American States Water Company (AWR) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. The combined filing covers AWR and its wholly owned regulated utility subsidiary, Golden State Water Company (GSWC). AWR also operates American States Utility Services (ASUS), which provides water and wastewater services at U.S. military installations.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $114.6 million | $115.6 million | $215.6 million | $217.6 million |
| Operating income | $30.5 million | $31.0 million | $55.4 million | $53.8 million |
| Net income | $15.6 million | $15.4 million | $27.8 million | $26.4 million |
| Diluted EPS | $0.41 | $0.39 | $0.73 | $0.67 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $63.0 million | $90.9 million |
- Q2 revenue declined 0.9% year over year, while net income rose 1.9% and diluted EPS increased 5.1%. First-half revenue declined 0.9%, while net income rose 5.4% and diluted EPS increased 9.0%.
- Water revenue increased 1.6% in Q2 and 1.3% year to date, mainly from approved rate increases. Contracted-services revenue fell 9.2% in Q2 and 10.1% year to date as several large military-base construction projects completed in 2014. Lower ASUS construction expenses and favorable revisions to project cost estimates supported earnings.
- Q2 water gross margin was $63.7 million, down $0.1 million; electric gross margin was $4.7 million, down $0.4 million. First-half water gross margin was $118.0 million, down $0.7 million; electric gross margin was $10.9 million, down $0.3 million. These are company-defined non-GAAP measures.
- At June 30, AWR reported cash of $43.9 million, total current assets of $150.2 million and current liabilities of $95.2 million. Long-term debt was $325.6 million, plus $0.3 million current debt; total capitalization was $803.2 million. Management reported capitalization of 59% equity and 41% debt.
- First-half capital expenditures were $34.2 million. AWR repurchased $41.8 million of shares and paid $16.2 million in dividends. Cash declined by $32.1 million from year-end 2014 to $43.9 million.
Changes, outlook and material matters
- Operating cash flow fell to $63.0 million from $90.9 million, primarily due to timing of ASUS construction billings and collections, lower water usage and increased WRAM regulatory assets. The company had $89.2 million available under its $100 million revolving credit facility, with $10.8 million of letters of credit outstanding and no borrowings. S&P affirmed A+ ratings but changed both companies’ outlooks from positive to stable.
- California drought restrictions and conservation reduced billed water use 13% in Q2 and 14% in the first half. Management said GSWC’s CPUC-approved Water Revenue Adjustment Mechanism (WRAM) limits the earnings effect of usage declines, but drought-related costs are being expensed pending approval of recovery. GSWC recorded $19.3 million of additional WRAM/MCBA under-collections in the first half; net regulatory assets were $139.2 million at June 30.
- GSWC estimated 2015 company-funded capital expenditures of $85–$90 million. A water general rate case for 2016–2018 was pending, with a final decision expected by year-end 2015 and rates expected effective January 1, 2016. GSWC sought interim rates in case a decision is delayed. The authorized water and electric return on equity and final rate outcomes remain subject to regulatory proceedings.
- Management expected water consumption to remain lower during the rest of 2015. All GSWC service areas had met applicable cumulative conservation targets at the filing date; management did not expect SWRCB penalties based on actions and performance to date. Further drought, supply constraints, higher purchased-water costs, or stricter restrictions could affect operations and costs.
- Material contingencies include municipal condemnation actions involving GSWC’s Claremont and Ojai systems; outcomes were not predictable. The Claremont system had a net book value of approximately $49.8 million and 11,000 customers. A CPUC procurement audit raised historical compliance findings, but regulators indicated they would not pursue further investigation, refunds or penalties; management considered a loss unlikely.
- GSWC’s Rural Water Company acquisition, for approximately $1.7 million, received CPUC approval in June, subject to customary closing conditions. AWR’s board approved a 5.2% increase in the third-quarter dividend to $0.224 per share, payable September 1, 2015.
Important investor verification points
- Track drought severity, conservation requirements, water supply availability and whether GSWC can recover WRAM balances and incremental drought costs through rates.
- Review the pending GSWC general rate case, interim-rate request, and eventual authorized rates and capital budgets.
- Monitor the Claremont and Ojai condemnation proceedings and any related costs or changes to GSWC’s customer base.
- Assess the persistence of lower operating cash flow, capital spending needs, share repurchases, dividend funding and access to credit.
- Check ASUS project activity, cost-estimate revisions, government payment timing and price-redetermination outcomes, given lower construction revenue and period-to-period cash-flow variability.