Business context and reporting period
American States Water Company (AWR) filed this unaudited combined Form 10-Q for the quarter and nine months ended September 30, 2022. AWR operates regulated California water and electric utilities through Golden State Water Company (GSWC) and Bear Valley Electric Service, and provides water and wastewater services at U.S. military bases through American States Utility Services (ASUS).
Financial performance and position
Amounts below are AWR consolidated, in millions except per-share data. Comparisons are with the corresponding 2021 period.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $135.0 | $136.8 | $366.2 | $382.2 |
| Operating income | $40.3 | $42.8 | $99.0 | $111.0 |
| Net income | $25.7 | $28.2 | $59.8 | $74.0 |
| Diluted EPS | $0.69 | $0.76 | $1.61 | $2.00 |
| Operating margin | 29.9% | 31.3% | 27.0% | 29.0% |
| Net margin | 19.0% | 20.6% | 16.3% | 19.4% |
| Operating cash flow | Not provided for quarter | $89.9 | $81.9 | |
| Capital expenditures | Not provided for quarter | $122.1 | $106.7 |
For the nine-month period, operating cash flow less capital expenditures was negative $31.8 million, compared with negative $24.8 million in 2021. AWR paid $41.7 million in dividends; dividends per share were $1.1275 versus $1.035. The board approved a fourth-quarter dividend of $0.3975 per share, payable December 1, 2022.
At September 30, AWR reported $2.3 million cash, $138.8 million current assets and $373.2 million current liabilities, a $234.4 million working-capital deficit. Bank notes payable included $238.5 million classified as current because AWR’s credit agreement expires in May 2023, and $3.0 million classified as noncurrent. Long-term debt was $446.8 million, plus $0.4 million current maturities. Capital expenditures and borrowing needs increased; AWR’s revolving facility capacity was raised to $280 million in April 2022.
Material changes versus the prior period
- Nine-month revenue declined 4.2%, operating income 10.8%, net income 19.2% and diluted EPS 19.5%. Q3 revenue fell 1.3% and net income 8.9%.
- Contracted-services revenue decreased $13.0 million year to date, mainly from lower construction activity and timing, supply-chain delays, weather and other project delays. Segment diluted EPS fell to $0.29 from $0.35 for the nine months.
- Year-to-date water revenue declined $3.9 million, partly reflecting a pending rate case and a $5.0 million estimated revenue reduction related to the cost-of-capital proceeding. Electric revenue rose 2.9% year to date following approved rate increases.
- Interest expense rose 7.9% year to date, largely due to higher borrowing levels and rates. AWR recorded a $6.4 million loss on retirement-plan trust investments, versus a $2.3 million gain in 2021; management estimated this reduced year-over-year EPS by $0.17.
- Capital expenditures increased to $122.1 million from $106.7 million. Net cash from financing was $29.1 million, compared with $5.0 million used in 2021, including the issuance of $35 million in BVESI long-term notes.
Outlook, management commentary, risks and unusual items
- Rates and regulation: GSWC’s 2022–2024 water general rate case remained pending; the CPUC extended the decision deadline to February 14, 2023. Billed 2022 water rates remained based on 2021 adopted rates, with any approved new rates retroactive to January 1, 2022. Management estimated that approval on the terms of the settlement would have added $22.7 million revenue, offset by $7.7 million of supply costs, or approximately $0.29 per share, for the first nine months. The cost-of-capital proceeding also remains unresolved; GSWC recorded a $5.0 million year-to-date revenue reduction subject to possible revision.
- Financing: Management planned to renew or replace AWR’s facility before May 2023 and expected GSWC to issue long-term debt in Q4 2022 to repay intercompany borrowings. As of November 7, neither AWR nor GSWC had sufficient liquidity to repay the respective borrowings without new debt or equity. Management considered its financing plan probable and said it expected to meet obligations for at least 12 months, while cautioning that access to financing is not assured. S&P affirmed A+ ratings for AWR and GSWC with a negative outlook; Moody’s affirmed GSWC’s A2 rating with a stable outlook.
- Spending and segment outlook: 2022 company-funded capital expenditures for the regulated utilities were projected at $145–$160 million, subject to schedule and supply-chain risks. ASUS was expected to contribute $0.43–$0.47 per share for full-year 2022 amid construction delays. ASUS reported $3.5 billion in remaining performance obligations over the remaining terms of its long-term government contracts; the U.S. government may terminate contracts for convenience.
- Operating and regulatory risks: California drought, water restrictions, reduced groundwater recharge and potential higher-cost supplies may affect operations and costs. Higher water-quality requirements, including potential PFAS standards, could increase treatment and capital costs. BVESI faces wildfire mitigation and cost-recovery scrutiny. COVID-related delinquent customer accounts increased bad-debt allowances, although related eligible costs were tracked in regulatory accounts and service disconnections for nonpayment resumed in June 2022.
- Contingencies and subsequent events: ASUS was under a civil government investigation into bidding and estimating practices on certain capital projects; management could not predict the outcome or possible penalties, but did not then expect a material adverse effect. GSWC recorded an estimated $1.3 million remediation liability, with recovery considered probable. On November 3, 2022, the CPUC authorized BVESI to recover $452,000 of winter-storm costs through a 12-month surcharge.
- Management’s adjusted EPS comparisons exclude retirement-plan investment gains and losses and incorporate estimated retroactive water-rate effects; these are non-GAAP measures and differ from reported GAAP results.
Important facts for investors to verify
- Whether the CPUC approves GSWC’s water rate settlement and cost-of-capital requests, and the timing and actual earnings impact of retroactive rate adjustments or refunds.
- Completion and terms of the planned AWR credit-facility renewal and GSWC debt issuance, including repayment of current and intercompany borrowings.
- Whether drought conditions, restrictions, water sourcing costs and water-quality requirements change utility costs or customer demand, and how much cost recovery regulators permit.
- Whether ASUS construction activity recovers, its remaining project pipeline and the outcome of the government investigation.
- Actual regulated-utility capital spending, cash generation and dividend coverage, alongside continued interest-rate and pension-investment volatility.