American States Water Company

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing the company's second quarter 2023 results. This call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at 5 p.m. Eastern Time and run through Tuesday, August 15, 2023, on the company's website, www.aswater.com. The slides that the company will be referring to are also available on the website. This call will be limited to one hour. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. Presenting today from American States Water Company are Bob Sprouse, 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 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 Sprouse, President and Chief Executive Officer of American States Water Company.

Thank you, Alan. 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 productive and positive quarter for the company. I'm very pleased that in late June, the California Public Utilities Commission, or CPUC, adopted the decisions for Golden State Water Company's Water General Rate Case, or GRC, to set rates for 2022 through 2024 and the cost of capital proceeding. Both decisions can be viewed as constructive and they enable us to continue investing in the utility infrastructure to provide safe and reliable water services for the communities we serve. The cost of capital decision adopted the authorized return on equity, capital structure, and vetted cost of debt prospectively and allows for continuation of the water cost of capital mechanism for adjusting the return on equity. As a result, Golden State Water's cost to capital reflects a 9.36% return on equity with a 57% equity ratio and a debt cost of 5.1%, effective July 31st. Advice letters have been filed with and approved by the CPUC to implement 2023 rates based on the newly adopted general rate case and cost of capital decisions. We started billing customers the new 2023 rates on July 31st and we'll seek recovery of the retroactive rates from January 1st, 2022 to July 30th, 2023 within 90 days of implementing the new rates. Let's briefly discuss our quarterly earnings. Recorded diluted earnings per share for the quarter increased 50 cents from last year. The 2023 second quarter results include a favorable variance of 21 cents per share that is made up of 18 cents per share from the reversal of revenues subject to refund that was previously recorded in 2022 through the first quarter of 2023, of which 3 cents per share had been recorded during the second quarter of last year. This reversal was as a result of receiving the final decision in the cost of capital proceeding in June that sets the cost of capital prospectively. Second quarter results also reflect a net favorable variance of 10 cents per share from gains on investments held to fund a retirement plan compared to losses for the second quarter of last year. Excluding these two favorable impacts, Consolidated earnings as adjusted for the second quarter of 2023 reflect an increase of 19 cents per share as compared to adjusted earnings for the second quarter of 2022. Higher adjusted earnings were largely due to the new 2023 water rates, a proven Golden State Waters final GRC decision. In addition, Higher construction activity at our contracted services business, American States Utility Services, or ASUS, also contributed to the higher earnings for the second quarter of 2023. And ASUS is on track to meet its targeted earnings contribution for the year. I'm also pleased to report that last week our board approved another sizable dividend increase. The annualized dividend rate after this increase is $1.72 per share, which represents an 8.2% increase from the current annualized dividend rate of $1.59 per share. This significant dividend increase reflects our board's confidence in the company's ability to achieve long-term sustainable earnings growth. This action also marks the 349th consecutive dividend payment by the company. American States Water has paid dividends every year since 1931, increasing the dividends received by shareholders each calendar year now for 69 consecutive years. Eva will discuss the quarterly earnings and liquidity, and I'll turn the call over to her.

Thank you, Bob. Hello, everyone. Let me start with our second quarter results. Consolidated earnings as recorded were $1.04 per share for the quarter as compared to $0.54 per share for the second quarter of 2022, an increase of $0.50 per share. Included in the result of the second quarter, as Bob mentioned, is the reversal of revenue subject to refund of $0.18 per share related to a lower cost of debt estimate that had been recorded during 2022 through the first quarter of 2023, of which $0.03 per share had been recorded in the second quarter of last year. The $0.50 per share increase also included a favorable variance of $0.10 per share from investment held to fund the retirement plan. We recorded gains on these investments of $1.5 million for the quarter as compared to losses of $3.5 million in 2022. Excluding these two items, adjusted consolidated earnings for the quarter were 83 cents per share as compared to adjusted earnings of 64 cents per share for the second quarter of last year, an increase of 19 cents per share. For our water utility subsidiaries, Golden State Water reported the earnings were $0.91 per share as compared to $0.40 per share for the second quarter of 2022, a $0.51 per share increase. Both items just discussed affected earnings at the water segment. So factoring in the same impact from the two items, adjusted earnings for the second quarter for the water segment were $0.70 per share which was an increase of 20 cents per share as compared to adjusted earnings of 50 cents per share for the same period last year. Since 2023 is the second year of the rate case cycle, a second year rate increase effective January 1, 2023 has been accounted for in this quarter as well. The 20 cents per share increase in 2023 adjusted earnings largely represent a difference from 2021 adopted rates and the 2023 second year increases, partially offset by increases in operating and interest expenses. Our electric segments earning were $0.03 per share for the second quarter as compared to $0.04 per share for the same period last year. The decrease primarily relates to not having new rates in effect yet 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 a decision is issued in the electric GRC, New rates are expected to be retroactive to January this year, and cumulative adjustment will be made and recorded at that time. Earnings from our contracted service segments increased $0.02 per share for the quarter due to higher construction activity. Slide 8 shows that consolidated revenue for the second quarter increased by $34.8 million as compared to the spent period in 2022. Revenues for the water segment increased by $26 million, which included the reversal of revenue subject to refund of $9.3 million as a result of the cost of capital being prospective, while lower revenue were recorded in the second quarter of 2022 of $1.7 million as an estimate of revenue subject to refund at the time. The additional increases of revenues as compared to the same period in 2022 largely represent the difference from the 2021 adopted rates and the 2023 second year increases. The increase in electric revenues was primarily attributable to advice letter filings and an expense allocation true-up as a result of the water GRC decision. An increase in general office expenses allocated to the electric segment also includes a corresponding offset increase in adopted electric revenues, resulting no impact to earnings. In addition, there was an increase in revenue of $8.2 million from our contracted services due to higher construction activity. Turning to slide nine, looking at total operating expenses other than supply costs, consolidated expenses increased $7.2 million as compared to last year's second quarter. The increase was largely related to an increase in construction costs at our contracted services segments resulting from higher construction activity due to timing differences when construction work was performed this year when compared to 2022. There were also higher administrative and general expenses across all business segments during the second quarter. Interest expense net of interest income increased by $3 million due to higher average interest rate during the quarter and increases in overall borrowing level. Other income net of other expenses increased by $4 million due primarily to gains on investments held for retirement benefit plan, partially offset by increase in non-service cost components for Golden State Water's benefit plan. resulting from changes in actual aerial assumptions on the planned assets. Slide 10 shows the adjusted EPS bridge comparing the second quarters of 2023 and 2022. This slide reflects our year-to-date earnings per share by segment as reported and adjusted. Fully diluted earnings as reported for the six months ended June 30, 2023, were $1.97 as compared to $0.92 for the same period in 2022, an increase of $1.05 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 GRC for the full year of 2022, of which 19 cents per share related to the first half of 2022. In addition, as a result of the final cost of capital decision, the 2023 year-to-date results include 13 cents per share related to the reversal of the estimated impact of a lower cost of debt recorded in 2022, of which 6 cents was recorded during the six months ended June 30, 2022. The $1.05 per share increase also includes a favorable variance of $0.16 per share from investment held to fund a retirement plan. Excluding the three items mentioned above, adjusted consolidated earnings for the six months ended June 30, 2023 were $1.40 per share as compared to adjusted earnings of $1.08 per share for the same period last year. an increase of $0.32 per share. Turning to liquidity, net cash provided by operating activities was $17.8 million through June of this year as compared to $56.9 million for year-to-date 2022. During the first half of last year, our regulated utility received $9.8 million in COVID-19 relief funds from the state of California provide assistance to customers for delinquent water and electric customer bills incurred during the pandemic. There have been no relief funds received thus far in 2023. The decrease in operating cash flow was also due to a 17% decrease in billed water consumption and the delay in receiving the water GRC final decision. Since the final decision has been received, Golden State Water filed for implementation of new 2023 rate increases that took effect on July 31, 2023, which is last Monday. And we'll file surcharges to recover retroactive amounts accumulated through the effective day of implementing the new rates in the near future. More investing activities will remain on track to spend $140 to $160 million this year in company-funded capital expenditure at our regulated utilities. During this past quarter, we also finalized new five-year credit agreements for both American States water and Golden State water. The new credit facilities will bring borrowing capacities of $100 million for American States and $200 million for Golden State Water for a combined borrowing capacity of $350 million. Each credit facility has the ability to spend the borrowing capacity for an additional $75 million subject to the lender's approval. Our electric utility also amended its credit facility to increase its borrowing capacity by an additional $15 million. American State Water is likely to start issuing additional equity in the next 12 to 18 months to raise capital over time to fund its current businesses. As we mentioned before, we will consider doing an at-the-market offering that will enable AWR to control the timing and the size of its sales of its common shares over time. With that, I'll turn the call to Bob.