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 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 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. All participants will be in a listen-only mode. Should you need any 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 touch-tone phone. To withdraw your question, please press star, then two. This call will be limited to one hour. Presenting today from American States Water Company are Bob Sprouls, 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 principle, 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 Sprouls, 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. It's 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 Waters authorized return on equity increased from 8.9% to 9.36% effective July 31st, 2023, and increased 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's general rate case in August 2023 to set new rates for the years 2025 through 2027. filing 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 41 cents 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 41 cents 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 bases served by ASUS existing at the end of 2022. We are pleased that ASUS was awarded two contracts by the US 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 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 US 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 US 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 result on slide eight. 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 revenues 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 were $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 the water segment were $0.31 per share as compared to recorded earnings of $0.41 per share for the fourth quarter of 2023, and adjusted the increase of $0.10 per share, or a 32% increase. The 10 cents 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 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 TRC 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, new rates are expected to be retroactive to January 2023, and cumulative adjustments will be recorded at the time. Earnings from SUS 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 year loss as compared to 2022, largely due to an increase in interest expenses. Moving on, 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 cost of capital decision effective July 31, 2023. In addition, water revenues were lowered in the fourth quarter of 2022 by $1.4 million due to the recording of revenues subject to refund at the time. Electric revenue for the three 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 $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 and SUS, 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, none of the other expense remain 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 rates the decision in the water generation case for the full year of 2022. In addition, as a result of the final cost of capital decision, the 2023 results include 13 cents 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 fund investment held to fund a retirement plan. Excluding the three 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 managed revenue from SUS, 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 billed water consumption and the delay in receiving final water TRC. However, Golden State Water has implemented new rates since July 31, 2023, 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 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 to $200 million this year. AWR currently maintains a credit rating of A-stable with Standard & Poor's global ratings for S&P, while Golden State maintains an A-plus stable rating with S&P and an A-2 stable rating with Moody's Investor Service. These are some highest credit ratings in the U.S. investor-owned water utility industry. As we mentioned in the prior quarter, American State Waters intends to seek $150 to $200 million of additional capital over the next three years through equity offerings, which may include and add to the market program. With that, I'll turn the call back to Bob.