American States Water Company (AWR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing the company's second quarter 2026 results. The call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at 5:00 p.m. Eastern Time and run through August 13 on the company's website, www.aswater.com. The slides that the company will be referring to are also available on the website. Presenting today from American States Water Company are Bob Sprowls, 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 the 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 except 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 in the United States and constitute non-GAAP financial measures. 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 Sprowls, President and Chief Executive Officer of American States Water Company.

Thank you, Bailey. Welcome, everyone, and thank you for joining us today. I'll begin with a discussion of the quarter. Eva will discuss some financial details, and then I'll wrap it up with updates on regulatory activity, ASUS and dividends, and then we will take your questions. . We are pleased to report an excellent quarter with financial results that reflected strong execution across our business. Company's performance highlights our effective management and the constructive regulatory framework in which we operate. Our reported earnings per share for the second quarter was $1.09 compared to $0.87 for the same quarter in 2025, an increase of $0.22 or 25.3%. All 3 of our operating business segments performed well and recorded year-over-year increases resulting from new customer rates implemented in 2026 at our regulated utilities to cover our infrastructure investments and an increase in construction activities at our Contracted Services segment. In particular, the earnings growth was largely driven by the Water segment's strong second quarter performance that was led by new customer rate increases effective January 1, 2026, a 4% increase in water consumption and a lower reliance on purchased water further supported the quarter's solid performance compared to the same quarter in 2025. However, it is uncertain whether these favorable conditions experienced in the second quarter will continue through the remainder of 2026 or if their positive earnings impact will reverse as we will discuss later. I'm also pleased to report that last week, our Board approved a significant dividend increase of 8.2%, resulting in an annualized dividend rate of $2.82 per share. This 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 enables us to provide safe and reliable services 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 72 consecutive years, which places it in an exclusive group of companies on the New York Stock Exchange that have achieved that result. We continue to seek opportunities to expand our regulated water operations. In July, Golden State Water Company and the Public Advocates Office at the California Public Utilities Commission, or Cal Advocates filed a joint settlement to approve the acquisition of an existing water system that serves almost 900 customer connections located in the city of Norwalk in Los Angeles County. Our regulated utilities are on pace to invest $185 million to $220 million in infrastructure investments this year as we continue to invest in our water, wastewater and electric utility systems for the long-term benefit of our customers. We filed a new electric general rate case in January for customer rates covering 2027 through 2030 and a new water general rate case in July, covering rates for 2028 through 2030. We successfully completed our at-the-market equity offering program in June, reaching the maximum aggregate offering capacity of $200 million in gross proceeds raised since the program was first established in February 2024. We have no plans to issue additional equity through at least the end of 2029, to support our current operation. Lastly, we were once again recognized on Times list of best companies in 2026 and we're 1 of only 2 investor-owned water utilities on the list. This recognition reflects the company's disciplined execution of its strategic growth plans, strong financial performance, commitment to our workforce and robust environmental, social responsibility and governance practices. With that, I will turn the call over to Eva to discuss earnings and liquidity.

Thank you, Bob. Hello, everyone. Let me start on Slide 7. As Bob mentioned, we delivered excellent financial results in this quarter. Our consolidated earnings were $1.09 per share compared to $0.87 per share for the second quarter of 2025. Our water utility Golden State Water reported earnings of $0.91 per share compared to $0.73 per share for the second quarter of last year. . The $0.18 per share increase was largely due to new water rates for 2026, including additional revenues associated with approved viewer capital projects in late 2025 and higher gains generated on investments for a retirement plan, partially offset by an increase in water supply costs, interest expense, net of interest income, and the effective income tax rate. Lastly, there was a decrease in earnings of $0.02 per share due to the dilutive effect from the share issuances under the parent company's at the market offering program. Our Electric segment's reported earnings were $0.04 per share for the quarter as compared to $0.03 per share for the same quarter last year. The $0.01 per share increase is primarily related to rate increases, partially offset by higher overall operating and interest expenses. Earnings from ASUS were $0.16 per share for the quarter compared to $0.13 per share for the same quarter last year, an increase of $0.03 per share. Largely due to higher construction activities, an increase in management fee revenues from the resolution of various economic price adjustments and lower interest expenses partially offset by an increase in operating expenses. This slide shows that consolidated revenue for the second quarter increased by $18.2 million compared to the same quarter of 2025. Revenues increased by $11.4 million in the water segment and $700,000 in the electric segment driven largely by the new 2026 rate and additional revenues generated from advice letter projects approved in 2025. Revenues from ASUS increased $6.2 million, primarily due to higher construction activities and management fee revenues. Turning to Slide 9. Looking at supply costs first. The increase in supply cost primarily related to our Water [indiscernible] due to an overall increase in per unit water supply cost covered in rates and an increase in the production of water, resulting from higher customer consumption, partially offset by the favorable impact of an actual water supply source mix that included less purchase water during the quarter compared to the same period last year due to wells being brought back aligned in certain customer service areas. The remaining consolidated operating expenses increased by $4.6 million compared to 2025, largely due to higher ASUS construction expenses from an increase in construction activity and overall increase in operating expenses. Interest expense net of interest income also increased largely from capitalization of debt costs related to certain isolated projects approved by the CPUC in the latest wallet GRC effective January 1, 2025 which was recorded in 2025 with no similar items this year and reduced interest income by a decrease in regulatory asset balances for both regulated utilities. Lastly, other income increased during the quarter due to higher gains generated from investment to fund a return plan. Slide 10 shows the EPS bridge comparing reported EPS for second quarter of 2026 against last year's second quarter. Consolidated earnings for the 6 months ended June 2026 were $1.86 per share compared to $1.57 per share for the same period in 2025 an increase of $0.29 per share. As Bob mentioned, all 3 of our operating business unit segments performed very well and reported year-over-year increases. Turning to liquidity on this slide. Net cash provided by operating activities were $116.6 million for year-to-date 20 as compared to $109.6 million for the same period last year. The increase is largely related to new rates implemented at our regulated utilities as well as various approved surcharges and additional revenues from approved advice leather project. In addition, the increase also results from PFAS litigation proceeds received during the year. For investing activities, our regulated utility invested $91.7 million on company-funded capital projects during the first half of the year, and we expect company fund this capital expenditures to total between $185 million to $200 million for the full year 2026. For financing activities, American States Water under its ad market offering program rates proceeds of $39.9 million during the first half of the year, net of issuing cost and legal costs. As Bob mentioned earlier, we have completed the equity offering program and do not expect to issue additional equity through at least the end of 2029. Last month, Standard and Poor's affirmed the company's strong credit ratings of A for American States Water with a stable outlook an A+ for Golden State Water also with a stable outlook. These are some of the highest credit ratings in the U.S. investor-owned water utility industry. With that, I'll turn the call back over to Bob.

Thank you, Eva. Turning now to updates on the regulatory front, starting with the latest water general rate case application that set new rates for the years 2025 through 2027. In December, Golden State Water received approval from the CPUC to implement its full second year and other rate increases, which were effective January 1 of this year. . This approval results in higher adopted operating revenues less water supply costs for the full year 2026 of $32 million compared to adopted operating revenues less water supply cost for 2025. Included in the 2026 increase is nearly $11 million related to advice letter capital projects. The advice letter projects were added to the adopted rate base for inclusion in the revenue requirement effective January 1, 2026. In comparison, the net change in adopted operating revenues less water supply cost in 2025 over 2024 adopted levels was $23 million. As a reminder, due to the CPUC's required use of a modified revenue decoupling mechanism and an incremental water supply cost balancing account effective January 1, 2025, Golden State Water's earnings face future volatility from consumption fluctuations and water supply mix changes. As I mentioned earlier, Golden State Water's second quarter earnings benefited from higher customer consumption of 4% and a favorable water supply source mix that included less purchased water than in the same period of 2025. This improvement in the supply mix was due in part to certain wells that had been temporarily off-line during the first quarter, returning to service in the second quarter. It remains uncertain whether these favorable conditions in the second quarter will continue through the remainder of 2026 or if their positive earnings impact will reverse customer consumption can fluctuate due to factors like climate change, conservation efforts weather conditions. For example, El Nino or La Nina weather events could significantly affect precipitation levels and outdoor water use. Additionally, water supply mix changes can occur due to unforeseen groundwater quality issues and changes in the operating conditions of groundwater basins and associated pumping facilities. Any of these factors could have a direct impact on Golden State Water's future net earnings. Next, we review pending and future regulatory proceedings at the water segment. On July 1, Golden State Water filed a general rate case application for all of its water regions and the general office. This general rate case will determine new water rates for the years 2028 through 2030. Golden State Water requested capital budgets of approximately $1 million for the 3-year rate cycle and among other things, requested to reinstate the regulatory mechanisms for full revenue decoupling and a full supply cost balancing account for water supply. The decision in this rate case is scheduled for the fourth quarter of 2027. And Also, as mentioned on prior earnings calls, the CPUC approved a request by Golden State Water and 3 other large investor-owned California water utilities to defer the cost of capital application by another year. CPUC's approval postponed the filing date of the application by 1 year until May 1, 2027, with a corresponding effective date of January 1, 2028. The CPUC also approved the joint party's request to leave the current modern cost of capital mechanism in place through the 1-year deferral period. Golden State Water's current authorized rate of return on rate base is 7.93% based on its weighted average cost of capital, which includes a return on equity of 10.6% and a capital structure with 57% equity and 43% debt, which will continue in effect through December 31, 2027. Furthermore, as I previously highlighted, on July 13, Golden State Water and Cal Advocates filed a joint motion seeking approval of the settlement agreement to acquire a water system in Norwalk, California. If the settlement agreement is approved by the CPC system will be incorporated into one of Golden State Water's existing ratemaking areas and will result in an increase to water revenues. The proposed decision is expected in the fourth quarter of this year. Turning our attention to Slide 15. We present the growth in Golden State Water's adopted average water rate base from 2021 through 2026, which increased from $980.4 million in 2021 and to $1.732 billion in 2026. That represents a compound annual growth rate of 11.3% and over the 5-year period. Golden State Water anticipates a robust and sustained growth in its rate base over the next few years. The annual increase in rate base reflects, among other factors, the net effect of capital investments less depreciation. The higher increase in 2026 as compared to the increases in the prior years, represents the effects of the advice letter projects completed prior to 2026, that were included in rate base effective January 1, 2026. Please see the first footnote at the bottom of the slide. The affordability of our customer bills is always something that our company takes very seriously. We remain focused on balancing the need for continued investment in system reliability and resiliency with the impact on customer bills. CPUC evaluates affordability using metrics such as the affordability ratio which measures essential utility bills relative to household income, particularly for low-income customers. The majority of our water service areas performed well under the CPUC's affordability metrics for a very few smaller service areas where affordability challenges exist we are either implementing or have proposed measures to address those concerns. Our electric customer bills and affordability metrics remain within a manageable range. Now turning our attention to Bear Valley Electric, which continues to be a strong contributor to the company's results. The current general rate case rates for 2023 through 2026. In January, [indiscernible] Electric implemented new rates for 2026, which is the last year of its 4-year rate cycle. There were also additional increases in revenues in 2025 and 2026 associated with $27.9 million of capital projects including AFUDC, approved for recovery through advice letters that were completed and placed in service. In January of this year, Fair Valley Electric filed a general rate case application that will determine new electric rates for the years 2027 through 2030 and Among other things, Fair Value Electric requested capital budgets of approximately $133 million for the 4-year rate cycle, and another approximately $17 million plus AFUDC for capital projects to be filed for revenue recovery through advice letters when the projects are completed. A return on equity of 11.3%, an embedded cost of debt of 5.92%, capital structure of 60% equity and 40% debt and a return on rate base of 9.15%. Let's continue to ASUS, which contributed earnings of $0.16 per share for the quarter which was $0.03 per share higher than last year. This was a result of an increase in construction activities higher management fee revenues resulting from the resolution of various economic price adjustments and lower interest expense from lower borrowing levels and lower average interest rates. Partially offset by higher overall operating expenses. ASUS is projected to contribute $0.63 to $0.67 per share this year. In addition, we remain confident that we can effectively compete for new military-based contract awards in the future based on our expertise and strong reputation with the military. I would like to turn our attention to dividends, which I touched on earlier. Last week, we announced an 8.2% 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 8.4% compound annual growth rate and our quarterly dividend rate to shareholders over the last 5 years since the third quarter of 2021. And the company is on pace to achieve a 10-year compound annual growth rate of 8.7% in its calendar year dividend payments through 2026. I'd 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.

[Operator Instructions] At this time, there are no questions. I would like to turn the conference back over to Bob Sprowls for closing remarks.

Thank you, Bailey. I just want to pass on my thanks to all of you for your participation today, and we look forward to speaking with you next quarter.

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