Business context and reporting period
American States Water Company (AWR) filed this unaudited Form 10-Q for the three months ended March 31, 2014, with Golden State Water Company (GSWC) as a co-registrant. AWR’s businesses are regulated water and electric utility operations in California (GSWC) and contracted water and wastewater services at U.S. military bases (ASUS). GSWC serves approximately 257,000 water and 24,000 electric customers. Amounts below are in U.S. dollars; financial results are in millions unless noted.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| AWR revenue | $101.9 | $110.6; down 7.8% |
| Operating income | $22.8 | $28.0; down 18.6% |
| Net income | $11.0 | $13.5; down 18.2% |
| Diluted EPS | $0.28 | $0.35; down $0.07 |
| Operating margin | 22.3% | 25.3% |
| Operating cash flow | $40.9 | $31.0 |
| Construction expenditures | $20.5 | $18.4 |
Water revenue rose 2.2% to $70.8 million; electric revenue decreased 2.6% to $10.5 million; contracted-services revenue fell 32.2% to $20.7 million. Contracted-services EPS declined from $0.07 to $0.04, mainly because of lower renewal-and-replacement construction. Water EPS was $0.22 versus $0.26 and electric EPS remained $0.02.
Water gross margin increased 2.7% to $54.9 million, while electric gross margin increased 3.1% to $6.1 million. These are company-defined, non-GAAP measures. AWR’s net income included the impact of a prior-year CPUC rate-case decision: recovery of previously incurred costs added approximately $0.05 per share in Q1 2013, with no comparable item in 2014. Excluding that effect, water EPS increased about $0.01.
At March 31, AWR reported cash of $74.9 million, total assets of $1.334 billion, shareholders’ equity of $495.8 million, long-term debt of $326.0 million, current debt maturities of $6.3 million, and $24.0 million drawn on its bank facility. Cash increased from $38.2 million at year-end. Operating cash flow less construction expenditures was approximately $20.3 million. Cash dividends paid were $7.8 million, or $0.2025 per share. GSWC separately reported Q1 net income of $9.3 million versus $10.7 million.
Material changes, outlook and commentary
- Management attributed higher operating cash flow to water rate increases and collections of CPUC-authorized surcharges, as well as timing of military construction billings and receipts. Q1 2013 included tax refunds not repeated in 2014.
- GSWC forecast 2014 capital expenditures of approximately $80–$90 million; it incurred $13.4 million in Q1, excluding work funded by others. Management expects GSWC capital expenditures to remain above depreciation expense and anticipates AWR may need additional external capital over time.
- CPUC-approved second-year rate increases effective January 1, 2014 are expected to add $1.6 million of 2014 revenue versus 2013 adopted levels. GSWC intended to file a water general rate case in July 2014, with rates expected to take effect in January 2016. A BVES electric rate-case settlement was anticipated in Q2 2014, with a final decision expected late in 2014.
- ASUS expected construction activity to rise during the rest of 2014 compared with Q1, but renewal-and-replacement work may vary year to year. Several military-contract price redeterminations and adjustments remained under negotiation or review; management expected resolutions at various points in 2014.
- California’s drought is a significant operating risk. The state declared a drought emergency; GSWC asked customers to voluntarily cut water use by 20% and warned mandatory rationing could be needed if dry conditions continued. State Water Project allocation was raised from zero to 5% in April 2014; groundwater levels were declining in some areas.
- Other material matters include GSWC’s appeal of a court ruling related to a potential eminent-domain acquisition of its Ojai system; a pending Claremont acquisition threat; CPUC procurement audits that could result in cost disallowances, with outcome and loss range not estimable; and an estimated $1.0 million remaining remediation liability at a plant site, expected by management to be recoverable through rates.
- AWR authorized repurchases of up to 1.25 million shares through June 30, 2016; none were made under that program during Q1. The 159,754 shares reported as purchased in Q1 were acquired for employee and dividend-reinvestment plans. The board approved a $0.2025-per-share quarterly dividend for payment in June.
- AWR had $58.5 million available under its $100 million revolving facility at quarter-end, after $24.0 million borrowing and $17.5 million in letters of credit. S&P affirmed AWR and GSWC at A+ with stable outlook; Moody’s affirmed GSWC at A2 with stable outlook.
Important facts for investors to verify
- Whether drought conditions, low water allocations or falling groundwater levels lead to mandatory conservation, higher supply costs or service-area impacts.
- Outcomes and timing of GSWC’s water and electric rate proceedings, including the planned water rate case and BVES settlement.
- Recovery of regulatory assets and surcharges, and potential cost disallowances arising from CPUC procurement audits.
- Timing and results of ASUS military-contract price redeterminations, construction work, government payments and any audit-related adjustments.
- Funding needs for the capital program, debt and credit-facility usage, and the effect of the share-repurchase program and dividends on liquidity.