Business context and reporting period
American States Water Company (AWR) filed this unaudited combined Form 10-Q with its wholly owned regulated utility, Golden State Water Company (GSWC), for the quarter ended September 30, 2017. AWR operates California water and electric utilities through GSWC and military-base water and wastewater services through American States Utility Services (ASUS). GSWC serves approximately 259,000 water and 24,000 electric customers.
Key financial metrics
Unless otherwise noted, amounts are AWR consolidated and in millions of dollars; income-statement and cash-flow comparisons are year over year.
| Metric | Third quarter 2017 | Nine months 2017 |
|---|---|---|
| Operating revenue | $124.4 (+0.5%) | $336.4 (+2.2%) |
| Operating income | $38.6 (-2.7%) | $105.1 (+13.5%) |
| Net income | $21.0 (-2.9%) | $56.5 (+16.4%) |
| Diluted EPS | $0.57 (vs. $0.59) | $1.53 (vs. $1.32) |
| Operating margin | 31.0% (vs. 32.0%) | 31.2% (vs. 28.1%) |
| Operating cash flow | Not stated for the quarter | $120.2 (vs. $77.5) |
| Capital expenditures | Not stated for the quarter | $77.9 (vs. $99.9) |
Management’s non-GAAP utility gross margins were $67.8 million for water and $4.9 million for electric in the quarter, down 0.8% and 3.7%, respectively. For the nine months, water gross margin was $181.4 million (-1.0%) and electric gross margin was $16.1 million (-3.2%).
At September 30, AWR had cash of $6.7 million, current assets of $146.7 million and current liabilities of $151.9 million. Long-term debt was $320.9 million, current debt $0.3 million and bank notes payable $46.0 million. The $150 million revolving credit facility had $97.7 million available, after $46.0 million borrowed and $6.3 million of letters of credit. The facility was due to expire in May 2018; management expected to extend it. AWR’s S&P rating was A+ with stable outlook; GSWC’s Moody’s rating was A2 with stable outlook.
Material changes versus the prior comparable period
- Quarterly earnings declined despite slightly higher revenue. Water-segment EPS fell $0.03, mainly because the 2016 quarter did not reflect a later CPUC rate-case adjustment; excluding identified comparability items, management said quarterly water-segment earnings were unchanged.
- Nine-month earnings growth included an $8.3 million pretax gain ($0.13 per share) on the June sale of GSWC’s Ojai water system for $34.3 million. The sale proceeds helped repay short-term borrowings; the sale also ended service to approximately 2,900 Ojai connections.
- Contracted-services revenue rose 9.8% for the nine months, reflecting price adjustments, construction activity and the start of operations at Eglin Air Force Base. ASUS’s Eglin contract is valued at approximately $702 million over 50 years.
- Net cash from operations increased, partly due to CPUC-authorized surcharges, federal tax refunds and timing of military-base construction receipts. Investing cash outflow declined, including because of the Ojai sale proceeds.
- Quarterly dividends declared increased to $0.255 per share from $0.224; nine-month dividends were $0.739 per share versus $0.672.
Guidance, outlook, management commentary, risks and unusual items
- GSWC estimated 2017 company-funded capital expenditures of approximately $110–$120 million; it had incurred $79.7 million through September. Management anticipated that utility construction costs would continue to be recovered through rates, subject to regulatory outcomes.
- Management said the 2017 second-year water rate increases were expected to increase adopted water gross margin by approximately $3.3 million versus 2016, excluding Ojai. A water cost-of-capital application sought an 11% return on equity and 9.11% overall return on rate base, compared with then-authorized levels of 9.43% and 8.34%; a decision was expected by year-end 2017. Water and electric rate cases were pending.
- ASUS was awarded a 50-year Fort Riley contract with an initial stated value of approximately $601 million, subject to annual price adjustments and asset-inventory results. Operations were expected after a six-to-twelve-month transition.
- Water-supply costs were pressured by wells out of service: purchased water was 46% of supply in the quarter versus a 31% adopted level, and 41% year-to-date versus approximately 29%. Higher wholesale water costs and groundwater assessments reduced water gross margin. California’s drought emergency had ended in most areas, but some basins remained stressed; the company had ended mandatory conservation plans across its service areas.
- GSWC faced a $3.5 million court judgment, including attorney fees, arising from a 2014 water-main break. It believed insurance was sufficient, but could not predict the outcome of litigation between its insurers. The CPUC complaint related to the incident was dismissed.
- Claremont agreed to drop its appeals and make an initial $2.0 million payment toward a $7.6 million litigation-cost judgment; the remaining $5.9 million was subject to interest-only payments over 12 years and could be waived if agreement conditions are met. Future condemnation action or missed payments could make the balance due.
- Other principal risks include CPUC rate recovery and timing, water availability and quality, infrastructure and operating costs, electric commodity prices, and ASUS contract adjustments, government payments, audits and construction activity. Management identified no significant change in previously disclosed risk factors.
Most important facts an investor should verify
- How much of nine-month earnings growth remains after excluding the $8.3 million Ojai gain and other period-comparison effects.
- Whether CPUC rate-case and cost-of-capital decisions are timely and support the company’s requested recovery and returns.
- Whether GSWC can manage purchased-water reliance and groundwater costs while maintaining reliable supply and recovering eligible costs.
- Progress on the planned credit-facility extension, capital spending and reduction of short-term borrowings.
- Collection and accounting for the Claremont settlement, insurance recovery for the water-main judgment, and Fort Riley transition and contract economics.