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 2024 results. The call is being recorded. If you would like to listen to a replay of this call, we'll begin this afternoon at 5 p.m. Eastern Time and run through Wednesday, August 14th, 2024 on the company's website, .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 assistance, please email 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 and then one. To withdraw your questions, you may press star and two. Today's call will be limited to one hour. 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 the Private Security Submitigation 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'd like to turn the floor over to Bob Sprouse, President and Chief Executive Officer of American States Water Company.

Thank you, Jamie. 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. Second quarter was notably productive for the company as our largest subsidiary, Golden State Water, reached a settlement in principle with the Public Advocates Office of the California Public Utilities Commission, or CAL Advocates for short, in connection with Golden State Water's general rate case that will set new water rates for the years 2025 to 2027. As a result of these efforts, on July 12th, the company and CAL advocates filed a joint motion to adopt the settlement agreement with the California Public Utilities Commission, or CPUC. Proposed settlement agreement, if approved by the CPUC, resolves most of the issues related to the 2025 annual revenue requirement, leaving only two unresolved issues, which will be discussed later. Among other items, the settlement authorizes Golden State Water to invest approximately $573.1 million in capital infrastructure over the three-year capital cycle. This allows the company to continue to provide safe and reliable water utility service to our customers. We're also very pleased that our contracted services segment commenced management of the water and wastewater systems on our two military bases, on two new military bases in April, as we successfully completed our transitions at Naval Air Station Patuxent River, also known as Pax River, and Joint Base Cape Cod. For the systems at Pax River, we have a 50-year firm fixed-price contract with an initial estimated value at $349 million, which was increased to $378 million in July upon completion of a joint inventory adjustment. Contract to serve Joint Base Cape Cod is for 15 years with 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. This was a unique quarter where recorded earnings for the second quarter were lower compared to the recorded and adjusted earnings for the second quarter of last year. As the unfavorable effects of higher operating expenses, some of which is due to timing, higher interest costs, favorable non-recurring water regulatory adjustments recorded in the second quarter of 2023, and a delay in receiving a decision in the pending electric general rate case were partially offset by an increase in third-year 2024 water rates and higher earnings at ASUS. 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 $170 to $200 million on capital expenditures this year at our regulated utilities. I'm also pleased to report that last week, our board approved another sizable dividend increase by increasing the company's third-quarter cash dividend to .4655.100 per share from $0.43 per share. The annualized dividend rate after this increase is .862.10 per share, which represents an .3% increase from the current annualized dividend rate of $1.72 per share. This significant dividend increase reflects our board's confidence in the company's ability to achieve long-term, sustainable earnings growth. We believe a growing dividend allows the company to attract capital for investments in its infrastructure that enable us to provide safe and reliable service to our customers and return value to our shareholders. American States Water has paid dividends every year since 1931, increasing the dividends received by shareholders each calendar year, now for 70 consecutive years, which places it in an exclusive group of companies on the New York Stock Exchange that have achieved that result. With that, I will turn the call over to Eva to discuss earnings and liquidity.

Thank you, Bob. Hello, everyone. Let me start with our second quarter results. Consolidated earnings as recorded were $0.85 per share for the second quarter, as compared to $1.04 per share for the second quarter of 2023. Included in the result of last year's second quarter was $0.18 per share, related to the impact of the final cost of capital decision for the water segment that made all adjustments to rate perspectives. The cost of capital decision resulted in the reversal in June of 2023 of revenues subject to refund of $9.3 million, or $0.18 per share, recorded during 2022 and the first quarter of 2023. Including this item, adjusted consolidated earnings for the second quarter of 2023 were $0.86 per share, as compared to recorded earnings of $0.85 per share for the second quarter, a decrease of $0.01 per share. For our water utility, Golden State Water, reported earnings were $0.67 per share, as compared to $0.91 per share for the second quarter of 2023. Factoring in the same effect from the adjusted item for 2023, earnings for the second quarter of 2024 at Golden State Water were $0.67 per share, a decrease of $0.06 per share, as compared to adjusted earnings of $0.73 per share for the second quarter of last year. The $0.06 per share decrease was largely due to favorable, non-recurring regulatory adjustments recorded during the second quarter of last year that did not recur this year. Higher operating and interest expenses and lower other income with less gains generated from investment held for retirement plan, partially offset by an increase in third year water rates in 2024. Lastly, there was also a decrease in earnings of approximately $0.01 per share due to the dilutive effect from the issuance of equity on the AWR and the market offering program. Our electric segments earnings were $0.01 per share for the quarter, as compared to $0.03 per share for same period in 2023, largely resulting from not having new rates in effect, 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 retroacted to January 2023 and cumulative adjustments will be recorded at that time. Earnings from ESUS increased $0.07 per share for the quarter, largely from higher management fee revenues, resulting from the resolution of various economic price adjustments, timing of when construction work was performed compared to the same period last year, and the commencement of operation at the two new bases, which Bob will discuss further. Consolidated revenue for the second quarter decreased by $2.1 million, as compared to 2023. Revenues for the water segment decreased by $6.5 million, mainly due to the reversal of previously recorded estimated revenues subject to refunds, as a result of final cost capital decisions of $9.3 million recorded in the second quarter of 2023, and favorable non-recurring regulatory adjustments of approximately $2 million, also recorded during the second quarter of last year, partially offset by an increase in water revenues, largely due to third year rate increases for this year. Electric revenues decreased slightly as we await a decision on the electric general rate case, while there was an increase in revenues from ESUS of $4.5 million, largely due to higher management fee revenues, resulting from the resolution of various economic price adjustments, and the commencement of operations at the two new bases, and timing differences in performing construction work. Turning to slide 10, and looking at total operating expenses other than supply cost, consolidated expenses increased $4.4 million, as compared to the second quarter of 2023. The increase was largely accessible to an increase in other operating expenses, largely related to the commencement of operations at the new bases, an increase to property and other taxes, due in large part to favorable property tax adjustments recorded in the second quarter of 2023, with no such adjustments this year, and higher administrative and general expenses, due mostly to higher outside services costs, related to the pending water generated proceedings and other regulatory findings. In addition, there was an increase in expenses that have corresponding and offset increases in surcharges revenues to recover previously incurred costs, resulting in no impact to earnings. Interest expense net of interest income increased by $2.1 million, due to increases in average interest rates and overall borrowing level during the quarter. Other income net of other expenses decreased by $200,000, largely because of lower gains recorded on investment held to fund a retirement plan in this quarter. Slide 11 shows the ETS bridge comparing recorded and adjusted ETS for the second quarter of 2024 against adjusted ETS for 2023. Consolidated -to-day earnings as recorded were $1.47 per share, as compared to $1.97 per share for the same period of 2023. Included in the result of the first quarter of last year was $0.38 per share, related to the impact of retroactive rates from the final decision in the Water GRC for the full year of 2022, and the reversal of $0.13 per share for revenue subject to refund recorded in 2022 as a result of the final cost of capital decision in June last year. Excluding these two items mentioned above, from the year to day 2023 earnings, recorded and adjusted consolidated earnings for the six months into the June 30, 2024 were $1.47 per share, as compared to adjusted earnings of $1.46 per share for the same period in 2023, an increase of net cash provided by operating activities was $70.5 million for the first half of 2024, as compared to $17.8 million for the same period 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, as well as the collection of surcharge to recover retroactive revenues from 2022 to July 30, 2023. The increase in cash flows from operating activity also resulted from differences in timing of billing and cash receipts for construction work at military bases at the U.S. and the timing of vendor payments. For investing activities, our regulated utility invested $105.1 million on company funded capital projects during the first half of 2024 and will project company funded capital expenditures at our regulated utilities to be $170 to $200 million this year. The American State Water's ad market offering program to sell common shares remains ongoing, as this program allows us at its sole discretion to sell up to $200 million over a three-year period. During the first half of 2024, AWR raised proceeds of approximately $32 million net of issuing costs. In June, Golden State Water issued $55 million in unsecured private placement notes with a coupon rate of 5.5 percent, maturing in June of 2027. American State Water currently maintains a credit rating of A stable with standard and fourth global ratings, or S&Ps, while Golden State Water maintains the A-plus stable ratings with S&Ps and A-2 stable ratings with Moody's Investors Service. Each of these ratings has been affirmed during 2024. These are some of the highest credit ratings in the U.S. investor-owned water use industry. With that, I'll turn the call back to Bob.

Thank you, Eva. I will start with Golden State Water's settlement agreement with Cal Advocates on Golden State's general rate case. As I mentioned earlier, Golden State Water and Cal Advocates filed a joint motion in July to adopt the settlement agreement between the two parties in connection with the general rate case that determines water rates for the years 2025 through 2027. If approved, the settlement resolves most of the issues related to the 2025 annual revenue requirement. The settlement authorizes Golden State Water to invest approximately $573.1 million in capital infrastructure over the three-year capital cycle. This amount, as settled, includes $17.7 million of advice letter capital investments to be filed for revenue recovery during the second and third year attrition increases when those projects are completed. In addition, the settlement agreement authorizes advice letter capital investments already under construction at the beginning of 2023 of $58.2 million to be filed for revenue recovery during the second and third year attrition increases when those projects are completed. Excluding revenues for advice letter capital projects, adopted operating revenues less water supply costs for 2025 are projected to increase by approximately $23 million when compared to 2024. Also, there are potential additional revenue increases of approximately $20 million for each of the years 2026 and 2027 based on inflation factors without factoring in the revenues from those advice letter capital

projects. The two remaining unresolved

2025 revenue requirement issues relate to the sales forecast and supply mix. In addition, there were four regulatory mechanisms that Golden State Water requested and are being litigated. First, a full sales and revenue decoupling mechanism and full cost balancing account for water supply. Second, the sales reconciliation mechanism. Third, a supply mix adjustment mechanism. And fourth, a request to modify the existing PFAS memorandum account to track carrying costs on capital investments needed to comply with the new PFAS regulations. The decision in the water general rate case is scheduled to be issued by the end of 2024 with new rates to become effective January 1, 2025. As you may know, in 2020, the CPUC issued a decision that mandated the discontinuation of existing full revenue decoupling mechanisms, also known as the water revenue adjustment mechanism and the modified cost balancing account. The modified cost balancing account allows Golden State Water to recover costs from the supply mix and rate changes from wholesale suppliers. In response to the procedures the CPUC followed in arriving at this decision, Golden State Water and three other investor owned water utilities and the California Water Association each filed a petition in 2021 with the California Supreme Court to review the CPUC's decision making processes that resulted in discontinuing the use of the water revenue adjustment mechanism and modified cost balancing account. Last month, the court issued a ruling that set aside the previously issued order by the CPUC and vacated portions of the CPUC's decision related to the discontinued use of both mechanisms. As mentioned, Golden State Water has continued to request the use of both mechanisms in this general rate case application, which is subject to CPUC approval. Our electric utility subsidiary filed its general rate case application on August 30th, 2022 for new rates for the period 2023 through 2026. The application includes additional capital expenditures of $68.2 million for the four-year rate cycle and a new cost capital. We have also requested the recovery of more than $23.5 million in capital already spent related to the wildfire mitigation plans. The new rates, once approved, will be retroactive to January 1st, 2023. Decision on the electric general rate case is scheduled to be issued in 2024. Turning our attention to slide 17, we present the growth in Golden State Water's adopted average water rate base from 2018 to 2024. Golden State Water's authorized average rate base increased from $752.2 million in 2018 to ,357.5 million in 2024. That is a compound annual growth rate of .3% for the six-year period. Golden State Water anticipates a robust and sustained growth in its rate base in the next few years.

Let's continue to ASUS.

I'm pleased to announce that ASUS contributed earnings of 19 cents per share for the second quarter of 2024, as compared to 12 cents per share for the same period in 2023. The increase was largely due to higher management fee revenue resulting from the resolution of various economic price adjustments and the commencement of operations at the new bases, and an increase in construction activity from timing differences of when construction work was performed in 2024 as compared to the same period of 2023. Partially offset by higher overall operating expenses, excluding construction expenses and higher interest costs. For the year to date, June 2024, ASUS's earnings were 32 cents per share as compared to 27 cents per share for the same period in 2023. We continue to project ASUS to contribute 50 cents to 54 cents per share this year, and 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 I touched on earlier. Last week, we announced an .3% increase in the third quarter dividend. This increase is 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 continued asset to our shareholders. This strong track record has allowed us to achieve an .8% compound annual growth rate in our quarterly dividend rate to shareholders over the last five years since the third quarter of 2019. I would 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.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then one to join the question queue.

We'll pause momentarily to assemble the roster. And our first question today comes from Jonathan Reeder from Wells Fargo. Please go ahead with your question. Hi, Bob and Eva. How are you guys today?

Good, Jonathan. How about you? Yeah.

Not too bad at all. Just about through earnings.

Almost done.

Yep. I wanted to ask you, like, what do you believe the prospects are of the CPUC reauthorizing the fully decoupled rates? Has there been any indication of how, you know, commissioners might be leaning following the California Supreme Court's decision? And do you expect that California Americans rate case will be the first indication of how the CPUC is thinking?

Yeah. So we don't really know how the PUC is leaning at this point. You know, we do have the Governor Newsom signing the bill to allow us to ask for full decoupling. We do have the Supreme Court case that came back in the utilities favor. So those are sort of two things on the plus side. But I, you know, it's still, I think, a question mark at this point. I mean, I believe the PUC can still possibly deny the use of the PUC, use of full decoupling. I do think it will be instructive to hear where they come out on the Cal American case. You know, they're a year ahead of us in that case. I can just sort of speak a little bit about our case, Jonathan, but just a comment or two. When the Public Advocates Office denied our request for the full RAM in their report, they almost singularly cited to the 2020 Lyra case decision. The company, our company has now filed a motion to strike that because the Lyra decision with regard to removing the RAM has been, I guess, eliminated or pushed back to the PUC. So what we struggle with is what's in the record at this point to say that we don't deserve to get the full RAM. But the PUC will do, I mean, they'll follow the rules, but it's just kind of a little bit of new territory, I would say.

Yeah, no, I think, and not surprisingly, I guess, PAO's testimony, you know, is obviously pretty consistent with Cal Americans, you know, citing that 2020 order that, you know, is no longer valid. So it does make it interesting. Switching to your other GRC for bare value, any, sorry, bare value, any update on the timing of that? I know after Q1 you mentioned how it's tough to, you know, kind of even get PAO to engage in settlement discussions, just given the small size and PAO being, you know, stretched thin with some of the larger electrics. Any kind of updates on what's going on there?

Yeah, so a decision has to be, under PUC rules, a decision has to be issued in September. However, as you know, Jonathan, they do, you know, have the ability to move that date out. So I don't really know, you know, we aren't getting a strong feeling that there's a proposed decision in the offing. But I think the size of the company there relative to what the commission has to deal with probably works against us in terms of getting a decision more quickly than what, you know, we hope to get a decision by the end of the year, but I doubt if it will be in the next month or two.

Yeah. Is that kind of a similar situation with, you know, trying to engage in settlement discussions still haven't been able to really get PAO's attention there for similar reasons?

Yes, you know, we've struggled, you know, we've been working on this for quite some time, and we do get the sense we're clearly not on the top of their to-do list. You know, whenever one of the bigger companies files something, you know, it's, hey, we've got to do, you know, they've got to deal with those things, and we understand that. We understand they don't have enough people and they, you know, the electrics are so much, the three big electrics are so much bigger than Bear Valley Electric. It's all pretty logical, to be honest, and we've been very, I would say, understanding. And, you know, they're a good group to work with. It's just we understand they get pulled in a lot of different directions.

Yeah. No, I mean, it's logical, but at the same time, I mean, it does impact not just your business, but then your customers and then, you know, the pancaking of rates and everything like that when a decision is finally, you know, kind of handed to them.

That's right, John. And we make that argument with them a lot, and they understand it and don't, you know, they don't push back on that argument. It's just

they

can only do what they can do, I think is probably the way to look at it.

Preaching to the choir here, so yeah. Any sense of like how big of an impact like the delayed, you know, Bear Valley GRC, you know, has had on like your first half 24 EPS? You know, I know the recovery of the wildfire mitigation costs made this case larger than, you know, it has been in the past. Obviously, it depends on like what the outcome would be. So maybe, you know, ask the different way if the case was approved as filed, like how big of a bump would it be? Or would it have been to the, you know, first half 24 EPS or full year 24 EPS?

Well, you know, another thing to throw into the mix relative to prior rate cases is that, you know, just the interest costs are higher these days than they were. And so we're having to, you know, cover a significant amount of rate base that's in the ground that isn't, you know, we aren't getting recovery of. Yeah, we really are not, we really not go on public with how big the impact might be. It just probably a bit, a little bit dangerous to do that given that the requested increase is pretty significant. And there's sort of have to wait and see what the proposed and final decisions look like in this case, I think.

Right. I mean, Bear Valley, it's, you know, three cents lower on a year to date basis. And, you know, had you had the relief, I would assume you would expect Bear Valley to be large, you know, last year. So, yeah, just trying to get a sense, you know, when we hopefully do get an order by year end and we get that retroactive component, you know, how helpful that would be. I mean, it's not immaterial at this point, I don't think.

Oh, no, it's very significant. It's very significant for Bear Valley elect.

Yeah. And we're putting a lot of wire fire mitigation plan in under the, you know, based on the PST regulation. And we're funding that ourselves at this point until the final decision comes about. Yeah,

and think about it. There's, well, if you're looking at the 2024 effect, of course, let's say we could go all the way to the end of September. That's 21 months delay. So you're going to get 21 months worth of increase that, I mean, we're, we think it will be an increase. I'm sure it will be an increase. It's just how large it is. And we are a bit surprised that it's taking this long given that, you know, the way I think about it, I haven't studied the big electrics, but I believe we are one of the last companies to come in for a rate case since the wildfire mitigation activities started in a big way. So one would think the commission would have dealt with this for three or four or five companies prior to us coming forward. I think that's an advantage for us in that clearly they're going to expect that that first year increase is going to be very sizable. And we've made the argument that, listen, it's potentially going to be higher for us than other companies because we've gone the longest without that increase. But again, the commission will do what they're going to do, and they have, I do have great respect for all the things they have to deal with there at the commission. You know, it's a big state with a lot of issues to regulate, and there's only five commissioners to deal with it.

Yeah. Yeah. Okay. Last question from me here then, any insight into potential new base additions at ASUS? I mean, I think the Kate Codd Award, you know, which is the 15-year variety, kind of snuck up on us.

Well, yes, I can talk a little bit about that. You know, we have a sense that the Army and the Air Force had sort of taken this strategic pause to evaluate whether the typical utility privatization contract, the 50-year variety is something they want to continue to do. We have a sense from meetings that have been held, public meetings, that they're both interested in moving forward on utility privatizations. With that said, I don't think we have a belief that there'll be a new privatization from either the Army or the Air Force on the street this year, but we would look to next year to see some new utility privatizations there. As we've talked in the past, the Navy has embraced the 50-year utility privatization activities, and they are, although it isn't going to be a bunch, they are very interested in continuing that process. At this point, I don't believe there's a single 50-year utility privatization contract on the street. Now, there is talk, you know, there is potentially these one-offs like the JBCC contract, but I don't think there'll be any, personally I don't think there'll be any contract awards in 2024 by any of the three, any of the big three. And of course, JBCC is Air National Guard, so it would be sort of a fourth arm of the Department of Defense. I don't know if that's helpful, Jonathan.

Yeah, no, it is. So do the 15-year ones, do those potentially come quicker than the 50-year in terms of, you know, the lead-up and the way that they're, you know, kind of competitively bid and all that?

Well, I'll just say the first one did not. We worked on that for years and years. But we were, we felt like we were the pioneer and we and our partner developed the template for that. Now, the template is out there and it's possible these will be done more quickly, but more quickly than they had been done, not more quickly than your standard utility privatization. Okay, one other thing, the standard utility privatization typically runs through the events logistics agency energy. They're sort of the one, the group that manages the standard 50-year utility privatization. On these exchange agreements or the one we did, it's, you know, it's sort of based on who's doing it and it typically doesn't roll through the DLAE. So there's always a little bit of reinventing the wheel, I guess, that will go on. So, but like I said, we've worked with our partner to establish the template and it should be quicker to do the second one than the first one. To a degree, there's an appetite for that.

Okay, but it doesn't sound like anything imminent though, so, okay.

Yeah, I would say that's a good assessment.

Yeah, all right. Thanks for the additional color. Looking forward to seeing you in San Diego here in a month or so.

As are we, Jonathan.

All right, thanks.

Thank you.

Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and

two. And ladies and gentlemen, at this time,

in showing no additional questions, I'd like to turn the floor back over to Bob Sprouse for any closing comments.

Yes, thank you, Jamie. And I just want to thank everyone for their participation today and let you know we look forward to speaking with you next quarter. Thank you, everyone.

And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.