American States Water pany(AWR) - 2022 Q2 - Quarterly Report

FORM 10-Q Filing Information Registrant Information This report is jointly filed by American States Water Company (AWR) and its wholly-owned subsidiary Golden State Water Company (GSWC), with AWR classified as a large accelerated filer and GSWC as a non-accelerated filer - American States Water Company (AWR) and its wholly-owned subsidiary Golden State Water Company (GSWC) jointly filed this quarterly report[1][7] - AWR is designated as a large accelerated filer, and GSWC is a non-accelerated filer[3] Outstanding Shares Information (as of July 29, 2022) | Company Name | Number of Common Shares Outstanding | | :------------------------ | :------------- | | American States Water Company | 36,956,824 | | Golden State Water Company | 170 | Part I Financial Information Item 1. Financial Statements This section includes the unaudited consolidated financial statements of American States Water Company (AWR) and its subsidiary Golden State Water Company (GSWC), comprising balance sheets, income statements, statements of changes in shareholders' equity, and cash flow statements, along with related notes - Financial statements are unaudited, prepared according to SEC rules and GAAP, and include normal recurring items and estimated adjustments deemed necessary by management[6][51] - AWR is the parent company of GSWC, Bear Valley Electric Service, Inc. (BVESI), and American States Utility Services, Inc. (ASUS); this report is a consolidated report for AWR and GSWC[7][51] - The report contains forward-looking statements, intended to comply with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, cautioning investors that actual results may differ materially from such statements[8] AMERICAN STATES WATER COMPANY CONSOLIDATED BALANCE SHEETS As of June 30, 2022, AWR's consolidated total assets were $1,949,646 thousand, a 2.56% increase from December 31, 2021, with total liabilities and capitalization also increasing, notably due to a significant rise in notes payable to banks reflecting short-term financing needs AWR Consolidated Balance Sheet Key Data (Thousands of USD) | Metric | June 30, 2022 | December 31, 2021 | Change Amount | Change Percentage | | :------------------------ | :------------ | :------------- | :------- | :--------- | | Assets | | | | | | Net utility plant | 1,683,487 | 1,626,004 | 57,483 | 3.54% | | Other property and investments | 36,643 | 41,922 | (5,279) | -12.59% | | Current assets | 138,970 | 138,052 | 918 | 0.66% | | Other assets | 90,546 | 95,005 | (4,459) | -4.69% | | Total Assets | 1,949,646 | 1,900,983 | 48,663 | 2.56% | | Capitalization and Liabilities | | | | | | Total common shareholders' equity | 694,225 | 685,947 | 8,278 | 1.21% | | Long-term debt | 446,940 | 412,176 | 34,764 | 8.43% | | Total Capitalization | 1,141,165 | 1,098,123 | 43,042 | 3.92% | | Current liabilities | 348,736 | 155,574 | 193,162 | 124.16% | | Of which: Notes payable to banks | 223,500 | 31,000 | 192,500 | 620.97% | | Other credits | 459,745 | 647,286 | (187,541)| -28.97% | | Total Capitalization and Liabilities | 1,949,646 | 1,900,983 | 48,663 | 2.56% | AMERICAN STATES WATER COMPANY CONSOLIDATED STATEMENTS OF INCOME For the three and six months ended June 30, 2022, AWR's consolidated net income and earnings per share both decreased year-over-year, primarily due to reduced total operating revenues, especially in contracted services, and negative changes in other income and expenses, net AWR Consolidated Statements of Income Key Data (Thousands of USD, except per share amounts) | Metric | 2022 Q2 | 2021 Q2 | Q2 YoY Change | 2022 YTD | 2021 YTD | YTD YoY Change | | :------------------------ | :------- | :------- | :--------- | :-------- | :-------- | :---------- | | Operating Revenues | | | | | | | | Water | 90,856 | 91,633 | -0.85% | 164,762 | 166,662 | -1.14% | | Electric | 8,217 | 8,108 | 1.34% | 20,109 | 19,647 | 2.35% | | Contracted services | 23,534 | 28,673 | -17.91% | 46,306 | 59,165 | -21.74% | | Total Operating Revenues| 122,607| 128,414| -4.52% | 231,177 | 245,474 | -5.82% | | Operating Expenses | 88,290 | 90,567 | -2.51% | 172,495 | 177,298 | -2.71% | | Operating Income | 34,317 | 37,847 | -9.33% | 58,682 | 68,176 | -13.93% | | Other income and expenses, net | (8,161) | (3,809) | 114.29% | (13,903) | (8,956) | 55.23% | | Income before income taxes | 26,156 | 34,038 | -23.16% | 44,779 | 59,220 | -24.38% | | Income tax expense | 6,205 | 7,462 | -16.84% | 10,666 | 13,376 | -20.26% | | Net Income | 19,951 | 26,576 | -24.93%| 34,113 | 45,844 | -25.59% | | Basic earnings per share | 0.54 | 0.72 | -25.00% | 0.92 | 1.24 | -25.81% | | Diluted earnings per share | 0.54 | 0.72 | -25.00% | 0.92 | 1.24 | -25.81% | | Dividends declared per share | 0.365 | 0.335 | 8.96% | 0.730 | 0.670 | 8.96% | AMERICAN STATES WATER COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY For the three and six months ended June 30, 2022, AWR's total common shareholders' equity increased, primarily driven by net income contributions, partially offset by common stock dividends declared, with stock option exercises and equity incentive-related stock compensation also having a positive impact AWR Consolidated Statements of Changes in Common Shareholders' Equity Key Data (Thousands of USD) | Metric | December 31, 2021 | March 31, 2022 | June 30, 2022 | | :------------------------------------ | :------------- | :------------ | :------------ | | Common stock | 258,442 | 259,284 | 259,656 | | Retained earnings | 427,505 | 428,141 | 434,569 | | Total Common Shareholders' Equity | 685,947 | 687,425 | 694,225 | | | | | | | Major Changes (as of June 30, 2022) | Three Months | Six Months| | | Net income | 19,951 | 34,113 | | | Exercise of stock options and other common stock issuances | — | — | | | Stock compensation, net | 338 | 1,139 | | | Stock award dividend equivalents, non-cash | 34 | 75 | | | Common stock dividends | (13,489) | (26,974) | | | Dividend equivalents, non-cash | (34) | (75) | | AWR Consolidated Statements of Changes in Common Shareholders' Equity Key Data (Thousands of USD) | Metric | December 31, 2020 | March 31, 2021 | June 30, 2021 | | :------------------------------------ | :------------- | :------------ | :------------ | | Common stock | 256,666 | 257,528 | 258,101 | | Retained earnings | 385,007 | 391,865 | 406,033 | | Total Common Shareholders' Equity | 641,673 | 649,393 | 664,134 | | | | | | | Major Changes (as of June 30, 2021) | Three Months | Six Months| | | Net income | 26,576 | 45,844 | | | Exercise of stock options and other common stock issuances | — | — | | | Stock compensation, net | 531 | 1,344 | | | Stock award dividend equivalents, non-cash | 42 | 91 | | | Common stock dividends | (12,366) | (24,727) | | | Dividend equivalents, non-cash | (42) | (91) | | AMERICAN STATES WATER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended June 30, 2022, AWR's operating cash flow significantly increased to $56.9 million, primarily due to net income adjustments and working capital changes, while investing cash outflows remained stable and financing cash inflows substantially rose, reflecting new debt issuance and net bank borrowings AWR Consolidated Statements of Cash Flows Key Data (Thousands of USD) | Metric | June 30, 2022 (Six Months) | June 30, 2021 (Six Months) | Change Amount | Change Percentage | | :---------------------------------- | :--------------------- | :--------------------- | :------- | :--------- | | Net cash provided by operating activities | 56,905 | 41,144 | 15,761 | 38.31% | | Net cash used in investing activities | (76,416) | (76,083) | (333) | 0.44% | | Net cash provided by (used in) financing activities | 25,373 | 3,561 | 21,812 | 612.53% | | Net change in cash and cash equivalents | 5,862 | (31,378) | 37,200 | -118.57% | | Cash and cash equivalents at end of period | 10,825 | 5,359 | 5,466 | 101.99% | GOLDEN STATE WATER COMPANY BALANCE SHEETS As of June 30, 2022, GSWC's total assets were $1,683,287 thousand, a 2.73% increase from December 31, 2021, with a significant rise in current liabilities primarily due to increased intercompany payables to parent AWR, reflecting short-term borrowings GSWC Balance Sheet Key Data (Thousands of USD) | Metric | June 30, 2022 | December 31, 2021 | Change Amount | Change Percentage | | :------------------------ | :------------ | :------------- | :------- | :--------- | | Assets | | | | | | Net utility plant | 1,553,389 | 1,499,745 | 53,644 | 3.58% | | Other property and investments | 33,386 | 38,659 | (5,273) | -13.64% | | Current assets | 72,880 | 75,215 | (2,335) | -3.10% | | Other assets | 23,632 | 24,863 | (1,231) | -4.95% | | Total Assets | 1,683,287 | 1,638,482 | 44,805 | 2.73% | | Capitalization and Liabilities | | | | | | Total common shareholder's equity | 613,157 | 615,686 | (2,529) | -0.41% | | Long-term debt | 412,118 | 412,176 | (58) | -0.01% | | Total Capitalization | 1,025,275 | 1,027,862 | (2,587)| -0.25% | | Current liabilities | 207,411 | 98,547 | 108,864 | 110.47% | | Of which: Due to parent company | 102,399 | — | 102,399 | N/A | | Other credits | 450,601 | 512,073 | (61,472) | -12.00% | | Total Capitalization and Liabilities | 1,683,287 | 1,638,482 | 44,805 | 2.73% | GOLDEN STATE WATER COMPANY STATEMENTS OF INCOME For the three and six months ended June 30, 2022, GSWC's net income decreased year-over-year, primarily due to reduced operating revenues and negative changes in other income and expenses, net GSWC Statements of Income Key Data (Thousands of USD) | Metric | 2022 Q2 | 2021 Q2 | Q2 YoY Change | 2022 YTD | 2021 YTD | YTD YoY Change | | :------------------------ | :------- | :------- | :--------- | :-------- | :-------- | :---------- | | Operating Revenues | | | | | | | | Water | 90,856 | 91,633 | -0.85% | 164,762 | 166,662 | -1.14% | | Total Operating Revenues| 90,856 | 91,633 | -0.85% | 164,762 | 166,662 | -1.14% | | Operating Expenses | 63,145 | 60,856 | 3.76% | 120,052 | 114,826 | 4.55% | | Operating Income | 27,711 | 30,777 | -9.96% | 44,710 | 51,836 | -13.75% | | Other income and expenses, net | (7,720) | (3,860) | 100.00% | (13,463) | (8,920) | 50.93% | | Income before income taxes | 19,991 | 26,917 | -25.73% | 31,247 | 42,916 | -27.19% | | Income tax expense | 5,103 | 5,957 | -14.34% | 7,792 | 9,725 | -19.97% | | Net Income | 14,888 | 20,960 | -28.94%| 23,455 | 33,191 | -29.34% | | Dividends declared per share | 13,500 | 12,400 | 8.87% | 27,000 | 24,800 | 8.87% | GOLDEN STATE WATER COMPANY STATEMENTS OF CHANGES IN COMMON SHAREHOLDER'S EQUITY For the three and six months ended June 30, 2022, GSWC's total common shareholder's equity slightly decreased, primarily because net income contributions did not fully offset dividends paid to parent AWR GSWC Statements of Changes in Common Shareholder's Equity Key Data (Thousands of USD) | Metric | December 31, 2021 | March 31, 2022 | June 30, 2022 | | :------------------------------------ | :------------- | :------------ | :------------ | | Common stock | 356,530 | 357,311 | 357,616 | | Retained earnings | 259,156 | 254,184 | 255,541 | | Total Common Shareholder's Equity | 615,686 | 611,495 | 613,157 | | | | | | | Major Changes (as of June 30, 2022) | Three Months | Six Months| | | Net income | 14,888 | 23,455 | | | Stock compensation, net | 274 | 1,016 | | | Stock award dividend equivalents, non-cash | 31 | 70 | | | Common stock dividends | (13,500) | (27,000) | | | Dividend equivalents, non-cash | (31) | (70) | | GSWC Statements of Changes in Common Shareholder's Equity Key Data (Thousands of USD) | Metric | December 31, 2020 | March 31, 2021 | June 30, 2021 | | :------------------------------------ | :------------- | :------------ | :------------ | | Common stock | 354,906 | 355,733 | 356,251 | | Retained earnings | 228,392 | 228,178 | 236,699 | | Total Common Shareholder's Equity | 583,298 | 583,911 | 592,950 | | | | | | | Major Changes (as of June 30, 2021) | Three Months | Six Months| | | Net income | 20,960 | 33,191 | | | Stock compensation, net | 479 | 1,261 | | | Stock award dividend equivalents, non-cash | 39 | 84 | | | Common stock dividends | (12,400) | (24,800) | | | Dividend equivalents, non-cash | (39) | (84) | | GOLDEN STATE WATER COMPANY STATEMENTS OF CASH FLOWS For the six months ended June 30, 2022, GSWC's operating cash flow increased to $43.2 million, driven by COVID-19 relief funds and income tax payment timing, while investing cash outflows remained stable and financing cash flow turned positive due to net intercompany borrowings GSWC Statements of Cash Flows Key Data (Thousands of USD) | Metric | June 30, 2022 (Six Months) | June 30, 2021 (Six Months) | Change Amount | Change Percentage | | :---------------------------------- | :--------------------- | :--------------------- | :------- | :--------- | | Net cash provided by operating activities | 43,225 | 40,049 | 3,176 | 7.93% | | Net cash used in investing activities | (66,861) | (63,749) | (3,112) | 4.88% | | Net cash provided by (used in) financing activities | 26,569 | (7,219) | 33,788 | -468.06% | | Net change in cash and cash equivalents | 2,933 | (30,919) | 33,852 | -109.49% | | Cash and cash equivalents at end of period | 3,458 | 4,659 | (1,201) | -25.78% | Notes to Consolidated Financial Statements This section provides detailed notes to the consolidated financial statements, covering company operations, accounting policies, revenue, regulatory matters, EPS, derivatives, fair value of financial instruments, income taxes, employee benefits, contingencies, and business segment information Note 1 — Summary of Significant Accounting Policies This note outlines AWR and its subsidiaries' business nature, basis of consolidated financial statement preparation, and related party transactions and financing activities, highlighting AWR's regulated water, electric, and contracted services, credit facility revision, long-term debt issuance, and COVID-19 impact monitoring - AWR is the parent company of Golden State Water Company (GSWC), Bear Valley Electric Service, Inc. (BVESI), and American States Utility Services, Inc. (ASUS), serving over one million people in nine states through its subsidiaries[50] - GSWC and BVESI are California public utilities regulated by the California Public Utilities Commission (CPUC), while ASUS provides water and/or wastewater services to U.S. military bases under 50-year fixed-price contracts through its subsidiaries[50] - AWR's credit facility was amended on April 22, 2022, increasing borrowing capacity from $200.0 million to $280.0 million and changing the benchmark rate from LIBOR to SOFR; $223.5 million was outstanding under this facility as of June 30, 2022[52] - BVESI issued $35.0 million in unsecured private placement notes on April 28, 2022, to repay outstanding borrowings under its credit facility, complying with CPUC's 24-month rule[53] - The COVID-19 pandemic led to increased overdue customer accounts receivable for GSWC and BVESI, with incremental costs recorded as regulatory assets not impacting company earnings, while ASUS's operations were not significantly affected[54] Note 2 — Revenues This note details the company's revenue composition across water, electric, and contracted services segments, with most revenue derived from customer contracts, including GSWC and BVESI's tariff revenues and ASUS's 50-year fixed-price contracts with the U.S. government - Most of the company's revenue is derived from contracts with customers, including tariff revenues for GSWC and BVESI, and 50-year fixed-price contracts with the U.S. government for ASUS[57] AWR Segment Revenues (Thousands of USD) | Revenue Source | 2022 Q2 | 2021 Q2 | Q2 YoY Change | 2022 YTD | 2021 YTD | YTD YoY Change | | :---------------- | :------- | :------- | :--------- | :-------- | :-------- | :---------- | | Water | 90,856 | 91,633 | -0.85% | 164,762 | 166,662 | -1.14% | | Electric | 8,217 | 8,108 | 1.34% | 20,109 | 19,647 | 2.35% | | Contracted services | 23,534 | 28,673 | -17.91% | 46,306 | 59,165 | -21.74% | | Total AWR Revenues| 122,607| 128,414| -4.52% | 231,177 | 245,474 | -5.82% | Contract Assets and Liabilities (Thousands of USD) | Metric | June 30, 2022 | December 31, 2021 | | :------------------------ | :------------ | :------------- | | Unbilled accounts receivable | 12,354 | 14,835 | | Receivables from U.S. government | 73,160 | 79,818 | | Contract assets | 14,177 | 9,587 | | Contract liabilities | 322 | 257 | - As of June 30, 2022, the company's total remaining performance obligations were $3.3 billion, expected to be recognized as revenue over the remaining contract terms of 32 to 46 years[60] Note 3 — Regulatory Matters This note details GSWC and BVESI's regulatory assets and liabilities, along with various regulatory proceedings impacting their rates and revenues, including water general rate case delays, cost of capital proceedings, alternative revenue program adjustments, COVID-19 memorandum account cost recovery, and BVESI's vegetation management and wildfire mitigation regulatory assets - GSWC and BVESI record regulatory assets and liabilities, representing future cost recovery from customers and future refunds to customers, respectively[61] Net Regulatory Assets and Liabilities (Thousands of USD) | Company | June 30, 2022 | December 31, 2021 | | :--- | :------------ | :------------- | | GSWC | (10,057) | (24,082) | | BVESI| (11,238) | (22,796) | - GSWC's water general rate case (2022-2024) is delayed for a final decision, with water revenues for the first half of 2022 still based on 2021 rates; new rates, once approved, will be retroactive to January 1, 2022[63] - GSWC's cost of capital proceeding is expected to have a decision in the second half of 2022, and management has reduced revenue by $3.1 million and recorded a corresponding regulatory liability in the first half of 2022 based on its estimate of lower debt costs[64] - GSWC recorded approximately $13.1 million in net under-collections in its WRAM/MCBA accounts, which track differences between authorized and actual water revenues and costs[65] - GSWC and BVESI recorded incremental costs, such as bad debt expense, due to the COVID-19 pandemic in memorandum accounts, totaling $5.6 million for GSWC and $652 thousand for BVESI as of June 30, 2022[66] - BVESI recorded approximately $6.9 million in incremental vegetation management costs and $3.5 million in wildfire mitigation plan-related expenses as regulatory assets, planning to seek recovery in its next general rate case application in August 2022[69] - BVESI is seeking recovery for $449 thousand in incremental costs from a 2019 winter storm, having refiled its application after CPUC previously denied its request[70] Note 4 — Earnings per Share/Capital Stock This note explains AWR's use of the "two-class method" for earnings per share calculation, provides reconciliation tables for basic and diluted EPS, and discloses restricted stock units and dividend information - AWR uses the "two-class method" to calculate earnings per share, allocating undistributed earnings to common stock and participating securities (e.g., restricted stock units)[72] AWR Basic Earnings Per Share Calculation (Thousands of USD, except per share amounts) | Metric | 2022 Q2 | 2021 Q2 | 2022 YTD | 2021 YTD | | :------------------------------------ | :------- | :------- | :-------- | :-------- | | Net income | 19,951 | 26,576 | 34,113 | 45,844 | | Income attributable to common shareholders, basic | 19,898 | 26,501 | 34,029 | 45,724 | | Weighted-average common shares outstanding, basic | 36,956 | 36,916 | 36,950 | 36,907 | | Basic Earnings Per Share | 0.54 | 0.72 | 0.92 | 1.24 | AWR Diluted Earnings Per Share Calculation (Thousands of USD, except per share amounts) | Metric | 2022 Q2 | 2021 Q2 | 2022 YTD | 2021 YTD | | :------------------------------------ | :------- | :------- | :-------- | :-------- | | Income attributable to common shareholders, basic | 19,898 | 26,501 | 34,029 | 45,724 | | Undistributed earnings for diluted stock awards | 17 | 40 | 17 | 55 | | Income attributable to common shareholders, diluted | 19,915 | 26,541 | 34,046 | 45,779 | | Weighted-average common shares outstanding, diluted | 37,039 | 37,007 | 37,029 | 36,993 | | Diluted Earnings Per Share | 0.54 | 0.72 | 0.92 | 1.24 | - As of June 30, 2022, and June 30, 2021, there were 100,820 and 107,772 unexercised restricted stock units, respectively[74] AWR Dividends Declared Per Share (USD) | Period | 2022 Q2 | 2021 Q2 | 2022 YTD | 2021 YTD | | :-------- | :------- | :------- | :-------- | :-------- | | Dividends declared per share | 0.365 | 0.335 | 0.730 | 0.670 | Note 5 — Derivative Instruments This note discloses BVESI's power purchase agreements as derivative instruments, accounted for at fair value, with unrealized gains and losses deferred due to CPUC-approved regulatory memorandum accounts, thus not impacting AWR's earnings, and fair value changes primarily driven by rising energy prices - BVESI's long-term power purchase agreements are treated as derivative instruments, requiring mark-to-market accounting[76] - CPUC-approved regulatory memorandum accounts defer unrealized gains and losses from power purchase agreements, thus not impacting AWR's earnings[76] Derivative Instruments Fair Value Changes (Thousands of USD) | Metric | 2022 Q2 | 2021 Q2 | 2022 YTD | 2021 YTD | | :------------------------ | :------- | :------- | :-------- | :-------- | | Fair value at beginning of period | 7,020 | 1,224 | 4,441 | (1,537) | | Unrealized gains on power purchase agreements | 1,094 | 1,586 | 3,673 | 4,347 | | Fair Value at End of Period | 8,114| 2,810| 8,114 | 2,810 | - Derivative instruments' valuation is classified as Level 3, with fair value changes primarily due to rising energy prices in the first half of 2022[76] Note 6 — Fair Value of Financial Instruments This note provides fair value information for the company's financial instruments, stating that book values for cash, receivables, payables, and short-term debt approximate fair value, while long-term debt fair value is estimated using Level 2 methods and assumptions, and SERP trust investments are disclosed at fair value - The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximate fair value due to their short-term nature[79] - Investments in the SERP trust are measured at fair value, totaling $26.3 million as of June 30, 2022, and $31.5 million as of December 31, 2021, all classified as Level 1 investments[79] AWR Long-Term Debt Fair Value (Thousands of USD) | Metric | June 30, 2022 Carrying Value | June 30, 2022 Fair Value | December 31, 2021 Carrying Value | December 31, 2021 Fair Value | | :---------------- | :-------------------- | :-------------------- | :--------------------- | :--------------------- | | Long-term debt—AWR (1) | 450,583 | 442,106 | 415,788 | 490,852 | - The fair value of long-term debt is estimated using Level 2 methods and assumptions, reflecting interest rates for similar financial instruments with comparable maturities[79] Note 7 — Income Taxes This note discloses AWR and GSWC's effective income tax rates (ETR) and explains their deviation from the 21% federal statutory rate, primarily due to state taxes, permanent differences, amortization of excess deferred income tax liabilities, and flow-through adjustments under regulatory requirements Effective Income Tax Rate (ETR) | Company | Period | ETR | | :--- | :-------- | :-------- | | AWR | 2022 Q2 | 23.7% | | AWR | 2021 Q2 | 21.9% | | AWR | 2022 YTD | 23.8% | | AWR | 2021 YTD | 22.6% | | GSWC | 2022 Q2 | 25.5% | | GSWC | 2021 Q2 | 22.1% | | GSWC | 2022 YTD | 24.9% | | GSWC | 2021 YTD | 22.7% | - The ETR difference from the 21% federal statutory rate is primarily due to state taxes, excess tax benefits from equity compensation, amortization of excess deferred income tax liabilities, and flow-through adjustments required by regulators[81] Note 8 — Employee Benefit Plans This note presents the net periodic benefit cost components for AWR's pension, post-retirement healthcare, and SERP plans, noting a decrease in pension plan costs in the first half of 2022 due to actuarial loss amortization, and GSWC and BVESI's pension two-way balancing accounts ensure cost recovery in customer rates Net Periodic Benefit Cost Components (Thousands of USD) | Metric | 2022 Q2 Pension | 2021 Q2 Pension | 2022 Q2 Other Post-Retirement Benefits | 2021 Q2 Other Post-Retirement Benefits | 2022 Q2 SERP | 2021 Q2 SERP | | :------------------------ | :------------- | :------------- | :------------------- | :------------------- | :------------ | :------------ | | Service cost | 1,342 | 1,625 | 33 | 40 | 298 | 348 | | Interest cost | 1,856 | 1,712 | 16 | 31 | 256 | 229 | | Expected return on plan assets | (3,290) | (3,134) | (147) | (134) | — | — | | Amortization of prior service cost | 109 | 109 | — | — | — | — | | Amortization of actuarial (gain) loss | — | 993 | (412) | (287) | 145 | 419 | | Net Periodic Benefit Cost under GAAP| 17 | 1,305 | (510) | (350) | 699 | 996 | | Regulatory adjustment - deferred | — | (351) | — | — | — | — | | Total Expense (Income) Recognized | 17 | 954 | (510) | (350) | 699 | 996 | Net Periodic Benefit Cost Components (Thousands of USD) | Metric | 2022 YTD Pension | 2021 YTD Pension | 2022 YTD Other Post-Retirement Benefits | 2021 YTD Other Post-Retirement Benefits | 2022 YTD SERP | 2021 YTD SERP | | :------------------------ | :-------------- | :-------------- | :-------------------- | :-------------------- | :------------- | :------------- | | Service cost | 2,822 | 3,250 | 66 | 80 | 596 | 696 | | Interest cost | 3,700 | 3,424 | 32 | 62 | 512 | 458 | | Expected return on plan assets | (6,582) | (6,268) | (294) | (268) | — | — | | Amortization of prior service cost | 218 | 218 | — | — | — | — | | Amortization of actuarial (gain) loss | — | 1,986 | (824) | (574) | 290 | 838 | | Net Periodic Benefit Cost under GAAP| 158 | 2,610 | (1,020) | (700) | 1,398 | 1,992 | | Regulatory adjustment - deferred | — | (702) | — | — | — | — | | Total Expense (Income) Recognized | 158 | 1,908 | (1,020) | (700) | 1,398 | 1,992 | - GSWC and BVESI use two-way balancing accounts to track pension expense differences, ensuring pension costs are recovered in customer rates with no significant impact on earnings[85] Note 9 — Contingencies This note discloses GSWC's environmental cleanup and remediation contingencies and other routine litigation, with GSWC expecting to recover additional environmental cleanup costs and management believing all litigation will not materially impact the company's consolidated operating results, financial position, or cash flows - GSWC has spent approximately $6.1 million on environmental cleanup and remediation at a site, with $1.5 million paid by the California Underground Storage Tank Fund[86] - As of June 30, 2022, GSWC estimated $1.3 million in additional costs to complete cleanup work, believing these costs are likely to be approved for recovery by the CPUC[86] - The company faces other routine litigation, but management believes existing rate recovery, insurance coverage, and reserves are sufficient, expecting no material impact on consolidated financial results[87] Note 10 — Business Segments This note provides financial information for AWR's three reportable segments: Water, Electric, and Contracted Services, with GSWC and BVESI operating in California and ASUS and its subsidiaries in nine states, detailing operating revenues, operating income (loss), net utility plant, depreciation and amortization, income tax expense (benefit), and capital additions - AWR has three reportable segments: Water, Electric, and Contracted Services, with GSWC and BVESI operating in California, and ASUS and its subsidiaries operating in nine states[89] AWR Segment Performance (2022 Q2, Thousands of USD) | Metric | Water | Electric | Contracted Services | AWR Parent | Consolidated AWR | | :------------------------ | :-------- | :------ | :------- | :-------- | :-------- | | Operating revenues | 90,856 | 8,217 | 23,534 | — | 122,607 | | Operating income (loss) | 27,711 | 2,038 | 4,571 | (3) | 34,317 | | Net utility plant | 1,553,389 | 111,394 | 18,704 | — | 1,683,487 | | Depreciation and amortization expense | 8,553 | 686 | 932 | — | 10,171 | | Income tax expense (benefit) | 5,103 | 215 | 1,108 | (221) | 6,205 | | Capital additions | 35,519 | 5,306 | 557 | — | 41,382 | AWR Segment Performance (2022 YTD, Thousands of USD) | Metric | Water | Electric | Contracted Services | AWR Parent | Consolidated AWR | | :------------------------ | :-------- | :------ | :------- | :-------- | :-------- | | Operating revenues | 164,762 | 20,109 | 46,306 | — | 231,177 | | Operating income (loss) | 44,710 | 5,636 | 8,341 | (5) | 58,682 | | Net utility plant | 1,553,389 | 111,394 | 18,704 | — | 1,683,487 | | Depreciation and amortization expense | 17,098 | 1,340 | 1,847 | — | 20,285 | | Income tax expense (benefit) | 7,792 | 1,167 | 2,052 | (345) | 10,666 | | Capital additions | 66,984 | 8,774 | 794 | — | 76,552 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed discussion and analysis of AWR's consolidated operations and assets, including an assessment of each business segment's performance (Water, Electric, and Contracted Services), and management's discussion of key factors affecting financial performance, such as regulatory rate cases, COVID-19 impacts, liquidity and capital resources, and environmental and water supply issues - Management's discussion and analysis includes information on AWR's consolidated operations and assets, specifically mentioning GSWC, BVESI, ASUS and its subsidiaries, and AWR (parent company)[97] - The company uses earnings per share by business segment as a key metric to evaluate operating performance, comparing it to historical periods and operating budgets[97] - Factors affecting the company's financial performance are summarized in the 2021 Form 10-K's "Risk Factors" section[98] General Rate Case Filings and Other Matters This section details various regulatory proceedings affecting GSWC and BVESI, including water general rate cases, low-income affordability rulemakings, cost of capital proceedings, and electric segment rate cases, all of which significantly impact the company's future revenues, cost recovery, and profitability - GSWC's water general rate case (2022-2024) is still awaiting a final decision from the CPUC; if approved as per the settlement agreement, 2022 revenues would increase by approximately $30.3 million, with water supply costs increasing by $9.7 million[100] - Due to the water general rate case delay, water revenues for the first half of 2022 are still based on 2021 rates; if new rates are approved and implemented retroactively, Q2 and YTD 2022 EPS would increase by $0.10 and $0.19 per share, respectively[101] - The CPUC's final decision on low-income affordability rulemaking will eliminate GSWC's use of the Water Revenue Adjustment Mechanism (WRAM) and Modified Cost Balancing Account (MCBA) starting in 2025, potentially increasing future earnings volatility[102] - GSWC's cost of capital proceeding is awaiting CPUC approval, and management has reduced revenue by $3.1 million and recorded a corresponding regulatory liability in the first half of 2022 based on its estimate of lower debt costs[104] - BVESI's electric general rate case has set new rates for 2018-2022, increasing 2022 revenues by $1.0 million; BVESI plans to file its next rate case application in August 2022 to set new rates for 2023-2026[106] - ASUS's contracted services revenue and cash flow depend on annual economic price adjustments and contract modifications with the U.S. government[107] COVID-19 Impact The COVID-19 pandemic continues to affect GSWC and BVESI's customer accounts receivable, leading to increased bad debt reserves, but the CPUC has authorized recording related incremental costs in memorandum accounts for future recovery, thus not impacting company earnings, while ASUS's operations remain largely unaffected, service disconnection moratoriums have lifted, and government relief funds have been received to assist customers with overdue bills - GSWC and BVESI experienced increased overdue customer accounts receivable due to the COVID-19 pandemic, leading to higher bad debt reserves[108] - The CPUC authorized GSWC and BVESI to record incremental costs (including bad debt expense) caused by the pandemic in COVID-19 related memorandum accounts for future recovery, thus not impacting company earnings[108] - ASUS's contracted services operations were not significantly impacted by the COVID-19 pandemic[108] - The CPUC's moratorium on service disconnections has ended, with residential customer disconnections resuming in June 2022[108] - GSWC received $9.5 million in COVID relief funds in January 2022, and BVESI received $321 thousand in February 2022, to help customers pay overdue bills from the pandemic period[108] Summary of Second Quarter Results by Segment In Q2 2022, AWR's consolidated diluted EPS was $0.54, a $0.18 year-over-year decrease, primarily due to retirement plan investment losses and water general rate case delays; excluding these factors and adjusting for rate delay impact, adjusted EPS was $0.71, an increase from the prior year 2022 Q2 Diluted Earnings Per Share by Segment (USD) | Segment | 2022 Q2 | 2021 Q2 | Change Amount | | :-------------- | :------- | :------- | :------- | | Water | 0.40 | 0.57 | (0.17) | | Electric | 0.04 | 0.04 | — | | Contracted Services | 0.10 | 0.11 | (0.01) | | Consolidated Diluted EPS| 0.54 | 0.72 | (0.18)| - In Q2 2022, AWR's consolidated diluted EPS was $0.54, a $0.18 year-over-year decrease[109] - The decrease was due to retirement plan investment losses of $3.5 million ($0.07 per share), compared to gains of $1.6 million ($0.03 per share) in the prior year, a net reduction of $0.10 per share[109] - If new water rates are approved and implemented retroactively, the Water segment would see an increase of $7.7 million in revenue ($0.15 per share) and $2.7 million in water supply costs ($0.05 per share) in Q2 2022, totaling a $0.10 per share increase[109] - Excluding investment gains/losses and including the impact of water rate delays, adjusted consolidated diluted EPS for Q2 2022 was $0.71, an increase of $0.02 from $0.69 in Q2 2021[109] - Adjusted diluted EPS for the Water segment (excluding investment gains/losses and rate delay impact) was $0.57, an increase of $0.03 or 5.6% from the prior year's adjusted $0.54[111] - Diluted EPS for the Electric segment remained $0.04 in both Q2 2022 and Q2 2021, positively impacted by CPUC-approved rate increases and a lower effective income tax rate, partially offset by higher interest expense[113] - Diluted EPS for the Contracted Services segment decreased by $0.01 in Q2 2022, primarily due to reduced construction activity, partially offset by increased management fees, with an expected full-year contribution of $0.45 to $0.49 per share for 2022[114] Summary of Year-to-Date Results by Segment As of June 30, 2022, AWR's consolidated diluted EPS was $0.92, a $0.32 year-over-year decrease, primarily due to retirement plan investment losses and water general rate case delays; excluding these factors and adjusting for rate delay impact, adjusted EPS was $1.21, a slight increase from the prior year 2022 YTD Diluted Earnings Per Share by Segment (USD) | Segment | 2022 YTD | 2021 YTD | Change Amount | | :-------------- | :-------- | :-------- | :------- | | Water | 0.63 | 0.90 | (0.27) | | Electric | 0.12 | 0.10 | 0.02 | | Contracted Services | 0.18 | 0.24 | (0.06) | | AWR (Parent) | (0.01) | — | (0.01) | | Consolidated Diluted EPS| 0.92 | 1.24 | (0.32)| - For YTD 2022, AWR's consolidated diluted EPS was $0.92, a $0.32 year-over-year decrease[116] - The decrease was due to retirement plan investment losses of $5.2 million ($0.10 per share), compared to gains of $2.2 million ($0.04 per share) in the prior year, a net reduction of $0.14 per share[116] - If new water rates are approved and implemented retroactively, the Water segment would see an increase of $14.0 million in revenue ($0.27 per share) and $4.3 million in water supply costs ($0.08 per share) for YTD 2022, totaling a $0.19 per share increase[116] - Excluding investment gains/losses and including the impact of water rate delays, adjusted consolidated diluted EPS for YTD 2022 was $1.21, an increase of $0.01 from $1.20 in YTD 2021[116] - Adjusted diluted EPS for the Water segment (excluding investment gains/losses and rate delay impact) was $0.92, an increase of $0.06 or 7% from the prior year's adjusted $0.86[118] - Diluted EPS for the Electric segment increased by $0.02 for YTD 2022, primarily due to CPUC-approved rate increases and a lower effective income tax rate, partially offset by higher interest expense[120] - Diluted EPS for the Contracted Services segment decreased by $0.06 for YTD 2022, primarily due to reduced construction activity, partially offset by increased management fees, with an expected full-year contribution of $0.45 to $0.49 per share for 2022[121] - Diluted EPS for AWR (parent company) decreased by $0.01 for YTD 2022, primarily due to changes in state unitary tax[122] Consolidated Results of Operations — Three Months Ended June 30, 2022 and 2021 In Q2 2022, AWR's consolidated operating revenues decreased by 4.5% year-over-year, mainly due to reduced contracted services revenue, while operating expenses also slightly decreased, but operating income still fell by 9.3%, and net income decreased by 24.9% year-over-year, primarily impacted by negative changes in other income and expenses, net 2022 Q2 Consolidated Results of Operations (Thousands of USD, except per share amounts) | Metric | 2022 Q2 | 2021 Q2 | Change Amount | Change Percentage | | :------------------------ | :------- | :------- | :------- | :--------- | | Operating Revenues | 122,607| 128,414| (5,807)| -4.5% | | Water | 90,856 | 91,633 | (777) | -0.8% | | Electric | 8,217 | 8,108 | 109 | 1.3% | | Contracted services | 23,534 | 28,673 | (5,139) | -17.9% | | Operating Expenses | 88,290 | 90,567 | (2,277)| -2.5% | | Operating Income | 34,317 | 37,847 | (3,530)| -9.3% | | Other income and expenses, net | (8,161) | (3,809) | (4,352) | 114.3% | | Income before income taxes | 26,156 | 34,038 | (7,882) | -23.2% | | Income tax expense | 6,205 | 7,462 | (1,257) | -16.8% | | Net Income | 19,951 | 26,576 | (6,625)| -24.9% | | Basic earnings per share | 0.54 | 0.72 | (0.18) | -25.0% | | Diluted earnings per share | 0.54 | 0.72 | (0.18) | -25.0% | Operating Revenues In Q2 2022, AWR's operating revenues decreased by 4.5% year-over-year, with water revenues slightly down due to lower debt costs in the cost of capital application, electric revenues up due to CPUC-approved rate increases, and contracted services revenues significantly down due to reduced construction activity and supply chain delays - Water revenues decreased by $777 thousand to $90.9 million, primarily due to lower debt costs in the cost of capital application, partially offset by advice letter project revenues and increased water supply costs[127] - Electric revenues increased by $109 thousand to $8.2 million, primarily due to new CPUC-approved rates, partially offset by a 2% decrease in electricity usage[128] - Contracted services revenues decreased by $5.1 million to $23.5 million, primarily due to reduced construction activity, supply chain delays, and weather conditions, partially offset by increased management fees[129] Operating Expenses In Q2 2022, AWR's total operating expenses decreased by 2.5% year-over-year, with water supply costs slightly up due to increased purchased water and pumping electricity costs, while other operating expenses, depreciation and amortization, maintenance, and property taxes all increased, and ASUS construction expenses significantly decreased - Total water supply costs accounted for 32.4% of total operating expenses; Q2 2022 water supply costs increased by $672 thousand to $26.3 million, primarily due to higher purchased water and pumping electricity costs[130][133] - Q2 2022 electric supply costs decreased by $65 thousand to $2.4 million, primarily due to increased CAISO settlement credits and reduced customer electricity usage[134] - Other operating expenses increased by $1.1 million to $9.7 million, primarily due to higher water treatment and conservation costs[137] - Depreciation and amortization expense increased by $401 thousand to $10.2 million, primarily due to additions to utility plant and other fixed assets[141] - Maintenance expense increased by $305 thousand to $3.6 million, with increases across all segments due to planned and unplanned maintenance[143] - Property and other taxes increased by $179 thousand to $5.5 million, primarily due to capital additions and higher assessed property values[145] - ASUS construction expenses decreased by $4.7 million to $10.3 million, primarily due to reduced construction activity and supply chain delays[146] Interest Expense In Q2 2022, consolidated interest expense increased by 4.6% year-over-year to $6.3 million, primarily due to higher overall borrowing levels supporting regulated utility capital expenditure programs, partially offset by a decrease in average interest rates Interest Expense (Thousands of USD) | Segment | 2022 Q2 | 2021 Q2 | Change Amount | Change Percentage | | :-------------- | :------- | :------- | :------- | :--------- | | Water Services | 5,464 | 5,643 | (179) | -3.2% | | Electric Services | 384 | 117 | 267 | 228.2% | | Contracted Services | 104 | 109 | (5) | -4.6% | | AWR (Parent) | 357 | 163 | 194 | 119.0% | | Total Interest Expense| 6,309| 6,032| 277 | 4.6% | - The increase in consolidated interest expense was primarily due to higher overall borrowing levels to support regulated utility capital expenditure programs, including BVESI's issuance of $35.0 million in unsecured private placement notes[148] - The increase in interest expense was partially offset by a decrease in average interest rates, primarily due to GSWC's early redemption of $28.0 million of 9.56% private placement notes in May 2021[148] Interest Income In Q2 2022, consolidated interest income increased by 25.6% year-over-year to $437 thousand, driven by a significant increase in interest income from the Electric Services segment Interest Income (Thousands of USD) | Segment | 2022 Q2 | 2021 Q2 | Change Amount | Change Percentage | | :-------------- | :------- | :------- | :------- | :--------- | | Water Services | 146 | 179 | (33) | -18.4% | | Electric Services | 89 | 29 | 60 | 206.9% | | Contracted Services | 206 | 197 | 9 | 4.6% | | AWR (Parent) | (4) | (57) | 53 | -93.0% | | Total Interest Income| 437 | 348 | 89 | 25.6% | Other Income and (Expense), net In Q2 2022, other income and (expense), net, decreased by 222.1% year-over-year to ($2.3) million, primarily due to retirement plan investment losses, partially offset by a reduction in actuarial losses from non-service costs of pension plans Other Income and (Expense), Net (Thousands of USD) | Segment | 2022 Q2 | 2021 Q2 | Change Amount | Change Percentage | | :-------------- | :------- | :------- | :------- | :--------- | | Water Services | (2,402) | 1,604 | (4,006) | -249.8% | | Electric Services | 77 | 54 | 23 | 42.6% | | Contracted Services | 36 | (41) | 77 | -187.8% | | AWR (Parent) | — | 258 | (258) | N/A | | Total Other Income and (Expense), Net| (2,289)| 1,875| (4,164)| -222.1%| - The decrease in other income and (expense), net, was primarily due to retirement plan investment losses, compared to gains in the prior year[150] - The decrease was partially offset by a reduction in non-service costs from actuarial losses in AWR's defined benefit pension plan and other post-retirement benefits[150] Income Tax Expense In Q2 2022, consolidated income tax expense decreased by 16.8% year-over-year to $6.2 million, primarily due to reduced income before taxes, partially offset by an increase in the consolidated effective income tax rate (ETR) Income Tax Expense (Thousands of USD) | Segment | 2022 Q2 | 2021 Q2 | Change Amount | Change Percentage | | :-------------- | :------- | :------- | :------- | :--------- | | Water Services | 5,103 | 5,957 | (854) | -14.3% | | Electric Services | 215 | 458 | (243) | -53.1% | | Contracted Services | 1,108 | 1,271 | (163) | -12.8% | | AWR (Parent) | (221) | (224) | 3 | -1.3% | | Total Income Tax Expense| 6,205| 7,462| (1,257)| -16.8% | - Consolidated income tax expense decreased primarily due to reduced income before taxes, partially offset by an increase in the consolidated ETR[151] - AWR's ETR increased from 21.9% in Q2 2021 to 23.7% in Q2 2022, and GSWC's ETR increased from 22.1% to 25.5%, primarily due to net changes in certain flow-through and permanent items at GSWC[151] Consolidated Results of Operations — Six Months Ended June 30, 2022 and 2021 For the six months ended June 30, 2022, AWR's consolidated operating revenues decreased by 5.8% year-over-year, mainly due to a significant reduction in contracted services revenue, while operating expenses also slightly decreased, but operating income still fell by 13.9%, and net income decreased by 25.6% year-over-year, primarily impacted by negative changes in other income and expenses, net 2022 YTD Consolidated Results of Operations (Thousands of USD, except per share amounts) | Metric | 2022 YTD | 2021 YTD | Change Amount | Change Percentage | | :------------------------ | :-------- | :-------- | :------- | :--------- | | Operating Revenues | 231,177 | 245,474 | (14,297)| -5.8% | | Water | 164,762 | 166,662 | (1,900) | -1.1% | | Electric | 20,109 | 19,647 | 462 | 2.4% | | Contracted services | 46,306 | 59,165 | (12,859) | -21.7% | | Operating Expenses | 172,495 | 177,298 | (4,803)| -2.7% | | Operating Income | 58,682 | 68,176 | (9,494)| -13.9% | | Other income and expenses, net | (13,903) | (8,956) | (4,947) | 55.2% | | Income before income taxes | 44,779 | 59,220 | (14,441) | -24.4% | | Income tax expense | 10,666 | 13,376 | (2,710) | -20.3% | | Net Income | 34,113 | 45,844 | (11,731)| -25.6% | | Basic earnings per share | 0.92 | 1.24 | (0.32) | -25.8% | | Diluted earnings per share | 0.92 | 1.24 | (0.32) | -25.8% | Operating Revenues For the six months ended June 30, 2022, AWR's operating revenues decreased by 5.8% year-over-year, with water revenues slightly down due to lower debt costs in the cost of capital application, electric revenues up due to CPUC-approved rate increases and higher usage, and contracted services revenues significantly down due to reduced construction activity and supply chain delays - Water revenues decreased by $1.9 million to $164.8 million, primarily due to lower debt costs in the cost of capital application, partially offset by advice letter project revenues and increased water supply costs[157] - Electric revenues increased by $0.5 million to $20.1 million, primarily due to new CPUC-approved rates and a 3.1% increase in electricity usage[158] - Contracted services revenues decreased by $12.9 million to $46.3 million, primarily due to reduced construction activity, supply chain delays, and weather conditions, partially offset by increased management fees[159] Operating Expenses For the six months ended June 30, 2022, AWR's total operating expenses decreased by 2.7% year-over-year, with water supply costs slightly up due to increased purchased water and pumping electricity costs, while other operating expenses, depreciation and amortization, and maintenance all increased, and ASUS construction expenses significantly decreased - Total water supply costs accounted for 30.1% of total operating expenses; YTD 2022 water supply costs increased by $1.1 million to $45.6 million, primarily due to higher purchased water and pumping electricity costs[160][164] - YTD 2022 electric supply costs increased by $134 thousand to $6.3 million, primarily due to higher average price per MWh and increased customer electricity usage[165] - Other operating expenses increased by $1.6 million to $18.3 million, primarily due to higher water treatment and conservation costs[167] - Administrative and general expenses increased by $753 thousand to $43.4 million, primarily due to higher labor and employee benefit-related costs in the Water segment[169] - Depreciation and amortization expense increased by $955 thousand to $20.3 million, primarily due to additions to utility plant and other fixed assets[171] - Maintenance expense increased by $783 thousand to $6.7 million, with increases across all segments due to planned and unplanned maintenance[172] - ASUS construction expenses decreased by $10.2 million to $20.5 million, primarily due to reduced construction activity and supply chain delays[175] Interest Expense For the six months ended June 30, 2022, consolidated interest expense decreased by 3.1% year-over-year to $11.9 million, primarily due to a decrease in average interest rates, partially offset by higher overall borrowing levels Interest Expense (Thousands of USD) | Segment | 2022 YTD | 2021 YTD | Change Amount | Change Percentage | | :-------------- | :-------- | :-------- | :------- | :--------- | | Water Services | 10,700 | 11,441 | (741) | -6.5% | | Electric Services | 496 | 233 | 263 | 112.9% | | Contracted Services | 166 | 218 | (52) | -23.9% | | AWR (Parent) | 553 | 398 | 155 | 38.9% | | Total Interest Expense| 11,915| 12,290| (375)| -3.1% | - The decrease in consolidated interest expense was partially due to a decrease in average interest rates, primarily due to GSWC's early redemption of $28.0 million of 9.56% private placement notes in May 2021[177] - The decrease was partially offset by higher overall borrowing levels to support regulated utility capital expenditure programs, including BVESI's issuance of $35.0 million in unsecured private placement notes[177] Interest Income For the six months ended June 30, 2022, consolidated interest income decreased by 10.3% year-over-year to $720 thousand, primarily due to reduced interest income from certain construction projects in the Contracted Services segment Interest Income (Thousands of USD) | Segment | 2022 YTD | 2021 YTD | Change Amount | Change Percentage | | :-------------- | :-------- | :-------- | :------- | :--------- | | Water Services | 237 | 266 | (29) | -10.9% | | Electric Services | 88 | 59 | 29 | 49.2% | | Contracted Services | 403 | 535 | (132) | -24.7% | | AWR (Parent) | (8) | (57) | 49 | -86.0% | | Total Interest Income| 720 | 803 | (83) | -10.3% | - The decrease in interest income was primarily due to reduced interest income from certain construction projects in the Contracted Services segment[178] [Other Income and (Expense), net