Business context and reporting period
American States Water Company (AWR) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. AWR’s businesses comprise regulated California water (Golden State Water Company, GSWC), regulated electric (Bear Valley Electric Service, BVES), and contracted water and wastewater services at U.S. military bases (ASUS). Unless noted, financial amounts below are AWR consolidated and in U.S. dollars.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $151.7 million | $135.0 million | $470.5 million | $366.2 million |
| Operating income | $51.8 million | $40.3 million | $161.9 million | $99.0 million |
| Net income | $31.6 million | $25.7 million | $104.5 million | $59.8 million |
| Diluted EPS | $0.85 | $0.69 | $2.82 | $1.61 |
| Operating margin | 34.1% | 29.9% | 34.4% | 27.0% |
| Net margin | 20.8% | 19.0% | 22.2% | 16.3% |
Year-to-date revenue increased 28.5% and net income increased 74.8%. Results benefited substantially from newly approved water rates, including retroactive rate recognition, and higher contracted-services revenue. Interest expense rose 65.7% to $31.9 million, reflecting higher borrowing levels and rates; interest income increased to $5.8 million, mainly on regulatory assets.
For the nine months, operating cash flow was $56.5 million, down from $89.9 million. Capital expenditures were $136.1 million, up from $122.1 million, leaving cash flow after capital expenditures of approximately negative $79.6 million. Financing activities provided $81.3 million; cash at period end was $8.6 million. Management attributed lower operating cash generation to, among other things, timing of rate-case collections, lower water usage, working-capital changes, and the absence of 2022 pandemic relief receipts.
At September 30, AWR reported $575.5 million of long-term debt, $273.5 million of bank borrowings, and $37.4 million of current long-term debt and notes payable, versus approximately $724.4 million of these debt items at year-end 2022. Current assets were $191.7 million and current liabilities $195.0 million. New five-year syndicated revolving facilities provide $150 million for AWR and $200 million for GSWC; each may be expanded by up to $75 million with lender approval. AWR’s facility capacity was increased to $165 million after quarter-end. AWR’s credit rating was downgraded by S&P from A+ to A in July, with outlook revised to stable; GSWC’s A+ rating was affirmed.
Material changes versus the prior comparable period
- Water revenue rose 30.2% year to date, primarily due to 2022 retroactive rates and 2023 rate increases. The final water general rate case decision added approximately $30 million of retroactive 2022 revenue; 2023 second-year rate increases also contributed.
- GSWC recorded $6.4 million of additional water revenue in 2023 after the final cost-of-capital decision led it to reverse a prior regulatory liability for revenues previously considered subject to refund.
- Contracted-services revenue increased 31.3% year to date, largely from higher construction activity and annual economic price adjustments.
- Electric segment diluted EPS declined from $0.16 to $0.14 year to date; new rates were still pending, while expenses and interest costs increased.
- Higher interest costs and borrowing levels accompanied the regulated utilities’ capital spending. GSWC issued $130 million of long-term notes in January and established a separate revolving credit facility in June.
Outlook, management commentary, risks and unusual items
- Guidance: Management expects contracted services to contribute $0.45–$0.49 per share for full-year 2023. Company-funded regulated-utility capital expenditures for 2023 were expected to be $155–$170 million, subject to possible schedule delays. No consolidated full-year EPS guidance is stated in the provided filing text.
- Rates and regulation: GSWC filed a 2025–2027 water general rate case seeking approximately $611.4 million in capital budgets; a decision was scheduled for Q4 2024. BVES’s 2023–2026 electric rate case remained pending; any new rates were expected to be retroactive to January 1, 2023. GSWC’s authorized return on equity is scheduled to increase to 10.06% effective January 1, 2024 under the approved cost-of-capital mechanism.
- Regulatory balances and collections: GSWC had $55.1 million in rate-case memorandum-account regulatory assets for retroactive rate differences. Surcharges to recover these amounts over 36 months were implemented in October 2023. GSWC also reported a $46.6 million net WRAM/MCBA regulatory asset. Recovery depends on regulatory mechanisms and collection over time.
- Operating and environmental risks: Water consumption was lower amid above-average California rainfall, while California conservation standards are expected to tighten. Management noted ongoing risks involving water supply, water quality and potential PFAS-related treatment costs, wildfire mitigation, weather, inflation, and interest rates. Recovery of eligible utility costs depends on regulatory approval.
- Contracted-services risks and developments: ASUS’s U.S. government contracts may be terminated for convenience, and future earnings depend partly on price adjustments, task orders, construction work, and timely government payments. ASUS received a new 50-year Patuxent River contract with an estimated initial value of $349 million and a 15-year Joint Base Cape Cod contract with up to $45 million of initial task-order value. A July 2023 government settlement concerning bidding and estimating practices had no material financial-statement impact.
- Other unusual items: Nine-month results included $2.1 million of gains on retirement-plan trust investments versus $6.4 million of losses in 2022. AWR’s reported nine-month diluted EPS of $2.82 was $2.31 after the company’s specified adjustments for retroactive rates and cost-of-capital effects; management also cited adjusted EPS of $2.27 versus $1.84 after excluding investment gains and losses as well. These are non-GAAP measures.
- Management reported no material change in disclosed risk factors, no material pending legal proceedings, and no material change in market-risk disclosures. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How quickly the $55.1 million of retroactive water-rate balances and other regulatory assets convert into customer cash collections, and whether regulatory recovery remains probable.
- The outcome and timing of BVES’s pending rate case and GSWC’s next water rate case, including approved capital budgets and recovery mechanisms.
- Whether operating cash flow can support the elevated capital program and dividends without materially higher borrowing, interest expense, or potential equity issuance; AWR said it may seek $150–$200 million through equity offerings beginning in 2024.
- Progress on ASUS contract transitions, task orders, economic price adjustments, collections, and government audit or compliance matters.
- Potential cost and recovery effects from water-quality rules, conservation requirements, wildfire mitigation, and other regulatory or environmental obligations.