American States Water Company — Q2 2019 Form 10-Q
Business context and period. This unaudited combined filing covers American States Water Company (AWR) and its wholly owned regulated utility, Golden State Water Company (GSWC), for the quarter and six months ended June 30, 2019. AWR reports water, electric and contracted-services segments; contracted services provides water and wastewater services and construction at U.S. military bases under long-term contracts.
Financial performance
| AWR consolidated | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $124.6m | $106.9m | $226.4m | $201.6m |
| Operating income | $39.4m | $25.6m | $59.6m | $44.3m |
| Net income | $26.8m | $16.3m | $39.6m | $27.1m |
| Diluted EPS | $0.72 | $0.44 | $1.07 | $0.73 |
| Operating margin | 31.6% | 23.9% | 26.3% | 21.9% |
Q2 revenue increased 16.6% and net income increased 63.8% year over year. For the first half, revenue rose 12.3% and net income 46.1%. Q2 water revenue grew 14.9%, reflecting the new water-rate decision and its retroactive effect; contracted-services revenue grew 30.3%, primarily due to Fort Riley operations and higher construction activity. Electric revenue declined 5.5% in Q2.
In Q2, water gross margin was $62.1m, up 11.2%; electric gross margin was $4.5m, down 10.2%. For the first half, water gross margin increased 5.6% to $110.5m, while electric gross margin declined 2.4% to $10.7m. These are management-defined, non-GAAP measures.
- Cash flow, first half: Operating cash flow was $44.7m, down from $65.1m. Capital expenditures were $81.2m, versus $58.8m; investing cash outflow was $80.9m. Financing provided $30.6m, compared with a $1.1m outflow in 2018. Cash at June 30 was $1.5m.
- Debt and liquidity: AWR had $185.5m outstanding on its $200m revolving credit facility, with $13.6m available after $0.94m of letters of credit. Consolidated long-term debt was $281.0m, with $0.3m current. GSWC repaid a $40m, 6.70% note at maturity using increased intercompany borrowings. Current assets were $122.0m and current liabilities $106.3m.
- Capital and distributions: Company-funded capital expenditures for 2019 were estimated at $115m–$125m. AWR declared $0.275 per share for Q2; on July 30, the board approved a 10.9% increase to $0.305 per share for Q3.
Material changes and notable items
- The CPUC issued a final water general rate case decision on May 30, with rates retroactive to January 1, 2019. The Q2 results include approximately $3.4m of water revenue attributable to Q1 and $0.08 per share of related retroactive earnings. Excluding that prior-quarter effect, Q2 diluted EPS was $0.64; the water segment contributed $0.51 per share. The decision also reduced Q2 administrative and general expense by $1.1m for previously incurred costs approved for recovery.
- The water decision authorizes approximately $334.5m of capital investment over the 2019–2021 rate cycle. Potential water revenue increases of approximately $9.6m in 2020 and $12.0m in 2021 are subject to an earnings test and inflation-index changes.
- The electric rate case remained pending at quarter-end. A July 16 proposed decision approved the settlement, including a 9.60% authorized return on equity and specified rate increases and capital projects; final CPUC approval was expected in Q3 or Q4 2019. Billed electric revenue continued to use 2017 rates, with proposed retroactive adjustments dating to January 1, 2018.
- Fort Riley operations began in July 2018 and contributed to higher contracted-services revenue and earnings. AWR reported $3.2bn in remaining performance obligations for contracted services, to be recognized over the remaining 35–49 years of the relevant contracts; the U.S. government may terminate contracts for convenience.
- Adoption of lease accounting in 2019 added $11.1m of right-of-use assets and $11.4m of lease liabilities at June 30, without a material effect on results or liquidity. AWR’s credit facility borrowing capacity was increased from $150m to $200m in March.
Outlook, risks and contingencies
Management expected operating cash flow to improve in the second half, supported by new water rates and planned recovery surcharges. The filing does not provide a formal earnings forecast. Management estimated 2019 company-funded capital expenditures of $115m–$125m and said maintenance expense at the water segment was expected to rise in the second half. GSWC intended to issue up to $115m of long-term debt by year-end to reduce intercompany borrowings and partly fund capital expenditures.
Key exposures include CPUC timing and approval of rate recovery, lower water usage and supply costs, drought and water availability, wildfire and severe-weather losses, and the cost of water-quality compliance. AB 1054 established a California wildfire fund; AWR had not decided whether to participate, with an initial contribution deadline of September 10, 2019. GSWC’s proposed transfer of its electric division to a separate AWR subsidiary required regulatory approvals and faced a protest. ASUS depends on timely U.S. government price adjustments, construction awards and payments. GSWC disclosed an estimated $1.3m remaining remediation liability for a former gasoline storage site, which management believed likely to be recoverable through rates. Management said routine litigation was not expected to have a material effect; no material legal proceeding was identified. Risk factors were reported as unchanged from the 2018 Form 10-K.
Important facts for investors to verify
- Whether and when the CPUC issued final approval of the electric rate case, including the amount and timing of retroactive revenue recognition.
- Actual collection of water-rate retroactive amounts and WRAM/MCBA under-collections, including the planned surcharges and the $7.2m tax-related customer refund.
- Capital spending, operating cash flow and financing needs relative to management’s 2019 estimates, including the planned debt issuance and credit-facility headroom.
- Any decision to participate in the wildfire fund, and the eventual financial exposure from wildfire, water-supply or water-quality events.
- Performance and funding of military-base contracts, including construction activity, government payments and contract-adjustment recoveries.