American States Water Company (AWR) has just reported a 33% decrease in EPS. This company is supposedly a utility that delivers water to some of the most parched areas of the United States. Should be like shooting fish in a barrel. How can you drop the ball by 33%? How can management issue a press release and just mechanically review the various inputs and not comment on the drastic reduction in profitability? Hello, is the executive suite awake?
The main culprit seems to be a decline in water consumption. Read this quote from the press release:
An 8.1% decrease in water consumption during the first quarter of 2008 resulted in a $2.6 million decrease in water revenues, or $0.06 per share. The 2007 first quarter results benefited from lower than average precipitation.
This point is approximately 60% of the decrease in EPS. The remainder of the press release goes on to ignore the issue and deal with many other details which just do not have the same impact. The executive is hiding the problem in plain sight and hoping it will be ignored.
A further issue is the change in construction expenses. Read this quote:
For the three months ended March 31, 2008, construction expenses decreased to $3.9 million compared to $9.1 million for the same period in 2007 primarily reflecting the costs incurred in 2007 for the wastewater expansion project at Fort Bliss. There was no similar project in the first quarter of 2008.
For some reason the construction costs could not be capitalized last year. This, from an infrastructure company that invests in pipes and pumps. But the reality is that construction costs are lower by about $6 million which should be a good thing.
It seems that this is a flush quarter where management is getting rid of some impurities. Investors can tolerate a few transitional quarters if there is a set up for the future. But they need to be brought into the loop if this is to be the case.