Business context and reporting period
American States Water Company (AWR) filed this unaudited combined Form 10-Q for the quarter and six months ended June 30, 2016. AWR includes Golden State Water Company (GSWC), a California regulated water and electric utility, and American States Utility Services (ASUS), which operates and maintains water and wastewater systems at U.S. military bases. Unless noted, financial figures below are AWR consolidated and in millions of dollars.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $112.0 | $114.6 | $205.5 | $215.6 |
| Operating income | $31.8 | $30.5 | $53.0 | $55.4 |
| Net income | $16.7 | $15.6 | $26.9 | $27.8 |
| Diluted EPS | $0.45 | $0.41 | $0.73 | $0.73 |
| Operating margin | 28.4% | 26.6% | 25.8% | 25.7% |
- Q2 revenue fell 2.3%, while operating income rose 4.1% and net income increased 7.0%. Q2 diluted EPS rose 9.8%, aided in part by fewer shares outstanding following 2015 repurchases.
- For the first half, revenue declined 4.7%, operating income 4.4%, and net income 3.3%; diluted EPS was unchanged.
- Q2 segment diluted EPS: water $0.36 versus $0.33; electric $0.01 in both periods; contracted services $0.07 versus $0.06. First-half segment EPS was water $0.58 versus $0.57, electric $0.04 in both periods, and contracted services $0.10 in both periods.
- Six-month operating cash flow was $48.5 million, down from $63.0 million. Capital expenditures were $65.3 million versus $34.2 million, leaving operating cash flow below investment spending. Dividends paid were $16.4 million.
- At June 30, cash was $4.5 million; long-term debt was $320.9 million, current long-term debt $0.3 million, and bank notes payable $63.5 million. Current assets of $132.8 million were below current liabilities of $160.2 million. AWR reported $26.1 million available under its $100 million revolving credit facility and $10.4 million of letters of credit outstanding.
- Shareholders’ equity was $476.7 million; management reported an equity-to-total-capitalization ratio of 60%. AWR paid $0.448 per share in dividends during the first half and approved a third-quarter dividend of $0.224 per share.
Material changes versus prior period
- Water revenue declined 7.4% in both Q2 and the first half, chiefly reflecting lower rates/revenue requirements incorporated in the pending water rate case and conservation-related lower consumption. Q2 billed water use was down about 8%; first-half use was also down about 8%. The WRAM mechanism generally limits consumption effects on recorded revenue, though it can affect timing.
- Contracted-services revenue increased 21.1% in Q2 and 5.9% for the first half, with more construction activity at Fort Bliss and Virginia bases and higher management fees following price redeterminations.
- Electric revenue fell 2.4% in Q2 and 3.1% year to date, mainly because a supply-cost surcharge ended; the related revenue reduction was offset by lower supply costs. First-half electric usage fell about 4%, partly due to higher snowfall and less snowmaking.
- Six-month capital spending rose substantially, and AWR drew $35.5 million under its bank facility during the period. The company attributed lower operating cash flow primarily to prior-year tax-payment timing and the timing of contracted-services billing and collections.
Outlook, risks and unusual items
- GSWC’s 2016–2018 water general rate case remained pending, with a CPUC decision expected during 2016 and rates retroactive to January 1. Unresolved issues included capital budgets and managerial compensation. Management said the final decision could require a material adjustment to first-half 2016 net income in the quarter of the decision. Management expected adopted 2016 revenues to be below 2015 levels, with lower supply costs, depreciation and other expenses partly offsetting the revenue reduction.
- GSWC estimated approximately $95 million of company-funded capital expenditures for 2016; the estimate could change following the rate-case decision. Management expects capital needs and potentially higher interest expense to require external funding, while stating that operating funds and credit-facility borrowings should support normal operations and financing requirements.
- On July 12, 2016, ASUS was awarded a 50-year contract for water and wastewater services at Eglin Air Force Base, estimated at approximately $510 million over the contract term. Operations are expected to begin after a 10-month transition; the contract is subject to annual economic price adjustments.
- California drought restrictions were extended through October 31, 2016. GSWC reported that its large systems had no predicted supply deficit in its June analysis, but smaller groundwater-dependent areas faced potential further conservation measures if dry conditions persisted. Reduced supply could require more costly water purchases or transport.
- Condemnation proceedings involve GSWC’s Claremont system, with a net book value of approximately $49.2 million and about 11,000 customers; management could not predict the outcome. A separate eminent-domain action concerns the Ojai system, serving about 3,000 customers.
- A third party filed a CPUC complaint over a 2014 water-main break and damage to a commercial building; related civil litigation and a dispute between GSWC’s insurers were ongoing. GSWC said it believed it had reasonable defenses and sufficient insurance coverage for a judgment in the civil suit, but could not predict the outcomes.
- Other disclosed exposures include water-quality and environmental compliance costs, regulatory recovery or disallowance risk, pension obligations, and military-contract risks such as delayed price adjustments, audits, cost disallowances, funding delays or contract termination. AWR and GSWC held S&P ratings of A+ with stable outlook; Moody’s rating for GSWC was A2 with stable outlook.
Important facts for investors to verify
- Track the CPUC’s final water rate-case decision, retroactive revenue effects, and any resulting adjustment to reported earnings.
- Monitor the Claremont and Ojai condemnation proceedings and the water-main complaint, related civil suit, and insurance coverage dispute.
- Assess how the $95 million GSWC capital-spending estimate is funded, including revolving-credit availability, debt levels and liquidity.
- Evaluate drought conditions, conservation rules, groundwater availability and the cost and recoverability of alternative water supplies.
- Follow ASUS’s Eglin transition and contract economics, as well as the timing of military-contract price redeterminations and construction collections.