American States Water Company (AWR) — Q2 2023 Form 10-Q
Business context and period. Combined unaudited quarterly filing for AWR and its wholly owned water utility, Golden State Water Company (GSWC), for the quarter and six months ended June 30, 2023. AWR operates regulated water and electric utilities and contracted water and wastewater services, primarily at U.S. military bases. Unless noted, figures below are AWR consolidated and dollars are in millions.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $157.4 | $122.6 | $318.8 | $231.2 |
| Operating income | $58.9 | $34.3 | $110.1 | $58.7 |
| Net income | $38.5 | $20.0 | $72.9 | $34.1 |
| Diluted EPS | $1.04 | $0.54 | $1.97 | $0.92 |
| Operating cash flow | — | $17.8 | $56.9 | |
| Capital expenditures | — | $88.6 | $76.6 |
Q2 operating margin was approximately 37.4% versus 28.0%; six-month operating margin was approximately 34.5% versus 25.4%. For the six months, water revenue was $229.6 million, electric revenue $21.7 million, and contracted-services revenue $67.5 million. AWR paid dividends of $0.3975 per share in Q2 and $0.7950 per share in the first half.
At June 30, AWR reported assets of $2,139.6 million, shareholders’ equity of $755.1 million, cash of $1.0 million, long-term debt of $576.4 million plus $0.4 million current, and $243.0 million of noncurrent bank notes payable. Net cash from operating activities fell year over year, while capital spending exceeded operating cash flow.
Material changes and drivers
- Revenue and earnings benefited from GSWC’s CPUC water-rate decision, including retroactive 2022 rates and 2023 increases. The six-month results include approximately $30 million of 2022 retroactive water revenue; management attributed $0.38 per share to the retroactive-rate impact.
- In Q2, GSWC reversed $9.3 million of previously recorded revenue-related regulatory liability after the cost-of-capital decision clarified that rate adjustments would be prospective. Management identified a net favorable cost-of-capital decision impact of $0.21 per share versus Q2 2022.
- Management’s adjusted diluted EPS was $0.86 for Q2 versus $0.57 a year earlier, excluding specified cost-of-capital estimate effects. Excluding retirement-plan investment gains and losses as well, adjusted EPS was $0.83 versus $0.64. For the first half, adjusted EPS was $1.46 versus $0.98 excluding specified rate and cost-of-capital items; it was $1.40 versus $1.08 after also excluding investment gains and losses. These are non-GAAP measures.
- Water consumption was down 17% in both Q2 and the first half, mainly due to above-average rainfall. The company said the CPUC-approved water revenue adjustment mechanism generally limits the impact of consumption changes on recorded revenue.
- Interest expense increased 70% in Q2 and 70% for the first half, reflecting higher borrowing levels and interest rates. ASUS construction activity also increased, contributing to contracted-services revenue growth.
Liquidity, financing, outlook and risks
- Operating cash flow was $17.8 million in the first half, down from $56.9 million. Management cited regulatory-asset and working-capital movements, lower billed water consumption, delayed rate-case recovery, and timing of vendor payments and military-project receipts. Capital expenditures were $88.6 million.
- On June 28, AWR and GSWC entered separate five-year unsecured revolving facilities: $150 million for AWR and $200 million for GSWC, each with potential lender-approved expansion of $75 million. AWR had $135 million and GSWC $78 million drawn at June 30. BVES had $30 million drawn on its amended $50 million facility. Covenants generally limit the applicable capitalization ratio to 0.65 to 1.00.
- GSWC’s final 2022–2024 general rate case decision was adopted June 29; new 2023 rates took effect July 31, 2023. GSWC recorded $50.3 million of cumulative general-rate-case regulatory assets at June 30 and planned to seek recovery of retroactive balances, with most expected to be recovered over 36 months. The decision and recovery remain subject to regulatory processes.
- Management forecast 2023 company-funded capital expenditures of $140–$160 million for the regulated utilities, subject to possible schedule delays. Contracted services was expected to contribute $0.45–$0.49 per share for full-year 2023; the filing gives no consolidated EPS guidance.
- On August 1, the board approved an 8.2% increase in the quarterly dividend, to $0.43 per share. In July, S&P downgraded AWR from A+ to A and revised its outlook to stable; GSWC’s A+ rating was affirmed.
- Risks include future rate-case outcomes and regulatory-asset recovery, higher financing costs and continued capital needs, water-supply and conservation conditions, wildfire mitigation and recovery of related costs, and potential additional water-treatment costs if proposed PFAS standards are finalized. ASUS’s U.S. government contracts may be terminated for convenience, and future construction awards and payment timing can vary. A July 2023 government settlement concerning ASUS investigations was reported as not material to the financial statements.
- Management reported no significant change in disclosed risk factors and concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Key facts for investors to verify
- How much of reported earnings growth reflects recurring authorized rates versus retroactive rate recognition, the $9.3 million estimate reversal, and investment gains or losses.
- Timing and collectability of GSWC’s $50.3 million general-rate-case regulatory asset and its $39.0 million WRAM/MCBA net regulatory asset.
- Cash conversion, working-capital movements, planned capital spending, and funding needs as debt and interest costs rise.
- Outcome and timing of BVES’s pending 2023–2026 rate case, including recovery of wildfire mitigation costs.
- Changes in water supply, conservation requirements, PFAS compliance obligations, and military-contract construction activity and collections.