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 2024 results. All participants will be in listen-only mode. 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 telephone keypad. To withdraw your question, please press star then two. 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 February 27th on the company's website, .aswater.com. The slides that the company will be referring to are also on the website. This call will be limited to an hour. Presenting today from American States Water Company are Bob Sprowles, 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 within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees or assurances of any outcomes, financial results, levels of activity, performance, or achievements, and listeners are cautioned not to place undue reliance upon them. Forward-looking statements are subject to estimates and assumptions and known and unknown risks, uncertainties, and other factors. Listeners should review a description of the company's risks and uncertainties that could affect the forward-looking statements in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission. Statements made on this conference call speak only as of the date of this call and accept As required by law, the company does not undertake any obligation to publicly update or revise any forward-looking statement. In addition, this conference call will include a discussion of certain measures that are not prepared in accordance with generally accepted accounting principles or GAP in the United States and constitute non-GAP financial measures under SEC rules. These non-GAP financial measures are derived from consolidated financial information that are not presented in our financial statements that are prepared in accordance with GAP. 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, Michael. Welcome, everyone, and thank you for joining us today. I'll begin with a discussion of the year. Even we'll then discuss some financial details for both the fourth quarter and the year, and then I'll wrap it up with updates on regulatory activity, ASUS, dividends, and then we'll take your questions. Let's first start with a look at 2024. On regulatory front, we're very pleased to have received final decisions from the California Public Utilities Commission, or CPUC, last month for both our water and electric utility subsidiaries. Both decisions represent constructive regulatory outcomes and enable us to continue investing in our water and electric infrastructure for safe and reliable services to our customers for generations to come. I will provide more details on these decisions later in the call. We finished 2024 with very strong financial results. Our reported earnings per share for the full year of 2024 were 19 cents lower compared to the prior year. Earnings per share were 32 cents higher than adjusted 2023 earnings, which exclude favorable variances related to the receipt of final decisions in the water general rate case and cost of capital proceedings in June of 2023. Excluding the 2023 adjustments, the increase in adjusted earnings for the full year of 2024 was primarily driven by rate increases in both the water and electric utilities and the commencement of water and wastewater operations at two new military bases and successful economic price adjustments in our contracted services business. Additionally, our water utility segment recorded a tax benefit following the final decision in its general rate case. These increases were partially offset by higher operating expenses and interest costs and the derivative effects from the issuance of equity under American State's Water's -The-Market Offering Program, which decreased consolidated earnings by approximately 4 cents per share. In 2024, we invested $235.5 million in infrastructure at our regulated utilities, reflecting our strong ability to execute our capital plan. ASU-S, our contracted services business, secured $56.5 million in new capital upgrade awards with projects scheduled for completion through 2027. Both are record highs for our regulated utilities and ASU-S. At ASU-S, we began work under two new military contracts serving new bases on the East Coast, further expanding our footprint of managing water and wastewater systems for the U.S. American State's Water achieved a return on equity of .1% for the year, and we increased our dividend to shareholders by 8.3%, marking 70 consecutive years of annual dividend increases. The .1% earned return on equity was achieved despite a .2% increase in our average consolidated equity balance between the two years. Some of the increase in the equity balance is due to the stock issued under the -The-Market Program. These accomplishments compare very favorably to other utilities, and we're very proud of our longstanding track record of delivering value to our shareholders. Overall, it was a productive year which sets the stage for future growth for the entire company. And of course, we continue to deliver safe and reliable service to over one million people in 10 states, no small task, and one that remains a key driver for the entire organization. With that, I'll turn the call over to Eva to discuss earnings and liquidity.

Thank you, Bob. And hello, everyone. And let me start with our fourth quarter results. The quarter's consolidated earnings were $0.25 per share for the quarter compared to $0.55 per share for the fourth quarter of 2023. For our water utility, Golden State Water, reported earnings were $0.52 per share as compared to $0.41 per share last year. The $0.11 per share increase in 2024 was largely due to an increase in third-year water rates, an overall increase in the authorized rate of return on rate base, and a tax benefit recorded in fourth quarter as a result of receiving the final decision in connection with Golden State Water's generate case proceedings. These increases partially offset by higher operating and interest expenses, and lower gains generated from investment held for a retirement plan. Lastly, there was a decrease in earnings of approximately $0.01 per share due to the dilutive effect from the issuance of equity under American State Water as a market offering program. Our electric segment earnings were $0.13 per share for the quarter as compared to $0.07 per share for 2023. A $0.06 per share increase primarily due to receiving the final CTUC decision on the electric generate case, with new rates retroactive to January 1, 2023. Earnings from ASUS decreased $0.01 per share for the quarter largely due to an increase in operating expenses, some of which was due to timing, partially offset by an increase in management fee revenues due to commencement of operations of the water and wastewater systems at the Jane Bay Cape Cod and Naval Air Station at the Southern River, and successful resolution of economic price adjustments at the legacy basis. Consolidated revenue for the quarter increased by $17.9 million as compared to 2023. Revenues for the water segment increased by $5.1 million, largely due to an increase in the third year water rate and an increase in authorized rate of return on rate base in 2024. Revenues for the electric segment increased by $10.6 million, mainly due to the impact of the retroactive new electric rate for the full year of 2023 and 2024. Revenues from ASUS increased $2.3 million, primarily due to higher management fee revenues, as I just mentioned. Turning to Fly 10, looking at total operating expenses other than supply costs, consolidated expenses increased by $13.1 million compared to 2023. This increase included the impact of the electric generator decision recorded in the fourth quarter of 2024, which reflected an $8.2 million increase in operating expenses, primarily due to higher administrative and general and maintenance expenses, partially offset by the retroactive impact of a lower overall composite depreciation rate for both 2023 and 2024, also recorded in Q4 of 2024. These items are included in the 2023 and 2024 revenue requirements. In addition, the increase was due to higher overall labor costs, maintenance expenses timing, and an increase in depreciation expenses largely as goes with water, and property tax expenses, both of which are impacted by the increased cash expenditures for our regulated utility. The increases are partially offset by a decrease in go with water, other operations related expenses resulting from receiving the recovery of previously incurred costs and lower US construction expenses. Other income, in addition to other expenses, decreased by $1.69 in the fourth quarter compared to last year, largely due to lower gains recorded on investments held to fund a retirement plan. The decrease was partially offset by the recording of the PUC which allows returns during construction for electric segments of the first level project. Slide 11 shows the ETS bridge comparing reported ETS for the fourth quarter of 2024 against the same period for 2023. This slide reflects our full year earnings per share by segment as reported and adjusted. Consolidated earnings for the full year of 2024 as recorded were $3.17 per share compared to $3.36 per share for 2023. However, included in the result for 2023 was $0.38 per share related to the impact of retroactive waste from the final decision to water GRC for the full year of 2022. And the reversal of $0.13 per share for revenue subject to refund originally recorded in 2022 as a result of the final cost of capital decision in June of 2023. Both items related to our water segment. The screen, the two items just mentioned, from 2023 earnings recorded and adjusted consolidated earnings for 2024 were $3.17 per share as compared to adjusted earnings of $2.85 per share for 2023, an increase of $0.32 per share. Please refer to our press release and the form 10K. File the EFGA for more detail on our full year earnings. Turning to liquidity of life 13, net cash provided by operating activities was $198.7 million for 2024 as compared to $67.7 million for 2023. The increase in operating cash flow was primarily as a result of Golden State Water having implemented new rates in 2023 and 2024. The collection of state charges to recover retroactive revenues from 2022 through July of 2023 and higher water consumption in 2024. The increase in cash flows from operating activities also resulted from differences in the timing of buildings and cash receipts for construction work at military bases as well as U.S. as well as the timing of its render payments. For investing activities, as Bob mentioned earlier, our regulated utility invested $235.8 million on company funded capital projects in 2024. And we projected company funded capital expenditures to reach $170 to $210 million for 2025. American State Water's ad market offering program to sell commercial shares remained ongoing as this program allowed the company at its sole discretion to sell up to $290 million over a three-year period. During 2024, American State Water raised proceeds of $88.7 million net of issuing costs and legal costs incurred. American State Water currently maintains a credit rating of A stable with standard and forced global ratings or S&P, while Golden State Water maintains A plus stable rating with S&P and A2 stable rating with Moody's Investors Service. Each of these ratings have been affirmed during 2024. These are some of the highest credit ratings in the U.S. investor owned water utility. With that, I'll turn the call back

to

Bob.

Thank you, Eva. I'll begin with Golden State Water's general rate case. On January 30th of this year, the CPC issued a final decision in connection with the general rate case. The final decision adopts the settlement agreement between Golden State Water and the Public Advocates Office at the CPUC, or Cal Advocates for short. More than anything, the decision authorizes Golden State Water to invest $573.1 million in capital infrastructure over the three-year capital cycle. This includes $17.7 million of advice letter capital projects to be filed for revenue recovery during the second and third year attrition increases when those projects are completed. In addition, the approved settlement agreement includes $58.2 million of advice letter capital projects that began construction in 2023. That we expect to file for revenue recovery during the second and third year attrition increases when those projects are completed. For all of the advice letter projects, Golden State Water will be allowed to accrue interest during construction at the adopted cost of debt. And recover the full rate of return, including all applicable components of the revenue requirement after the assets are placed in fullness up until the assets are included in customer rate. 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. In addition, 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 final decision also adopts Golden State Water's recommended sales forecast, a supply mix that splits the difference between Golden State Water's and Cal Advocates' forecasts. Then accepts the sales reconciliation mechanism proposed by the company. In addition, there are three other regulatory mechanisms that Golden State Water requested that were litigated and addressed in the decision. The decision however rejected a full sales and revenue decoupling mechanism and a full supply cost balancing account and instead ordered the transition to a modified rate adjustment mechanism for sales. The decision also rejected an incremental cost balancing account for supply costs. The decision also rejected a supply mix adjustment mechanism and 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 new mechanisms authorized in the decision are effective January 1, 2025. The final decision approved Golden State Water's proposed rate design associated with the modified rate adjustment mechanism, which means more revenue recovery into the fixed service charge than under the rate design associated with the company's full revenue decoupling mechanism. On January 14 of this year, the CPUC approved a request to defer the cost of capital application by one year to May 1, 2026. With the deferral, Golden State Water will retain its authorized return on equity of .06% and a 57% equity ratio through the end of 2026. On January 16 of this year, our electric utility subsidiary received a final CPUC decision in its general rate case that it pre-exists a settlement agreement between Bear Valley Electric, Cal Advocates, and the other intervener in the proceeding in its entirety. The proceeding sets rates retroactive to January 1, 2023 and determines electric rates for the years 2023 through 2026. The decision, among other things, allows Bear Valley Electric to invest $75.6 million in capital infrastructure, including at least $23.1 million of advice letter projects over the four-year rate cycle. It adopts a return on equity of .0% and a 57% equity ratio and a previous recovery of requested capital expenditures and incremental operating costs incurred prior to 2023 in connection with its wildfire mitigation plan. The settlement also provides increases in the adopted operating revenues of $2.2 million for 2025 and $3.3 million in 2026. The rate increases for 2024 through 2026 are not subject to an earnings test. The previously mentioned advice letter projects of at least $23.1 million are expected to generate additional annual operating revenues of approximately $3 million when the respective projects are completed, placed in service, and filed for recovery and customer rate. These projects also accrue allowance for funds used during construction that will further increase the revenue requirement. During our attention to slide 17, we present the growth in Golden State Water's adopted average water rate base for 2018 through 2024, which 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, using 2018 as the base year for the calculation. Golden State Water anticipates a robust and sustained growth in its rate base over the next few years as a result of receiving its recent general rate case decision. That again authorizes it to invest $573.1 million in capital infrastructure, including $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, it authorizes investment on certain other capital projects already under construction beginning in 2023, the recovery of which will also be handled through advice letter filings upon project completion. All advice letter capital projects will contribute to further growth in rate base in the second and third years of this cycle. Let's continue to ASUS, which contributed earnings of $0.55 per share for the full year of 2024 as compared to $0.50 per share for 2023. The increase was mainly due to an increase in management fee revenues resulting from the commencement of operations at the two new bases and the resolution of various economic price adjustments, partially offset by higher overall operating expenses from the new bases, and a decrease in earnings of approximately $0.01 per share due to the dilutive effects from the issuance of equity under the company's -the-market offering program. We're also very pleased that ASUS has received a significant increase in new capital upgrade awards in 2024 of $56.5 million in total as compared to $25.2 million for 2023. In addition to continued work on the existing bases we serve, we remain confident that we can effectively compete for new military-based contract awards. With a solid performance expected for ASUS in 2025, we project that subsidiary to contribute $0.59 to $0.63 per share this year. 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, or CAGR, of .8% over the last five years through 2024, and we have achieved a 10-year CAGR of 8% in the calendar of dividend payments through 2024. 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. I'd like to conclude our preparing remarks this morning by thanking you for your interest in American State's water, and we'll now turn the call over to the operator for questions.

We will now take your questions. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. We will begin with Jonathan Reeder with Wells Fargo. Please go ahead.

Hello, Bob and Eva. Hope you guys are well.

Thank you,

Jonathan.

Hi, Jonathan. Hope you are as well.

Yeah, hanging in there. Could you help me reconcile how much of the six cents electric, you know, GRC retroactive EPS benefit that was recorded in Q4 is solely related to 2023? And I saw the 10K mentioned like 9.8 million of the effective revenues for both 2023 and 2024, but it seems like, you know, some of that is offset by corresponding operating expense increases related to those years as well.

Yeah, I would say more of it is related to 2024 than 2023, Jonathan. As you know, I think you know, and it's interesting we had sort of had this situation on both settlements, the Bear Valley settlement and the Golden State settlement. The public advocates was very interested in trying to move out that first year increase. And that then that's why you sort of see these advice letter projects in both cases.

So, you know, Jonathan, we have a substantial amount of unrecovered costs, both capital OM from implementing our WIFI mitigation plan. We will request recovery of amount of projected capital OM for 2023 and 2026. So on top of what we need to do for the square rate case cycle, we also request those dollars to be included in base rate for the square rate cycle. You know, the recovered historical cost is about $24 million cabas related to the WIFI mitigation plan. And along with the increases in cost, we recover the tree trimming costs and all the WIFI mitigation operating related expenses. So our first year's request was quite significant when we filed the case in 2022. So during the settlement agreement, we agreed to move certain capital projects to 2024 and beyond and file a sub-project as a advice letter project, which will earn an AFU-DC or construction. So that's why the first year increase since small compared to 2024. You know, we believe this is how we can reach the settlement and mitigate the first year increase to customers. Kind of pancake to rate cases in one. So that's why most of the increase you see probably is for 2024.

And as a reminder, the last rate cycle we had at Bear Valley was a five-year rate cycle. Our decision came out in that particular case just as things were being put in place for the requirements associated with filing wildfire mitigation plans. I don't know if this is completely accurate, but I think we, because of just how the rate cycle lined up, we had probably had gone the longest of any of the electrics in terms of starting the wildfire mitigation plan activities before our next rate case where we would then seek recovery of those expenditures. And so that put, I would say, a little more pressure on that first year rate increase because we had several years of wildfire mitigation plan activities that we hadn't recovered from customers, but needed to be then included in the rate cycle for 2023 through 2026.

Okay. So would you say any of that six cents of the retroactive EPS benefit is related to 2023? You know, 2023 was pretty neutral in all the six cents in Q1 through Q3 of 2024.

I think the way to think about it is the majority is for 2024. I can't really give you a precise split on the six, but I think the way to think about it is the majority of it was for 2024.

Okay. All right. And then, you know, as you noted, you know, 2024 we saw a huge increase in consolidated operating cash flows to nearly 200 million. Is that a good proxy for your 2025 expectations given you'll still be collecting, you know, the retroactive revenues from the delayed 2022 to 2024 water GRC decision plus some of the retroactive revenues from the electric GRC?

I think both, Jonathan. It's more aligned with what's going forward in 2023, I would say.

Okay. And then last question for me, how much of the remaining, you know, roughly 110 million of equity under the ATM program do you anticipate issuing in 2025?

$60 million-ish, Jonathan. So we'd like to even make out for two years, but if we needed a little more, I would say probably $60 million for this year.

Okay. Perfect. Thank you so much for taking my questions.

Thank you.

Again, if you have a question, please press star, then one. Seeing no further questions in the queue, this concludes our question and answer session. I would like to turn the conference back over to Bob Sprouse for any closing remarks.

Yes, I'd just like to wrap up the call today by thanking everyone for their continued interest in American states. We appreciate your interest and have a good start to your year. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.