American States Water Company (AWR) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. The combined filing covers AWR and its wholly owned regulated utility, Golden State Water Company (GSWC). AWR also owns American States Utility Services (ASUS), which operates military-base water and wastewater systems.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| AWR operating revenue | $93.5 million | $100.9 million |
| Operating income | $21.2 million | $24.9 million |
| Net income | $10.2 million | $12.1 million |
| Diluted EPS | $0.28 | $0.32 |
| Operating cash flow | $27.6 million | $38.5 million |
| Capital expenditures | $29.5 million | $17.4 million |
- Revenue declined 7.3%, operating income 14.7%, and net income 16.5% year over year. Lower water revenue and contracted-services construction revenue were the principal revenue headwinds.
- Operating margin was approximately 22.7%, down from 24.7%; net margin was approximately 10.9%, versus 12.0%.
- Water gross margin, a company-defined non-GAAP measure, was $52.7 million, down 2.9%; margin percentage rose to 79.5% from 75.9%. Electric gross margin increased 7.1% to $6.6 million, with margin percentage of 62.5% versus 56.2%.
- Operating cash flow fell by $10.9 million, attributed mainly to timing of military construction billing and receipts, lower water use and higher income-tax payments. Cash flow less capital expenditures was negative $1.8 million, compared with positive $21.1 million a year earlier.
- At March 31, AWR had $8.5 million cash, $43.0 million in bank borrowings, $320.9 million long-term debt and $0.3 million current long-term debt. Current assets of $131.1 million were below current liabilities of $139.1 million. The $100 million revolving facility had $46.6 million available, with $10.4 million of letters of credit outstanding.
- Quarterly dividend paid was $0.224 per share, up from $0.213. The board approved another $0.224 dividend for Q2 2016.
Material changes and management commentary
- Water revenue declined 7.3% to $66.3 million. Billed water consumption was down approximately 8%, mainly reflecting conservation. Management said the CPUC-approved WRAM mechanism generally limits the direct earnings effect of usage changes, though lower usage can affect revenue recognition and cash timing.
- GSWC reduced first-quarter water revenue by approximately $5.8 million to reflect the anticipated lower revenue requirement in its pending 2016–2018 water general rate case (GRC), with related expense reductions. Management said these adjustments had no significant effect on pretax operating income.
- The GRC decision was expected during 2016, with rates retroactive to January 1. Resolved issues include most operating expenses and conservation-based consumption assumptions; capital budgets and management compensation remained unresolved. Management warned the final decision could require a material adjustment to first-quarter net income.
- Electric earnings per share remained $0.03. Rate increases were largely offset by higher operating expenses, including storm-response, depreciation and energy-efficiency program costs.
- Contracted-services revenue declined 9.8% to $16.6 million and segment EPS fell from $0.04 to $0.03, mainly due to lower construction activity and project timing. Management expected most of the relevant project work during the remaining quarters of 2016. AWR reported approximately $50 million of new construction projects awarded in 2015, most expected to be completed in 2016.
- GSWC’s 2016 company-funded capital expenditure estimate was $85–$95 million, subject to change after the GRC decision. AWR expects capital needs and interest expense to increase; management said internal cash and available borrowing capacity should support operations and financing needs.
Risks, contingencies and unusual items
- California drought restrictions were extended through October 31, 2016. As of the filing, all but one GSWC water system met revised conservation standards. Continued drought could reduce groundwater supplies, require additional conservation, and increase purchased-water costs. Management did not expect penalties for failure to implement conservation plans.
- Water supply costs were affected by wells being out of service: purchased water represented 42% of supply, versus 34% a year earlier, compared with an adopted level of approximately 32%. GSWC intended to seek recovery of approximately $1.0 million of previously incurred drought-related costs.
- Condemnation matters remain material uncertainties. The City of Claremont’s eminent-domain trial was scheduled to begin June 13, 2016; the system had a net book value of approximately $49.1 million and served about 11,000 customers. Casitas Municipal Water District had made an offer for the Ojai system, which GSWC rejected; the district adopted a resolution of necessity in April 2016, and management expected a possible lawsuit. Ojai serves about 3,000 customers.
- GSWC reported $144.2 million of net regulatory assets, including a $53.9 million WRAM/MCBA asset. Recovery depends on CPUC processes and timing. Most balances were expected to be recovered within 12–18 months, but some 2015 balances had longer recovery periods.
- A $7.2 million unrealized loss on fixed-price purchased-power derivatives was deferred in a regulatory memorandum account and did not affect earnings. The fair-value estimate was classified Level 3.
- Other disclosed exposures include water-quality and environmental compliance costs, procurement oversight, military-contract price adjustments and payment timing, and ordinary-course litigation. The Chadron remediation accrual was $1.4 million, with recovery expected through rates.
Most important facts to verify
- Final CPUC water GRC decision: approved revenue requirement, capital budget, compensation treatment, retroactive rates and any first-quarter earnings adjustment.
- WRAM/MCBA recovery schedules and whether the recorded regulatory assets will be collected within the applicable periods.
- Progress and potential outcomes of the Claremont and Ojai condemnation actions, including compensation and effects on future revenues.
- Water supply availability, conservation requirements, well restoration and the recovery of drought-related costs.
- Execution and cash collection of 2016 military-base construction work, including price redeterminations and equitable-adjustment requests.
- Capital spending, operating cash flow, borrowing levels and continued dividend capacity as investment needs rise.