American States Water Company (AWR) — Q1 2023 Form 10-Q
Reporting period: Unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022. AWR’s businesses include regulated California water and electric utilities and contracted water and wastewater services, primarily for U.S. military facilities. GSWC is AWR’s water utility subsidiary; the filing presents both registrants.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $161.4 million | $108.6 million | +48.7% |
| Operating income | $51.2 million | $24.4 million | +110.0% |
| Net income | $34.4 million | $14.2 million | +143.0% |
| Diluted EPS, reported | $0.93 | $0.38 | +$0.55 |
| Operating margin | 31.7% | 22.4% | +9.3 percentage points |
Water revenue was $112.7 million, electric revenue $12.9 million, and contracted-services revenue $35.8 million. Reported results include $0.36 per share from retroactive water rates for 2022 recorded after a proposed CPUC rate-case decision. Management also reported adjusted consolidated diluted EPS of $0.54, excluding both that retroactive-rate impact and investment gains/losses, versus $0.41 a year earlier; this is a non-GAAP measure.
Cash flow: Operating cash flow was $7.0 million, down from $38.0 million. Capital expenditures were $49.3 million, versus $35.2 million; operating cash flow less capital expenditures was therefore approximately negative $42.2 million. Financing activities provided $38.3 million, including $129.7 million of net long-term debt issuance proceeds. Cash ended the quarter at $2.1 million.
Debt and liquidity: At March 31, AWR reported $576.4 million of long-term debt, $175.5 million of current bank borrowings, and $25.0 million of noncurrent bank borrowings. AWR’s $280 million revolving facility was amended on May 8 to extend its maturity to July 23, 2023, or earlier if replaced. AWR had a $168.0 million negative working-capital position; GSWC had an $87.9 million negative working-capital position, including $45.0 million owed to AWR. Management said neither had sufficient liquidity to repay these borrowings without refinancing or new financing, but believed it probable that financing would be secured and concluded obligations could be met for at least twelve months from issuance of the statements. No assurance was given.
GSWC issued $130 million of unsecured notes in January: $100 million at 5.12% due 2033 and $30 million at 5.22% due 2038. Consolidated interest expense rose to $9.5 million from $5.6 million, reflecting higher borrowing levels and rates. AWR paid $0.3975 per share in Q1 dividends; the board approved the same per-share dividend for Q2.
Material changes and operating developments
- Water revenue rose 52.5%, principally because Q1 2023 recognized retroactive 2022 rate increases and estimated 2023 increases following the April 13 proposed CPUC decision. The quarter included approximately $30 million attributable to 2022 retroactive rates. A $38.4 million rate-case memorandum-account balance had accumulated by March 31; GSWC plans to request recovery through surcharges after a final decision.
- Water consumption billed was approximately 17% lower year over year, mainly due to above-average rainfall in California; the water revenue adjustment mechanism generally limits the earnings impact of consumption changes.
- Contracted-services revenue increased 57.2%, largely due to construction timing and economic price adjustments. Segment diluted EPS increased to $0.15 from $0.08. Management expects this segment to contribute $0.45–$0.49 per share for full-year 2023.
- Electric segment diluted EPS declined to $0.06 from $0.07 as costs and interest expense increased while a new general rate case remained pending.
- Regulated-utility capital expenditures are projected at $140–$160 million for 2023, subject to schedule and supply-chain delays.
Outlook, risks, contingencies and unusual items
- Regulatory uncertainty: The water general rate case proposed decision was not yet final at filing. Estimated 2023 increases remain subject to an earnings test and inflation-index values. A proposed cost-of-capital decision received May 9 would adopt an 8.85% return on equity and 5.1% cost of debt for 2022–2024, subject to CPUC process; GSWC recorded a $9.3 million regulatory liability for estimated revenues subject to refund. Management said the ultimate outcome and revenue effects remain uncertain.
- Financing: The near-term facility maturity and negative working capital make successful refinancing or other financing important. AWR cited A+ ratings and its financing history, but access to capital markets is not assured. S&P’s outlook for AWR and GSWC was negative; Moody’s affirmed GSWC’s A2 rating with a stable outlook.
- Contract investigation: ASUS is cooperating with a civil government investigation into bidding and estimating practices on certain capital upgrade projects. Management did not expect a material adverse effect but could not predict the outcome or any penalties or damages.
- Other regulatory and environmental exposure: BVES’s wildfire mitigation and vegetation-management costs, and approximately $0.8 million of costs from a 2023 winter storm, are recorded or sought as regulatory assets and remain subject to review or recovery. Proposed federal PFAS drinking-water standards may increase future treatment and operating costs. Prolonged Colorado River supply constraints remain a risk despite improved California conditions.
- Unusual earnings factors: Q1 included investment gains of $1.6 million, compared with losses of $1.7 million in Q1 2022. The filing also records regulatory-accounting items and retroactive rate adjustments that materially affect period comparisons.
Important facts for investors to verify
- Whether AWR completed a replacement or extended credit facility before the July 23, 2023 maturity, and the resulting borrowing capacity and terms.
- Final CPUC decisions and actual implemented water rates, including surcharge recovery of the $38.4 million memorandum-account balance and any refunds under the cost-of-capital proceeding.
- Whether reported earnings growth persists after excluding the $0.36-per-share retroactive-rate benefit and investment-market effects.
- Cash generation relative to the planned $140–$160 million regulated-utility capital program, and the impact of higher financing costs.
- Developments in the ASUS government investigation and recovery approval for wildfire, storm, water-quality, and other regulatory assets.