American States Water Company (AWR) — Q1 2024 10-Q
Business context and period: This combined, unaudited filing for the quarter ended March 31, 2024 covers AWR and its regulated water subsidiary, Golden State Water Company (GSWC). AWR also owns Bear Valley Electric Service (BVES) and American States Utility Services (ASUS), which operates water and wastewater systems at U.S. military bases. AWR’s operations serve customers in ten states; GSWC and BVES are California-regulated utilities.
Financial results and liquidity
| AWR consolidated | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Operating revenue | $135.3 million | $161.4 million | Down 16.2% |
| Operating income | $39.0 million | $51.2 million | Down 23.8% |
| Net income | $23.1 million | $34.4 million | Down 32.8% |
| Diluted EPS | $0.62 | $0.93 | Down $0.31 |
| Operating margin | 28.8% | 31.7% | Down 2.9 percentage points |
| Net cash from operations | $45.8 million | $7.0 million | Up $38.8 million |
| Capital expenditures | $47.6 million | $49.3 million | Down $1.8 million |
Q1 2024 revenue comprised water $90.3 million, electric $12.2 million and contracted services $32.8 million. The year-earlier water results included about $30 million of retroactive 2022 rates, making reported revenue and EPS comparisons unusually difficult. Excluding specified one-time water rate and refund items from 2023, management reported adjusted diluted EPS of $0.62 in 2024 versus $0.60 in 2023; adjusted water-segment EPS rose to $0.48 from $0.41.
Cash and cash equivalents were $17.0 million at March 31, 2024, compared with $14.1 million at year-end 2023. Current assets were $205.1 million and current liabilities $178.6 million. AWR reported $575.5 million of long-term debt, $337.5 million of bank borrowings and $0.4 million of current long-term debt. Interest expense increased 35.6% to $12.9 million, primarily due to higher borrowing levels and interest rates. AWR’s total capitalization was $1.38 billion, including $800.5 million of shareholders’ equity.
Operating cash flow exceeded quarterly capital expenditures by $1.7 million, versus a $42.4 million shortfall in Q1 2023. The improvement reflected, among other factors, higher billed rates and surcharges implemented after the 2023 water rate case decision, a 3.2% increase in billed water consumption and timing of working-capital receipts and payments. Cash flow remains seasonal and affected by timing.
Material changes and management commentary
- Reported water revenue fell 19.9% year over year, principally because Q1 2023 included retroactive rate revenue. Q1 2024 reflected the third-year water rate increases effective January 1, 2024. Higher interest expense and operating costs weighed on earnings.
- Electric-segment diluted EPS declined to $0.05 from $0.06. BVES’s general rate case remains pending; new rates are expected to be retroactive to January 1, 2023, subject to CPUC approval.
- Contracted-services revenue declined 8.5% to $32.8 million, largely due to the timing of construction work. Segment diluted EPS was $0.13, compared with $0.15.
- AWR sold 227,981 shares through a new at-the-market program, raising $16.2 million net of commissions; proceeds were used to reduce borrowings. The program permits up to $200 million of gross sales over three years, with approximately $183.5 million remaining as of March 31.
- Two new military-base contracts began operations after quarter-end: Naval Air Station Patuxent River on April 1 and Joint Base Cape Cod on April 15. The filing estimates the Patuxent River contract at about $349 million over 50 years; Cape Cod has a 15-year term with a maximum value of $75 million, subject to task orders. A $4.1 million first-year Cape Cod task order was awarded in April.
Outlook, risks and contingencies
- Management expects regulated-utility company-funded capital expenditures of $160 million to $200 million in 2024, subject to project timing, weather and supply-chain conditions. It expects regulated-utility capital spending to remain substantially above depreciation over coming years.
- ASUS is expected to contribute $0.50–$0.54 per share for full-year 2024. The filing provides no consolidated full-year EPS guidance.
- GSWC’s 2025–2027 water general rate case seeks approximately $611.4 million in capital budgets; a decision is scheduled for Q4 2024, with requested new rates effective January 1, 2025. BVES’s 2023–2026 electric rate case decision is scheduled by the end of Q3 2024. Timing and outcomes are not assured.
- GSWC requested CPUC authority for up to $750 million of additional debt and equity financing. AWR and GSWC have revolving facilities of $165 million and $200 million, respectively. BVES had $43 million outstanding against its $65 million facility; its required pay-off period ends in August 2024. AWR says it may reduce capital spending if market conditions constrain financing access.
- Water-quality rules could raise investment and operating costs. The filing reports more than 40 GSWC sources exceeding one or more new PFAS limits; monitoring is required by 2027 and identified exceedances must be addressed by 2029. New hexavalent chromium limits and the lead-and-copper rule may also require added spending. Recovery of costs through rates is subject to regulatory processes.
- Other significant exposures include California drought and water-supply conditions, wildfire mitigation, inflation, interest rates, regulatory delays or disallowances, and cybersecurity. Military contracts are fixed-price subject to annual economic adjustments and may be terminated or suspended by the U.S. government; reimbursement and adjustment timing, construction levels and government audits may affect ASUS results.
- GSWC recorded a $1.3 million liability for estimated remaining costs at an environmental remediation site; management expects recovery through rates. Management reported no pending legal proceeding it believes material and no significant changes to previously disclosed risk factors.
AWR paid $0.43 per share in Q1 and declared a $0.43-per-share Q2 dividend, payable June 3, 2024. Management stated its long-term policy is dividend growth above 7% annually.
Important facts for investors to verify
- Separate recurring operating performance from Q1 2023’s approximately $30 million retroactive water-rate benefit and other identified comparison adjustments.
- Track CPUC decisions and timing for GSWC’s water case, BVES’s electric case, and pending utility financing applications, including the recoverability of accumulated regulatory assets.
- Assess the impact of higher interest expense, planned capital spending and refinancing needs, particularly BVES’s August 2024 facility pay-off period and GSWC’s June 2025 period.
- Monitor PFAS, chromium and lead-rule compliance costs, and whether and when regulators authorize recovery from customers.
- Evaluate ASUS’s new-base ramp-up, contract economics, task-order awards, government payment timing and construction activity against its 2024 segment EPS outlook.