American States Water Company (AWR) and Golden State Water Company (GSWC) — Q3 2015 Form 10-Q
Business context and period. The unaudited filing covers the quarter and nine months ended September 30, 2015, with comparisons to 2014. AWR’s businesses are regulated water and electric utility operations in California, principally through GSWC, and contracted water and wastewater services at U.S. military bases through ASUS.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $133.0 million | $138.3 million | $348.5 million | $355.9 million |
| Operating income | $41.2 million | $39.9 million | $96.6 million | $93.7 million |
| Net income | $21.1 million | $21.2 million | $48.9 million | $47.5 million |
| Diluted EPS | $0.56 | $0.54 | $1.29 | $1.22 |
| Operating margin | 31.0% | 28.8% | 27.7% | 26.3% |
- For the nine months, water revenue rose 1.1% to $256.4 million; electric revenue fell 2.2% to $26.8 million; contracted-services revenue declined 12.6% to $65.4 million, primarily reflecting less construction work than in 2014.
- Nine-month water gross margin was $187.1 million, down slightly from $187.4 million, with margin percentage declining to 73.0% from 73.9%. Electric gross margin fell to $15.6 million from $16.3 million.
- Operating cash flow was $86.1 million for the nine months, versus $120.1 million. Capital expenditures were $59.8 million. Cash ended at $27.3 million, compared with $76.0 million at year-end 2014.
- At September 30, AWR had $325.6 million of long-term debt, $15.0 million of bank notes payable and $0.3 million of current long-term debt. Current assets were $135.5 million and current liabilities $124.0 million. The $100 million revolving credit facility had $74.2 million available, with $15 million borrowed and $10.8 million of letters of credit outstanding.
- AWR repurchased $63.2 million of shares during the nine months and paid $24.5 million in dividends. The quarterly dividend was $0.224 per share; the board approved the same per-share dividend for Q4.
Material changes and management commentary
- Despite a 24% decline in billed water consumption in Q3 amid California drought conservation, CPUC-approved revenue mechanisms generally preserve authorized water revenues. GSWC recorded $36 million of additional net WRAM under-collections during the first nine months; its net WRAM/MCBA regulatory asset was $43.6 million at quarter-end.
- Management cautioned that continued conservation could make some 2015 WRAM balances uncollectible within the current 24-month recovery framework. The annual surcharge cap and amortization rules could delay revenue recognition for amounts expected to be recovered later.
- Lower contracted-services construction activity reduced revenue, but the U.S. government approved price redeterminations in Q3. AWR recorded about $3.5 million in retroactive ASUS revenue and pretax operating income, including $3.0 million for periods before 2015. ASUS also received approximately $50 million of new construction awards, most expected to be completed within 12 months.
- Management expects GSWC’s 2015 company-funded capital expenditures to be approximately $85–$90 million; nine-month company-funded expenditures were $57.6 million. Capital spending is expected to remain above depreciation. No consolidated earnings guidance was provided.
- GSWC’s water general rate case for 2016–2018 was awaiting a CPUC decision expected by year-end 2015, with new rates expected January 1, 2016. Interim rates were approved for use if a final decision was not issued by that date. Current authorized return on equity was 9.43% through December 2016.
Risks, contingencies and unusual items
- California drought, mandated conservation, reduced groundwater recharge and potentially higher purchased-water costs create operational and recovery-timing risks. GSWC’s 2015 water consumption reductions and pending WRAM collections are particularly important to monitor.
- GSWC is defending a Claremont condemnation action; the water system’s net book value was approximately $49.1 million and the right-to-take trial was scheduled for March 2016. A separate potential condemnation of the Ojai system and an Artesia feasibility study were also disclosed. Management could not predict the outcome of the Claremont proceeding.
- GSWC reported a $7.2 million unrealized loss on purchased-power contracts, offset through a CPUC-authorized regulatory memorandum account, so it did not affect earnings. The valuation was classified as Level 3.
- GSWC estimated $1.4 million of remaining remediation costs at a former gasoline-storage site; the amount was recorded as a regulatory asset and accrued liability, with ultimate costs subject to estimation.
- Other key risks include CPUC rate decisions and cost recovery, water quality and environmental compliance, utility infrastructure needs, and ASUS contract price redeterminations, government audits, payment timing and contract performance. Management said there were no significant changes to the risk factors disclosed in the 2014 Form 10-K.
- AWR and GSWC reported disclosure controls as adequate and effective, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the CPUC rate-case decision and 2016 rates support recovery of GSWC’s operating costs and planned investment.
- Whether WRAM balances can be collected within the permitted period despite ongoing conservation, and whether drought-related costs receive rate recovery.
- Actual water supply conditions, purchased-water mix and costs, and compliance with state conservation requirements.
- ASUS construction execution, cash collection and timing of future U.S. government price redeterminations, audits and contract modifications.
- Capital spending, cash generation, revolving-credit availability, and the impact of share repurchases and dividends on liquidity and financing needs.
- Developments in the Claremont, Ojai and Artesia matters, including potential effects on customers, assets and earnings.