American States Water Company (AWR) — Q2 2017 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2017, compared with the same 2016 periods. AWR owns Golden State Water Company (GSWC), a California water and electric utility, and American States Utility Services (ASUS), which operates and maintains water and wastewater systems at U.S. military bases.
Key financial results
Amounts below are AWR consolidated and in millions of dollars, except per-share amounts.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $113.2 | $112.0 | $212.0 | $205.5 |
| Operating income | $41.8 | $31.8 | $66.6 | $53.0 |
| Net income | $22.8 | $16.7 | $35.5 | $26.9 |
| Diluted EPS | $0.62 | $0.45 | $0.96 | $0.73 |
| Operating margin | 36.9% | 28.4% | 31.4% | 25.8% |
- Revenue growth was led by contracted services: up 7.1% in Q2 and 17.4% year to date. Water and electric revenues were slightly lower year over year.
- Operating income and margins benefited materially from the $8.3 million pretax gain on the Ojai water-system sale. The gain contributed approximately $0.13 per share.
- For the first six months, operating cash flow was $75.4 million, versus $48.5 million in 2016. Capital expenditures were $45.9 million, compared with $65.3 million. Cash from asset sales was $34.3 million.
- At June 30, AWR reported cash of $2.1 million, current assets of $149.5 million and current liabilities of $140.5 million. Long-term debt was $321.0 million, current maturities $0.3 million, and bank notes payable $44.0 million. The $150 million revolving facility had $99.7 million available after borrowings and letters of credit.
- Common dividends declared were $0.242 per share in Q2 and $0.484 for the first half, compared with $0.224 and $0.448 in 2016.
Material changes and operating developments
- In June, Casitas Municipal Water District acquired GSWC’s Ojai system for $34.3 million, including customer receivables and regulatory assets. The transaction generated the $8.3 million gain; proceeds were used to repay short-term borrowings. Claims by Casitas and Ojai FLOW were dismissed.
- ASUS began operating the Eglin Air Force Base water and wastewater systems on June 15. The initial 50-year contract value was estimated at approximately $510 million, subject to inventory and annual economic price adjustments.
- GSWC’s water gross margin was $61.4 million in Q2, down 1.2%, and $113.6 million for the first half, down 1.1%. Higher purchased-water costs and groundwater assessments, the Ojai exit and timing of WRAM revenue affected comparisons. Utility balancing mechanisms defer or recover some supply-cost and revenue differences through customer rates.
- Water general-rate-case rates for 2017 were implemented in April, retroactive to January 1. GSWC filed to recover a $9.9 million revenue shortfall; surcharges were expected to begin September 1, 2017. The approved rates and supply costs were expected to increase 2017 adopted water gross margin by about $3.7 million versus 2016.
Outlook, risks and contingencies
- Management estimated 2017 company-funded capital expenditures at approximately $110–$120 million. GSWC spent $44.8 million on company-funded capital expenditures in the first half. Management said operating cash and available credit were adequate for normal operations and financing needs; additional long-term debt could be issued depending on market conditions.
- GSWC filed water and electric general rate cases in 2017. It also requested a water cost-of-capital return on rate base of 9.11%, including an 11% return on equity, versus the then-authorized 8.34% and 9.43%, respectively. Decisions were expected by year-end 2017 for cost of capital and the electric case; new water rates for 2019–2021 were expected following a decision in late 2018.
- On August 1, 2017, the board approved a 5.4% increase in the quarterly dividend, from $0.242 to $0.255 per share, payable September 1 to holders of record August 15.
- California ended the drought emergency in most areas in April 2017 after improved rainfall and snowpack. GSWC nevertheless continued mandatory restrictions in certain Central Coast service areas because of groundwater conditions; water availability, drought recurrence and costlier supply alternatives remain risks.
- GSWC faced an appeal by the City of Claremont over its unsuccessful condemnation action. Separately, a court found GSWC liable in a case arising from a 2014 water-main break; damages were still to be determined. GSWC said it believed insurance would cover any judgment, but could not predict the outcome. A related CPUC complaint was also pending. Management did not expect the matter to materially affect results, financial position or cash flows.
- Other key risks include CPUC rate decisions and cost recovery, water supply and quality, infrastructure and capital costs, regulatory and environmental requirements, and ASUS contract price adjustments, government payment timing, audits and contract performance. Management cited no significant change in previously disclosed risk factors.
Important facts for investors to verify
- How much of earnings growth persists after excluding the Ojai gain and other timing-related regulatory or contract adjustments.
- Progress and final outcomes for the $9.9 million water-rate shortfall recovery, pending rate cases and requested cost of capital.
- Actual capital spending, financing needs and borrowing levels as the revolving credit facility approaches its May 2018 expiration.
- Final damages and insurance recovery in the water-main-break litigation, and the outcome of the Claremont appeal.
- Eglin contract economics after completion of the inventory review, and the timing and amounts of ASUS price redeterminations and construction activity.
- Whether drought-related groundwater constraints, water-quality requirements or higher purchased-water costs affect supply reliability, expenses or future rate recovery.