American States Water Company (AWR) — Q1 2019 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. AWR’s segments are regulated water and electric utilities (Golden State Water Company, or GSWC) and contracted services (ASUS), which operates and builds water and wastewater systems at U.S. military bases under long-term contracts. Amounts below are in U.S. dollars; financial-statement figures are in millions unless noted.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $101.7 | $94.7 | +7.4% |
| Operating income | $20.2 | $18.7 | +8.0% |
| Net income | $12.9 | $10.8 | +19.2% |
| Diluted EPS | $0.35 | $0.29 | +$0.06 |
| Operating cash flow | $29.4 | $35.7 | −$6.3 |
| Capital expenditures | $40.6 | $30.4 | +$10.2 |
Operating margin was approximately 19.9%, versus 19.7% a year earlier. AWR’s disclosed non-GAAP utility gross margins were $48.4 million for water (down 0.8%) and $6.2 million for electric (up 4.3%). These measures exclude several operating expenses and should not be treated as GAAP operating income.
At March 31, 2019, AWR reported cash of $1.8 million, current assets of $116.8 million and current liabilities of $107.6 million. Long-term debt was $281.1 million, current debt $0.3 million, and bank notes payable $151.5 million. The revolving credit facility had $47.6 million available, after $151.5 million drawn and $0.9 million of letters of credit. Shareholders’ equity was $561.5 million. The company’s cash flow after capital expenditures was negative $11.2 million, calculated from reported operating cash flow less capital expenditures.
Material changes versus Q1 2018
- Revenue growth was led by contracted services, up $5.9 million (28.8%), mainly reflecting Fort Riley operations, which began in July 2018, and increased construction activity and contract price adjustments. Contracted-services diluted EPS rose to $0.11 from $0.05.
- Water revenue was nearly flat, up 0.5%; lower customer usage and delayed rate decisions constrained billed revenues. Water diluted EPS increased to $0.21 from $0.20.
- Electric revenue increased 8.1%, partly reflecting higher usage and approved advice-letter rate changes, but electric diluted EPS declined to $0.03 from $0.04 as operating costs rose while the general rate case remained pending.
- Operating expenses rose 7.2%, including higher depreciation, administrative costs and ASUS construction expenses; lower water maintenance costs partly offset increases. Interest expense increased 6.7% with higher average borrowings and facility rates.
- Operating cash flow declined while capital spending increased. AWR repaid GSWC’s $40 million, 6.70% senior note at maturity in March, funding the repayment in part through increased borrowing under AWR’s credit facility and intercompany lending.
Outlook, commentary, risks and unusual items
- Regulated rates: The water general rate case proposed decision, issued April 8, 2019, largely approved a settlement but directed that approximately $20.4 million of advice-letter capital projects be included in the next rate case. GSWC and the CPUC’s Public Advocates Office challenged that treatment. If approved, the proposal would authorize about $314.1 million of water infrastructure investment over the three-year cycle. The filing estimates Q1 water pretax income would have been about $4.0 million higher under proposed rates; any approved new water rates are retroactive to January 1, 2019.
- The electric rate-case settlement remained subject to CPUC approval. It provides for a 9.60% electric return on equity and specified rate increases; new rates would be retroactive to January 1, 2018. The filing estimates Q1 2019 electric pretax income would have been about $941,000 higher under the settlement rates.
- Spending and financing: AWR estimated 2019 company-funded capital expenditures of $115–$125 million. Management said operating cash and credit-facility borrowings were expected to support operations and financing needs. S&P affirmed AWR and GSWC at A+ with stable outlooks; Moody’s affirmed GSWC at A2 with a positive outlook.
- Water conditions and regulation: Management cited lower Q1 water consumption amid wet weather, and reported improved statewide conditions and a State Water Project allocation raised to 70% of requested deliveries for 2019. Longer-term risks include drought and supply constraints, conservation and usage changes, water-quality requirements, wildfire and other severe weather, and the timing or outcome of CPUC rate decisions.
- Contracted services: Remaining performance obligations were $3.2 billion, to be recognized over the remaining 36–49 years of the military contracts. Contracts may be terminated by the U.S. government; results also depend on construction activity, timely contract price adjustments and government payments.
- Other items: AWR recorded higher other income, primarily gains on retirement-benefit-plan investments compared with losses in Q1 2018. The company adopted lease accounting on January 1, 2019, recording $6.3 million of right-of-use assets and $6.5 million of lease liabilities; management reported no material effect on results or liquidity. The filing reports an estimated $1.3 million remaining environmental remediation liability, expected to be recoverable through rates, and no pending litigation believed material.
- The board approved a Q2 2019 dividend of $0.275 per share, payable June 3, 2019. Management stated that AWR had paid common dividends for over 80 consecutive years.
Important facts for investors to verify
- Final CPUC decisions on the water and electric rate cases, including the treatment of water capital projects and the timing and amount of retroactive rate adjustments.
- Whether capital spending, working-capital needs and utility investment can be funded without materially increasing debt or financing costs.
- Whether ASUS can sustain construction activity and obtain timely price adjustments and payments under its military contracts.
- Water supply, demand and quality conditions, and the potential financial effects of wildfire, severe weather or other operating disruptions.
- Progress and final cost of the environmental remediation, and whether related costs remain recoverable through rates.