American States Water Co
NYSE:AWR
Earnings Call Analysis
Q4-2023 Analysis
American States Water Co
The year was marked by strategic growth and a strong financial performance for the company, exemplified by its water utility subsidiary, Golden State Water Company, receiving favorable rate case and cost of capital decisions. The decisions paved the way for continued investment in water infrastructure, ensuring reliable water services for future generations. The adjusted earnings saw an increase of $0.41 per share, mainly attributed to new water rates approved in Golden State Water's General Rate Case decision. The company’s return on equity for 2023 stood at an impressive 14.1%, showcasing the successful management of resources and operational efficiency.
The company secured new contracts with the U.S. government, projected at $349 million and $45 million respectively, to operate water distribution and waste treatment facilities at two military bases, reinforcing its reputation for reliability and expertise in this niche sector. The company proudly celebrated its 69th year of consecutive annual dividend increases, underlining its commitment to providing consistent shareholder value.
Earnings per share (EPS) increased to $0.55, up from $0.50 in the previous year, showing a healthy trend in profitability. Adjusted earnings for the water segment rose by $0.13 per share, which includes a favorable variance from the cost of capital decision, underscoring the positive impact of prudent financial strategies on the company’s bottom line.
Despite increased operating expenses, the company managed its finances well, leading to decreased consolidated expenses by $9.3 million compared to the previous year's fourth quarter. This fiscal discipline has been crucial in maintaining the company's high credit ratings, which remain among the highest in the U.S. investor-owned water utility industry.
A record high of $175.7 million was invested in infrastructure at regulated utilities, with plans to continue substantial investments in the range of $160 to $200 million for the upcoming year. The company also intends to seek additional capital in the range of $150 to $200 million, ensuring continued growth and stability.
Golden State Water's general rate case initiated steps to set new rates for 2025 through 2027, including a request for capital investments totaling $611.4 million over the rate cycle, while maintaining mechanisms for decoupled revenues and expenses. Furthermore, cost of capital decisions have led to an increase in the return on equity to 10.06% effective January 2024. Flexibility in the cost of capital has been extended as the company, along with other utilities, received CPUC approval to defer cost of capital applications by a year, effectively keeping rates stable through 2025.
For Golden State Water and the company's electric utility subsidiary, new rates are being sought for upcoming periods, with decisions on rates expected to be retroactive to the beginning of their respective rate cycles once approved. This strategy aims to ensure fairness and accuracy in billing, enhancing customer trust and regulatory compliance.
ASUS displayed an increase in earnings per share to $0.50 for 2023, attributed to increased management fee revenue from economic price adjustments and construction activity. Notably, ASUS won two significant contract awards, which testifies to its growing influence and performance within the industry. Fluctuations in construction work timing contributed to variability in quarterly earnings but did not detract from the overall positive contribution to corporate earnings.
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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 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 5:00 p.m. 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]. After today's presentation, there will be an opportunity to ask questions. [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.
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 the 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 the Golden State Water's general rate case in August 2023 to set new rates for the years 2025 through 2027. Finally, included a request for capital investment of $611.4 million over the rate cycle. Let's briefly discuss our earnings for the full 2023 year. 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 decisions 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. The $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 decision. 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's 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 basis served by ASUS existing at the end of 2022. We are pleased that ASUS was awarded 2 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 2 military bases. The first was our first Navy contract that Naval Air Station Patuxent River or Pax River located in Maryland. The initial value of the contract is estimated at $349 million over a 50-year period. ASUS was also awarded a 15-year contract at Joint Base Cape Cod located in Massachusetts. Under this contract, ASUS 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 increases. 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.
Thank you, Bob. Hello, everyone. Let me start with our fourth quarter results on Slide 8. Consolidated earnings as recorded were $0.55 per share for the quarter as compared to $0.50 per share for the quarter of 2022. That is an increase of $0.05 per share. In last year's fourth quarter, Golden State Water 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 sets 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 2023 was $0.55 per share as compared to adjusted earnings of $0.53 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 2022. The $0.13 per share increase includes 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 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 $0.10 per share or a 32% increase. The $0.10 per share increase largely represents the rate increases for 2022 and 2023 recorded in 2023 and higher gains generated from investments held for retirement plan. Partially offset by the effect of the cost of capital decision effective July 31, 2023, where there was a reduction in cost of debt recovered in rates, partially offset by an increase to the authorized return on equity. There were also increases in operating expenses, interest expenses and income taxes. Our Electric segment earnings for the 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 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. When the decisions are issued new rates are expected to be retroactive to January 2023 and cumulative adjustments will be recorded at the time. Earnings from ASUS 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 2022. Bob will discuss this in more detail later. Losses from our parent company were $0.04 per share for the quarter, an increase of $0.01 per share loss as compared to 2022, largely due to an increase in interest expenses. Moving on to next slide. Consolidated revenue for the fourth quarter was 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 cotton capital 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 subject to refund at the top. Electric revenue for the 3 months ended December 31, 2023, have remained flat compared to the same period in 2022 as new rates for 2023 have yet to be approved. For ASUS, there was a decrease in revenue of $30 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 ASUS, partially offset by higher administrative and general expenses and other taxes. Interest expense, net of interest income decreased by $2.4 million due to higher average interest rate during the quarter and increases in overall borrowing levels. Other income, net of other expense remained flat for the quarter compared to the same period in 2022. Slide 11 shows the adjusted EPS bridge comparing fourth quarter of 2023 and 2022. 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 from the decision in the water generated for the full year of 2022. In addition, as a result of the final cost of capital decision, the 2023 results include $0.13 per share related to the reversal of the estimated impact of a lower cost of debt recorded in 2022. The $1.25 per share increase also includes a favorable variance of $0.20 per share from investments held to fund a retirement plan. Excluding the 3 items mentioned above, adjusted 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 revenue from ASUS, partially offset by overall higher operating and 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 build water consumption and the delay in receiving final [Indiscernible]. However, Golden State Water has implemented new rates since July 31, 2023, and is collecting surcharges to recover retroactive amount due to the delay beginning in October of last year. In addition, cash flow from construction-related activities at ASUS, decreased this year, representing timing differences of when the construction work is being performed and 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. AWR currently maintain a credit rating of A stable with Standard & Poor's global ratings or SMT, while Golden State maintains an A+ stable rating with S&P and A2 stable rating with Moody's Investor Service. There 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 State Water intends to seek $150 million to $200 million of additional capital over the next 3 years through equity offering, which may include and add the market program. With that, I'll turn the call back to Bob.
Thank you, Eva. I'll 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 issued set new rates for 2022 through 2024, authorized the capital infrastructure budget of $404.8 million over the 3-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, Build& 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. Also in June of last year, the CPUC adopts 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, our 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, all adjustments to rates were prospective. Golden State Water filed an advice letter that implemented the new cost of capital effective July 31, 2023. 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 by 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%, 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 again triggered another water cost of capital mechanism adjustment. In November 2023, the CPUC approved Golden State Water's filing to increase the 9.36% return on equity to 10.06% effective January 1, 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 triennial basis, which means Golden State Water's next cost of capital application is scheduled to be filed on May 1 of this year, 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 defer the cost of capital applications by 1 year, which was approved by the CPUC on February 2 of this year. The joint request asks 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, the Golden State Water's cost of capital mechanism will remain active through the 1-year deferral period. 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 of $68.2 million 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 plan. The new rates once approved, will be retroactive to January 1, 2023. Turning our attention to Slide 17, we present the 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 billion in 2024. That is a compound annual growth rate of 10.3% for the 6-year period. Let's continue to ASUS. ASUS has contributed earnings of $0.50 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. ASUS 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, ASUS had 2 contract award wins during 2023. The Naval Air Station Patuxent River contract has an estimated $349 million contract value over a 50-year period that will be subject to annual economic price adjustments. ASUS 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 or work that will be performed in the next few years on a military basis that existed at the end of 2022. With a solid performance expected for ASUS in 2024, we project ASUS to contribute $0.50 to $0.54 per share this year, which is $0.02 per share higher than the range for 2024 that we had 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 5 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.
We will now take your questions. [Operator instructions]. And our first question will come from Greg Orrill of UBS.
Sorry, I'm on mute. Thank you. What's the schedule in the rate case? What are the milestones coming up? I know you said the proposed decision in the fourth quarter.
Yes, I would say 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 -- but it will be very interesting to see what [Indiscernible] has to say and sorry, Craig.
Yes. And so I know there was sort of a controversial or nonstandard recommendation by [Cal] Advocates in the case for one of your peers, is that kind of what you're expecting in this case?
Well, we're not really sure. We -- it's a little strange to see a signed commissioner issue alternate decision from the ALJ given that commissioner is the assigned commissioner but it's not unheard of. We hope we don't have something similar there but 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 or the alternate revised, not exactly sure why it's headed down this path. Some of the things included in the decision are things that we've had included in our prior filings. So we're watching it closely as you would expect, Greg.
Once again, if you would like to [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.
Thank you, Andrea. I just want 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.
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.