American States Water Company — Q1 2018 Form 10-Q
Period: Three months ended March 31, 2018; unaudited. AWR is the parent of regulated California utility Golden State Water Company (GSWC) and American States Utility Services (ASUS), which operates and builds water and wastewater systems at U.S. military bases. Unless noted, financial amounts below are AWR consolidated and in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $94.7 million | $98.8 million | Down 4.1% |
| Operating income | $18.7 million | $24.6 million | Down 23.9% |
| Net income | $10.8 million | $12.7 million | Down 15.1% |
| Diluted EPS | $0.29 | $0.34 | Down $0.05 |
| Operating margin | 19.7% | 24.9% | Down 5.2 percentage points |
| Cash from operations | $35.7 million | $28.0 million | Up $7.7 million |
| Capital expenditures | $30.4 million | $24.0 million | Up $6.4 million |
Net income was lower despite income tax expense declining to $2.6 million from $6.9 million, primarily reflecting the federal tax-rate reduction. The effective tax rate was 19.2%, versus 35.1% for AWR. Quarterly dividends declared were $0.255 per share, compared with $0.242.
At March 31, AWR reported cash of $6.0 million and current assets of $145.7 million against current liabilities of $196.5 million. Long-term debt was $281.1 million, current long-term debt $40.3 million, and bank notes payable $69.0 million. Total debt across these balance-sheet categories was approximately $390.4 million. Shareholders’ equity was $531.5 million.
Changes and operating drivers
- Water revenue fell 3.0% to $64.4 million; electric revenue fell 6.4% to $9.8 million; contracted-services revenue fell 6.5% to $20.5 million. Lower contracted-services construction activity was attributed primarily to timing.
- Water segment diluted EPS declined to $0.20 from $0.25. Q1 2017 included a one-time $1.5 million pretax recovery of drought-related costs. The 2018 comparison also reflects a lower authorized water return and the loss of Ojai operations following its 2017 condemnation and sale.
- Water gross margin was $48.8 million, down 6.3%; electric gross margin was $5.9 million, down 6.5%. Water supply costs increased 9.2%, including higher purchased-water costs and groundwater assessments. GSWC said wells out of service and higher usage contributed to a greater share of purchased water.
- Water consumption billed increased approximately 24%, partly due to drier weather, while electric usage declined approximately 5%. Regulatory mechanisms limit the direct earnings effect of usage changes, subject to timing effects.
- Operating cash flow improved, partly from the timing of customer and other receivable collections and CPUC-approved rate increases and surcharges. Investing cash use increased with higher capital spending.
Outlook, risks and unusual items
- Regulation and rates: The CPUC’s March 2018 water cost-of-capital decision reduced GSWC’s authorized water return on equity from 9.43% to 8.90% and return on rate base from 8.34% to 7.91%. Including tax-law effects, management estimated a reduction of about $3.6 million in 2018 adopted annual water revenue requirement. Water and electric general rate cases remained pending; electric rates were expected to be decided in 2018 and applied retroactively to January 1.
- Tax Act: Lower tax rates reduced customer revenue requirements, with corresponding reductions in income tax expense. The company expects lower operating cash flow and potentially greater financing needs; it also expects lower deferred tax liabilities to increase rate base and earnings for a given level of capital investment, partly offset by higher financing costs.
- Capital plan and funding: AWR estimated 2018 company-funded capital expenditures of $110–$120 million. Its $150 million revolving facility had $69 million drawn and $6.3 million in letters of credit at quarter-end, leaving $74.7 million available. It was due to expire May 23, 2018; management expected to renew or extend it. AWR said S&P affirmed A+ ratings with stable outlooks in April. GSWC’s $40 million 6.70% senior note matures in March 2019.
- Contracted services: ASUS expected 2018 construction activity to exceed 2017 levels. It was transitioning to a new Fort Riley, Kansas, 50-year contract, with operations expected to begin in mid-2018; the contract’s stated initial value was approximately $601 million and is subject to annual price adjustments. Remaining performance obligations were $3.1 billion, recognized over contract terms of 37–50 years. U.S. government contracts may be terminated for convenience, and payment, adjustment, audit and construction timing remain risks.
- Water supply and other risks: California dryness could prompt further conservation measures or raise supply costs; the State Water Project allocation was set at 20% of requested orders in January 2018. Other disclosed risks include regulatory recovery of costs, water quality and environmental compliance, wildfire and infrastructure exposures, interest rates, and access to capital.
- Contingency: GSWC estimated $1.3 million of additional remediation costs at the Chadron Plant site, recorded as a regulatory asset and accrued liability; management considered recovery through rates probable. The filing reported no pending legal proceedings believed material.
- Accounting and controls: Adoption of revenue-recognition guidance in 2018 did not materially change revenue measurement or timing. Management reported disclosure controls effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Timing and outcome of GSWC’s pending general rate cases, and how the lower authorized water return and tax-related customer refunds affect revenue and earnings.
- Renewal or extension of AWR’s revolving credit facility and financing plans for the 2019 GSWC note and the stated capital program.
- Whether water-supply conditions, mandatory conservation, purchased-water costs, and well availability change materially.
- Execution and economics of the Fort Riley transition, construction pipeline, and collection of amounts due from the U.S. government.
- Progress and rate recovery of the Chadron remediation estimate, and any material developments in regulatory, environmental, wildfire, or other contingencies.