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 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 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. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. This call will be limited to an hour. Presenting today from American States Water Company are Bob Strauss, 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 Commission's 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 Sprouse, President and Chief Executive Officer of American States Water Company.

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 16 cents per share from last year. or 12 cents per share, excluding a favorable variance of 4 cents 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 12 cents 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 two contracts by the US government in the third quarter to operate, maintain, and provide construction management services for the water distribution and wastewater collection facilities on two 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 eight 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 for 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 US 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.

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 refunds 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 this item, adjusted consolidated earnings for the third quarter of 2023 were 85 cents per share as compared to adjusted earnings of 73 cents per share for the third quarter of last year, an increase of 12 cents per share. For our water utility, Golden State Water, reported the earnings were $0.72 per share as compared to $0.54 per share for the third quarter of 2022, an $0.18 per share increase. Both items I just discussed affected earnings at the water segment. So factoring in the same effect from the two items, adjusted earnings for the third quarter at the 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 year, 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 TRC 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 flows through income taxes. When a decision is issued in the Electric DRC, new rates are expected to be retroactive to January 2023, and cumulative adjustment will be recorded at the time. Earnings from our contracted services segment were 12 cents 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 covered in rates partially offset by a higher authorized return on equity. In addition, bond revenue were lower in the third quarter of 2022 by $1.9 million due to the recording of an estimate of revenue subject to refund at the time. Electric revenues for three months ended September 30, 2023, have remained flat compared to the same period in 2022, as new rates for 2023 have yet to be approved. In addition, there was an increase in revenues of $1.2 million from our contracted services segments due to an increase in management fee revenue from annual economic price adjustment and higher construction activities. 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 contractor services segment and higher other operation and maintenance expenses across all business segments during this 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 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's two-way 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 ETS bridge compared to the third quarter of 20, comparing the third quarters of 2023 and 2022. Moving on to slide 11. This slide reflects our year-to-date earnings per share by segment as reported and adjusted. Fully dilute the earnings as reported for the nine 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 nine months of 2022. In addition, as a result 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 per share was recorded during the nine months ended September 30, 2022. A $1.21 per share increase was also included, a favorable variance of 17 cents per share from investments held to fund a retirement plan. Excluding the three items mentioned above, adjusted consolidated earnings for the nine months ended September 30, 2023. were $2.27 per share as compared to a just earning 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. compared to $89.9 million for year-to-date 2022. During the first nine months of last year, our regulated utilities received $9.8 million in COVID-19 relief funds 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 fund received thus far in 2023. The decrease in operating cash flow was also a result of lower water consumption and the delay in receiving water GRC final decisions. Golden State Water has implemented the new 2023 rate that took effect on July 31. Surges 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 of 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 nine months of 2023. And we project company-funded capital expenditure at our regulated utilities to be $155 to $107 million this year. Yesterday, we executed an amendment to American State 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 borrowing capacity from $150 million to $165 million that will provide additional support to the operations of ASUS and AWR Paris. In addition, American States water may seek additional capital of $150 to $200 million over the next three years beginning in 2024, potentially through an ad market common equity program to fund business operations and pay down credit facilities. I will turn the call over to Bob now. Thank you.