 million for the full year of 2023.
Eva: With this in mind, as we look ahead to 2025, we project that ASUS will contribute 59 cents to 63 cents per share next year.
I'd like to turn our attention to dividends.
which remains a compelling part of our investment story.
Eva: Our quarterly given rate has grown at a compound annual growth rate, or CAGR, of 8.8% over the last five years.
Eva: and is on pace to achieve a 10-year CAGR of 8% in the calendar year dividend payments.
Eva: 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.
Speaker Change: 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.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. 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 and then 2.
Speaker Change: Our first question comes from Jonathan Reeder with Wells Fargo. Please go ahead.
Hey Bob and Eva, how are y'all today?
Okay, Jonathan. Very well. Thank you, Jonathan. How about you?
Speaker Change: Surprise, surprise. I literally just hopped on, so I apologize. I got a couple questions and if you...
Speaker Change: address them in your, you know, prepared remarks. I do apologize for that, but...
I know year-to-date Bear Valley or the electric operations
Speaker Change: You know, have contributed 7 cents of EPS, you know, versus 14 cents during the same period last year.
Speaker Change: at the start of 2024, what would the year-to-date EPS have been? I'm trying to understand, you know, just kind of what the EPS power would have looked like, obviously excluding, you know, the retroactive portion related to 2023.
Speaker Change: Okay, so Jonathan, I don't know if you heard the 5 to 7 cent estimate for 23 and 24 together.
That would be the cumulative.
Yes, both years combined.
Speaker Change: Okay, so when you get the final order you think the full year impact of recording the retroactive would be that?
Yes, for two years, yes.
Okay.
Speaker Change: All right, so some of the CapEx, of course, is advice letter projects, so it's sort of been moved out in the rate cycle a bit.
Speaker Change: Okay, okay. And then, when, like, if you were going to be able to get that recorded in 2024 results, when do you need to get, like, a final order? Is it just before you report?
Speaker Change: of year-end earnings, or is it by... I think I heard you say you don't expect to get a decision until 2025, but if it's in January or early February, will you be able to book it in 2024, then, that cumulative gain?
Speaker Change: We have, I would say, more flexibility to book a proposed decision into 2024 than if I, you know, if it's the commission or if the ALJ's proposed decision is different from the settlement agreement.
Speaker Change: makes it more difficult to book a proposed decision into 2024 financial results.
Speaker Change: If we have a final decision, of course, before the 10K, then we'll be able to vote.
yeah
That's that way, if you have any.
Speaker Change: It takes a month, at least a month, between proposed and final, so...
I mean, it's possible, but...
Speaker Change: Yeah, so if you get a proposed decision that just fully adopts the settlement and that occurs before you've got to file your 10-K, then you might be able to...
you might feel comfortable booking it then as well.
Yeah, yeah.
Speaker Change: Does the big increase in capital work, you know, authorized, does that reflect like PFAS mitigation work? Is it just a reflection of like the new bases that you've added in recent years or kind of what do you think drove that increase?
Speaker Change: Well, I think the government had some money to devote. You know, usually there's a big rush.
Speaker Change: in awarding these new capital upgrades by the end of the fiscal year, which is September 30th.
the government.
Speaker Change: I also feel like I've heard that some of the contracting officers
Speaker Change: raise their hand for some of the money to be spent on water and wastewater operations.
Speaker Change: You know, we've taken great care to present projects that are meaningful to the government for these new capital upgrades.
Speaker Change: But, you know, we'd be lying if we said we thought we were going to get 54 million. That's a big number for us.
Speaker Change: Okay, yeah that kind of leads into my next kind of question. I know like
Speaker Change: Well, two parts I guess. Do you think that, it sounds like maybe you don't believe that will be the new normal level, like going forward? That this could just be a little bit of a one-off if there was extra money that needed to be spent before the end of the year?
Speaker Change: Yeah, I think the, you know, it's, it's approximately double what our average is sort of recent average has been.
One of the new bases contributed to that number.
And then
Speaker Change: You know, in the future, we think those two bases will help.
Sure.
And as we think of it, like, you know, the...
Speaker Change: annual construction expense for ASUS has kind of been in that 50 to 60 million dollar range for many years.
Speaker Change: Just given that award, and I know there's other ways, you know, you get projects approved and everything. What are you assuming for 2025 in the guidance range for kind of annual construction expense?
Speaker Change: relative to, you know, that historical 50 to 60 million dollar kind of total.
Speaker Change: Yeah, it sort of goes back to, you know, our 59 to 63 cent...I don't know if you heard that, the 59 to 63 cent estimate for 2025 on the earnings side.
Yeah.
Speaker Change: Like, knowing that you've got that $54 million or whatever it is.
Speaker Change: kind of appropriation, and then I know there's other projects that come into the fold over the course of, you know, the year and everything. Like, historically, when you've gotten more like 25, you know, you've still had 50 to 60 million in annual construction expense, right? So, what...
Speaker Change: What might construction expense look like in 2025 given the higher awards?
Speaker Change: Well, and that $54 million is for the period 2024 through 2027.
You know, the other part of construction...
expenses is renewal and replacement.
and...
Speaker Change: We have the ability to move that number up or down depending upon the efforts that need to take place on the new capital upgrade work.
Speaker Change: So we've got a lot to manage here, I guess, is what I'm saying.
but we typically haven't given an estimate for what our
construction.
expenses or revenues are going to be.
Speaker Change: okay but I mean I guess if you can move this stuff around and maybe like we shouldn't expect
Speaker Change: you know, a huge jump in that annual construction expense, I guess, like...
Speaker Change: May be some increase in 2025, but it's not like saying it's 20 or 25 million higher because of that 54 million award versus 25. Right. I wouldn't do that if I were you. I wouldn't move it all in there.
because you know we've got
Speaker Change: We've got to manage all of this. I mean, it's very, very nice to be awarded all this, but it's, you know, we've got to manage that along with the renewal and replacement work.
Speaker Change: be able to plan ahead two, three years rather than a bump in one year. So it's just more planning involved to schedule it out.
Speaker Change: Okay, that helps. And then I guess, sorry John, just a little side light on the 59 to 63 set per share.
and why that's higher than what we're expecting this year.
Speaker Change: Some of that is due to having the new bases for a full year versus...
Speaker Change: call it eight and a half or nine, nine months. You know, we took over Pax River on April 1st and JBCC on April 15th. So we'll have a full year of their contribution.
Speaker Change: But some of that increase is also due to the higher level of New Capital Upgrade awards that we were given.
Speaker Change: That helps. No, that's very helpful. And then I guess what drove the increase in the 2024 guidance range?
Speaker Change: I don't know if you mentioned that because I think the midpoint was $0.52 and now you're more like you know $0.55 or $0.56
Speaker Change: Yes, so I would say a couple of things. One is we've had a pretty good year from a construction standpoint. We've encountered fewer unforeseen
site conditions.
and had very cooperative weather.
than we anticipated.
Speaker Change: Additionally, the new operations for us at Joint Base Cape Cod and Naval Air Station Patuxent River contributed. We were perhaps a bit conservative.
Speaker Change: when we were providing the range as to what these two bases were going to generate for us in 2024. And, you know, they've done a bit better.
So it's, you know, a combination of...
Speaker Change: a better, I would say, better construction situation and then the new bases contributing better than what we had anticipated.
Speaker Change: okay which is a really really good sign I would say
Speaker Change: Yeah, I know, and it sounds like that would be an ongoing thing, you know.
Speaker Change: in terms of their their contribution being higher than what you're thinking. So no, that's good stuff.
Speaker Change: Okay, that's it for me. I appreciate you taking my questions. Congrats on those GRC settlements and, you know, hopefully we'll get the approval in the not-too-distant future.
Thank you. Thank you, Johnson.
Speaker Change: Again, if you have a question, please press star and then 1.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Bob Sprowls for any closing remarks.
Bob Sprowls: As I wrap up today, I just wanted to thank everyone for their participation today, and we look forward to speaking with you next quarter. Thank you all.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.