Business context and reporting period
American States Water Company (AWR) filed this unaudited combined Form 10-Q with its wholly owned regulated water subsidiary, Golden State Water Company (GSWC), for the quarter and six months ended June 30, 2022. AWR operates regulated water and electric utilities and provides contracted water and wastewater services, principally at U.S. military bases. Unless noted otherwise, financial figures below are AWR consolidated and in U.S. dollars.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $122.6M | $128.4M | $231.2M | $245.5M |
| Operating income | $34.3M | $37.8M | $58.7M | $68.2M |
| Net income | $20.0M | $26.6M | $34.1M | $45.8M |
| Diluted EPS | $0.54 | $0.72 | $0.92 | $1.24 |
| Operating margin | 28.0% | 29.5% | 25.4% | 27.8% |
| Net margin | 16.3% | 20.7% | 14.8% | 18.7% |
For the first half, operating cash flow was $56.9M, capital expenditures were $76.6M, and cash flow after capital expenditures was negative $19.5M. Cash and cash equivalents were $10.8M at June 30, 2022. Total assets were $1.95B, shareholders’ equity $694.2M, and long-term debt $446.9M. An additional $223.5M was outstanding under AWR’s bank credit facility, reported as current debt; long-term debt due within one year was $0.4M. Current assets of $139.0M compared with current liabilities of $348.7M.
Material changes versus prior comparable periods
- First-half revenue declined 5.8% and net income declined 25.6%; diluted EPS fell from $1.24 to $0.92. Q2 revenue declined 4.5% and net income declined 24.9%.
- Contracted-services revenue fell 21.7% in the first half, primarily from lower construction activity due to project timing, supply-chain lead times, weather and other delays. Water revenue decreased 1.1%; electric revenue increased 2.4%.
- Management attributed a significant portion of the reported earnings decline to retirement-plan investment losses of $5.2M in the first half of 2022, versus $2.2M of gains in 2021. Management’s adjusted, non-GAAP diluted EPS—which excludes those investment results and includes estimated retroactive water-rate effects—was $1.21 versus $1.20 for the first half, and $0.71 versus $0.69 for Q2.
- Higher water operating costs, including treatment, conservation, insurance, depreciation and maintenance, also pressured results. First-half operating expenses declined overall, mainly because ASUS construction expense was lower along with its construction revenue.
Outlook, commentary, and key risks
- GSWC’s 2022–2024 water general rate case remained pending. Billed water revenue in the first half used 2021 adopted rates; any approved 2022 rates would be retroactive to January 1. Management estimated that implementing the proposed settlement from the start of the year would have increased first-half EPS by a net $0.19. A proposed CPUC decision was expected in the second half of 2022.
- In a separate cost-of-capital proceeding, GSWC recorded revenue reductions of $3.1M for the first half, reflecting its estimate of amounts potentially subject to refund. The final outcome and 2022 revenue impact were uncertain.
- Management expected AWR to spend $140M–$160M on company-funded regulated-utility capital expenditures in 2022, subject to schedule changes, supply-chain issues and pandemic effects. ASUS was expected to contribute $0.45–$0.49 per share for full-year 2022.
- AWR’s $280M credit facility expires in May 2023. Management expected to renew or extend it and expected GSWC to issue long-term debt before then to reduce intercompany borrowings. GSWC had $102.4M of intercompany borrowings classified as current. AWR and GSWC had S&P ratings of A+ with negative outlooks; Moody’s rated GSWC A2 with a stable outlook.
- California drought, mandatory conservation restrictions, reduced State Water Project allocations and potential increases in purchased-water needs may affect supply costs and operations. GSWC’s WRAM/MCBA mechanisms are scheduled to end in 2025, subject to ongoing legal review, potentially increasing future earnings volatility.
- Other risks include delayed regulatory rate recovery, rising operating and financing costs, wildfire mitigation obligations, evolving drinking-water standards (including PFAS), and collection of delinquent customer accounts. Pandemic-related incremental costs were tracked in regulatory accounts for future recovery; such recovery is subject to regulatory processes and required offsets.
- BVESI continued to pursue recovery of approximately $449,000 of 2019 winter-storm costs after the CPUC denied its initial request; failure to obtain recovery could result in an earnings charge. GSWC also disclosed an estimated $1.3M remaining environmental remediation liability, which it believed probable of recovery in rates. No material legal proceedings were reported.
- AWR’s board approved an 8.9% increase in the third-quarter dividend, from $0.3650 to $0.3975 per share. The filing reported $3.3B of remaining performance obligations under long-term government contracts; the U.S. government may terminate those contracts for convenience.
Important facts for investors to verify
- Track CPUC decisions on the water general rate case and cost-of-capital proceeding, including timing, retroactive rate adjustments and any refunds.
- Assess refinancing plans and liquidity before the May 2023 credit-facility maturity, including anticipated GSWC debt issuance and the current classification of borrowings.
- Evaluate whether lower ASUS construction activity and supply-chain delays persist, and how they affect contracted-services earnings and cash receipts.
- Monitor drought conditions, water sourcing costs, customer conservation, and the potential financial effects of changes to WRAM/MCBA and other regulatory recovery mechanisms.
- Distinguish GAAP earnings from management’s adjusted EPS; the adjusted measure incorporates estimated unrecorded rate effects and excludes retirement-plan investment gains or losses.