American States Water Company (AWR) — Q1 2020 Form 10-Q
Business context and reporting period. Combined unaudited quarterly filing for AWR and its wholly owned regulated utility subsidiary, Golden State Water Company (GSWC), for the three months ended March 31, 2020, compared with Q1 2019. AWR operates water, electric and military-base contracted-services businesses. GSWC serves approximately 261,000 water and 24,000 electric customer connections in California; ASUS provides water and wastewater services at U.S. military installations.
Key financial results
| AWR consolidated (dollars in millions, except EPS) | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenues | $109.1 | $101.7 | +7.2% |
| Operating income | $25.7 | $20.2 | +27.3% |
| Net income | $14.1 | $12.9 | +9.5% |
| Diluted EPS | $0.38 | $0.35 | +$0.03 |
| Operating margin | 23.6% | 19.9% | +3.7 percentage points |
| Dividends declared per share | $0.305 | $0.275 | +$0.030 |
- Segment diluted EPS: water $0.24 vs. $0.21; electric $0.06 vs. $0.03; contracted services $0.08 vs. $0.11.
- Water gross margin, a non-GAAP measure defined by the company, was $53.6 million, up 10.7%; electric gross margin was $7.8 million, up 26.5%.
- Operating cash flow was $15.7 million, down from $29.4 million. Capital expenditures were $33.5 million, versus $40.6 million; operating cash flow less capital expenditures was negative $17.9 million.
- At March 31, AWR had $127.4 million in current assets and $132.5 million in current liabilities, including $0.4 million of cash. Long-term debt was $281.0 million; bank borrowings totaled $232.0 million, supported by a $260 million credit facility commitment through year-end 2020. AWR reported $32 million of bank notes as current.
- AWR total assets were $1.661 billion and shareholders’ equity was $604.6 million. GSWC separately reported Q1 revenue of $82.4 million and net income of $11.2 million, compared with $75.4 million and $9.0 million, respectively, in Q1 2019.
Material changes and drivers
- Water revenue rose $6.7 million, primarily reflecting CPUC-authorized rates effective January 2020 and 2019 rate-case timing. The full second-year water rate step increase is expected to add $10.4 million to 2020 water gross margin, subject to the disclosed rate-case framework.
- Electric revenue rose $0.3 million, with improved results principally reflecting new CPUC-authorized rates. Electric usage fell approximately 6%; the company said its revenue adjustment mechanism limits the earnings effect of usage changes.
- Contracted-services revenue increased modestly, but segment EPS declined $0.03. Higher-than-expected costs on certain construction projects and increased legal and outside-services costs contributed. Q1 2019 included approximately $0.01 per share of retroactive military-contract price adjustments.
- Q1 2020 included $2.4 million of losses on investments held for a retirement plan, versus $1.5 million of gains in Q1 2019. Management estimated this reduced year-over-year water-segment EPS by approximately $0.08; excluding the market-related effect, water EPS increased $0.11.
- Lower depreciation expense, largely reflecting revised CPUC-approved water depreciation rates, helped operating income comparability. Maintenance expense increased $1.3 million, mainly from higher unplanned water-system maintenance.
Outlook, risks and contingencies
- COVID-19 and liquidity: GSWC suspended residential service disconnections for nonpayment through April 2021, waived certain reconnection fees and deposits, closed customer-service offices temporarily, expanded telecommuting and delayed some water capital projects. Management expected increased delinquent receivables, bad-debt expense and borrowing needs; the extent of effects remained uncertain. The company increased its customer-account allowance for doubtful accounts by $393,000. Incremental qualifying pandemic costs, including certain bad debt, may be tracked in a CPUC-authorized CEMA account for future recovery.
- Capital and financing: GSWC estimated 2020 company-funded capital expenditures of approximately $115–$130 million, subject to possible schedule changes. It planned to issue long-term debt to reduce intercompany borrowings and help fund capital spending. A CPUC proposed decision issued April 27, 2020 approved a financing application; a final decision was expected in Q2. GSWC had $182.4 million of intercompany borrowings classified as current, with a required paydown period ending November 2020.
- Rates: The CPUC postponed the next water cost-of-capital application filing to May 1, 2021; GSWC’s 7.91% authorized water return on rate base remains in effect through December 31, 2021. A potential 2021 water gross-margin increase of approximately $11.4 million is conditional on an earnings test and inflation-index changes.
- Water supply and quality: The filing reports below-normal 2020 precipitation, statewide snowpack at about 64% of average, and a 15% State Water Project allocation. As of April 28, about 42% of California was in moderate drought and 20% in severe drought. Some local restrictions remained. GSWC was testing for PFAS, had removed some wells from service and expected further treatment costs; cost recovery depends on regulatory processes.
- Other matters: A $4.3 million unrealized loss on purchased-power contracts was recorded as a regulatory asset and does not affect earnings under the approved accounting treatment. GSWC recorded an estimated $1.3 million liability and corresponding regulatory asset for remaining cleanup at a former plant site. Management said routine litigation was not expected to have a material effect and no material legal proceeding was pending.
- The filing identifies risks involving customer payment delays, market volatility and pension-plan assets, access to financing, regulatory recovery and timing, drought and water availability, wildfire and severe weather exposure, and military-contract adjustments, audits and termination rights. Management stated that COVID-19 had not materially affected ASUS operations to date.
Important facts for investors to verify
- Whether COVID-related delinquencies, service-disconnection restrictions and bad-debt expense materially affect cash flow, and how much incremental cost is ultimately recoverable through the CEMA process.
- Final CPUC approval and terms of GSWC’s proposed financing, its planned debt issuance, and the November 2020 intercompany-borrowing paydown requirement.
- Actual delivery of the expected water rate-step benefits, the conditional 2021 rate increase, and the timing and outcome of future rate proceedings.
- Progress and cost of GSWC’s capital program, water-supply conditions, local restrictions and PFAS-related testing and treatment.
- Whether ASUS construction costs, military-contract price adjustments and U.S. government payment timing affect contracted-services profitability and cash flows.