10-Q: American States Water Company and Golden State Water Company Report First Quarter 2024 Results

American States Water Company and Golden State Water Company jointly released their first quarter 2024 financial results, showing a decrease in earnings compared to the same period last year.

Summary

• American States Water Company (AWR) and its subsidiary Golden State Water Company (GSWC) have released their financial results for the first quarter of 2024.
• AWR's consolidated diluted earnings per share were $0.62, down from $0.93 in the same period last year.
• The decrease is primarily attributed to the impact of retroactive rates from a prior water general rate case and estimated revenues subject to refund recorded in 2023.
• Excluding these items, adjusted consolidated diluted earnings per share were $0.62, compared to $0.60 in the first quarter of 2023.
• Water segment earnings decreased to $0.48 per share, compared to $0.74 per share in the first quarter of 2023, but adjusted earnings increased by $0.07 per share.
• Electric segment earnings decreased slightly by $0.01 per share, while contracted services segment earnings decreased by $0.02 per share.
• AWR parent company losses increased by $0.01 per share due to higher interest expenses.
• Water revenues decreased by $22.4 million, largely due to the impact of retroactive rates recorded in the first quarter of 2023.
• Electric revenues decreased by $699,000, and contracted services revenues decreased by $3.0 million.
• Operating expenses decreased by $13.9 million, primarily due to a decrease in supply costs and construction expenses.
• Interest expenses increased by $3.3 million due to higher borrowing levels and interest rates.
• Net cash provided by operating activities was $45.8 million, compared to $7.0 million in the same period last year.
• Capital expenditures were $47.5 million for the quarter.
• AWR sold 227,981 common shares through an at-the-market offering program, raising $16.2 million net of commissions.
• GSWC's net cash provided by operating activities was $31.0 million, compared to $10.9 million in the same period last year.

Sentiment

Score: 5

Explanation: The document presents mixed results with a decrease in earnings but an increase in operating cash flow. The company is facing regulatory and environmental challenges, but is also taking steps to address them. The outlook is cautiously optimistic, but there are significant risks and uncertainties.

Positives

• Adjusted consolidated diluted earnings per share increased slightly year-over-year.
• Water segment adjusted earnings increased by $0.07 per share.
• Net cash provided by operating activities increased significantly for both AWR and GSWC.
• AWR successfully raised capital through an at-the-market offering program.
• GSWC received $3.5 million in additional COVID-19 relief funds from the state of California.

Negatives

• AWR's consolidated diluted earnings per share decreased year-over-year.
• Water segment earnings decreased year-over-year.
• Electric and contracted services segment earnings decreased slightly year-over-year.
• AWR parent company losses increased due to higher interest expenses.
• Water revenues decreased due to the impact of retroactive rates recorded in the first quarter of 2023.
• Interest expenses increased due to higher borrowing levels and interest rates.

Risks

• The company is subject to regulatory risks, including the ability to recover costs through regulated rates.
• There is a risk of customer dissatisfaction due to rising rates.
• The company faces competition in bidding on utility service contracts.
• The company is exposed to the impact of climate change and extreme weather events.
• There are risks associated with cybersecurity incidents and the physical security of critical assets.
• The company's ability to borrow funds and access capital markets on reasonable terms is subject to market conditions.
• The company is exposed to the impact of inflation and supply chain disruptions on operational costs.
• There is a risk of delays in obtaining decisions from the CPUC on regulated public utility rates.
• The company is subject to potential government audits and investigations.
• The company is subject to the risk of groundwater contamination and increasing costs associated with treatment.

Future Outlook

The company expects the contracted services segment to contribute $0.50 to $0.54 per share for the full 2024 year. The company anticipates that interest expense will increase in future periods due to the need for additional external capital to fund construction programs at its regulated utilities and if market interest rates increase. The company expects to continue paying quarterly cash dividends on or about March 1, June 1, September 1 and December 1, subject to earnings and financial conditions, regulatory requirements and such other factors as the Board of Directors may deem relevant.

Management Comments

• Management believes that rate recovery, proper insurance coverage and reserves are in place to insure against, among other things, property, general liability, employment, and workers compensation claims incurred in the ordinary course of business.
• Management believes that the estimated additional costs for environmental clean-up and remediation will continue to be approved in rate base by the CPUC as approved historically.
• Management believes that AWR's and GSWC's sound capital structures and strong credit ratings, combined with its financial discipline, will enable AWR to access the debt and equity markets.

Industry Context

The announcement reflects the challenges faced by regulated utilities in California, including the need to balance infrastructure investments with customer rate increases, and the impact of regulatory decisions on revenue and earnings. The company is also navigating the complexities of climate change, water supply issues, and new environmental regulations.

Comparison to Industry Standards

• The company's performance is impacted by the regulatory environment in California, which is unique compared to other states.
• The company's reliance on CPUC approvals for rate increases is a common factor for investor-owned utilities in California.
• The company's capital expenditure plans are significant, reflecting the need to upgrade aging infrastructure, which is a common trend in the water and electric utility sectors.
• The company's focus on wildfire mitigation is a specific concern for utilities operating in California.
• The company's involvement in military base contracts is a niche area, and its performance is dependent on government funding and contract terms.
• The company's efforts to address PFAS contamination and other water quality issues are consistent with industry-wide challenges.
• The company's dividend policy of increasing dividends each year for 69 consecutive years is a notable achievement compared to industry peers.

Related Party Transactions

• GSWC allocates certain corporate office administrative and general costs to its affiliates, BVES and ASUS.
• AWR borrows and provides funds to ASUS in support of its operations.

Stakeholder Impact

• Shareholders are impacted by the decrease in earnings and the potential for future capital raises.
• Customers are impacted by rising rates and the need to comply with water conservation measures.
• Employees are impacted by changes in labor costs and employee-related benefits.
• Suppliers are impacted by supply chain disruptions and changes in purchasing patterns.
• Creditors are impacted by the company's debt levels and ability to access capital markets.

Next Steps

• GSWC will continue to pursue its general rate case application for 2025-2027.
• BVES will await a decision on its general rate case application for 2023-2026.
• The company will continue to monitor and address water quality issues, including PFAS and hexavalent chromium.
• The company will continue to monitor and address water supply issues, including the Colorado River System.
• The company will continue to invest in cybersecurity and physical security measures.
• The company will continue to seek economic price adjustments and equitable adjustments for its contracted services segment.
• The company will continue to monitor and address the impact of climate change on its operations.

Key Dates

Keywords

water utility, electric utility, contracted services, regulatory, capital expenditures, earnings, revenue, operating expenses, interest rates, cash flow, CPUC, military bases, rate case, water quality, wildfire mitigation