Q4 2023 American States Water Co Earnings Call

Participants

Bob Sprowls; President & CEO; American States Water Company

Eva Tang; SVP, Finance, CFO, Corporate Secretary & Treasurer; American States Water Company

Gregg Orrill; Analyst; UBS Securities

Presentation

Operator

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 2023 results. The call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at 05:00 PM Eastern Time and run through Thursday, February 29, 2024, 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 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. Please go ahead.

Bob Sprowls

Thank you Andrea, and welcome, everyone, and thank you for joining us today. I'll begin with some brief comments on the year. 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, a very productive and positive year for the Company.
In June, the company's water utility subsidiary, Golden State Water Company received a final decision from the California Public Utilities Commission or CPUC on its water general rate case to set rates for 2022 through 2024. As well as the decision on its cost of capital proceeding. Both decisions represent constructive regulatory outcomes and enable us to continue investing in our water infrastructure for safe and reliable water services for generations to come.
The cost of capital decision adopted the authorized return on equity capital structure and the embedded cost of debt prospectively. It also allows for the continuation of the water cost of capital mechanism for adjusting the return on equity. As a result, Golden State Water's authorized return on equity increased from 8.9% to 9.36% effective July 31, 2023, and decreased again to 10.06% for 2024 as a result of triggering the cost of capital mechanism for each year. In addition, we filed Golden State Water general rate case in August 2023 to set new rates for the years 2025 through 2027 filing included a request for capital investment of 600 to $11.4 billion over the rate cycle.
Let's briefly discuss our earnings for the full 2023 year. We recorded diluted earnings for the year increased by $1.25 per share from 2022 or $0.41 per share. Adjusted, which excludes favorable variances resulting from the receipt of the final decision in the general rate case and cost of capital proceedings in June 2023 that Eva will discuss in more detail. The adjusted earnings also exclude the net favorable variance from investments held to fund a retirement plan from both years $0.41 per share. Higher adjusted earnings were largely from the new 2023 water rates approved in Golden State Water's final general rate case.
Yes, I'm proud to report that the consolidated company earned a return on equity for 2023 of 14.1%, excluding the additional income from the adjusted items associated with Golden State Water, general rate case and cost of capital decisions in 2023, we invested a record high $175.7 million in infrastructure at our regulated utilities and received $24.1 million in new capital upgrade awards at the military bases served by ASUS existing at the end of 2022.
We are pleased that ASUS was awarded two contracts by the U.S. government in the third quarter of 2023 to operate, maintain and provide construction management services for the water distribution and wastewater collection and treatment facilities on two military bases. The first was our first Navy contract at Naval Air Station protection river or Pax River located in Maryland.
The initial value of the contract is estimated at $349 million over a 50-year period. Issuance was also awarded a 15-year contract at Joint Base Cape Cod located in Massachusetts under this contract issue and has 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.
Both new contract awards 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 believe we are well positioned to continue competing for new contracts in the future.
In 2023, we increased our third quarter cash dividend by 8.2%. This is our 69th consecutive year of annual dividend increase. We remain proud of our dividend history and continued growth.
With that, I'll turn the call over to Eva to discuss the fourth quarter and full year earnings and liquidity.

Eva Tang

Thank you, Bob, and hello, everyone. And let me start with our fourth quarter results on Slide 8, consolidated earnings as reported or $0.25 per share for the quarter as compared to $0.5 per share for the quarter of 2022. That is an increase of $0.05 per share in last year's fourth quarter closes the lottery quarter, it recorded a decrease in earnings of $0.03 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 of 2023 that set the cost of capital prospectively, the $0.03 per share accrual recorded in Q4 2022 was reversed in the second quarter of 2023.
Excluding this item, adjusted consolidated earnings for the fourth quarter of 2020 was $0.35 per share as compared to adjusted earnings of $0.33 per share for the fourth quarter of 2022, an increase of $0.02 per share for Golden State Water reported earnings were $0.41 per share as compared to $0.28 per share for the fourth quarter of 2020 to the $0.13 per share increase included a $0.03 favorable variance from the cost of capital decision.
As discussed. Excluding this item, adjusted earnings for the fourth quarter of 2022 at the water segment were $0.31 per share as compared to recorded earnings of $0.41 per share for the fourth quarter of 2023, an adjusted increase of $0.1 per share or a 32% increase. The $0.1 per share increase largely represents the rate increases for 2022 and 2023 recorded in 2023 and higher gains generated from investment held for retirement plan, partially offset by the effect of the cost of capital decision effective July 31st, 2023, where there was a reduction in cost of debt recovered in rate, partially offset by increased to up to the authorized return on equity there.
There were also increases in operating expenses, interest expenses and income taxes. Our electric segment earnings for fourth quarter this year were $0.07 per share, which was a decrease of $0.01 per share compared to 2022, largely resulting from not having any way effect for 2023 as we await the pending electric GRC that will set new rates for 2023 through 2026. We are also experiencing continued increases in other operating expenses and interest costs. We're expectations issued new rates are expected to be retroactive to January 2023, and cumulative adjustments will be recorded at the time.
Turning from a US were $0.12 per share for the quarter, a decrease of $0.05 per share when compared to the same period in 2022, largely from timing differences of when construction work was performed throughout the 2023 year compared to 2019. Bob will discuss this in more detail later.
Losses from our parent company were $0.04 per share for the quarter and included a $0.01 per share loss as compared to 2022, so actually due to an increase in interest expenses.
Moving on next slide, consolidated revenue for the fourth quarter were consistent with the same period in 2022. Revenues for the water segment increased by $12.6 million, largely representing the rate increases for 2022 and 2023 recorded in 2023, partially offset by a decrease in revenues resulting from the cost of decision effective July 31, 2023.
In addition, while the revenues were lower in the fourth quarter of 2022 by $1.4 million due to the recording of revenues I'll get to refund at this time electric revenue for the three months ended December 31st, 2023, has remained flat compared to the same period in 2020 to a new rate for 2023 has yet to be approved for a US sale with a decreasing revenue of $13 million due to timing differences in performing construction work.
Turning to Slide 10 and looking at a total operating expenses other than supply costs, consolidated expenses decreased $9.3 million as compared to last year's fourth quarter. The decrease was largely related to lower construction costs at SUN, partially offset by higher administrative and general expenses and other taxes.
Interest expense net of interest income decreased by $2.4 million. It drove higher average interest rate during the quarter and increases in overall power levels. Other income net of the other expense remained flat for the quarter compared to the same period in 2018. Yes, slide 11 shows the adjusted EPS bridge comparing fourth quarter of 2023 and 2020.
Okay. This slide reflects our full year earnings per share by segment as reported and adjusted fully diluted earnings as reported for 2023 were $3.36 as compared to $2.11 for 2022, an increase of $1.25 per share. Included in the 2023 result was the $0.38 per share related to the impact of retroactive rate funded decision water generated for the full year of 2022. In addition, as a result of the final cost of capital decision for 2023 results include $0.13 per share related to the reversal of the estimate, the impact of a lower cost of debt recorded in 2022, $1.25 per share increase also include a favorable variance of $0.2 per share of fund investments held to fund a retirement plan.
Excluding the three items mentioned above, again, the consolidated earnings for the year were $2.75 per share as compared to adjusted earnings of $2.34 per share for 2022, an increase of $0.41 per share. The change in earnings is largely a result of rate increases from Golden State Water and higher construction activity and increases to manage to revenue from U.S., partially offset by overall higher operating interest expenses across all segments for more details on the annual results, please refer to yesterday's press release and Form 10-K.
Turning to liquidity. Net cash provided by operating activities was $67.7 million for this year as compared to $117.8 million for 2022. The decrease in operating cash flow was largely as a result of a decrease in billed water consumption and the delayed receipt of final quantity I see. However, Golden State Water has implemented new rates since July 31, '23, and is collecting surcharges to recover retroactive amounts due to the delay beginning in October of last year. In addition, cash flow from construction related activities at SUS. decreased this year, representing timing differences of when the construction work is being performed when the payments are made to our contractors for investing activities.
As Bob mentioned, our regulated utility invested a record high $175.7 million on company-funded capital projects during 2023, we project company-funded capital expenditure at our regulated utility to be $160 million to $200 million this year. Again, we are currently maintaining a credit rating of AA stable with Standard & Poor's Global Ratings for S&T while go to stay, maintains a AA plus stable rating with S&P and A2 stable rating with Moody's Investor Service.
cThere are some these are some highest credit ratings in the U.S. investor-owned water utility industry. As we mentioned in the prior quarters, American States Water's intends to seek $150 million to $200 million of additional capital over the next three years through equity offering, which may include an at the market program.
With that, I'll turn the call back to Bob.

Bob Sprowls

Thank you, Eva. I will take a minute here and discuss a few key regulatory matters. As mentioned earlier, the CPUC adopted Golden State Water's General Rate Case decision in June of 2023.
Final decision issue set new rates for 2022 through 2024, authorized a capital infrastructure budget of $404.8 million over the three year rate 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 inflationary index values. In August of last year, Golden State Water filed its 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 billion 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.
The proposed 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 of last year, 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 adopted our requested capital structure of 57% equity and 43% debt are requested cost of debt of 5.1% and a 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 or adjustments to rates for a prospective 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 double A. utility bond rate increased by 102.8 basis points from the benchmark, which triggered the water cost of capital mechanism adjustment by 51 basis points because of the recently authorized cost of capital as prospective Golden State Water's adopted return on equity increased from 8.85% to 9.36% and its cost to debt decreased from 6.6% to 5.1% effective July 31, 2023.
Additionally, for the period from October 1, 2022, through September 30, 2023, the Moody's double A. utility bond rate increased by 139.7 basis points from the benchmark, which again triggered another wire cost of capital mechanism adjustments. In November 2023, the CPUC approved Golden State Water's filing to increase the 9.36% return on equity to 10.06% effective January first, 2024.
Moving on to Slide 16. As many of you know, investor-owned water utilities serving in California are required to file their cost of capital applications on a triannual basis, which means Golden State Water's next cost of capital application scheduled to be filed on May 1 of this year for the years 2025 through 2027.
However, Golden State Water, along with three other Class A investor-owned water utilities filed a joint request with the CPUC to defer the cost of capital applications by one year, which was approved by the CPUC on February 2 of this year, joint request asked that the utilities keep the cost of capital currently authorized for 2024 in effect through 2025 and to file new cost of capital applications by May 1, 2025, to set the cost of debt return on equity and capital structure. Starting January 1, 2026, Golden State Water's current authorized rate of return on rate base is 7.93%, which will continue to be in effect through December 31, 2025.
Additionally, Golden State Water's cost of capital mechanism will remain active through the one-year deferral period. Our electric utility subsidiary filed its general rate case on August 30th, 2022 for new rates for the period 2023 through 2026 the application includes additional capital expenditures of $68.2 million for the four-year rate cycle and a new cost of capital. We have also requested the recovery of more than $22 million in capital already spent related to the wildfire mitigation plans. The new rates once approved will be retroactive to January 1, 2023.
Turning our attention to slide 17, we present growth in Golden State Water's adopted average water rate base from 2018 through 2024, Golden State Water's adopted. Average rate base increased from 752.2 million in 2018 to $1,357.5 million in 2024. That's is compound annual growth rate of 10.3% for the six year period. Let's continue to ASUN. issuance contributed earnings of $0.5 per share for the full year of 2023. As compared to $0.46 per share for 2022.
The increase year over year was largely due to an increase in management fee revenue resulting from the resolution of various economic price adjustments and an increase in construction activity, partially offset by higher overall operating expenses and interest costs. Issuance contributed earnings of $0.12 per share for the fourth quarter of 2023 as compared to $0.17 per share for the same period in 2022.
The decrease largely resulted from the timing of when construction work was performed in 2023 as compared to 2022. As previously highlighted, issue has had to contract award wins during 2023. The Naval Air Station protection river contract has an estimated $349 million contract value over a 50-year period that will be subject to annual economic price adjustments.
The SUS. was also awarded a 15-year contract to serve Joint Base 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 and is also subject to annual economic price adjustments in September 2023. The first task order was issued with a value of $2.3 million to perform an evaluation, construction and transition services that are scheduled for completion in 2024.
As I mentioned earlier, ASUS. received new capital upgrade project awards of $24.1 million in 2023 for work that will be performed in the next few years on the military bases that existed at the end of 2022 with a solid performance expected for ASUS. in 2024, we project a SUS. to contribute 50 to $0.54 per share this year, which is $0.02 per share higher than the range for 2024 that we had done discussed with you during our third quarter earnings call, we remain confident that we can effectively compete for new military base contract awards based on our proven track record of managing water and wastewater related services for military bases since 2004.
I would like to turn our attention to dividends, which remains a compelling part of our investment story. Our quarterly dividend rate has grown at a compound annual growth rate of 9.4% over the last five years from 2018 to 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 it's a continuing asset to our shareholders.
I'd like to conclude our prepared remarks by thanking you for your interest in American States Water, and we'll now turn the call over to the operator for questions.

Question and Answer Session

Operator

(Operator Instructions)
Gregg Orrill, UBS.

Gregg Orrill

So Gregg up, sorry, ma'am, you take it back and say what's the schedule in the rate case?
What are the milestones coming up on you said the proposed decision in the fourth quarter?

Bob Sprowls

Yes, I would say that the big the big issues. We're waiting for public advocates report on the rate case, and that's, I think, due out by the end of February, and then we'll move forward there. I'm not sure hearings have been scheduled at this point. But yes, but we'll be very happy to see what public advocates has to say and started. Greg?

Eva Tang

Hello, Craig?
Yes, yes. And so I know what and, you know, there was sort of a and controversial or nonstandard recommendation by CAL advocates in the case for one of your peers. And is that kind of what you're expecting in this?
Okay.
Well, we're we're not really sure we have it took us a little strange, you know, to see a sign Commissioner issue a alternate decision from the ALJ given that commissioners the assigned commissioner, but it's not unheard of. We hope we hope we don't have something similar there, but we and we do believe that the alternate in the Cal Water case does not reflect a balanced decision. And we'd like to see the original proposed decision approved for the alternate revise some not exactly sure why it's headed down this path of some of the things included in the decision or things that we've we've had included in our prior filings. So we're watching it closely as you can as you would expect.

Gregg Orrill

Great. Okay. Thank you.

Bob Sprowls

Thank you, Greg.

Operator

(Operator Instructions)
That will conclude today's question-and-answer session. I would like to turn the conference back over to Bob Sprowls for any closing remarks.

Bob Sprowls

Thank you, Andrew. I just wanted to thank everybody that participated today for their participation and let them know that we look forward to speaking with them during the next quarter. Thank you, everyone.

Operator

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.