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American States Water Co
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Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference call discussing the company's First 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 5:00 p.m. Eastern Time and run through Wednesday, May 15, 2024, on the company's website at www.aswater.com. The slides that the company will be referring to are also on the website.
This call will be limited to 1 hour presenting today from American States Water Company are Mr. Bob Sprowls, President and Chief Executive Officer; and Ms. Eva Tang, Senior Vice President in 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 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 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 would like to turn the call over to Mr. Bob Sprowls, President and Chief Executive Officer of American States Water Company. Please go ahead, sir.
Thank you, Chuck. 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.
It was a solid quarter for the company as we continue to invest in our regulated utilities and began water and wastewater operations at 2 new military bases in April.
Let's first briefly discuss our earnings for the first quarter of 2024. Reported diluted earnings for the quarter decreased by $0.31 per share from the same period in 2023, or a $0.02 per share increase as adjusted. The $0.02 per share higher adjusted earnings were largely from the third year 2024 water rates approved in the final decision in Golden State Water's general rate case, partially offset by lower construction activities at ASUS due to timing differences in performing work and the delay in the electric general rate case decision. Eva will discuss the adjusted results in more detail.
At the regulated utilities, we continue to invest in our infrastructure to strengthen our water and electric systems and remain focused on operating the water and electric businesses safely, efficiently and for the long term.
We are committed to the goal of spending $160 million to $200 million this year at our regulated utilities. We are very pleased to have begun operations of the water and wastewater systems on 2 new military bases in April as we successfully completed our transition at Naval Air Station Patuxent River or Pax River, located in Maryland, and Joint based Cape Cod in Massachusetts. Pax River provides our contracted services segment with a 50-year firm fixed price contract estimated at $349 million, while joint base Cape Cod is a 15-year contract of up to a maximum firm fixed price value of $75 million through the issuance of annual task orders. We look forward to supporting both installations and consider it a privilege to leverage our broad utility expertise to make significant contributions to the military and their respective missions at these locations. With that, I'll turn the call over to Eva to discuss the quarterly earnings and liquidity.
Thank you, Bob, and hello, everyone. Let me start with our first quarter financial results. Consolidated earnings as recorded were $0.62 per share for the first quarter, as compared to $0.93 per share for the first quarter of 2023. Included in the results of last year's first quarter was $0.38 per share related to the recording of retroactive rate from the proposed decision in the water general rate case for the full year of 2022.
In addition, during the first quarter of last year, we recorded a loss of $0.05 per share associated with the revenue subject to refund as a result of the lower cost of debt related to the pending cost of capital proceeding at the time, which were subsequently reversed in June 2023 upon receiving the final decision in the cost of capital proceedings that made our adjustments to rate perspective. Excluding these 2 items, adjusted consolidated earnings for the first quarter of 2023 were $0.60 per share as compared to recorded earnings of $0.62 per share this year, an increase of $0.02 per share.
For our water utility Golden State Water Company, reported earnings were $0.48 per share as compared to $0.74 per share for the first quarter of 2023 both items are discussed impacted earnings at Water segment last year. So factoring the same effect from the 2 adjusted items for 2023, earnings for the first quarter of 2024 at Golden State Water were $0.48 per share, which was an increase of $0.07 per share, as compared to adjusted earnings of $0.41 per share for the first quarter of last year.
Since 2024 is the third year of the GRC rate cycle, Golden State Water received third year rate increases effective January 1, 2024. So the $0.07 per share increase in 2024 largely represent increases in water revenue and other income from gains generated from investments held for retirement plan, partially offset by increases in operating and interest expense.
Our electric segment's earnings were $0.05 per share for the first quarter as compared to $0.06 per share for the same period in 2023, largely resulting from not having new rates in effect as we await the pending electric that will set new rates for 2023 to 2026, while also experiencing continued increases in overall operating expenses and interest costs. On the decisions issued in the electric GRC, new rates are expected to be retroactive to January of 2023 and cumulative adjustment will be recorded at that time. Earnings from ASUS decreased $0.02 per share for the quarter, largely from timing differences of when construction work was performed when comparing to the first quarter of this year, with the same period of 2023. Bob will discuss it in more detail later.
Losses from our parent company were $0.03 per share for the quarter as compared to losses of $0.02 per share for the same period in 2023, largely due to an increase in interest expense. Moving on Slide 8. Consolidated revenue for the first quarter decreased by $26.1 million as compared to the same period in 2023. Revenue for the wireless segment decreased by $22.4 million, mainly due to $30.3 million recorded in the first quarter of 2023, which represented the impact of retroactive new rates for the full year of 2022 as a result of the proposed decision issued by the CPUC in April of last year on Golden State Water's general rate cases at the time, partially offset by increases in water revenue in 2024 due to the 3-year rate increases.
Electric revenue decreased slightly as we await a decision on the electric general rate case, while there were a decrease in revenue from ASUS of $3 million, largely due to timing differences in performing construction work. Turning to Slide 9 and looking at total operating expenses other than supply costs, consolidated expenses decreased $2.2 million as compared to the first quarter of 2023. The decrease was largely attributable to a decrease in construction costs at ASUS, resulting from lower construction activity due to timing differences of when construction work was performed in 2024 as compared to Q1 of 2023, partially offset by higher administrative and general expenses. Interest expense, net of interest income increased by $3.2 million due to higher interest rates during the quarter and increases in overall borrowing levels.
Other income, net of other expenses increased by $700,000 largely because of higher gains recorded our investment hub to fund one of company's retirement plans in the first quarter. Slide 10 shows the EPS bridge comparing recorded adjusted EPS for the first quarter of 2024, against adjusted EPS for 2023. Turning to liquidity. Net cash provided by operating activity was $45.8 million as compared to $7 million for the first quarter of 2023. The increase in operating cash flow was largely as a result of Golden State Water having implemented new rates in 2023 and 2024, and the collection of surcharges to recover retroactive revenue from 2022 through July 30, 2023.
In addition, cash used for construction-related activity at ASUS decreased this year due to timing differences, actually increased this year -- decreased the year, I'm sorry, due to timing differences of when the construction work is being performed and when payments are made to our contractors. For investing activities, our regulated utility invested $47.6 million on company-funded capital projects during the first quarter and we project company-funded capital expenditure at our regulated utility to be $160 million to $200 million this year. In February, American States Water entered into an equity distribution agreement to sell common shares through an ad market offering program. This program allows the company additional discretion to sell up to $200 million over a 3-year period.
During the first quarter, AWR raised proceeds of approximately $16 million net of issuance costs. American States Water currently maintain a credit rating of a stable rating with Standard for global ratings or S&P, while Golden State Water maintained A plus stable rating with S&P and A2 stable rating with Moody's Investor Service. These are some of the highest credit ratings in the U.S. investor-owned water utility industry. With that, I'll turn the call back to Bob.
Thank you, Eva. I'll discuss a few key regulatory matters. In August 2023, 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 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 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.
In June of last year, the CPUC adopted a final decision in Golden State Water's cost of capital proceeding where all changes to rates were to be implemented prospectively. As a result, Golden State Water maintained an authorized return on rate base of 7.91% for the first 7 months of 2023, and 7.53% for the remaining 5 months of the year, reflecting an authorized return on equity of 9.36% and cost of debt of 5.1% which was a reduction from 6.6%.
Effective January 1, 2024, the authorized Return on equity was increased to 10.06% and as a result of the water cost of capital mechanism being triggered for 2024. And the authorized return on rate base increased to 7.93%. As many of you know, investor-owned water utilities serving in California are required to file their cost of capital applications on a triennial basis, which means Golden State Water's next cost of capital application was scheduled to be filed on May 1, 2024, for the years 2025 through 2027.
However, Golden State Water, along with 3 other Class A investor-owned water utilities filed a joint request with the CPUC to postpone the cost of capital applications by 1 year which was approved by the CPUC on February 2 of this year. The joint request asked that the utilities keep the cost of capital currently authorized for 2024 and in effect through 2025. our quarterly dividend rate has grown at a compound annual growth rate or CAGR 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 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.
We will now begin the question-and-answer session.
[Operator Instructions]
And the first question will come from Jonathan Reeder with Wells Fargo.
A couple of questions I wouldn't mind going through. First off, how large was the third year rate increase from the 2022 to 2024 GRC? I don't believe I saw that in the K or the Q. I think the settlement you had reached outlined like $13.2 million.
So you're asking the rate increases for this year?
24 over 23.
I think first quarter, our increase is...
Are you asking for the entire year, Jonathan or...
Yes. What's the annual amount. I mean I think the settlement had outlined $13.2 million, but I know that's always subject to adjustment for inflationary factors, the earnings stuff like that.
We may need to get back to you, Jonathan, on that.
Yes. I think first quarter is about $3.5 million. So we'll get back to you on that one for the full year.
Okay. And then where exactly do things stand with like the electric GRC? Are you just waiting for a PD at this point?
We are. All the work in the case has been done for waiting for a PD. We -- settlement discussions continue, but it -- one of the issues we have with Bear Valley Electric is we're so small, sometimes it's difficult to get the attention of the public advocates office. They, Bear Valley is so small relative to the big electrics. So although they've been nice to work with, but we continue to work through that. It's possible we could get to a settlement. It's also possible a proposed decision would come out.
Okay. I mean, are you optimistic that it -- I mean I think the statutory deadline has been extended a couple of times now. The latest is the September 30th. Are you optimistic that it actually gets done by then? Or since settlement discussions are potentially still taking place? Is it likely to even extend beyond?
Well, they have assigned a second ALJ to the case. So I think there's a pretty good chance it will get done by then, unless if we were to reach a settlement, that may be something that slows the case down a little bit, but so it's hard to say. Again, the size of the company is part of the factor here. So...
Yes. But I mean for the size of the company, it's a pretty significant case though, correct? I mean there's a lot of capital between the wildfire mitigation stuff and everything that's kind of in there where -- I mean, is that -- if you're able to kind of go into it all, is that what is perhaps making the case more drawn out or challenges reaching settlement?
Yes. I think it's a fair statement, Jonathan, that -- so we're basically as far as I know, kind of a last electric utility to file its rate case after wildfire mitigation plans got put in place. And so that first year increase is fairly significant because there's significant amount of unrecovered costs. We have north of $23 million of unrecovered wildfire mitigation capital expenditures. So I think that's part of the difficulty. And because we're the last one, there's more -- I would say there's more years accumulated in the wildfire mitigation plan, unrecovered CapEx than perhaps the bigger companies. So I think that's part of the way.
We've had delays on the Bear Valley Electric case in the past to pre-wildfire mitigation planned expenditures. So I'd say some of it is because it's the -- that first year is fairly significant. And then part of it is just -- in some cases, we're having to compete with the big electric companies for the attention of public advocates on settlement discussions.
In some respects, it's good to not be on the POs right?
No, right. It's always -- I would say it's always been a little bit of an advantage for Bear Valley. We're just going to have to be patient. They -- that group has got a lot of work to do, and we feel for them, and we're very understanding of what they have to deal with. So we have a good working relationship with them. It's just -- there's only so much time to do so many things, I think.
Yes. Okay. In terms of PFAS, does the pending Golden State Water case include any of that $80 million to $200 million of anticipated PFAS related CapEx?
It does not, Jonathan, although we have requested to expand. We have a memo account established to track O&M costs associated with PFAS. In our water general rate case, we're requesting to expand the memo account to include carrying costs for capital projects as well. So there is that in the rate case, although there aren't specific PFAS related CapEx.
So the capital request, I guess, in the memo account, it would just track the financing costs or whatever related to PFAS, is that right?
Yes. Financing costs or operating have to buy material to maintain the wells -- chemical costs, those kind of things in addition to what we are having authorized rates.
Okay. I'm trying to remember because I know Cal Water is trying to get this expanded the capital cost that requests the nut, but their request was outside of the general rate case. So is this something that the commission is more likely to improve as part of the rate case, do you think?
Well, the big trigger point in a lot of regulatory jurisdictions is whether there's an MCL out there. And now that we have one, although it's pretty far along in the rate case process, hopefully, we can get the carrying costs recovered.
And Jonathan, most of the costs right now, we track in the memo account, which we have already for the OEM are testing related costs. We have to test all the wells to determine how many wells are over the MCO level. So we're tracking those incremental costs in our minor account right now.
Right. Okay. And then just kind of curious how the final PFAS rule might impact ASUS construction work going forward? Is that something that's going to drive more work than what we've seen over the past 5 years?
Yes. So right now, I think we have PFAS-related issues at only one military base. Yes. So I wouldn't think it's a needle mover at this point.
Okay. That's a misunderstand my part. For some reason, I was thinking that military basis was somewhere where this was kind of common. So last question, more of a clerical, the Joint Base Cape Cod contract, did that get up to the $75 million level? I was seeing the initial announcement only indicated it was $45 million.
Your memory is very good, Jonathan. Yes. It got moved up. I'm glad you see it.
Okay. And that was just one of those not the economic price adjustment, but sorry, the equitable adjustment or something like that?
I think there was a sort of better understanding of the work that will need to be done.
I want to get back to you, Jonathan, on your first question about 3-year rate increases. So if you look at our explanation in the press release, the first quarter rate increases, while the revenue increased by about $5.2 million, mostly due to the third year rate increases. So on an annual basis, I think that top number revenue number is about $24 million increase compared to 2023, but that including the higher ROE, recall that we have 10.06 ROE this year compared to 9.36.
So overall, the revenue increase for both third year rate increases and the higher ROE is about $24 million. But we also have higher supply costs to associate with this. So...
Okay. That's helpful. Yes. I mean I can back into the difference between the ROE one and to get to that 24. Thank you for that Eva.
I think Eva was referring to the 10-Q, not the press release.
Got you.
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Bob Sprowls for any closing remarks. Please go ahead, sir.
Thank you, Chuck. I just want to say to everyone, thank you all for your participation today, and we look forward to speaking with you next quarter. Thank you all.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.