Q3 2023 American States Water Co Earnings Call
Participants
Eva G. Tang; Senior VP of Finance, CFO, Corporate Secretary & Treasurer; American States Water Company
Robert J. Sprowls; CEO, President & Director; American States Water Company
Jonathan Garrett Reeder; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division
Presentation
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing the company's third quarter 2023 results. This call is being recorded. If you'd like to listen to the replay of this call, it will begin this afternoon at 5:00 p.m. Eastern Time and run through Tuesday, November 14, 2023, on the company's website, www.aswater.com. The slides that the company will be referring to are also available on the website. (Operator Instructions)
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 the 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 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 General 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 J. Sprowls
Thank you, Jason. 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.
Let's briefly discuss our quarterly earnings. Recorded diluted earnings for the quarter increased by $0.16 per share from last year or $0.12 per share, excluding a favorable variance of $0.04 per share, resulting from the receipt of a final decision in the cost of capital proceeding in June 2023 at our Water Utility that Eva will discuss later. The higher adjusted earnings of $0.12 per share was largely due to the new 2023 water rates approved in Golden State Water's final general rate case decision.
On the regulatory front, we've had some significant events at Golden State Water. We filed a new general rate case in August with the California Public Utilities Commission, or CPUC, to set new rates for the years 2025 through 2027. The filing included a request for capital investment of $611.4 million, over the rate cycle. In addition, as a result of triggering our existing water cost of capital mechanism, we filed an advice letter with the CPUC to increase our authorized return on equity from 9.36% to 10.06%, which has been approved and will be effective on January 1, 2024.
From an operations perspective, it's been business as usual for our subsidiaries, providing reliable water, electric and wastewater services to our regulated water and electric utility customers as well as on the military bases we serve. We plan to spend $155 million to $170 million this year in infrastructure investments at our regulated utilities. We're very pleased that ASUS was awarded 2 contracts by the U.S. government in the third quarter to operate, maintain and provide construction management services for the water distribution and wastewater collection facilities on 2 military bases.
The first was the Navy contract we were awarded for Naval Air Station Patuxent River or Pax River, located in Maryland, which is our first Navy contract. The initial value of the contract is estimated at $349 million over a 50-year period. This contract is similar in form to our 8 other military privatization contracts.
In addition, ASUS was awarded a new 15-year contract at Joint Base Cape Cod, located in Massachusetts that is different than our existing 50-year contracts. Under this contract, ASUS will have the opportunity to perform work through the periodic issuance of task orders by the U.S. government. We're up to a maximum initial value of $45 million over a 15-year period.
Both new contracts are subject to annual economic price adjustments. We take great pride in our strong relationship with the U.S. government and their continued confidence in our expertise in managing water and wastewater systems on military bases, and we feel we are well positioned to continue competing for new contracts in the future.
Eva will discuss the quarterly earnings and liquidity, and I'll turn the call over to her.
Eva G. Tang
Thank you, Bob. Hello, everyone. Let me start with our third quarter results. Consolidated earnings as reported were $0.85 per share for the quarter as compared to $0.69 per share for the third quarter of 2022, an increase of $0.16 per share. In last year's third quarter, Golden State Water recorded a decrease in earnings of $0.04 per share for revenue subject to refund based on its cost of capital filing in 2021. As a result of receiving the final decision in the cost of capital proceeding in June that sets the cost of capital prospectively, the $0.04 per share recorded in Q3 2022 was reversed in the second quarter this year.
Excluding these items, adjusted consolidated earnings for the third quarter of 2023 were $0.85 per share as compared to adjusted earnings of $0.73 per share for the third quarter of last year, an increase of $0.12 per share. For our water utility, Golden State Water reported earnings were $0.72 per share as compared to $0.54 per share for the third quarter of 2022, and $0.18 per share increase. Both items I just discussed, affected earnings at the water segment.
So factoring in the same effect from the 2 items, adjusted earnings for the third quarter at water segment were $0.72 per share, which was an increase of $0.14 per share as compared to adjusted earnings of $0.58 per share for the third quarter of 2022. The $0.14 per share increase in 2023 adjusted earnings largely represents the difference from the 2021 adopted rates and 2023 second year increases, partially offset by increases in operating and interest expenses.
Our Electric segment earnings for the third quarter this year were $0.04 per share, which were flat compared to the same period in 2022, largely resulting from not having new rates in effect for 2023 as we await the pending electric GRC that will set new rates for 2023 through 2026. While also experiencing continued increases in overall operating expenses and interest costs. The increase in expenses were mostly offset by favorable changes of certain flow-through income taxes.
When the decision is issued in the electric GRC, new rates are expected to be retroactive to January 2023 and cumulative adjustment will be recorded at the top. Earnings from our contracted services segment were $0.12 per share for this quarter, the same as the earnings for the same period in 2022. Consolidated revenues for the third quarter increased by $16.7 million as compared to the same period in 2022. Revenues for the water segment increased by $15.4 million, largely representing the difference from the 2021 adopted rates recorded in 2022 and 2023 rates approved in June, partially offset by a decrease in revenue resulting from the cost of capital decision effective July 31, 2023, which included the effect of a reduction in the cost of debt recovered in rates, partially offset by higher authorized return on equity.
In addition, water revenue were lower in the third quarter of 2022 by $11.9 million due to the recording of an estimate of revenue structure to refund at the time. Electric revenues for the 3 months ended September 30, 2023, have remained flat compared to the same period in 2022, but new rates for 2023 has yet to be approved.
In addition, there was an increase in revenues of $1.2 million from our Contracted Services segment due to an increase in management fee revenue from annual economic price adjustments and higher construction activity.
Turning to Slide 9 and looking at total operating expenses other than supply costs. Consolidated expenses increased $1.9 million as compared to last year's third quarter. The increase was largely related to higher construction costs at our Contracted Services segment and higher other operations and maintenance expenses across all business segments during the third quarter. These increases were partially offset by lower administrative and general expenses. Interest expense, net of interest income, increased by $2.9 million due to higher average interest rate during the quarter and increases in overall borrowing levels.
Other expenses -- other expense net of other income increased by $1.4 million due primarily to an increase in the non-service cost component for Golden State Water's benefit plan, resulting from changes in actual aerial assumptions in the plan assets. However, as a result of Golden State Water to weigh balancing accounts authorized by the CPUC, changes in total net periodic pension costs related to the pension plan have no material impact to earnings.
Slide 10 shows the adjusted EPS bridge compared to the third quarter of -- comparing the third quarters of 2023 and 2022.
Moving on Slide 11. This slide reflects our year-to-date earnings per share by segment as reported and adjusted. Fully diluted earnings as reported for the 9 months ended September 30, 2023, were $2.82 as compared to $1.61 for the same period in 2022, an increase of $1.21 per share. Included in year-to-date 2023 results was $0.38 per share related to the impact of retroactive rates from the decision in the water general rate case for the full year of 2022, of which $0.30 per share relates to the first 9 months of 2022.
In addition, as a result of the full cost of capital decision -- of the final cost of capital decision, the 2023 year-to-date results include $0.13 per share related to the reversal of the recording of a lower cost of debt in 2022, of which $0.10 per share was recorded during the 9 months ended September 30. 2022. $1.21 per share increase was also included a favorable variance of $0.17 per share from investments held to fund a retirement plan.
Excluding the 3 items mentioned above, adjusted consolidated earnings for the 9 months ended September 30, 2023, were $2.27 per share as compared to adjusted earnings of $1.84 per share for the same period in 2022, an increase of $0.43 per share.
Turning to liquidity on Slide 12. Net cash provided by operating activities was $56.5 million through September of this year as compared to $89.9 million for year-to-date 2022. During the first 9 months of last year, our regulated utilities received $9.8 million in COVID-19 refund from the state of California to provide assistance to customers for delinquent water and electric customer bills incurred during the pandemic. There has been no relief funds received thus far in 2023.
The decrease in operating cash flow was also a result of lower water consumption and the delayed in receiving water GRC final decision. Golden State Water has implemented the new 2023 rate that took effect on July 31. The surcharges to recover retroactive amount accumulated through July 30 have also been implemented in October. In addition, cash flow from construction-related activity at ASUS decreased this year, representing timing differences when the work is being performed and when the cash is received for the payment of the work.
For investing activities, our regulated utility invested $126 million on company-funded capital projects during the first 9 months of 2023, and we project company funded capital expenditure at our regulated utilities to be $155 million to $107 million this year.
Yesterday, we executed the amendment to American States Water's credit facility that allows for the addition of a new bank joining the existing syndicate group. We are pleased to expand our banking group, which also increased AWR's bond capacity from $150 million to $165 million that will provide additional support to the operations of ASUS and AWR parent.
In addition, American States Water may seek additional capital of $150 million to $200 million over the next 3 years beginning in 2024, potentially through at the market common equity program to fund business operations and pay down credit facilities.
I will turn the call to -- over to Bob now. Thank you.
Robert J. Sprowls
Thank you, Eva. I will discuss a few key regulatory matters. As discussed last quarter and to provide you a recap of key points in the decision, the water utility rate case final decision issued on June 29 of this year set new rates for 2022 through 2024, authorize a capital infrastructure budget of $404.8 million over the 3-year cycle, adopts new operating expense levels. and allows for additional increases in adopted revenues for 2023 and 2024, subject to an earnings test and changes to the inflation index values.
As mentioned earlier, on August 14, Golden State Water filed its water general rate case for water rates for the years 2025 through 2027. Among other things, Golden State Water requested capital budgets in this application of $611.4 million over the rate cycle. We also requested the continuation of mechanisms to accommodate fully decoupled revenues and sales and track differences between recorded and CPUC-authorized supply-related expenses. A decision in the water general rate case is scheduled for the fourth quarter of 2024 with new rates to become effective January 1, 2025.
Also in June, the CPUC adopt the final decision in the cost of capital proceeding to set the new cost of capital for 2022 through 2024. The decision adopts a requested capital structure of 57% equity and 43% debt, a requested cost of debt of 5.1% and an authorized return on equity of 8.85%. It also allows for the continuation of the water cost of capital mechanism. In addition, based on the final decision, all adjustments to rates are prospective and not retroactive.
Golden State Water filed an advice letter that implemented the new cost of capital effective July 31, 2023. As I just mentioned, the decision allowed for the continuation of the water cost of capital mechanism. For the period from October 1, 2021 through September 30, 2022, the Moody's AA utility bond rate increased by 102.8 basis points from the benchmark, which triggered the water cost of capital mechanism adjustment of 51 basis points.
Because the recently authorized cost of capital is prospective, Golden State Water's adopted return on equity increased from 8.85% to 9.36%, and its cost of debt decreased from 6.6% to 5.1%, both effective July 31, 2023. Additionally, for the period from October 1, 2022, through September 30, 2023, the Moody's AA utility bond rate increased by 139.7 basis points from the benchmark, which triggered another water cost of capital mechanism adjustment.
In October, Golden State Water filed an advice letter to establish the water cost of capital mechanism for 2024, which was approved last week on November 2, to increase the 9.36% adopted return on equity to 10.06% effective January 1, 2024.
Moving on to Slide 15. Our electric utility subsidiary filed its general rate case on August 30, 2022 for new rates for the period 2023 through 2026. The application includes additional capital expenditures for the 4-year rate cycle and a new cost of capital. We have also requested a recovery of more than $22 million in capital already spent related to the wildfire mitigation plans.
The CPUC has approved a decision for a general rate case memorandum account that will make new rates once approved in a CPUC final decision effective January 1, 2023.
Turning our attention to Slide 16, we present the growth in Golden State Water's adopted average water rate base from 2018 to 2024. Golden State Water's adopted average rate base increases from $752.2 million in 2018 to $1,357.5 billion in 2024. That's a compound annual growth rate of 10.3% for the 6-year period.
Let's continue to ASUS. ASUS contributed earnings of $0.12 per share for the third quarter for both 2023 and 2022. For the year-to-date 2023, ASUS' earnings were $0.38 per share, an increase of $0.09 per share compared to $0.29 per share for the same period of 2022. The year-to-date increase was largely due to an increase in construction activity 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 costs as compared to the same period of 2022.
ASUS is on target to contribute $0.45 to $0.49 per share for the year. As previously highlighted, ASUS had 2 contract award wins during the quarter. With the award of the estimated $349 million contract value over a 50-year period, ASUS will assume operations at Naval Air Station, Pax River following the completion of a 6-month transition period. ASUS was also awarded a new 15-year contract to serve joint-based Cape Cod. Under this contract, ASUS will have the opportunity to perform work through the periodic issuance of task orders by the U.S. government for up to a maximum initial value of $45 million over a 15-year period, subject to annual economic price adjustments.
In September, the first task order was issued with a value of $2.3 million. We performed evaluation, construction and transition services that are scheduled for completion in 2024. We project that ASUS will contribute $0.48 to $0.52 per share for 2024. We remain confident that we can effectively compete for new military-based contract awards based on our proven track record of managing water and wastewater related services for military bases since 2004.
I'd like to turn our attention to dividends, which remain a compelling part of our investment story. Our quarterly dividend rate has grown at a compound annual growth rate of 9.4% over the last 5 years from 2018 through 2023. These increases are consistent with our policy to achieve a compound annual growth rate in the dividend of more than 7% over the long term. Our strong dividend history is something that the company is proud of and is a continuing asset to shareholders.
I'd like to conclude our prepared remarks by thanking you for your interest in American States Water, and we'll now turn the call over to the operator for questions.
Question and Answer Session
Operator
(Operator Instructions). Our first question comes from Jonathan Reeder from Wells Fargo.
Jonathan Garrett Reeder
I want to start, first, the CapEx budget. I think earlier in the year, you were expecting like $140 million to $160 million and you've increased it to $155 million to $170 million. Can you expand on what drove the increase? And does it at all reflect the substantially higher CapEx budget requested in the recently filed GRC?
Robert J. Sprowls
Jonathan, we're just a little bit ahead of schedule on our projects. We do have a pretty substantial step-up in our request with the new rate case that we filed and it's really important that we continue to spend capital on time. So our team is doing a great job.
Jonathan Garrett Reeder
Can you talk about what the annual rate increases were that were requested under the recently filed GRC based on that higher proposed CapEx budget? And I guess just how does that interplay with maintaining rate payer affordability? Is that something that's becoming like an increasing challenge for you guys?
Robert J. Sprowls
So Jonathan, as you know, we have 8 different rate making areas, but the overall collective rate increase and under PUC rules, you sort of have to measure your requested increase versus 2 years ago. So it's -- our requested increase for 2025 in comparison to 2023 rates is in the neighborhood of 23% to 24% for all the -- as an aggregate of all the ratemaking areas. So some ratemaking areas will be higher and some will be lower.
Affordability is always something we need to keep an eye on and have been. We do have a substantial step-up in the CapEx. We're pretty comfortable we're not going to get 100% of what we ask for, but we think all of the projects are needed. And I think it's really important that we have a very reliable system for our customers. So we do balance that with affordability.
Eva G. Tang
Jonathan, if I may add, one of another big factor of the increase is really supply cost. We expect that we may take some wealth down because of meeting the new requirement of the PFOS. So we do expect supply costs will increase in the next rate case cycle. That directly impacts the revenue increase for the rate case cycle.
Jonathan Garrett Reeder
Does any of that CapEx just reflect also like PFOS CapEx compliance cost, too? Or...
Robert J. Sprowls
I Mean there are some dollars in there for PFOS, but it's -- I would say it's not a big amount associated with the overall request. And Jonathan, just the cost of everything has really increased since the last rate request.
Jonathan Garrett Reeder
And then, Eva, just to clarify one of your statements. Was the $150 million to $200 million of additional capital comment, does that relate just to potential equity needs over the 2024 to 2026 period?
Eva G. Tang
Yes, some small systems that we're looking into, it does include that and also fund the current business because we haven't issued equity since 2009, as you may recall, Jonathan. So it's been 14 years that we haven't gone to the market for this. And we try to build a very strong balance sheet, and we'll continue to do so. So it's important we try to maintain a certain equity ratio at a consolidated basis as well.
Robert J. Sprowls
Jonathan, it's all equity. The $150 million to $200 million is all equity.
Jonathan Garrett Reeder
And it's over 2024 to 2026?
Eva G. Tang
Yes. That's the plan right now.
Jonathan Garrett Reeder
And then maybe help me understand the joint-base Cape Cod contract and I guess how it differs from the traditional 50-year contracts. Is it basically just cover construction work on the base over the next 15 years and no O&M component?
Robert J. Sprowls
No, not necessarily. It -- so different branches of the Department of Defense are looking for perhaps alternatives to the 50-year privatization contract. Our company has sort of been out on the leading edge here working to try to, I guess, create, I would say, a second model for privatization. And so we have this contract at joint-base Cape Cod or JBCC. And as we mentioned earlier, Jonathan, it's -- you have these annual task orders that you get approved. And so we're working through this process. But this is a very new contract type. It's possible this could be used at other places. We're very excited about this contract. It's not perhaps as easy to understand as the standard utility privatization contract, which we think is also just a very effective way to improve the facilities for the military bases.
Jonathan Garrett Reeder
So are you actually though going to be on that base, like operating the system in additional to doing some of these, like task orders, which are -- I mean, are the task orders like capital projects or...
Robert J. Sprowls
Right. So Jonathan, we're sort of in this transition phase at the base. Although we've got -- it hasn't been approved yet, but the plan is for us to operate, maintain, operate to maintain the system, do capital improvements, do renewal and replacement, et cetera. But it would be one of these approaches where each year, we would get sort of approval to go ahead and move forward with that year's projects, O&M, capital improvements, et cetera. So it's -- I would say a similar work to what we do under the 50-year contract. It's just the contracting vehicle is a bit different.
Jonathan Garrett Reeder
So each year, you get like a new contract or dollar amount, and that would reflect both O&M work as well as renewal and the replacement?
Robert J. Sprowls
Yes, that's how we think it will work. Although we're, again, the first ones doing this, but that's how we think it will work.
Jonathan Garrett Reeder
Do you expect to be -- is this going to be the model that any new bases that come up for grabs are going to be under this 15-year versus the 50-year, because I mean certainly from a regulated investor kind of standpoint, I mean, the 50-year seems to provide longer-term certainty around the stability of the business.
Robert J. Sprowls
I would say it's an alternative to the -- for those folks that are -- those departments that aren't completely sold on the 50-year privatization. It is an alternative.
I should mention that the government will basically turn over the system to a different owner. And so we'll be working with that owner on this particular project. So what does that mean? That means it might be -- I don't want you sitting there thinking, well, it's easy for the government to take this thing back. You should think that, okay, it's, although not as easy to take it back as under the 50-year version, it is -- it still will be difficult for them to take the system back and they're -- you typically don't privatize things until it's -- until you need your need of repair and capital improvements. We're -- I mean, we're super excited about working with the folks at JBCC on this project and consider it sort of an innovative contracting method.
Operator
(Operator Instructions) There are no more 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 J. Sprowls
Thank you, Jason. I just want to thank everybody today for your participation, and let you know, we look forward to speaking with you the next quarter and wish you all happy holiday season. Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
