AMERICAN STATES WATER CO quarterly report, Q3 FY2019

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Business context and reporting period

American States Water Company (AWR) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. AWR’s businesses are regulated water and electric utility operations through Golden State Water Company (GSWC), and contracted water and wastewater services at U.S. military bases through ASUS. GSWC serves approximately 261,000 water connections and 24,000 electric connections. Unless otherwise noted, financial amounts below are AWR consolidated and in millions.

Financial performance and position

  • Third quarter: Revenue was $134.5, up 8.3% from $124.2; operating income was $42.7, up 25.8%; net income was $28.0, up 22.0%; and diluted EPS was $0.76 versus $0.62.
  • First nine months: Revenue was $360.9, up 10.8%; operating income was $102.3, up 30.8%; net income was $67.6, up 35.1%; and diluted EPS was $1.83 versus $1.35.
  • Rate-case adjustments: Reported third-quarter EPS included $0.07 related to the electric rate decision for prior periods. Excluding that item, AWR reported adjusted EPS of $0.69 versus $0.62. Nine-month adjusted EPS was $1.79 versus $1.35, excluding $0.04 related to 2018 electric rates.
  • Utility gross margins: Water gross margin, a company-defined non-GAAP measure, was $66.5 in the quarter, up 6.8%, and $177.0 for nine months, up 6.0%. Electric gross margin was $8.9 in the quarter, up 86.3%, and $19.6 for nine months, up 24.7%. The electric comparison includes the effect of the rate decision; see prior-period adjustment above.
  • Cash flow and investment: Nine-month operating cash flow was $84.3 versus $108.4. Capital expenditures were $111.1 versus $87.3, leaving operating cash flow below capital spending by $26.8. Cash ended at $10.4. Financing cash flow was $29.6, primarily reflecting increased bank borrowing.
  • Debt and liquidity: At September 30, long-term debt was $281.0, current long-term debt was $0.3, and bank notes payable were $194.5. AWR’s $200.0 million credit facility, expiring in May 2023, was nearly fully drawn. On October 31, the facility was temporarily increased to $225.0 million through June 30, 2020. Current assets were $132.5 and current liabilities $119.8. Management said available internal funds and facility borrowings should support operations and financing needs.
  • Dividends: AWR declared $0.305 per share in the third quarter and approved a fourth-quarter dividend of the same amount, payable December 2, 2019.

Material changes versus the prior comparable period

  • Water revenue rose in part following the May 2019 CPUC water rate decision, retroactive to January 1. The decision authorized approximately $334.5 million of investment over the 2019–2021 rate cycle. Lower water use contributed to a 20.5 million net under-collection in WRAM/MCBA accounts during the first nine months.
  • The August 2019 electric rate decision was retroactive to January 1, 2018. It raised electric revenue and included prior-period earnings in third-quarter results. It set a 9.60% authorized electric return on equity, down from 9.95%, and authorized approximately $44 million of capital projects over the five-year rate cycle.
  • Contracted-services revenue increased 15.8% year to date, supported by Fort Riley operations, which began in July 2018, and higher construction activity and management fees. Third-quarter contracted-services revenue and segment EPS declined year over year, primarily due to construction timing.
  • Capital spending increased, while operating cash flow declined. AWR repaid GSWC’s $40.0 million 6.70% senior note at maturity in March using increased borrowing under AWR’s credit facility.

Outlook, risks and unusual items

  • Management estimated 2019 company-funded capital expenditures of approximately $115–$125 million for GSWC. It expects higher future capital needs and anticipates additional financing; management intended to issue GSWC long-term debt during 2020 to reduce intercompany borrowings and help fund capital expenditures.
  • Water rates may increase further in 2020 and 2021, subject to an earnings test and inflation assumptions. ASUS reported $3.2 billion in remaining performance obligations under long-term U.S. government contracts, with contract terms remaining 35–49 years; the government may terminate contracts for convenience.
  • Key exposures include CPUC rate and cost-recovery decisions; drought, water supply and conservation; PFAS testing and potential treatment costs; wildfires and public-safety power shutoffs; severe weather; and government contract adjustments, audits, funding delays, or termination. GSWC reported removing some wells from service during PFAS work and expected additional treatment costs.
  • California’s AB 1054 wildfire framework may permit cost recovery under specified conditions, but GSWC’s Bear Valley electric division did not participate in the Wildfire Fund and management said its potential access to the fund was highly limited.
  • GSWC’s new purchased-power agreements carried approximately $28.0 million of commitments. Their $3.0 million unrealized fair-value loss was deferred in a regulatory account and did not affect earnings.
  • AWR and GSWC reported no pending legal proceedings believed material and no significant changes to the 2018 Form 10-K risk factors. A $1.3 million estimated remaining remediation cost was accrued for a former gasoline tank site; management considered rate recovery probable. Lease accounting adoption added $13.0 million of right-of-use assets and $13.4 million of lease liabilities at quarter-end, with no material effect on results or liquidity.
  • FERC approved the proposed transfer of GSWC’s electric operations to a separate AWR subsidiary on October 11, 2019; CPUC approval remained pending, with a decision expected by year-end.

Important facts for investors to verify

  1. How much of reported earnings growth is attributable to current-period rate changes versus retroactive electric-rate recognition and other regulatory adjustments.
  2. Whether CPUC-authorized rates and surcharges are recovered on schedule, and how lower water usage affects WRAM/MCBA balances and cash collections.
  3. Capital expenditure timing, operating cash flow, and plans to refinance or reduce the nearly drawn credit facility, including the intended 2020 GSWC debt issuance.
  4. Developments in PFAS sampling and treatment, water supply conditions, wildfire exposure and potential cost recovery for BVES.
  5. ASUS construction activity, price adjustments and government payment timing, as well as any changes to its long-term contract outlook.