American States Water Company (AWR) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The filing is a combined report for AWR and its wholly owned regulated utility, Golden State Water Company (GSWC). Unless noted, financial figures below are AWR consolidated and in U.S. dollars.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $98.8 million | $93.5 million | +5.6% |
| Operating income | $24.7 million | $21.2 million | +16.5% |
| Net income | $12.7 million | $10.2 million | +25.1% |
| Diluted EPS | $0.34 | $0.28 | +$0.06 |
| Operating margin | 25.0% | 22.7% | +2.3 percentage points |
| Net cash from operations | $28.0 million | $27.6 million | +$0.4 million |
| Capital expenditures | $24.0 million | $29.5 million | -$5.5 million |
Water revenue was $66.4 million, electric revenue $10.5 million, and contracted-services revenue $21.9 million. Contracted-services revenue rose 31.6%, primarily on higher military-base construction activity and increased management fees. AWR’s diluted EPS by segment was water $0.25, electric $0.04, and contracted services $0.05. GSWC separately reported revenue of $76.9 million and net income of $10.7 million, versus $76.9 million and $9.0 million, respectively, a year earlier.
At March 31, AWR had cash of $0.6 million, current assets of $192.1 million and current liabilities of $178.7 million. Long-term debt was $321.0 million, current long-term debt $0.3 million, and bank notes payable $96.0 million. The $150 million revolving credit facility had $47.7 million available, with $6.3 million of letters of credit outstanding. Operating cash flow less capital expenditures was approximately $4.0 million. The quarterly dividend was $0.242 per share, up from $0.224 a year earlier.
Material changes and unusual items
- Water billed consumption fell about 9% year over year, attributed to a wet winter and continued conservation. WRAM mechanisms generally limit the effect of usage changes on recorded revenue, but can affect revenue timing.
- Water results included a $1.5 million one-time pretax recovery of drought-related costs approved by the CPUC. Comparability was also affected by a $1.5 million prior-period water gross-margin adjustment recorded in Q4 2016 after the delayed rate-case decision.
- Contracted-services results benefited from higher construction and management-fee activity; construction expense also rose with activity. Management said construction-related earnings and cash flows may not continue at current levels.
- Adoption of share-based-payment accounting reduced Q1 income-tax expense by about $0.4 million at AWR. AWR’s effective tax rate was 35.1%, compared with 36.4% in Q1 2016.
- GSWC classified the Ojai water system as held for sale: $26.8 million of assets and $0.9 million of associated liabilities. A post-quarter settlement provides for an expected approximately $34.5 million cash sale and an estimated $8.0 million pretax gain, subject to closing and final reconciliation.
Outlook, regulation and risks
- GSWC implemented 2017 water rates in April, retroactive to January 1. The rates and adopted supply costs are expected to increase 2017 adopted water gross margin by about $3.7 million versus 2016; the company expects surcharges to recover prior rate shortfalls.
- GSWC estimated 2017 company-funded capital expenditures of $110–$120 million. AWR expected revolving-credit borrowings to continue during 2017 to fund operations and some capital spending; it said it may issue long-term debt depending on market conditions.
- GSWC’s April cost-of-capital application proposed a 9.11% overall return on rate base and 11% return on equity, versus currently authorized 8.34% and 9.43%. The outcome was uncertain; a decision was expected by year-end for an intended January 2018 effective date. GSWC also planned a water general rate case filing and filed its electric general rate case in May.
- California ended the drought emergency in most areas in April 2017 after improved rainfall and snowpack. GSWC nonetheless reported groundwater constraints in some areas and continued mandatory restrictions in certain Central Coast service areas. The State Water Project allocation had increased to 85% of requested orders.
- ASUS expected to assume operations at Eglin Air Force Base around mid-2017 under a 50-year contract with an initially estimated value of about $510 million, subject to adjustment. The filing identifies federal payment, price-adjustment, audit, contract-performance and construction-activity risks.
- Contingencies include Claremont’s appeal of a decision rejecting its attempt to acquire GSWC’s water system, and litigation concerning a 2014 water-main break. GSWC said it could not estimate a loss or range for the latter matter. Environmental remediation at the Chadron site had an estimated $1.4 million remaining cost, with rate recovery considered probable by management.
- The filing gives no formal full-year earnings or EPS guidance. AWR said its risk factors had not changed significantly from its 2016 Form 10-K.
Important facts for investors to verify
- Whether the Ojai sale closes on expected terms, and the final proceeds, reconciliation and recognized gain.
- CPU C decisions and timing for water and electric rate cases, cost of capital, and recovery of regulatory balances and prior rate shortfalls.
- Whether projected capital spending, cash generation and financing access are sufficient, given low cash balances and reliance on revolving borrowings.
- Persistence of contracted-services construction and fee revenue, and progress on the Eglin transition and contract price adjustments.
- Water supply conditions, conservation trends, and the remaining legal and remediation exposures, including amounts not estimable in this filing.