SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
for the quarterly period ended March 31, 2020
or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
for the transition period from to |
Commission file number 001-14431
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | |||
(Address of Principal Executive Offices) | (Zip Code) | |||
(909 ) 394-3600
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Commission file number 001-12008
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class | Trading symbol | Name of each exchange on which registered | ||
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | |||
(Address of Principal Executive Offices) | (Zip Code) | |||
(909 ) 394-3600
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
American States Water Company | x | No | ¨ | ||
Golden State Water Company | x | No | ¨ | ||
Indicate by check mark whether Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files).
American States Water Company | x | No | ¨ | ||
Golden State Water Company | x | No | ¨ | ||
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
American States Water Company
x | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | Emerging growth company | |||||||
Golden State Water Company
Large accelerated filer | ¨ | Accelerated filer | ¨ | x | Smaller reporting company | Emerging growth company | |||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
American States Water Company | Yes | No | x | |||
Golden State Water Company | Yes | No | x | |||
As of May 1, 2020, the number of Common Shares outstanding of American States Water Company was 36,883,771 shares. As of May 1, 2020, all of the 165 outstanding Common Shares of Golden State Water Company were owned by American States Water Company.
Golden State Water Company meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form, in part, with the reduced disclosure format for Golden State Water Company.
AMERICAN STATES WATER COMPANY
and
GOLDEN STATE WATER COMPANY
FORM 10-Q
INDEX
3 | |||
PART I
Item 1. Financial Statements
General
The basic financial statements included herein have been prepared by Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments consisting of normal recurring items and estimates necessary for a fair statement of results for the interim period have been made.
It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto in the latest Annual Report on Form 10-K of American States Water Company and its wholly owned subsidiary, Golden State Water Company.
Filing Format
American States Water Company (“AWR”) is the parent company of Golden State Water Company (“GSWC”) and American States Utility Services, Inc. and its subsidiaries ("ASUS").
This quarterly report on Form 10-Q is a combined report being filed by two separate Registrants: AWR and GSWC. For more information, please see Note 1 of the Notes to Consolidated Financial Statements and the heading entitled "General" in "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations." References in this report to “Registrant” are to AWR and GSWC collectively, unless otherwise specified. GSWC makes no representations as to the information contained in this report other than with respect to itself.
Forward-Looking Information
This Form 10-Q and the documents incorporated herein contain forward-looking statements intended to qualify for the “safe harbor” from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current estimates, expectations and projections about future events and assumptions regarding these events and include statements regarding management’s goals, beliefs, plans or current expectations, taking into account the information currently available to management. Forward-looking statements are not statements of historical facts. For example, when we use words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “may” and other words that convey uncertainty of future events or outcomes, we are making forward-looking statements. We are not able to predict all the factors that may affect future results. We caution you that any forward-looking statements made by us are not guarantees of future performance and the actual results may differ materially from those in our forward-looking statements. Some of the factors that could cause future results to differ materially from those expressed or implied by our forward-looking statements or from historical results, include, but are not limited to:
• | the outcome of pending and future regulatory, legislative or other proceedings, investigations or audits, including decisions in GSWC's general rate cases and the results of independent audits of GSWC's construction contracting procurement practices or other independent audits of our costs; |
• | changes in the policies and procedures of the CPUC; |
• | timeliness of CPUC action on GSWC rates; |
• | availability of GSWC's water supplies, which may be adversely affected by increases in the frequency and duration of droughts, changes in weather patterns, contamination, and court decisions or other governmental actions restricting the use of water from the Colorado River, the California State Water Project, and/or pumping of groundwater; |
• | liabilities of GSWC associated with the inherent risks of damage to private property and injuries to employees and the public if our or their property should come into contact with electrical current or equipment; |
• | the potential of strict liability for damages caused by GSWC's property or equipment, even if GSWC was not negligent in the operation and maintenance of that property or equipment, under a doctrine known as inverse condemnation; |
• | the impact of storms, high winds, earthquakes, floods, mudslides, drought, wildfires and similar natural disasters, contamination or acts of terrorism or vandalism, that affect water quality and/or supply, affect customer demand, that damage or disrupt facilities, operations or information technology systems owned by us, our customers or third parties on whom we rely or that damage the property of our customers or other third parties or cause bodily injury resulting in liabilities that we may be unable to recover from insurance, other third parties and/or the U.S. government or that the CPUC or the courts do not permit us to recover from ratepayers; |
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• | the economic impact of the COVID-19 pandemic on GSWC’s liquidity and the value of its pension and other retirement plan assets, and the ability of GSWC and the Military Privatization Subsidiaries to continue to operate, maintain, repair and improve their infrastructure and to provide services to its customers in the ordinary course of business; |
• | the impact on water utility operations during high fire threat conditions as a result of the Public Safety Power Shut-Off program authorized by the CPUC and implemented by the electric utilities that serve GSWC facilities throughout the state and our ability to get full cost recovery in rates for costs incurred in preparation of and during a Public Safety Power Shut-Off event; |
• | liabilities of GSWC for wildfires caused by GSWC’s electrical equipment if GSWC is unable to recover the costs and expenses associated with such liabilities from insurance or from ratepayers on a timely basis, if at all; |
• | penalties which may be assessed by the CPUC if GSWC shuts down power to its customers during high threat conditions under the Public Safety Power Shut-Off program authorized by the CPUC if the CPUC determines that the shutdown was not reasonably necessary or excessive in the circumstances; |
• | our ability to implement GSWC's wildfire mitigation program and effectively implement Public Safety Power Shut-Offs when appropriate; |
• | costs incurred, and the ability to recover such costs from customers, associated with service disruptions as the result of a Public Safety Power Shut-Off program; |
• | risks associated with California Assembly Bill No. 1054's effectiveness in mitigating the risk faced by California investor-owned utilities related to liability for damages arising from catastrophic wildfires where utility facilities are a substantial cause, including GSWC's ability to maintain a valid safety certification and the CPUC's interpretation of and actions under California Assembly Bill No. 1054; |
• | the liquidity impact of California Senate Bill No. 998, which went into effect on February 1, 2020 and prohibits a water company from discontinuing residential water service for nonpayment until a payment by a customer has been delinquent for at least 60 days, and prohibits residential service from being discontinued under specified circumstances; |
• | increases in the cost of obtaining insurance or in uninsured losses that may not be recovered in rates, or under our contracts with the U.S. government, including increases due to difficulties in obtaining insurance for certain risks, such as wildfires and earthquakes in California; |
• | increases in costs to reduce the risks associated with the increasing frequency of severe weather, including to improve the resiliency and reliability of our water production and delivery facilities and systems, and our electric transmission and distribution lines; |
• | increases in service disruptions if severe weather and wildfires or threats of wildfire become more frequent as predicted by some scientists who study climate change; |
• | our ability to efficiently manage GSWC capital expenditures and operating and maintenance expenses within CPUC authorized levels and timely recover our costs through rates; |
• | the impact of opposition to GSWC rate increases on our ability to recover our costs through rates, including costs associated with construction and costs associated with damages to our property and that of others and injuries to persons arising out of more extreme weather events; |
• | the impact of opposition by GSWC customers to conservation rate design, including more stringent water-use restrictions if drought in California persists due to climate change, as well as future restrictions on water use mandated in California, which may decrease adopted usage and increase customer rates; |
• | the impact of condemnation actions on future GSWC revenues and other aspects of our business if we do not receive adequate compensation for the assets taken, or recovery of all charges associated with the condemnation of such assets, as well as the impact on future revenues if we are no longer entitled to any portion of the revenues generated from such assets; |
• | our ability to forecast the costs of maintaining GSWC’s aging water and electric infrastructure; |
• | our ability to recover increases in permitting costs and costs associated with negotiating and complying with the terms of our franchise agreements with cities and counties and other demands made upon us by the cities and counties in which GSWC operates; |
• | changes in accounting valuations and estimates, including changes resulting from our assessment of anticipated recovery of GSWC's regulatory assets, settlement of liabilities and revenues subject to refund or regulatory disallowances and the timing of such recovery, and the amounts set aside for uncollectible accounts receivable, inventory obsolescence, pension |
2
and post-retirement liabilities, taxes and uninsured losses and claims, including general liability and workers' compensation claims;
• | changes in environmental laws, health and safety laws, and water and recycled water quality requirements, and increases in costs associated with complying with these laws and requirements, including costs associated with GSWC's upgrading and building new water treatment plants, GSWC's disposing of residuals from our water treatment plants, more stringent rules regarding pipeline repairs and installation, handling and storing hazardous chemicals, upgrading equipment to make it more resistant to extreme weather events, removal of vegetation near power lines, compliance-monitoring activities and GSWC's securing alternative water supplies when necessary; |
• | changes in laboratory detection capabilities and drinking water notification levels for certain substances, such as fluorinated organic perfluoroalkyl chemicals (e.g. PFOA and PFOS) used to make certain fabrics and other materials, used in certain fire suppression agents and also used in various industrial processes; |
• | our ability to obtain adequate, reliable and cost-effective services, supplies of chemicals, electricity, fuel, water and other raw materials that are needed for our water and wastewater operations; |
• | our ability to attract, retain, train, motivate, develop and transition key employees; |
• | our ability to recover the costs associated with any contamination of GSWC’s groundwater supplies from parties responsible for the contamination or through the ratemaking process, and the time and expense incurred by us in obtaining recovery of such costs; |
• | adequacy of GSWC's electric division's power supplies and the extent to which we can manage and respond to the volatility of electricity and natural gas prices; |
• | GSWC's electric division's ability to comply with the CPUC’s renewable energy procurement requirements; |
• | changes in GSWC's long-term customer demand due to changes in customer usage patterns as a result of conservation efforts, regulatory changes affecting demand such as mandatory restrictions on water use, new landscaping or irrigation requirements, recycling of water by customers or purchase of recycled water supplied by other parties, unanticipated population growth or decline, changes in climate conditions, general economic and financial market conditions and cost increases, which may impact our long-term operating revenues if we are unable to secure rate increases in an amount sufficient to offset reduced demand; |
• | changes in accounting treatment for regulated utilities; |
• | effects of changes in, or interpretations of, tax laws, rates or policies; |
• | changes in estimates used in ASUS’s cost-to-cost method for revenue recognition of certain construction activities; |
• | termination, in whole or in part, of one or more of ASUS's military utility privatization contracts to provide water and/or wastewater services at military bases for the convenience of the U.S. government or for default; |
• | suspension or debarment of ASUS for a period of time from contracting with the government due to violations of laws or regulations in connection with military utility privatization activities; |
• | delays by the U.S. government in making timely payments to ASUS for water and/or wastewater services or construction activities at military bases because of fiscal uncertainties over the funding of the U.S. government or otherwise; |
• | delays in ASUS obtaining economic price or equitable adjustments to our prices on one or more of our contracts to provide water and/or wastewater services at military bases; |
• | disallowance of costs on any of ASUS's contracts to provide water and/or wastewater services at military bases because of audits, cost reviews or investigations by contracting agencies; |
• | inaccurate assumptions used by ASUS in preparing bids in our contracted services business; |
• | failure of wastewater systems that ASUS operates on military bases resulting in untreated wastewater or contaminants spilling into nearby properties, streams or rivers, a risk which may increase if flooding and rainfall become more frequent or severe as a result of climate change; |
• | failure to comply with the terms of our military privatization contracts; |
• | failure of any of our subcontractors to perform services for ASUS in accordance with the terms of our military privatization contracts; |
• | competition for new military privatization contracts; |
• | issues with the implementation, maintenance or upgrading of our information technology systems; |
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• | general economic conditions which may impact our ability to recover infrastructure investments and operating costs from customers; |
• | explosions, fires, accidents, mechanical breakdowns, the disruption of information technology and telecommunication systems, human error and similar events that may occur while operating and maintaining water and electric systems in California or operating and maintaining water and wastewater systems on military bases under varying geographic conditions; |
• | potential costs, lost revenues, or other consequences resulting from misappropriation of assets or sensitive information, corruption of data, or operational disruption due to a cyber-attack or other cyber incident; |
• | restrictive covenants in our debt instruments or changes to our credit ratings on current or future debt that may increase our financing costs or affect our ability to borrow or make payments on our debt; and |
• | our ability to access capital markets and other sources of credit in a timely manner on acceptable terms. |
Please consider our forward-looking statements in light of these risks as you read this Form 10-K. We qualify all of our forward-looking statements by these cautionary statements.
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(in thousands) | March 31, 2020 | December 31, 2019 | ||||||
Property, Plant and Equipment | ||||||||
Regulated utility plant, at cost | $ | $ | ||||||
Non-utility property, at cost | ||||||||
Total | ||||||||
Less - Accumulated depreciation | ( | ) | ( | ) | ||||
Net property, plant and equipment | ||||||||
Other Property and Investments | ||||||||
Goodwill | ||||||||
Other property and investments | ||||||||
Total other property and investments | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | ||||||||
Accounts receivable — customers (less allowance for doubtful accounts of $1,086 in 2020 and $857 in 2019) | ||||||||
Unbilled receivable | ||||||||
Receivable from the U.S. government | ||||||||
Other accounts receivable (less allowance for doubtful accounts of $59 in 2020 and 2019) | ||||||||
Income taxes receivable | ||||||||
Materials and supplies, at weighted average cost | ||||||||
Regulatory assets — current | ||||||||
Prepayments and other current assets | ||||||||
Contract assets | ||||||||
Total current assets | ||||||||
Other Assets | ||||||||
Unbilled revenue- receivable from U.S. government | ||||||||
Receivable from the U.S. government | ||||||||
Contract assets | ||||||||
Operating lease right-of-use assets | ||||||||
Other | ||||||||
Total other assets | ||||||||
Total Assets | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements
5
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(Unaudited)
(in thousands, except number of shares) | March 31, 2020 | December 31, 2019 | ||||||
Capitalization | ||||||||
Common shares, no par value | ||||||||
Authorized: 60,000,000 shares | ||||||||
Outstanding: 36,883,771 shares in 2020 and 36,846,614 shares in 2019 | $ | $ | ||||||
Earnings reinvested in the business | ||||||||
Total common shareholders’ equity | ||||||||
Long-term debt | ||||||||
Total capitalization | ||||||||
Current Liabilities | ||||||||
Notes payable to banks | ||||||||
Long-term debt — current | ||||||||
Accounts payable | ||||||||
Income taxes payable | ||||||||
Accrued other taxes | ||||||||
Accrued employee expenses | ||||||||
Accrued interest | ||||||||
Unrealized loss on purchased power contracts | ||||||||
Contract liabilities | ||||||||
Operating lease liabilities | ||||||||
Other | ||||||||
Total current liabilities | ||||||||
Other Credits | ||||||||
Notes payable to bank | ||||||||
Advances for construction | ||||||||
Contributions in aid of construction - net | ||||||||
Deferred income taxes | ||||||||
Regulatory liabilities | ||||||||
Unamortized investment tax credits | ||||||||
Accrued pension and other postretirement benefits | ||||||||
Operating lease liabilities | ||||||||
Other | ||||||||
Total other credits | ||||||||
Commitments and Contingencies (Note 9) | ||||||||
Total Capitalization and Liabilities | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements
6
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
MARCH 31, 2020 AND 2019
(Unaudited)
Three months ended March 31, | ||||||||
(in thousands, except per share amounts) | 2020 | 2019 | ||||||
Operating Revenues | ||||||||
Water | $ | $ | ||||||
Electric | ||||||||
Contracted services | ||||||||
Total operating revenues | ||||||||
Operating Expenses | ||||||||
Water purchased | ||||||||
Power purchased for pumping | ||||||||
Groundwater production assessment | ||||||||
Power purchased for resale | ||||||||
Supply cost balancing accounts | ( | ) | ( | ) | ||||
Other operation | ||||||||
Administrative and general | ||||||||
Depreciation and amortization | ||||||||
Maintenance | ||||||||
Property and other taxes | ||||||||
ASUS construction | ||||||||
Gain on sale of assets | ( | ) | ||||||
Total operating expenses | ||||||||
Operating Income | ||||||||
Other Income and Expenses | ||||||||
Interest expense | ( | ) | ( | ) | ||||
Interest income | ||||||||
Other, net | ( | ) | ||||||
Total other income and expenses, net | ( | ) | ( | ) | ||||
Income before income tax expense | ||||||||
Income tax expense | ||||||||
Net Income | $ | $ | ||||||
Weighted Average Number of Common Shares Outstanding | ||||||||
Basic Earnings Per Common Share | $ | $ | ||||||
Weighted Average Number of Diluted Shares | ||||||||
Fully Diluted Earnings Per Common Share | $ | $ | ||||||
Dividends Declared Per Common Share | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements
7
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CHANGES
IN COMMON SHAREHOLDERS' EQUITY
(Unaudited)
Three Months Ended March 31, 2020 | |||||||||||||||
Common Shares | Reinvested | ||||||||||||||
Number | Earnings | ||||||||||||||
of | in the | ||||||||||||||
(in thousands) | Shares | Amount | Business | Total | |||||||||||
Balances at December 31, 2019 | $ | $ | $ | ||||||||||||
Add: | |||||||||||||||
Net income | |||||||||||||||
Exercise of stock options and other issuances of Common Shares | |||||||||||||||
Stock-based compensation, net of taxes paid from shares withheld from employees related to net share settlements (Note 4) | |||||||||||||||
Dividend equivalent rights on stock-based awards not paid in cash | |||||||||||||||
Deduct: | |||||||||||||||
Dividends on Common Shares | |||||||||||||||
Dividend equivalent rights on stock-based awards not paid in cash | |||||||||||||||
Balances at March 31, 2020 | $ | $ | $ | ||||||||||||
Three Months Ended March 31, 2019 | |||||||||||||||
Common Shares | Reinvested | ||||||||||||||
Number | Earnings | ||||||||||||||
of | in the | ||||||||||||||
(in thousands) | Shares | Amount | Business | Total | |||||||||||
Balances at December 31, 2018 | $ | $ | $ | ||||||||||||
Add: | |||||||||||||||
Net income | |||||||||||||||
Exercise of stock options and other issuances of Common Shares | |||||||||||||||
Stock-based compensation, net of taxes paid from shares withheld from employees related to net share settlements (Note 4) | |||||||||||||||
Dividend equivalent rights on stock-based awards not paid in cash | |||||||||||||||
Deduct: | |||||||||||||||
Dividends on Common Shares | |||||||||||||||
Dividend equivalent rights on stock-based awards not paid in cash | |||||||||||||||
Balances at March 31, 2019 | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(Unaudited)
Three Months Ended March 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Cash Flows From Operating Activities: | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | ||||||||
Provision for doubtful accounts | ||||||||
Deferred income taxes and investment tax credits | ( | ) | ||||||
Stock-based compensation expense | ||||||||
Gain on sale of assets | ( | ) | ||||||
Loss (gain) on investments held in a trust | ( | ) | ||||||
Other — net | ||||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable — customers | ( | ) | ||||||
Unbilled receivable | ||||||||
Other accounts receivable | ||||||||
Receivables from the U.S. government | ( | ) | ||||||
Materials and supplies | ( | ) | ( | ) | ||||
Prepayments and other assets | ( | ) | ( | ) | ||||
Contract assets | ( | ) | ( | ) | ||||
Regulatory assets | ( | ) | ( | ) | ||||
Accounts payable | ( | ) | ( | ) | ||||
Income taxes receivable/payable | ||||||||
Contract liabilities | ( | ) | ||||||
Accrued pension and other postretirement benefits | ||||||||
Other liabilities | ( | ) | ||||||
Net cash provided | ||||||||
Cash Flows From Investing Activities: | ||||||||
Capital expenditures | ( | ) | ( | ) | ||||
Proceeds from sale of assets | ||||||||
Other investing activities | ||||||||
Net cash used | ( | ) | ( | ) | ||||
Cash Flows From Financing Activities: | ||||||||
Proceeds from stock option exercises | ||||||||
Receipt of advances for and contributions in aid of construction | ||||||||
Refunds on advances for construction | ( | ) | ( | ) | ||||
Retirement or repayments of long-term debt | ( | ) | ( | ) | ||||
Net change in notes payable to banks | ||||||||
Dividends paid | ( | ) | ( | ) | ||||
Other financing activities | ( | ) | ( | ) | ||||
Net cash provided | ||||||||
Net change in cash and cash equivalents | ( | ) | ( | ) | ||||
Cash and cash equivalents, beginning of period | ||||||||
Cash and cash equivalents, end of period | $ | $ | ||||||
Non-cash transactions: | ||||||||
Accrued payables for investment in utility plant | $ | $ | ||||||
Property installed by developers and conveyed | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements
9
(in thousands) | March 31, 2020 | December 31, 2019 | ||||||
Utility Plant | ||||||||
Utility plant, at cost | $ | $ | ||||||
Less - Accumulated depreciation | ( | ) | ( | ) | ||||
Net utility plant | ||||||||
Other Property and Investments | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | ||||||||
Accounts receivable-customers (less allowance for doubtful accounts of $1,086 in 2020 and $857 in 2019) | ||||||||
Unbilled receivable | ||||||||
Other accounts receivable (less allowance for doubtful accounts of $59 in 2020 and 2019) | ||||||||
Income taxes receivable from Parent | ||||||||
Materials and supplies, at average cost | ||||||||
Regulatory assets — current | ||||||||
Prepayments and other current assets | ||||||||
Total current assets | ||||||||
Other Assets | ||||||||
Operating lease right-of-use assets | ||||||||
Other | ||||||||
Total other assets | ||||||||
Total Assets | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements
10
(in thousands, except number of shares) | March 31, 2020 | December 31, 2019 | ||||||
Capitalization | ||||||||
Common Shares, no par value: | ||||||||
Authorized: 1,000 shares | ||||||||
Outstanding: 165 shares in 2019 and 2018 | $ | $ | ||||||
Earnings reinvested in the business | ||||||||
Total common shareholder’s equity | ||||||||
Long-term debt | ||||||||
Total capitalization | ||||||||
Current Liabilities | ||||||||
Intercompany payable to Parent | ||||||||
Long-term debt — current | ||||||||
Accounts payable | ||||||||
Accrued other taxes | ||||||||
Accrued employee expenses | ||||||||
Accrued interest | ||||||||
Unrealized loss on purchased power contracts | ||||||||
Operating lease liabilities | ||||||||
Other | ||||||||
Total current liabilities | ||||||||
Other Credits | ||||||||
Advances for construction | ||||||||
Contributions in aid of construction — net | ||||||||
Deferred income taxes | ||||||||
Regulatory liabilities | ||||||||
Unamortized investment tax credits | ||||||||
Accrued pension and other postretirement benefits | ||||||||
Operating lease liabilities | ||||||||
Other | ||||||||
Total other credits | ||||||||
Commitments and Contingencies (Note 9) | ||||||||
Total Capitalization and Liabilities | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements
11
GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
MARCH 31, 2020 AND 2019
(Unaudited)
Three Months Ended March 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Operating Revenues | ||||||||
Water | $ | $ | ||||||
Electric | ||||||||
Total operating revenues | ||||||||
Operating Expenses | ||||||||
Water purchased | ||||||||
Power purchased for pumping | ||||||||
Groundwater production assessment | ||||||||
Power purchased for resale | ||||||||
Supply cost balancing accounts | ( | ) | ( | ) | ||||
Other operation | ||||||||
Administrative and general | ||||||||
Depreciation and amortization | ||||||||
Maintenance | ||||||||
Property and other taxes | ||||||||
Total operating expenses | ||||||||
Operating Income | ||||||||
Other Income and Expenses | ||||||||
Interest expense | ( | ) | ( | ) | ||||
Interest income | ||||||||
Other, net | ( | ) | ||||||
Total other income and expenses, net | ( | ) | ( | ) | ||||
Income before income tax expense | ||||||||
Income tax expense | ||||||||
Net Income | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements
12
GOLDEN STATE WATER COMPANY
STATEMENTS OF CHANGES
IN COMMON SHAREHOLDER'S EQUITY
(Unaudited)
Three Months Ended March 31, 2020 | |||||||||||||||
Common Shares | Reinvested | ||||||||||||||
Number | Earnings | ||||||||||||||
of | in the | ||||||||||||||
(in thousands, except number of shares) | Shares | Amount | Business | Total | |||||||||||
Balances at December 31, 2019 | $ | $ | $ | ||||||||||||
Add: | |||||||||||||||
Net income | |||||||||||||||
Stock-based compensation, net of taxes paid from shares withheld from employees related to net share settlements (Note 4) | |||||||||||||||
Dividend equivalent rights on stock-based awards not paid in cash | |||||||||||||||
Deduct: | |||||||||||||||
Dividends on Common Shares | |||||||||||||||
Dividend equivalent rights on stock-based awards not paid in cash | |||||||||||||||
Balances at March 31, 2020 | $ | $ | $ | ||||||||||||
Three Months Ended March 31, 2019 | |||||||||||||||
Common Shares | Reinvested | ||||||||||||||
Number | Earnings | ||||||||||||||
of | in the | ||||||||||||||
(in thousands, except number of shares) | Shares | Amount | Business | Total | |||||||||||
Balances at December 31, 2018 | $ | $ | $ | ||||||||||||
Add: | |||||||||||||||
Net income | |||||||||||||||
Stock-based compensation, net of taxes paid from shares withheld from employees related to net share settlements (Note 4) | |||||||||||||||
Dividend equivalent rights on stock-based awards not paid in cash | |||||||||||||||
Deduct: | |||||||||||||||
Dividends on Common Shares | |||||||||||||||
Dividend equivalent rights on stock-based awards not paid in cash | |||||||||||||||
Balances at March 31, 2019 | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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GOLDEN STATE WATER COMPANY
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(Unaudited)
Three Months Ended March 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Cash Flows From Operating Activities: | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | ||||||||
Provision for doubtful accounts | ||||||||
Deferred income taxes and investment tax credits | ( | ) | ||||||
Stock-based compensation expense | ||||||||
Loss (gain) on investments held in a trust | ( | ) | ||||||
Other — net | ||||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable — customers | ( | ) | ||||||
Unbilled receivable | ||||||||
Other accounts receivable | ( | ) | ||||||
Materials and supplies | ( | ) | ||||||
Prepayments and other assets | ( | ) | ( | ) | ||||
Regulatory assets | ( | ) | ( | ) | ||||
Accounts payable | ( | ) | ( | ) | ||||
Intercompany receivable/payable | ( | ) | ( | ) | ||||
Income taxes receivable/payable from/to Parent | ||||||||
Accrued pension and other postretirement benefits | ||||||||
Other liabilities | ( | ) | ||||||
Net cash provided | ||||||||
Cash Flows From Investing Activities: | ||||||||
Capital expenditures | ( | ) | ( | ) | ||||
Other investing activities | ||||||||
Net cash used | ( | ) | ( | ) | ||||
Cash Flows From Financing Activities: | ||||||||
Receipt of advances for and contributions in aid of construction | ||||||||
Refunds on advances for construction | ( | ) | ( | ) | ||||
Retirement or repayments of long-term debt | ( | ) | ( | ) | ||||
Net change in intercompany borrowings | ||||||||
Dividends paid | ( | ) | ( | ) | ||||
Other financing activities | ( | ) | ( | ) | ||||
Net cash provided | ||||||||
Net change in cash and cash equivalents | ( | ) | ||||||
Cash and cash equivalents, beginning of period | ||||||||
Cash and cash equivalents, end of period | $ | $ | ||||||
Non-cash transactions: | ||||||||
Accrued payables for investment in utility plant | $ | $ | ||||||
Property installed by developers and conveyed | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements
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AMERICAN STATES WATER COMPANY AND SUBSIDIARIES
AND
GOLDEN STATE WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Summary of Significant Accounting Policies
Nature of Operations: American States Water Company (“AWR”) is the parent company of Golden State Water Company (“GSWC”) and American States Utility Services, Inc. (“ASUS”) (and its subsidiaries, Fort Bliss Water Services Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”), Old Dominion Utility Services, Inc. (“ODUS”), Palmetto State Utility Services, Inc. (“PSUS”), Old North Utility Services, Inc. (“ONUS”), Emerald Coast Utility Services, Inc. ("ECUS"), and Fort Riley Utility Services, Inc. ("FRUS")). The subsidiaries of ASUS are collectively referred to as the “Military Utility Privatization Subsidiaries.” AWR, through its wholly owned subsidiaries, serves over one million people in nine states.
GSWC is a public utility engaged principally in the purchase, production, distribution and sale of water in California serving approximately 261,000 customer connections. GSWC also distributes electricity in several San Bernardino County mountain communities in California serving approximately 24,000 customer connections through its Bear Valley Electric Service (“BVES”) division. The California Public Utilities Commission (“CPUC”) regulates GSWC’s water and electric businesses in matters including properties, rates, services, facilities, and transactions by GSWC with its affiliates. GSWC filed applications with the CPUC and the Federal Energy Regulatory Commission ("FERC") in December 2018 and July 2019, respectively, to transfer the assets and liabilities of the BVES division of GSWC to Bear Valley Electric Service, Inc., a newly created separate legal entity that will be a stand-alone subsidiary of AWR. The FERC and CPUC approved GSWC's application for reorganization in October and December of 2019, respectively. On April 30, 2020, the FERC also approved Bear Valley Electric Service, Inc.'s application for market-based rate authority with an accompanying tariff. The reorganization plan is pending the completion of certain closing procedures to effectuate the transfer of assets and liabilities. When completed, the reorganization plan is not expected to result in a substantive change to AWR's operations and business segments.
ASUS, through its wholly owned subsidiaries, operates, maintains and performs construction activities (including renewal and replacement capital work) on water and/or wastewater systems at various U.S. military bases pursuant to 50 -year firm fixed-price contracts. These contracts are subject to annual economic price adjustments and modifications for changes in circumstances, changes in laws and regulations and additions to the contract value for new construction of facilities at the military bases.
There is no direct regulatory oversight by the CPUC over AWR or the operations, rates or services provided by ASUS or any of its wholly owned subsidiaries.
The consolidated financial statements included herein have been prepared by Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The December 31, 2019 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments consisting of normal, recurring items and estimates necessary for a fair statement of the results for the interim periods have been made. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2019 filed with the SEC.
15
AWR borrows under a credit facility, which expires in May 2023, and provides funds to its subsidiaries, GSWC and ASUS, in support of their operations. The interest rate charged to GSWC and ASUS is sufficient to cover AWR’s interest expense under the credit facility. In March 2020, AWR amended the credit facility to temporarily increase the borrowing capacity by $35.0 million to $260.0 million until December 31, 2020, at which point the commitment will be reduced to $200.0 million. As of March 31, 2020, there was $232.0 million outstanding under this facility, of which $32.0 million has been reflected as a current liability on the consolidated balance sheet of AWR. Management intends to obtain additional financing during 2020 by issuing long-term debt at GSWC. GSWC intends to use the proceeds from any new long-term debt to reduce its intercompany borrowings and to partially fund capital expenditures. AWR intends to use any financing proceeds from GSWC to pay down the amounts outstanding under its credit facility. Furthermore, on April 24, 2020, the newly created entity, Bear Valley Electric Service, Inc., entered into a commitment letter with a bank that agreed to establish a $50.0 million revolving credit facility effective in June 2020 for a period of three years, subject to the execution and delivery of a definitive revolving credit agreement. Borrowings made under this facility will support the electric business operations and capital expenditures.
The CPUC requires GSWC to completely pay down all intercompany borrowings from AWR within a 24 -month period. In November 2018, GSWC paid down its intercompany borrowings owed to AWR. The next 24 -month period in which GSWC is required to completely pay down its intercompany borrowings ends in November 2020. As a result, GSWC’s intercompany borrowings of $182.4 million as of March 31, 2020 have been classified as a current liability on GSWC’s balance sheet.
The extent to which COVID-19 may materially impact GSWC’s results is uncertain but will depend on future developments, which cannot be predicted at this time. However, the CPUC has authorized GSWC to track incremental costs, including bad debt expense in excess of what is included in GSWC's revenue requirement, incurred as a result of the COVID-19 pandemic in a Catastrophic Event Memorandum Account ("CEMA") to be filed with the CPUC for future recovery.
Recently Issued Accounting Pronouncements:
Accounting Pronouncements Adopted in 2020 - In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and issued further guidance in November 2018 and May 2019, related to the impairment of financial instruments, effective January 1, 2020. The new guidance provides an impairment model, known as the current expected credit loss model, which is based on expected credit losses rather than incurred losses over the remaining life of most financial assets measured at amortized cost, including trade and other receivables. Registrant has increased its allowance for doubtful accounts for utility customer accounts receivable by $393,000 due to the Company's current estimate of the expected associated economic impact of the COVID pandemic (see Note 10).
Accounting Pronouncements to be Adopted in Future Periods
In August 2018, the FASB issued ASU 2018-14-Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU removes disclosures to pension plans and other retirement plans that no longer are considered cost beneficial, clarifies the specific disclosure requirements and adds disclosure requirements deemed relevant. This ASU is effective for fiscal years ending after December 15, 2020 and will be applied by Registrant on a retrospective basis to all periods presented. Registrant is still evaluating the ASU and has not yet determined the effect on the Company's financial statements and disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. The amendments in this update simplify the accounting for income taxes by removing certain exceptions and clarifying certain requirements regarding franchise taxes, goodwill, consolidated tax expenses, and annual effective tax rate calculations. The ASU is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. Registrant is evaluating the impact of this ASU on its financial statements.
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Note 2 — Revenues
Most of Registrant's revenues are derived from contracts with customers, including tariff-based revenues from its regulated utilities. ASUS's 50 -year firm fixed-price contracts with the U.S. government are considered service concession arrangements under ASC 853 Service Concession Arrangements. Accordingly, the services under these contracts are accounted for under Topic 606 Revenue from Contracts with Customers and the water and/or wastewater systems are not recorded as Property, Plant and Equipment on Registrant’s balance sheet.
Although GSWC has a diversified base of residential, commercial, industrial and other customers, revenues derived from residential and commercial customers generally account for approximately 90 % of total water and electric revenues. The vast majority of ASUS's revenues are from the U.S. government. For the three months ended March 31, 2020 and 2019, disaggregated revenues from contracts with customers by segment were as follows:
Three Months Ended March 31, | |||||||
(dollar in thousands) | 2020 | 2019 | |||||
Water: | |||||||
Tariff-based revenues | $ | $ | |||||
Surcharges (cost-recovery activities) | |||||||
Other | |||||||
Water revenues from contracts with customers | |||||||
WRAM under (over)-collection (alternative revenue program) | |||||||
Total water revenues | |||||||
Electric: | |||||||
Tariff-based revenues | |||||||
Surcharges (cost-recovery activities) | |||||||
Electric revenues from contracts with customers | |||||||
BRRAM under (over)-collection (alternative revenue program) | ( | ) | |||||
Total electric revenues | |||||||
Contracted services: | |||||||
Water | |||||||
Wastewater | |||||||
Contracted services revenues from contracts with customers | |||||||
Total revenues | $ | $ | |||||
The opening and closing balances of the receivable from the U.S. government, contract assets and contract liabilities from contracts with customers, which related entirely to ASUS, were as follows:
(dollar in thousands) | March 31, 2020 | December 31, 2019 | ||||||
Unbilled receivables | $ | $ | ||||||
Receivable from the U.S. government | $ | $ | ||||||
Contract assets | $ | $ | ||||||
Contract liabilities | $ | $ | ||||||
Contract Assets - Contract assets are those of ASUS and consist of unbilled revenues recognized from work-in-progress construction projects, where the right to payment is conditional on something other than the passage of time. The classification of this asset as current or noncurrent is based on the timing of when ASUS expects to bill these amounts.
Contract Liabilities - Contract liabilities are those of ASUS and consist of billings in excess of revenue recognized. The classification of this liability as current or noncurrent is based on the timing of when ASUS expects to recognize revenue.
17
Revenue for the three months ended March 31, 2020, which were included in contract liabilities at the beginning of the period were $7.6 million. Contracted services revenues recognized during the three months ended March 31, 2020 from performance obligations satisfied in previous periods were not material.
As of March 31, 2020, Registrant's aggregate remaining performance obligations, which are entirely for the contracted services segment, were $3.2 billion. Registrant expects to recognize revenue on these remaining performance obligations over the remaining term of each of the 50 -year contracts, which range from 34 to 48 years. Each of the contracts with the U.S. government is subject to termination, in whole or in part, prior to the end of its 50 -year term for convenience of the U.S. government.
Note 3 — Regulatory Matters
In accordance with accounting principles for rate-regulated enterprises, Registrant records regulatory assets, which represent probable future recovery of costs from customers through the ratemaking process, and regulatory liabilities, which represent probable future refunds that are to be credited to customers through the ratemaking process. At March 31, 2020, Registrant had approximately $42.7 million of regulatory liabilities, net of regulatory assets, not accruing carrying costs. Of this amount, (i) $79.5 million of regulatory liabilities are excess deferred income taxes arising from the lower federal income tax rate due to the Tax Cuts and Jobs Act ("Tax Act") enacted in December 2017 that are expected to be refunded to customers, (ii) $12.2 million of regulatory liabilities are from flowed-through deferred income taxes, (iii) $42.9 million of net regulatory assets relates to the underfunded position in Registrant's pension and other retirement obligations (not including the two-way pension balancing accounts), and (iv) $4.3 million of regulatory assets relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on BVES's purchase power contracts over the term of the contracts. The remainder of regulatory assets relates to other items that do not provide for or incur carrying costs.
Regulatory assets represent costs incurred by GSWC for which it has received or expects to receive rate recovery in the future. In determining the probability of costs being recognized in other periods, GSWC considers regulatory rules and decisions, past practices, and other facts or circumstances that would indicate if recovery is probable. If the CPUC determines that a portion of GSWC’s assets are not recoverable in customer rates, GSWC must determine if it has suffered an asset impairment that requires it to write down the asset's value. Regulatory assets are offset against regulatory liabilities within each ratemaking area. Amounts expected to be collected or refunded in the next twelve months have been classified as current assets and current liabilities by ratemaking area. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:
(dollars in thousands) | March 31, 2020 | December 31, 2019 | ||||||
GSWC | ||||||||
Water Revenue Adjustment Mechanism and Modified Cost Balancing Account | $ | $ | ||||||
Costs deferred for future recovery on Aerojet case | ||||||||
Pensions and other post-retirement obligations (Note 8) | ||||||||
Derivative unrealized loss (Note 5) | ||||||||
General rate case memorandum accounts | ||||||||
Excess deferred income taxes | ( | ) | ( | ) | ||||
Flow-through taxes, net | ( | ) | ( | ) | ||||
Other regulatory assets | ||||||||
Various refunds to customers | ( | ) | ( | ) | ||||
Total | $ | $ | ( | ) | ||||
Regulatory matters are discussed in the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2019 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2019.
Alternative-Revenue Programs:
GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC using the Water Revenue Adjustment Mechanism ("WRAM") and Modified Cost Balancing Account (“MCBA”) accounts approved by the CPUC. The over- or under-collection of the WRAM is aggregated with the MCBA over- or under-collection for the corresponding ratemaking area and bears interest at the current 90 -day commercial paper rate.
As required by the accounting guidance for alternative revenue programs, GSWC is required to collect its WRAM balances, net of its MCBA, within 24 months following the year in which an under-collection is recorded in order to recognize such amounts as revenue. The recovery periods for the majority of GSWC's WRAM/MCBA balances are primarily within 12 to
18
Catastrophic Event Memorandum Account ("CEMA")
On April 3, 2020 the CPUC approved GSWC's request to activate a Catastrophic Event Memorandum Account ("CEMA") for COVID-19. GSWC's response to the pandemic has included suspending service disconnections for nonpayment, waiving reconnection or facilities fees for affected customers, and suspending deposit requirements for affected customers who must reconnect to the system. Costs incurred by GSWC in response to the COVID-19 outbreak, including bad debt expense in excess of what is included in GSWC's revenue requirement, are being included in the CEMA account for future recovery. As of March 31, 2020, costs recorded in the CEMA account have not been material, but are expected to increase in future periods to the extent that the COVID-19 pandemic continues.
Cost of Capital Proceeding
In March 2018, the CPUC issued a final decision in the cost of capital proceeding for GSWC and three other water utilities serving California for the years 2018 - 2020. Among other things, the final decision adopted for GSWC's water segment a return on equity of 8.90 %, with a return on rate base of 7.91 %.
Investor-owned water utilities serving California are required to file their cost of capital applications on a triennial basis, with the next scheduled filing required to have taken place on May 1, 2020 and to be effective for the years 2021 - 2023. In January 2020, GSWC, along with the three other water utilities, requested an extension of the date by which each of them must file its 2020 cost of capital application. In March 2020, the CPUC approved the request, postponing the filing date by one year until May 1, 2021, with a corresponding effective date of January 1, 2022. GSWC’s current authorized rate of return on rate base of 7.91 %, based on its weighted cost of capital, will continue in effect through December 31, 2021.
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Note 4 — Earnings per Share/Capital Stock
In accordance with the accounting guidance for participating securities and earnings per share (“EPS”), Registrant uses the “two-class” method of computing EPS. The “two-class” method is an earnings allocation formula that determines EPS for each class of common stock and participating security. AWR has participating securities related to restricted stock units that earn dividend equivalents on an equal basis with AWR’s Common Shares, and that have been issued under AWR's stock incentive plans for employees and the non-employee directors stock plans. In applying the “two-class” method, undistributed earnings are allocated to both common shares and participating securities.
The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding used for calculating basic net income per share:
Basic: | For The Three Months Ended March 31, | |||||||
(in thousands, except per share amounts) | 2020 | 2019 | ||||||
Net income | $ | $ | ||||||
Less: (a) Distributed earnings to common shareholders | ||||||||
Distributed earnings to participating securities | ||||||||
Undistributed earnings | ||||||||
(b) Undistributed earnings allocated to common shareholders | ||||||||
Undistributed earnings allocated to participating securities | ||||||||
Total income available to common shareholders, basic (a)+(b) | $ | $ | ||||||
Weighted average Common Shares outstanding, basic | ||||||||
Basic earnings per Common Share | $ | $ | ||||||
Diluted EPS is based upon the weighted average number of Common Shares, including both outstanding shares and shares potentially issuable in connection with stock options and restricted stock units granted under AWR’s stock incentive plans for employees and the non-employee directors stock plans, and net income. There were no options outstanding as of March 31, 2020 and there were 29,160 options outstanding as of March 31, 2019 under these plans. At March 31, 2020 and 2019, there were also 129,637 and 184,833 restricted stock units outstanding, respectively, including performance shares awarded to officers of the Registrant.
The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding for calculating diluted net income per share:
Diluted: | For The Three Months Ended March 31, | |||||||
(in thousands, except per share amounts) | 2020 | 2019 | ||||||
Common shareholders earnings, basic | $ | $ | ||||||
Undistributed earnings for dilutive stock-based awards | ||||||||
Total common shareholders earnings, diluted | $ | $ | ||||||
Weighted average common shares outstanding, basic | ||||||||
Stock-based compensation (1) | ||||||||
Weighted average common shares outstanding, diluted | ||||||||
Diluted earnings per Common Share | $ | $ | ||||||
(1) In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 29,160 stock options at March 31, 2019, respectively, were deemed to be outstanding in accordance with accounting guidance on earnings per share. All of the 129,637 and 184,833 restricted stock units at March 31, 2020 and 2019, respectively, were included in the calculation of diluted EPS for the three months ended March 31, 2020 and 2019.
There were no stock options outstanding at March 31, 2020, and there were no stock options outstanding at March 31, 2019 that were anti-dilutive.
20
During the three months ended March 31, 2020 and 2019, AWR issued 37,157 and 37,376 common shares, for approximately $30,000 and $75,000 , respectively, under Registrant’s stock incentive plans for employees.
During the three months ended March 31, 2020 and 2019, AWR paid $1.8 million and $1.6 million, respectively, to taxing authorities on employees' behalf for shares withheld related to net share settlements. During the three months ended March 31, 2020 and 2019, GSWC paid $1.6 million and $1.3 million, respectively, to taxing authorities on employees' behalf for shares withheld related to net share settlements. These payments are included in the stock-based compensation caption of the statements of equity.
Note 5 — Derivative Instruments
GSWC's electric division, BVES, purchases power under long-term contracts at a fixed cost depending on the amount of power and the period during which the power is purchased under such contracts. In August 2019, the CPUC approved an application that allowed BVES to enter into new long-term purchased power contracts with energy providers, which BVES executed in September 2019. BVES began taking power under these long-term contracts during the fourth quarter of 2019 to replace existing expiring contracts. The new contracts provide power at a fixed cost over approximately three- and five-year terms depending on the amount of power and period during which the power is purchased under the contracts.
These purchase power contracts are subject to the accounting guidance for derivatives and require mark-to-market derivative accounting. Among other things, the CPUC also authorized BVES to use a regulatory asset and liability memorandum account to offset the mark-to-market entries required by the accounting guidance. Accordingly, all unrealized gains and losses generated from the purchased power contracts are deferred on a monthly basis into a non-interest bearing regulatory memorandum account that tracks the changes in fair value of the derivative throughout the terms of the contracts. As a result, these unrealized gains and losses do not impact GSWC’s earnings. As of March 31, 2020, there was a $4.3 million unrealized loss recorded as a regulatory asset in the memorandum account for the purchased power contracts. The notional volume of derivatives remaining under these long-term contracts as of March 31, 2020 was 594,392 megawatt hours.
The accounting guidance for fair value measurements applies to all financial assets and financial liabilities that are measured and reported on a fair value basis. Under the accounting guidance, GSWC makes fair value measurements that are classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
To value the contracts, Registrant utilizes various inputs that include quoted market prices for energy over the duration of the contracts. The market prices used to determine the fair value for this derivative instrument were estimated based on independent sources such as broker quotes and publications that are not observable in or corroborated by the market. When such inputs have a significant impact on the measurement of fair value, the instruments are categorized as Level 3. Accordingly, the valuation of the derivatives on Registrant’s purchased power contract has been classified as Level 3 for all periods presented.
The following table presents changes in the fair value of GSWC’s Level 3 derivatives for the three months ended March 31, 2020 and 2019:
For The Three Months Ended March 31, | ||||||||
(dollars in thousands) | 2020 | 2019 | ||||||
Fair value at beginning of the period | $ | ( | ) | $ | ( | ) | ||
Unrealized loss on purchased power contracts | ( | ) | ( | ) | ||||
Fair value at end of the period | $ | ( | ) | $ | ( | ) | ||
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Note 6 — Fair Value of Financial Instruments
For cash and cash equivalents, accounts receivable, accounts payable and short-term debt, the carrying amount is assumed to approximate fair value due to the short-term nature of these items.
Investments held in a Rabbi Trust for the supplemental executive retirement plan ("SERP") are measured at fair value and totaled $19.1 million as of March 31, 2020. All equity investments in the Rabbi Trust are Level 1 investments in mutual funds. The investments held in the Rabbi Trust are included in "Other Property and Investments" on Registrant's balance sheets.
The table below estimates the fair value of long-term debt held by GSWC. The fair values as of March 31, 2020 and December 31, 2019 were determined using rates for similar financial instruments of the same duration utilizing Level 2 methods and assumptions. The interest rates used for the March 31, 2020 valuation increased as compared to December 31, 2019, decreasing the fair value of long-term debt as of March 31, 2020. Changes in the assumptions will produce different results.
March 31, 2020 | December 31, 2019 | |||||||||||||||
(dollars in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Financial liabilities: | ||||||||||||||||
Long-term debt—GSWC (1) | $ | $ | $ | $ | ||||||||||||
(1) Excludes debt issuance costs and redemption premiums.
Note 7 — Income Taxes
AWR's effective income tax rate (“ETR”) was 21.7 % and 20.5 % for the three months ended March 31, 2020 and 2019, respectively. GSWC's ETR was 22.4 % and 19.0 % for the three months ended March 31, 2020 and 2019, respectively.
The AWR and GSWC effective tax rates differ from the federal statutory tax rate primarily due to (i) state taxes; (ii) permanent differences, including the excess tax benefits from share-based payments, which were reflected in the income statements and resulted in a reduction to income tax expense during the three months ended March 31, 2020 and 2019; (iii) the continuing amortization of the excess deferred income tax liability that commenced upon the lowering of the federal tax rate; and (iv) differences between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements (principally from plant, rate-case, and compensation expenses). As a regulated utility, GSWC treats certain temporary differences as flow-through in computing its income tax expense consistent with the income tax method used in its CPUC-jurisdiction ratemaking. Flow-through items either increase or decrease tax expense and thus impact the ETR.
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Note 8 — Employee Benefit Plans
The components of net periodic benefit costs for Registrant’s pension plan, postretirement medical benefit plan and SERP for the three months ended March 31, 2020 and 2019 were as follows:
For The Three Months Ended March 31, | ||||||||||||||||||||||||
Pension Benefits | Other Postretirement Benefits | SERP | ||||||||||||||||||||||
(dollars in thousands) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||
Components of Net Periodic Benefits Cost: | ||||||||||||||||||||||||
Service cost | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Interest cost | ||||||||||||||||||||||||
Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
Amortization of prior service cost | ||||||||||||||||||||||||
Amortization of actuarial (gain) loss | ( | ) | ( | ) | ||||||||||||||||||||
Net periodic benefits costs under accounting standards | ( | ) | ( | ) | ||||||||||||||||||||
Regulatory adjustment - deferred | ( | ) | ||||||||||||||||||||||
Total expense (benefit) recognized, before surcharges and allocation to overhead pool | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||
Note 9 — Contingencies
Environmental Clean-Up and Remediation:
GSWC has been involved in environmental remediation and cleanup at a plant site ("Chadron Plant") that contained an underground storage tank which was used to store gasoline for its vehicles. This tank was removed from the ground in July 1990 along with the dispenser and ancillary piping. Since then, GSWC has been involved in various remediation activities at this site. Analysis indicates that off-site monitoring wells may be necessary to document effectiveness of remediation.
As of March 31, 2020, the total amount spent to clean up and remediate GSWC’s plant facility was approximately $6.3 million, of which $1.5 million has been paid by the State of California Underground Storage Tank Fund. Amounts paid by GSWC have been included in rate base and approved by the CPUC for recovery. As of March 31, 2020, GSWC has a regulatory asset and an accrued liability for the estimated additional cost of $1.3 million to complete the cleanup at the site. The estimate includes costs for two years of continued activities of groundwater cleanup and monitoring, future soil treatment and site-closure-related activities. The ultimate cost may vary as there are many unknowns in remediation of underground gasoline spills and this is an estimate based on currently available information. Management also believes it is probable that the estimated additional costs will be approved in rate base by the CPUC.
Other Litigation:
Registrant is also subject to other ordinary routine litigation incidental to its business, some of which may include claims for compensatory and punitive damages. Management believes that rate recovery, proper insurance coverage and reserves are in place to insure against, among other things, property, general liability, employment, and workers’ compensation claims incurred in the ordinary course of business. Insurance coverage may not cover certain claims involving punitive damages. However, Registrant does not believe the outcome from any pending suits or administrative proceedings will have a material effect on Registrant's consolidated results of operations, financial position or cash flows.
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Note 10 — Allowance for Doubtful Accounts
Registrant adopted ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments effective January 1, 2020. The guidance requires estimated credit losses on financial instruments, such as Registrant's trade and other receivable, be based on expected credit losses rather than incurred losses.
Registrant's allowance for doubtful account as of March 31, 2020 was developed based on observed effects of the economic impact of the COVID-19 pandemic on GSWC's aging of utility customer accounts receivable, as well as economic data such as unemployment rates and other considerations which may impact customers' ability to pay their bills. Management also took into consideration the impact of the CPUC's order to suspend through April 2021 service disconnections for nonpayments, which is expected to have the effect of increasing delinquent customer accounts receivable during the COVID-19 pandemic. However, the CPUC has authorized GSWC to track incremental costs, including bad debt expense in excess of what is included in GSWC's revenue requirement, incurred as a result of the COVID-19 pandemic in a CEMA account to be filed with the CPUC for future recovery. As a result, the adoption of ASU 2016-13 did not have a material earnings impact to Registrant.
The table below presents Registrant’s provision for doubtful accounts charged to expense and accounts written off, net of recoveries.
Three Months Ended March 31, 2020 | ||||||||
(dollars in thousands) | AWR | GSWC | ||||||
Balances at December 31, 2019 | $ | $ | ||||||
Increase to provision | ||||||||
Accounts written off, net of recoveries | ( | ) | ( | ) | ||||
Balances at March 31, 2020 | $ | $ | ||||||
Allowance for doubtful accounts related to accounts receivable-customer | $ | $ | ||||||
Allowance for doubtful accounts related to receivable from U.S. government | ||||||||
Allowance for doubtful accounts related to other accounts receivable | ||||||||
Total allowance for doubtful accounts | $ | $ | ||||||
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Note 11 — Business Segments
AWR has three reportable segments, water, electric and contracted services, whereas GSWC has two segments, water and electric. On a stand-alone basis, AWR has no material assets other than its equity investments in its subsidiaries and note receivables therefrom, and deferred taxes.
All activities of GSWC, a rate-regulated utility, are geographically located within California. Activities of ASUS and its subsidiaries are conducted in California, Georgia, Florida, Kansas, Maryland, New Mexico, North Carolina, South Carolina, Texas and Virginia. Each of ASUS’s wholly owned subsidiaries is regulated, if applicable, by the state in which the subsidiary primarily conducts water and/or wastewater operations. Fees charged for operations and maintenance and renewal and replacement services are based upon the terms of the contracts with the U.S. government, which have been filed, as appropriate, with the commissions in the states in which ASUS’s subsidiaries are incorporated.
The tables below set forth information relating to GSWC’s operating segments, ASUS and its subsidiaries and other matters. Total assets by segment are not presented below, as certain of Registrant’s assets are not tracked by segment. The utility plant amounts are net of respective accumulated provisions for depreciation. Capital additions reflect capital expenditures paid in cash, excluding U.S. government- and third-party contractor-funded capital expenditures for ASUS and property installed by developers and conveyed to GSWC.
As Of And For The Three Months Ended March 31, 2020 | ||||||||||||||||||||
GSWC | AWR | Consolidated | ||||||||||||||||||
(dollars in thousands) | Water | Electric | ASUS | Parent | AWR | |||||||||||||||
Operating revenues | $ | $ | $ | $ | $ | |||||||||||||||
Operating income (loss) | ( | ) | ||||||||||||||||||
Interest expense, net | ( | ) | ||||||||||||||||||
Utility plant | ||||||||||||||||||||
Depreciation and amortization expense (1) | ||||||||||||||||||||
Income tax expense (benefit) | ( | ) | ||||||||||||||||||
Capital additions | ||||||||||||||||||||
As Of And For The Three Months Ended March 31, 2019 | ||||||||||||||||||||
GSWC | AWR | Consolidated | ||||||||||||||||||
(dollars in thousands) | Water | Electric | ASUS | Parent | AWR | |||||||||||||||
Operating revenues | $ | $ | $ | $ | $ | |||||||||||||||
Operating income (loss) | ( | ) | ||||||||||||||||||
Interest expense, net | ( | ) | ||||||||||||||||||
Utility plant | ||||||||||||||||||||
Depreciation and amortization expense (1) | ||||||||||||||||||||
Income tax expense (benefit) | ||||||||||||||||||||
Capital additions | ||||||||||||||||||||
(1) Depreciation computed on GSWC’s transportation equipment is recorded in other operating expenses and totaled $82,000
and $58,000 for the three months ended March 31, 2020 and 2019, respectively.
March 31, | ||||||||
2020 | 2019 | |||||||
Total utility plant | $ | $ | ||||||
Other assets | ||||||||
Total consolidated assets | $ | $ | ||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion and analysis provides information on AWR’s consolidated operations and assets and includes specific references to AWR’s individual segments and/or its subsidiaries (GSWC and ASUS and its subsidiaries), and AWR (parent) where applicable.
Included in the following analysis is a discussion of water and electric gross margins. Water and electric gross margins are computed by subtracting total supply costs from total revenues. Registrant uses these gross margins as important measures in evaluating its operating results. Registrant believes these measures are useful internal benchmarks in evaluating the performance of GSWC. The discussions and tables included in the following analysis also present Registrant’s operations in terms of earnings per share by business segment, which equals each business segment’s earnings divided by Registrant’s weighted average number of diluted shares.
Registrant believes that the disclosure of the water and electric gross margins and earnings per share by business segment provide investors with clarity surrounding the performance of its different services. Registrant reviews these measurements regularly and compares them to historical periods and to its operating budget. However, these measures, which are not presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"), may not be comparable to similarly titled measures used by other entities and should not be considered as an alternative to operating income or earnings per share, which are determined in accordance with GAAP. A reconciliation of water and electric gross margins to the most directly comparable GAAP measures is included in the table under the section titled “Operating Expenses: Supply Costs.” A reconciliation to AWR’s diluted earnings per share is included in the discussion under the sections titled “Summary of First Quarter Results by Segment.”
Overview
Factors affecting our financial performance are summarized under Forward-Looking Information and under “Risk Factors” in our Form 10-K for the period ended December 31, 2019.
Water and Electric Segments:
GSWC's revenues, operating income and cash flows are earned primarily through delivering potable water to homes and businesses in California and the delivery of electricity in the Big Bear area of San Bernardino County, California. Rates charged to GSWC customers are determined by the CPUC. These rates are intended to allow recovery of operating costs and a reasonable rate of return on capital. GSWC plans to continue to seek additional rate increases in future years from the CPUC to recover operating and supply costs and receive reasonable returns on invested capital. Capital expenditures in future years at GSWC are expected to remain at higher levels than depreciation expense. When necessary, GSWC obtains funds from external sources in the capital markets and through bank borrowings.
General Rate Case Filings and Other Matters:
Water Segment:
In May 2019, the CPUC issued a final decision on GSWC's water general rate case, which determines new rates for the years 2019 – 2021 with rates retroactive to January 1, 2019. Among other things, the final decision authorized GSWC to invest approximately $334.5 million over the rate cycle. The $334.5 million of infrastructure investment includes $20.4 million of capital projects to be filed for revenue recovery through advice letters when those projects are completed.
Due to the delay in receiving a final CPUC decision on the water general rate case, billed water revenues for the first three months of 2019 were based on 2018 adopted rates, pending a final decision. As a result of the May 2019 CPUC final decision, GSWC recorded the impact of the final decision in the second quarter of 2019, including earnings of $0.08 per share that related to the first quarter of 2019. The final decision also allowed for a water gross margin increase in 2020 and 2021, subject to an earnings test. Effective January 1, 2020, GSWC received its full second-year step increase, which it achieved because of passing the earnings test at all of its ratemaking areas. The full step increase is expected to generate an additional $10.4 million in water gross margin for 2020. The final decision will also allow for a potential additional increase in the water gross margin of approximately $11.4 million in 2021, subject to the results of an earnings test and changes to the forecasted inflationary index values.
Electric Segment:
In August 2019, the CPUC issued a final decision on the electric general rate case. Among other things, the decision (i) extended the rate cycle by one year (new rates were effective for 2018 - 2022); (ii) increased the electric gross margin for 2018 by approximately $2.3 million compared to the 2017 adopted electric gross margin, adjusted for Tax Act changes;
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(iii) authorizes BVES to construct all the capital projects requested in its application, which are dedicated to improving system safety and reliability and total approximately $44 million over the 5-year rate cycle; and (iv) increases the adopted electric gross margin by $1.2 million for each of the years 2019 and 2020, by $1.1 million in 2021, and by $1.0 million in 2022. The rate increases for 2019 - 2022 are not subject to an earnings test. The decision authorizes a return on equity for GSWC's electric segment of 9.60% and includes a capital structure and debt cost that is consistent with those approved by the CPUC in March 2018 in connection with GSWC's water segment cost of capital proceeding.
Due to the delay in finalizing the electric general rate case, electric revenues recognized during the first three months of 2019 were based on 2017 adopted rates. Because the August 2019 CPUC final decision was retroactive to January 1, 2018, the cumulative retroactive earnings impact of the decision was included in the third quarter results of 2019, including approximately $0.02 per share related to the first quarter of 2019 had the new 2018 and 2019 rates been in place at that time.
Cost of Capital Proceeding:
Investor-owned water utilities serving California are required to file their cost of capital applications on a triennial basis, with the next scheduled filing required to have taken place on May 1, 2020 and to be effective for the years 2021 - 2023. In January 2020, GSWC, along with the three other water utilities, requested an extension of the date by which each of them must file its 2020 cost of capital application. In March 2020, the CPUC approved the request, postponing the filing date by one year until May 1, 2021, with a corresponding effective date of January 1, 2022. The CPUC also approved the joint parties’ request to leave the current Water Cost of Capital Mechanism in place, but there will be no changes to the companies’ rate of return on rate base during the one-year extension, regardless of what the mechanism might otherwise indicate.
GSWC’s current authorized rate of return on rate base is 7.91%, based on its weighted cost of capital, which will continue in effect through December 31, 2021. The 7.91% return on rate base includes a return on equity of 8.9%, an embedded cost of debt of 6.6%, and a capital structure with 57% equity and 43% debt.
Contracted Services Segment:
ASUS's revenues, operating income and cash flows are earned by providing water and/or wastewater services, including operation and maintenance services and construction of facilities at the water and/or wastewater systems at various military installations, pursuant to 50-year firm fixed-price contracts. The contract price for each of these 50-year contracts is subject to annual economic price adjustments. Additional revenues generated by contract operations are primarily dependent on new construction activities under contract modifications with the U.S. government or agreements with other third-party prime contractors.
COVID-19:
Recently, the outbreak of novel coronavirus (COVID-19) has become a global pandemic. GSWC continues to operate as its water and electric utility services are deemed essential services. GSWC's response to the COVID-19 outbreak continues to rapidly evolve and has included: (i) suspending through April 2021 service disconnections for nonpayments pursuant to CPUC orders, which will remain in effect over other existing requirements governing disconnections; (ii) waiving reconnection or facilities fees for affected customers and suspending deposit requirements for affected customers who must reconnect to the system; (iii) the temporary closing of customer service offices; (iv) increasing the number of employees telecommuting; and (v) delaying some capital improvement projects at its water utility services business.
The effects of the continuing pandemic on the Company are still emerging, but among other things, it has caused significant negative impacts on financial markets. This has resulted in significant fluctuations in the fair value of plan assets in the Company's pension and other retirement plans, which are likely to continue. Furthermore, due to expected future credit losses on utility customer bills, GSWC has increased its allowance for doubtful accounts as of March 31, 2020 and expects to increase intercompany borrowings as well as borrowings from outside sources due to the associated potential decrease in liquidity. Thus far, the COVID-19 pandemic has not had a material impact on ASUS's operations, as the water and wastewater services performed on the military bases are deemed essential services.
The extent to which COVID-19 may materially impact GSWC’s results is uncertain but will depend on future developments, which cannot be predicted at this time. However, the CPUC has approved GSWC to track incremental costs, including bad debt expense in excess of what is included in GSWC's revenue requirement, incurred as a result of the COVID-19 pandemic in a Catastrophic Event Memorandum Account ("CEMA") to be filed with the CPUC for future recovery.
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Summary of First Quarter Results by Segment
The table below sets forth the first quarter diluted earnings per share by business segment:
Diluted Earnings per Share | ||||||||||||
Three Months Ended | ||||||||||||
3/31/2020 | 3/31/2019 | CHANGE | ||||||||||
Water | $ | 0.24 | $ | 0.21 | $ | 0.03 | ||||||
Electric | 0.06 | 0.03 | 0.03 | |||||||||
Contracted services | 0.08 | 0.11 | (0.03 | ) | ||||||||
Consolidated diluted earnings per share | 0.38 | 0.35 | 0.03 | |||||||||
Water Segment:
Diluted earnings per share from the water segment for the three months ended March 31, 2020 increased by $0.03 per share as compared to the same period in 2019. The total impact of COVID-19 and the continuing pandemic are still emerging; however, among other things, it has negatively impacted financial markets, which resulted in significant losses incurred during the three months ended March 31, 2020 on investments held to fund one of the Company's retirement plans. Affecting the results and comparability between the two periods were losses of $2.4 million incurred on these investments during the first quarter of 2020 compared to gains of $1.5 million recorded during the same period in 2019. This item decreased the water segment’s earnings for the three months ended March 31, 2020 by approximately $0.08 per share as compared to the same period in 2019.
Excluding the impact of current market conditions discussed above, diluted earnings per share from the water segment for the three months ended March 31, 2020 increased by $0.11 per share largely due to new rates authorized by the CPUC. In May 2019, the CPUC issued a final decision on GSWC's water general rate case, which determined new rates for the years 2019 - 2021 with rates retroactive to January 1, 2019. As a result, GSWC recorded the impact of the final decision in the second quarter of 2019, including earnings of $0.08 per share that related to the first quarter of 2019. The following items, including the delay in receiving a final CPUC decision, affected the comparability between the two periods (excluding the impact of billed surcharges, which have no impact to net earnings):
• | An increase in the water gross margin of $4.7 million (excluding surcharges), or approximately $0.09 per share, as a result of new rates authorized by the CPUC. Effective January 1, 2020, GSWC received its full second-year step increase, which it achieved because of passing the earnings test. The full step increase is expected to generate an additional $10.4 million in water gross margin for 2020. In addition, billed water revenues recorded during the three months ended March 31, 2019 were based on 2018 authorized amounts, pending the final decision on the water rate case, which was not received until May 2019. The CPUC’s final decision resulted in an increase of $9.2 million in 2019's adopted water gross margin over 2018, after adjusting the 2019 gross margin for excess deferred tax refunds. It should be noted that the 2019 adopted water revenue requirement also reflected a decrease in depreciation expense of $7.0 million based on a revised study, as compared to the 2018 adopted revenue requirement. This decrease in adopted revenue resulted in a corresponding decrease in depreciation expense, as noted below, having no impact to net earnings. |
• | An overall decrease in operating expenses (excluding supply costs), which positively impacted earnings by $0.02 per share. This decrease was mostly due to a decrease in depreciation expense resulting from lower authorized composite rates approved by the CPUC in the May 2019 final decision. The lower depreciation expense, which was not recorded until receipt of the final decision, is reflected in the revenue requirement approved in the general rate case. The decrease in depreciation expense was partially offset by higher unplanned maintenance expense, and higher administrative and general expense due to labor-related costs. |
Electric Segment:
Diluted earnings per share from the electric segment for the three months ended March 31, 2020 increased by $0.03 per share as compared to the same period in 2019 largely due to an increase in the electric gross margin resulting from new rates authorized by the CPUC in its final decision on the electric general rate case issued in August 2019. Billed electric revenues for the first three months of 2019 were based on 2017 adopted rates due to the delay in receiving a final decision, which was not received until August 2019 and was retroactive to January 1, 2018. Among other things, the final decision approved an increase in the electric gross margin for 2018 of approximately $2.3 million, and authorized increases in the adopted electric gross margin of $1.2 million for each of the years 2019 and 2020.
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As a result of the delay in finalizing the electric general rate case, the cumulative retroactive earnings impact of the final August 2019 decision was included in the third quarter results of 2019, including approximately $0.02 per share related to the first quarter of 2019 had the new 2018 and 2019 rates been in place at that time.
Contracted Services Segment:
For the three months ended March 31, 2020, diluted earnings from the contracted services segment decreased by $0.03 per share as compared to the same period in 2019. Included in the results for the first quarter of 2019 were retroactive revenues, resulting from the successful resolution of an economic price adjustment at one of the military bases served which totaled approximately $0.01 per share and related to periods prior to 2019. Excluding this retroactive amount, diluted earnings from the contracted services segment decreased by $0.02 per share as compared to the same period in 2019 largely due to higher than expected construction costs incurred on certain capital projects, as well as higher legal and outside services costs which tend to fluctuate from period to period. These decreases to earnings were partially offset by an increase in management fee revenues.
The following discussion and analysis for the three months ended March 31, 2020 and 2019 provides information on AWR’s consolidated operations and assets and, where necessary, includes specific references to AWR’s individual segments and subsidiaries: GSWC and ASUS and its subsidiaries.
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Consolidated Results of Operations — Three Months Ended March 31, 2020 and 2019 (amounts in thousands, except per share amounts):
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | $ CHANGE | % CHANGE | ||||||||||||
OPERATING REVENUES | |||||||||||||||
Water | $ | 71,424 | $ | 64,723 | $ | 6,701 | 10.4 | % | |||||||
Electric | 10,968 | 10,629 | 339 | 3.2 | % | ||||||||||
Contracted services | 26,685 | 26,381 | 304 | 1.2 | % | ||||||||||
Total operating revenues | 109,077 | 101,733 | 7,344 | 7.2 | % | ||||||||||
OPERATING EXPENSES | |||||||||||||||
Water purchased | 14,092 | 13,140 | 952 | 7.2 | % | ||||||||||
Power purchased for pumping | 1,859 | 1,538 | 321 | 20.9 | % | ||||||||||
Groundwater production assessment | 4,148 | 3,746 | 402 | 10.7 | % | ||||||||||
Power purchased for resale | 3,043 | 3,704 | (661 | ) | (17.8 | )% | |||||||||
Supply cost balancing accounts | (2,165 | ) | (1,372 | ) | (793 | ) | 57.8 | % | |||||||
Other operation | 8,486 | 8,571 | (85 | ) | (1.0 | )% | |||||||||
Administrative and general | 22,950 | 21,672 | 1,278 | 5.9 | % | ||||||||||
Depreciation and amortization | 8,811 | 10,832 | (2,021 | ) | (18.7 | )% | |||||||||
Maintenance | 3,884 | 2,566 | 1,318 | 51.4 | % | ||||||||||
Property and other taxes | 5,159 | 4,896 | 263 | 5.4 | % | ||||||||||
ASUS construction | 13,115 | 12,245 | 870 | 7.1 | % | ||||||||||
Gain on sale of assets | (4 | ) | — | (4 | ) | * | |||||||||
Total operating expenses | 83,378 | 81,538 | 1,840 | 2.3 | % | ||||||||||
OPERATING INCOME | 25,699 | 20,195 | 5,504 | 27.3 | % | ||||||||||
OTHER INCOME AND EXPENSES | |||||||||||||||
Interest expense | (6,050 | ) | (6,317 | ) | 267 | (4.2 | )% | ||||||||
Interest income | 558 | 942 | (384 | ) | (40.8 | )% | |||||||||
Other, net | (2,234 | ) | 1,342 | (3,576 | ) | * | |||||||||
(7,726 | ) | (4,033 | ) | (3,693 | ) | 91.6 | % | ||||||||
INCOME BEFORE INCOME TAX EXPENSE | 17,973 | 16,162 | 1,811 | 11.2 | % | ||||||||||
Income tax expense | 3,901 | 3,310 | 591 | 17.9 | % | ||||||||||
NET INCOME | $ | 14,072 | $ | 12,852 | $ | 1,220 | 9.5 | % | |||||||
Basic earnings per Common Share | $ | 0.38 | $ | 0.35 | $ | 0.03 | 8.6 | % | |||||||
Fully diluted earnings per Common Share | $ | 0.38 | $ | 0.35 | $ | 0.03 | 8.6 | % | |||||||
* not meaningful
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Operating Revenues:
General
GSWC relies upon approvals by the CPUC of rate increases to recover operating expenses and to provide for a return on invested and borrowed capital used to fund utility plant for GSWC. Registrant relies on economic price and equitable adjustments by the U.S. government in order to recover operating expenses and provide a profit margin for ASUS. Current operating revenues and earnings can be negatively impacted if the Military Privatization Subsidiaries do not receive adequate rate relief or adjustments in a timely manner. ASUS’s earnings are also impacted by the level of additional construction projects at the Military Utility Privatization Subsidiaries, which may or may not continue at current levels in future periods.
Water
For the three months ended March 31, 2020, revenues from water operations increased $6.7 million to $71.4 million as compared to the same period in 2019 due, in part, to new water rates approved by the CPUC, which became effective January 1, 2020. GSWC received the full second-year step increase for 2020 as a result of passing the earnings test. In addition, billed water revenues for the first three months of 2019 were based on 2018 adopted rates, due to the delay in receiving a final decision on the water general rate case, which was not received until May 2019 and was retroactive to January 1, 2019. There were also revenue increases during the three months ended March 31, 2020 related to CPUC-approved surcharges to recover previously incurred costs. These surcharges are largely offset by corresponding increases in operating expenses, resulting in no impact to earnings.
Billed water consumption for the first quarter of 2020 increased by approximately 11% as compared to the same period in 2019 largely due to January and February 2020 being among the driest months on record. In general, changes in consumption do not have a significant impact on recorded revenues due to the CPUC-approved Water Revenue Adjustment Mechanism ("WRAM") in place in all but one small rate-making area. GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC in the WRAM accounts as regulatory assets or liabilities.
Electric
Electric revenues for the three months ended March 31, 2020 increased $339,000 to $11.0 million, due to new rates approved by the CPUC and effective January 1, 2020. In addition, billed revenues for the first three months of 2019 were based on 2017 adopted electric rates pending a CPUC final decision on the electric general rate case, which was not received until August 2019 and was retroactive to January 1, 2018.
Billed electric usage during the three months ended March 31, 2020 decreased by approximately 6% as compared to the three months ended March 31, 2019. Due to the CPUC-approved Base Revenue Requirement Adjustment Mechanism ("BRRAM"), which adjusts certain revenues to adopted levels authorized by the CPUC, changes in usage do not have a significant impact on earnings.
Contracted Services
Revenues from contracted services are composed of construction revenues (including renewal and replacements) and management fees for operating and maintaining the water and/or wastewater systems at various military bases. For the three months ended March 31, 2020, revenues from contracted services increased $304,000 to $26.7 million as compared to $26.4 million for the same period in 2019 due to increases in construction activity and management fees due to the successful resolution of various economic price adjustments.
ASUS subsidiaries continue to enter into U.S. government-awarded contract modifications and agreements with third-party prime contractors for new construction projects at the Military Utility Privatization Subsidiaries. Earnings and cash flows from modifications to the original 50-year contracts with the U.S. government and agreements with third-party prime contractors for additional construction projects may or may not continue in future periods.
Operating Expenses:
Supply Costs
Supply costs for the water segment consist of purchased water, purchased power for pumping, groundwater production assessments and changes in the water supply cost balancing accounts. Supply costs for the electric segment consist primarily of purchased power for resale, the cost of natural gas used by BVES’s generating unit, the cost of renewable energy credits and changes in the electric supply cost balancing account. Total supply costs comprise the largest segment of total operating expenses. Supply costs accounted for approximately 25.2% and 25.5% of total operating expenses for the three months ended March 31, 2020 and 2019, respectively.
Water and electric gross margins are computed by subtracting total supply costs from total revenues. Registrant uses these gross margins and related percentages as an important measure in evaluating its operating results. Registrant believes
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these measures are useful internal benchmarks in evaluating the utility business performance within its water and electric segments. Registrant reviews these measurements regularly and compares them to historical periods and to its operating budget. However, these measures, which are not presented in accordance with GAAP, may not be comparable to similarly titled measures used by other entities, and should not be considered as an alternative to operating income, which is determined in accordance with GAAP.
The table below provides the amounts (in thousands) of increases (decreases) and percent changes in water and electric revenues, supply costs and gross margin during the three months ended March 31, 2020 and 2019. There were increases of $443,000 and $204,000 in surcharges recorded in water and electric revenues, respectively, to recover previously incurred costs, which did not impact earnings. Surcharges to recover previously incurred costs are recorded to revenues when billed to customers and are offset by a corresponding amount in operating expenses, resulting in no impact to earnings.
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | $ CHANGE | % CHANGE | ||||||||||||
WATER OPERATING REVENUES (1) | $ | 71,424 | $ | 64,723 | $ | 6,701 | 10.4 | % | |||||||
WATER SUPPLY COSTS: | |||||||||||||||
Water purchased (1) | $ | 14,092 | $ | 13,140 | $ | 952 | 7.2 | % | |||||||
Power purchased for pumping (1) | 1,859 | 1,538 | 321 | 20.9 | % | ||||||||||
Groundwater production assessment (1) | 4,148 | 3,746 | 402 | 10.7 | % | ||||||||||
Water supply cost balancing accounts (1) | (2,274 | ) | (2,119 | ) | (155 | ) | 7.3 | % | |||||||
TOTAL WATER SUPPLY COSTS | $ | 17,825 | $ | 16,305 | $ | 1,520 | 9.3 | % | |||||||
WATER GROSS MARGIN (2) | $ | 53,599 | $ | 48,418 | $ | 5,181 | 10.7 | % | |||||||
ELECTRIC OPERATING REVENUES (1) | $ | 10,968 | $ | 10,629 | $ | 339 | 3.2 | % | |||||||
ELECTRIC SUPPLY COSTS: | |||||||||||||||
Power purchased for resale (1) | $ | 3,043 | $ | 3,704 | $ | (661 | ) | (17.8 | )% | ||||||
Electric supply cost balancing accounts (1) | 109 | 747 | (638 | ) | (85.4 | )% | |||||||||
TOTAL ELECTRIC SUPPLY COSTS | $ | 3,152 | $ | 4,451 | $ | (1,299 | ) | (29.2 | )% | ||||||
ELECTRIC GROSS MARGIN (2) | $ | 7,816 | $ | 6,178 | $ | 1,638 | 26.5 | % | |||||||
(1) As reported on AWR’s Consolidated Statements of Income, except for supply cost balancing accounts. The sum of water and electric supply cost balancing accounts in the table above are shown in AWR’s Consolidated Statements of Income and totaled $(2,165,000) and $(1,372,000) for the three months ended March 31, 2020 and 2019, respectively. Revenues include surcharges, which increase both revenues and operating expenses by corresponding amounts, thus having no net earnings impact.
(2) Water and electric gross margins do not include any depreciation and amortization, maintenance, administrative and general, property or other taxes or other operation expenses.
Two of the principal factors affecting water supply costs are the amount of water produced and the source of the water. Generally, the variable cost of producing water from wells is less than the cost of water purchased from wholesale suppliers. Under the CPUC-approved Modified Cost Balancing Account ("MCBA"), GSWC tracks adopted and actual expense levels for purchased water, power purchased for pumping and pump taxes. GSWC records the variances (which include the effects of changes in both rate and volume) between adopted and actual purchased water, purchased power, and pump tax expenses. GSWC recovers from, or refunds to, customers the amount of such variances. GSWC tracks these variances individually for each water ratemaking area.
The overall actual percentages of purchased water for the three months ended March 31, 2020 and 2019 were approximately 45% and 43%, respectively, as compared to the authorized adopted percentages of 30% and 25% for the three months ended March 31, 2020 and 2019, respectively. The authorized adopted percentage used for the three months ended March 31, 2019 were based on 2018 adopted rates, due to the delay in receiving a final decision on the water general rate case, which was not received until May 2019 and was retroactive to January 1, 2019. The higher actual percentage of purchased water as compared to the adopted percentage resulted from a higher volume of purchased water costs due to several wells being out of service, as well as an increase in customer usage. As a result, purchased water costs for the three months ended March 31, 2020 increased to $14.1 million as compared to $13.1 million for the same period in 2019. The increases in power purchased for
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pumping, as well as groundwater production assessments, were due to increases in customer usage as compared to the three months ended March 31, 2019.
The under-collection balance in the water supply cost balancing account increased by $155,000 during the three months ended March 31, 2020 as compared to the same period in 2019 mainly due to the increase in purchased water.
For the three months ended March 31, 2020, the cost of power purchased for resale to BVES's customers decreased to $3.0 million as compared to $3.7 million during the same period in 2019 due to a decrease in customer usage and a lower average price per megawatt-hour. The average price per megawatt-hour, including fixed costs, decreased from $77.77 for the three months ended March 31, 2019 to $70.65 for the same period in 2020. The over-collection in the electric supply cost balancing account decreased as compared to the three months ended March 31, 2019 due to an updated adopted supply cost approved in the CPUC's final decision in the electric general rate case received in August 2019.
Other Operation
The primary components of other operation expenses for GSWC include payroll, materials and supplies, chemicals and water treatment costs and outside service costs of operating the regulated water systems, including the costs associated with water transmission and distribution, pumping, water quality, meter reading, billing, and operations of district offices as well as the electric system. Registrant’s contracted services operations incur many of the same types of expenses as well. For the three months ended March 31, 2020 and 2019, other operation expenses by business segment consisted of the following (dollar amounts in thousands):
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | $ CHANGE | % CHANGE | ||||||||||||
Water Services | $ | 5,819 | $ | 6,045 | $ | (226 | ) | (3.7 | )% | ||||||
Electric Services | 811 | 815 | (4 | ) | (0.5 | )% | |||||||||
Contracted Services | 1,856 | 1,711 | 145 | 8.5 | % | ||||||||||
Total other operation | $ | 8,486 | $ | 8,571 | $ | (85 | ) | (1.0 | )% | ||||||
For the three months ended March 31, 2020, other operation expense at the water segment decreased due, in part, to higher surcharges of approximately $120,000 billed for the recovery of previously incurred costs as compared to the same period in 2019, which have no impact on earnings. In addition, there was a decrease in conservation costs compared to the same period in 2019, partially offset by an increase in bad debt expense. The lower conservation costs are largely due to timing, and are expected to increase during the remainder of 2020. The increase in bad debt expense is due to expected increases in delinquent customer payments as a result of the economic downturn associated with the stay-at-home orders in response to the COVID-19 pandemic. However, bad debt expense in excess of what is included in GSWC's revenue requirement has been included in the CPUC-approved catastrophic event memorandum account to be filed for future recovery.
For the three months ended March 31, 2020, total other operation expenses for the contracted services segment increased due to higher outside service costs related to water sample testing and the operation of water system infrastructure.
Administrative and General
Administrative and general expenses include payroll related to administrative and general functions, all employee-related benefits, insurance expenses, outside legal and consulting fees, regulatory-utility-commission expenses, expenses associated with being a public company and general corporate expenses charged to expense accounts. For the three months ended March 31, 2020 and 2019, administrative and general expenses by business segment, including AWR (parent), consisted of the following (dollar amounts in thousands):
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | $ CHANGE | % CHANGE | ||||||||||||
Water Services | $ | 14,552 | $ | 13,932 | $ | 620 | 4.5 | % | |||||||
Electric Services | 2,286 | 2,162 | 124 | 5.7 | % | ||||||||||
Contracted Services | 6,110 | 5,576 | 534 | 9.6 | % | ||||||||||
AWR (parent) | 2 | 2 | — | — | % | ||||||||||
Total administrative and general | $ | 22,950 | $ | 21,672 | $ | 1,278 | 5.9 | % | |||||||
For the three months ended March 31, 2020, administrative and general expenses at the water segment increased by $620,000 due, in part, to an increase of $210,000 in surcharges billed for the recovery of previously incurred administrative and
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general expenses as compared to the same period in 2019, which have no impact on earnings. In addition, there was an increase in labor, other employee-related benefits and outside services costs.
For the three months ended March 31, 2020, the increase in administrative and general expenses at the electric segment was due to an increase of $120,000 in surcharges billed for the recovery of previously incurred administrative and general expenses as compared to the same period in 2019, which have no impact on earnings. The increase at the contracted services segment was due to higher legal and outside service costs as compared to the same period in 2019. Legal and outside services tend to fluctuate from period to period, and are expected to continue to fluctuate.
Depreciation and Amortization
For the three months ended March 31, 2020 and 2019, depreciation and amortization by business segment consisted of the following (dollar amounts in thousands):
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | $ CHANGE | % CHANGE | ||||||||||||
Water Services | $ | 7,422 | $ | 9,389 | $ | (1,967 | ) | (21.0 | )% | ||||||
Electric Services | 607 | 600 | 7 | 1.2 | % | ||||||||||
Contracted Services | 782 | 843 | (61 | ) | (7.2 | )% | |||||||||
Total depreciation and amortization | $ | 8,811 | $ | 10,832 | $ | (2,021 | ) | (18.7 | )% | ||||||
The decrease in depreciation at the water segment was due to lower composite rates approved in the CPUC's May 2019 final decision on the water general rate case. The lower new composite rates were not recorded during the first quarter of 2019 pending receipt of the final decision. This decrease in composite depreciation rates lowers the water gross margin, with a corresponding decrease in depreciation expense, resulting in no impact on net earnings. The decrease in depreciation expense resulting from the new composite rates was partially offset by increased depreciation from additions to utility plant.
Maintenance
For the three months ended March 31, 2020 and 2019, maintenance expense by business segment consisted of the following (dollar amounts in thousands):
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | $ CHANGE | % CHANGE | ||||||||||||
Water Services | $ | 2,887 | $ | 1,659 | $ | 1,228 | 74.0 | % | |||||||
Electric Services | 306 | 254 | 52 | 20.5 | % | ||||||||||
Contracted Services | 691 | 653 | 38 | 5.8 | % | ||||||||||
Total maintenance | $ | 3,884 | $ | 2,566 | $ | 1,318 | 51.4 | % | |||||||
Maintenance expense at the water segment increased primarily due to higher unplanned maintenance as compared to the same period in 2019. Maintenance expense at the water segment is expected to level off during the remainder of 2020.
Property and Other Taxes
For the three months ended March 31, 2020 and 2019, property and other taxes by business segment consisted of the following (dollar amounts in thousands):
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | $ CHANGE | % CHANGE | ||||||||||||
Water Services | $ | 4,313 | $ | 4,127 | $ | 186 | 4.5 | % | |||||||
Electric Services | 320 | 286 | 34 | 11.9 | % | ||||||||||
Contracted Services | 526 | 483 | 43 | 8.9 | % | ||||||||||
Total property and other taxes | $ | 5,159 | $ | 4,896 | $ | 263 | 5.4 | % | |||||||
Property and other taxes increased overall due, in part, to capital additions at the water segment.
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ASUS Construction
For the three months ended March 31, 2020, construction expenses for contracted services were $13.1 million, increasing $870,000 compared to the same period in 2019 due primarily to increases in construction activity and higher than expected costs incurred on certain capital projects.
Interest Expense
For the three months ended March 31, 2020 and 2019, interest expense by business segment, including AWR (parent), consisted of the following (dollar amounts in thousands):
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | $ CHANGE | % CHANGE | ||||||||||||
Water Services | $ | 5,398 | $ | 5,617 | $ | (219 | ) | (3.9 | )% | ||||||
Electric Services | 379 | 381 | (2 | ) | (0.5 | )% | |||||||||
Contracted Services | 161 | 174 | (13 | ) | (7.5 | )% | |||||||||
AWR (parent) | 112 | 145 | (33 | ) | (22.8 | )% | |||||||||
Total interest expense | $ | 6,050 | $ | 6,317 | $ | (267 | ) | (4.2 | )% | ||||||
The overall decrease in interest expense is due primarily to GSWC's repayment of $40.0 million of its 6.70% senior note that matured in March 2019, as well as lower interest rates on the revolving credit facility as compared to 2019. GSWC intends to obtain additional financing during 2020 by issuing long-term debt and using the proceeds to reduce its intercompany borrowings from AWR parent and to partially fund capital expenditures. As a result, interest expense in 2020 is expected to increase as compared to 2019.
Interest Income
For the three months ended March 31, 2020 and 2019, interest income by business segment, including AWR (parent), consisted of the following (dollar amounts in thousands):
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | $ CHANGE | % CHANGE | ||||||||||||
Water Services | $ | 265 | $ | 380 | $ | (115 | ) | (30.3 | )% | ||||||
Electric Services | 53 | 28 | 25 | 89.3 | % | ||||||||||
Contracted Services | 238 | 535 | (297 | ) | (55.5 | )% | |||||||||
AWR (parent) | 2 | (1 | ) | 3 | (300.0 | )% | |||||||||
Total interest income | $ | 558 | $ | 942 | $ | (384 | ) | (40.8 | )% | ||||||
The decrease in interest income during the three months ended March 31, 2020 was largely due to interest income recognized on certain initial construction projects performed by the contracted services segment at Fort Riley during the three months ended March 31, 2019, as well as lower interest related to regulatory assets at the water segment.
Other Income and Expenses, net
For the three months ended March 31, 2020, other income decreased due to losses of $2.4 million recorded on Registrant's investments held for a retirement benefit plan because of recent market conditions as compared to gains of $1.5 million recorded during the same period in 2019. These losses were partially offset by a decrease in the non-service cost components of net periodic benefit costs related to Registrant's defined benefit pension plan and other retirement benefits. However, as a result of GSWC's pension balancing account authorized by the CPUC, changes in net periodic benefit costs are mostly offset by corresponding changes in revenues, having no material impact to earnings.
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Income Tax Expense
For the three months ended March 31, 2020 and 2019, income tax expense by business segment, including AWR (parent), consisted of the following (dollar amounts in thousands):
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | $ CHANGE | % CHANGE | ||||||||||||
Water Services | $ | 2,378 | $ | 1,673 | $ | 705 | 42.1 | % | |||||||
Electric Services | 850 | 447 | 403 | 90.2 | % | ||||||||||
Contracted Services | 748 | 1,125 | (377 | ) | (33.5 | )% | |||||||||
AWR (parent) | (75 | ) | 65 | (140 | ) | (215.4 | )% | ||||||||
Total income tax expense | $ | 3,901 | $ | 3,310 | $ | 591 | 17.9 | % | |||||||
Consolidated income tax expense for the three months ended March 31, 2020 increased by $591,000 due primarily to an increase in pretax income, largely due to new water and electric rates implemented since the first quarter of 2019. AWR's effective income tax rate ("ETR") was 21.7% and 20.5% for the three months ended March 31, 2020 and 2019, respectively. The increase was due primarily to the increase in GSWC's ETR, which was 22.4% and 19.0% for the three months ended March 31, 2020 and 2019, respectively, resulting primarily from changes in certain flow-through items.
A comparison of the results of AWR's consolidated operations for the three months ended March 31, 2019 and March 31, 2018 can be found in AWR’s Form 10-Q for the period ended March 31, 2019 under the heading “Item 2. Management’s Discussion and Analysis - Results of Operations for the Three Months Ended March 31, 2019 and March 31, 2018.”
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Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those that are important to the portrayal of AWR’s financial condition, results of operations and cash flows, and require the most difficult, subjective or complex judgments of AWR’s management. The need to make estimates about the effect of items that are uncertain is what makes these judgments difficult, subjective and/or complex. Management makes subjective judgments about the accounting and regulatory treatment of many items. These judgments are based on AWR’s historical experience, terms of existing contracts, AWR’s observance of trends in the industry, and information available from other outside sources, as appropriate. Actual results may differ from these estimates under different assumptions or conditions.
The critical accounting policies used in the preparation of the Registrant’s financial statements that it believes affect the more significant judgments and estimates used in the preparation of its consolidated financial statements presented in this report are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Registrant’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes to Registrant’s critical accounting policies.
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Liquidity and Capital Resources
AWR
Registrant’s regulated business is capital intensive and requires considerable capital resources. A portion of these capital resources is provided by internally generated cash flows from operations. AWR anticipates that interest expense will increase due to the need for additional external capital to fund its construction program and increases in market interest rates. AWR believes that costs associated with capital used to fund construction at GSWC will continue to be recovered through water and electric rates charged to customers. AWR funds its operating expenses and pays dividends on its outstanding Common Shares primarily through dividends from its wholly owned subsidiaries. The ability of GSWC to pay dividends to AWR is restricted by California law. Under these restrictions, approximately $257.3 million was available on March 31, 2020 to pay dividends to AWR. The ability of ASUS to pay dividends to AWR is also restricted by California law and by the ability of its subsidiaries to pay dividends to it.
When necessary, Registrant obtains funds from external sources in the capital markets and through bank borrowings. Access to external financing on reasonable terms depends on the credit ratings of AWR and GSWC and current business conditions, including that of the water utility industry in general as well as conditions in the debt or equity capital markets.
AWR borrows under a credit facility, which expires in May 2023, and provides funds to its subsidiaries, GSWC and ASUS, in support of their operations. In March 2020, AWR amended the credit facility to temporarily increase the borrowing capacity by $35 million to $260 million until December 31, 2020, at which point the commitment will be reduced to $200 million. As of March 31, 2020, there was $232.0 million outstanding under this facility. Management believes further increases to AWR's credit facility can be obtained until long-term financing can be issued.
On April 24, 2020, the newly created entity, Bear Valley Electric Service, Inc., entered into a commitment letter with a bank that agreed to establish a $50 million revolving credit facility effective in June 2020 for a period of three years, subject to the execution and delivery of a definitive revolving credit agreement. Borrowings made under this facility will support the electric business operations and capital expenditures.
The CPUC requires GSWC to completely pay down all intercompany borrowings from AWR within a 24-month period. The end of the next 24-month period in which GSWC is required to completely pay down its intercompany borrowings will be in November 2020. As a result, GSWC’s intercompany borrowings of $182.4 million as of March 31, 2020 have been classified as a current liability on GSWC’s balance sheet. GSWC intends to use the proceeds from any new long-term debt to reduce its intercompany borrowings and to partially fund capital expenditures. AWR parent intends to use any financing proceeds from GSWC to pay down the amounts outstanding under its credit facility.
As part of the response to the COVID-19 outbreak, GSWC has suspended through April 2021 service disconnections for nonpayments pursuant to CPUC orders, is waiving reconnection or facilities fees for affected customers, and is suspending deposit requirements for affected customers who must reconnect to the system. This is expected to reduce Registrant's cash flows from operating activities and increase borrowings under AWR's credit facility. The magnitude of the reduction to cash flows is difficult to predict at this time, and is dependent on variables such as how long stay-at-home orders issued by state and local governments will remain in place, how successful such measures will be in containing the outbreak, and the nature and effectiveness of government assistance.
In December 2019, Standard and Poor’s Global Ratings (“S&P”) affirmed an A+ credit rating with a stable outlook on both AWR and GSWC. S&P’s debt ratings range from AAA (highest possible) to D (obligation is in default). In May 2019, Moody's Investors Service ("Moody's") affirmed its A2 rating with a revised outlook from positive to stable for GSWC. Securities ratings are not recommendations to buy, sell or hold a security, and are subject to change or withdrawal at any time by the rating agencies. Registrant believes that AWR’s sound capital structure and A+ credit rating, combined with its financial discipline, will enable AWR to access the debt and equity markets. Recent economic stimulus efforts by the federal government has provided additional liquidity to the financial markets, which management believes GSWC can access for future debt financing. However, unpredictable financial market conditions in the future may limit its access or impact the timing of when to access the market, in which case Registrant may choose to temporarily reduce its capital spending.
AWR’s ability to pay cash dividends on its Common Shares outstanding depends primarily upon cash flows from its subsidiaries. AWR intends to continue paying quarterly cash dividends on or about March 1, June 1, September 1 and December 1, subject to earnings and financial conditions, regulatory requirements and such other factors as the Board of Directors may deem relevant. Registrant has paid common dividends for over 80 consecutive years. On April 30, 2020, AWR's Board of Directors approved a second quarter dividend of $0.305 per share on AWR's Common Shares. Dividends on the Common Shares will be paid on June 1, 2020 to shareholders of record at the close of business on May 15, 2020.
Registrant's current liabilities may at times exceed its current assets. Management believes that internally generated funds, borrowings from AWR's credit facility, as well as the new $50 million revolving credit facility at Bear Valley Electric
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Service, Inc. expected to be effective in June 2020, will be adequate to provide sufficient capital to maintain normal operations and to meet its capital and financing requirements.
Cash Flows from Operating Activities:
Cash flows from operating activities have generally provided sufficient cash to fund operating requirements, including a portion of construction expenditures at GSWC and construction expenses at ASUS, and to pay dividends. Registrant’s future cash flows from operating activities are expected to be affected by a number of factors, including utility regulation; changes in tax law; maintenance expenses; inflation; compliance with environmental, health and safety standards; production costs; customer growth; per-customer usage of water and electricity; weather and seasonality; conservation efforts; compliance with local governmental requirements, including mandatory restrictions on water use; and required cash contributions to pension and post-retirement plans. Future cash flows from contracted services subsidiaries will depend on new business activities, existing operations, the construction of new and/or replacement infrastructure at military bases, timely economic price and equitable adjustment of prices, and timely collection of payments from the U.S. government and other prime contractors operating at the military bases and any adjustments arising out of an audit or investigation by federal governmental agencies.
ASUS funds its operating expenses primarily through internal operating sources, which include U.S. government funding under 50-year contracts for operations and maintenance costs and construction activities, as well as investments by, or loans from, AWR. ASUS, in turn, provides funding to its subsidiaries. ASUS's subsidiaries may also from time to time provide funding to ASUS or its subsidiaries.
Cash flows from operating activities are primarily generated by net income, adjusted for non-cash expenses such as depreciation and amortization, and deferred income taxes. Cash generated by operations varies during the year. Net cash provided by operating activities of Registrant was $15.7 million for the three months ended March 31, 2020 as compared to $29.4 million for the same period in 2019. There was a decrease in cash flows from accounts receivable from utility customers due to the economic impact associated with stay-at-home orders issued by state and local governments in response to the COVID-19 pandemic, and the CPUC-mandated suspension of service disconnections to customers for nonpayment. There were also decreases in cash flows resulting from the timing in billing of and cash receipts for construction work at military bases during the three months ended March 31, 2020. The billings (and cash receipts) for construction work at our contracted services segment generally occur at completion of the work or in accordance with a billing schedule contractually agreed to with the U.S. government and/or other prime contractors. Thus, cash flow from construction-related activities may fluctuate from period to period with such fluctuations representing timing differences of when the work is being performed and when the cash is received for payment of the work. The timing of cash receipts and disbursements related to other working capital items also affected the change in net cash provided by operating activities.
Cash Flows from Investing Activities:
Net cash used in investing activities was $33.4 million for the three months ended March 31, 2020 as compared to $40.3 million for the same period in 2019. Registrant invests capital to provide essential services to its regulated customer base, while working with its regulators to have the opportunity to earn a fair rate of return on investment. Registrant’s infrastructure investment plan consists of both infrastructure renewal programs (where infrastructure is replaced, as needed) and major capital investment projects (where new water treatment, supply and delivery facilities are constructed). GSWC may also be required from time to time to relocate existing infrastructure in order to accommodate local infrastructure improvement projects. Projected capital expenditures and other investments are subject to periodic review and revision.
Cash Flows from Financing Activities:
Registrant’s financing activities include primarily: (i) the sale proceeds from the issuance of Common Shares and stock option exercises and the repurchase of Common Shares, (ii) the issuance and repayment of long-term debt and notes payable to banks, and (iii) the payment of dividends on Common Shares. In order to finance new infrastructure, GSWC also receives customer advances (net of refunds) for, and contributions in aid of, construction. Borrowings on Registrant's credit facility are used to fund capital expenditures until long-term financing is arranged.
Net cash provided by financing activities was $16.8 million for the three months ended March 31, 2020 as compared to $5.7 million during the same period in 2019. This increase in cash provided from financing activities was due to the repayment of $40.0 million of GSWC's 6.70% senior note, which matured in March 2019. The funds for repayment of this note came from revolving credit facility borrowings. There was no similar repayment made during the three months ended March 31, 2020.
GSWC
GSWC funds its operating expenses, payments on its debt, dividends on its outstanding common shares, and a portion of its construction expenditures through internal sources. Internal sources of cash flow are provided primarily by retention of a portion of earnings from operating activities. Internal cash generation is influenced by factors such as weather patterns, conservation efforts, environmental regulation, litigation, changes in tax law and deferred taxes, changes in supply costs and
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regulatory decisions affecting GSWC’s ability to recover these supply costs, timing of rate relief, increases in maintenance expenses and capital expenditures, surcharges authorized by the CPUC to enable GSWC to recover expenses previously incurred from customers, and CPUC requirements to refund amounts previously charged to customers. Internal cash flows may also be impacted from delays in receiving payments from GSWC customers due to the associated economic impact of the COVID-19 pandemic and new state legislation issued regarding customer disconnection requirements.
GSWC may, at times, utilize external sources, including equity investments and borrowings from AWR, and long-term debt to help fund a portion of its construction expenditures. In March 2020, AWR amended its credit facility to temporarily increase its borrowing capacity to $260 million, effective through December 31, 2020. AWR’s borrowing capacity will decrease to $200 million on January 1, 2021. Under the terms of an intercompany agreement that may be amended if necessary, GSWC may borrow up to $222 million from AWR. Management intends to obtain additional financing during 2020 by issuing long-term debt at GSWC, pending CPUC approval of a finance application filed in November 2019. On April 27, 2020, the CPUC issued a proposed decision in GSWC's finance application approving the requested additional financing. A final decision on the finance application is expected to be issued during the second quarter of 2020. GSWC intends to use the proceeds from any additional long-term debt to reduce its intercompany borrowings and to partially fund capital expenditures.
In addition, GSWC receives advances and contributions from customers, homebuilders and real estate developers to fund construction necessary to extend service to new areas. Advances for construction are generally refundable at a rate of 2.5% in equal annual installments over 40 years. Amounts that are no longer subject to refund are reclassified to contributions in aid of construction. Utility plant funded by advances and contributions is excluded from rate base. Generally, GSWC amortizes contributions in aid of construction at the same composite rate of depreciation applicable to the related property.
As is often the case with public utilities, GSWC’s current liabilities may at times exceed its current assets. Management believes that internally generated funds along with the proceeds from the issuance of long-term debt, borrowings from AWR and common share issuances to AWR will be adequate to provide sufficient capital to enable GSWC to maintain normal operations and to meet its capital and financing requirements pending recovery of costs in rates.
Cash Flows from Operating Activities:
Net cash provided by operating activities was $17.9 million for the three months ended March 31, 2020 as compared to $25.9 million for the same period in 2019. There was a decrease in cash flows from accounts receivable from utility customers due to the economic impact associated with stay-at-home orders issued by state and local governments in response to the COVID-19 pandemic, and the CPUC-mandated suspension of customer service disconnections for nonpayment. The timing of cash receipts and disbursements related to other working capital items also affected the change in net cash provided by operating activities.
Cash Flows from Investing Activities:
Net cash used in investing activities was $31.9 million for the three months ended March 31, 2020 as compared to $38.9 million for the same period in 2019. Cash used for capital expenditures was $32.0 million for the three months ended March 31, 2020 as compared to $39.1 million during the same period in 2019. During 2020, GSWC's company-funded capital expenditures are estimated to be approximately $115 - $130 million barring any delays resulting from changes in GSWC's capital improvements schedule due to the COVID-19 pandemic.
Cash Flows from Financing Activities:
Net cash provided by financing activities was $14.0 million for the three months ended March 31, 2020 as compared to $9.4 million for the same period in 2019. This increase in cash from financing activities was due to the repayment of $40.0 million of GSWC's 6.70% senior note, which matured in March 2019. There was no similar repayment made during the three months ended March 31, 2020.
Contractual Obligations and Other Commitments
Registrant has various contractual obligations, which are recorded as liabilities in the consolidated financial statements. Other items, such as certain purchase commitments, are not recognized as liabilities in the consolidated financial statements but are required to be disclosed. In addition to contractual maturities, Registrant has certain debt instruments that contain an annual sinking fund or other principal payments. Registrant believes that it will be able to refinance debt instruments at their maturity through public issuance, or private placement, of debt or equity. Annual payments to service debt are generally made from cash flows from operations.
On April 24, 2020, the newly created entity, Bear Valley Electric Service, Inc., entered into a commitment letter with a bank that agreed to establish a $50 million revolving credit facility effective in June 2020 for a period of three years, subject to the execution and delivery of a definitive revolving credit agreement. Bear Valley Electric Service, Inc. intends to utilize the credit facility to fund its operations and capital expenditures.
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See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations, Commitments and Off-Balance Sheet Arrangements” section of the Registrant’s Form 10-K for the year ended December 31, 2019 for a detailed discussion of contractual obligations and other commitments.
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Contracted Services
Under the terms of the current and future utility privatization contracts with the U.S. government, each contract's price is subject to an economic price adjustment (“EPA”) on an annual basis. In the event that ASUS (i) is managing more assets at specific military bases than were included in the U.S. government’s request for proposal, (ii) is managing assets that are in substandard condition as compared to what was disclosed in the request for proposal, (iii) prudently incurs costs not contemplated under the terms of the utility privatization contract, and/or (iv) becomes subject to new regulatory requirements, such as more stringent water-quality standards, ASUS is permitted to file, and has filed, requests for equitable adjustment (“REAs”). The timely filing for and receipt of EPAs and/or REAs continues to be critical in order for the Military Utility Privatization Subsidiaries to recover increasing costs of operating, maintaining, renewing, and replacing the water and/or wastewater systems at the military bases it serves.
Under the Budget Control Act of 2011 (the “2011 Act”), substantial automatic spending cuts, known as "sequestration," have impacted the expected levels of Department of Defense budgeting. The Military Utility Privatization Subsidiaries have not experienced any earnings impact to their existing operations and maintenance and renewal and replacement services, as utility privatization contracts are an "excepted service" within the 2011 Act. While the ongoing effects of sequestration have been mitigated through the passage of various legislation, most recently the Bipartisan Budget Act of 2019 for fiscal years 2020 and 2021, similar issues may arise as part of fiscal uncertainty and/or future debt-ceiling limits imposed by Congress. However, any future impact on ASUS and its operations through the Military Utility Privatization Subsidiaries will likely be limited to (a) the timing of funding to pay for services rendered, (b) delays in the processing of EPAs and/or REAs, (c) the timing of the issuance of contract modifications for new construction work not already funded by the U.S. government, and/or (d) delays in the solicitation for and/or awarding of new contracts under the Department of Defense utility privatization program.
At times, the DCAA and/or the DCMA may, at the request of a contracting officer, perform audits/reviews of contractors for compliance with certain government guidance and regulations, such as the Federal Acquisition Regulations and Defense Federal Acquisition Regulation Supplements. Certain audit/review findings, such as system deficiencies for government-contract-business-system requirements, may result in delays in the resolution of filings submitted to and/or the ability to file new proposals with the U.S. government.
Regulatory Matters
Water Segment:
Recent Changes in Rates
The CPUC approved water rate increases effective January 1, 2020. These increases are expected to generate an additional $10.4 million in gross margin for 2020 as compared to the adopted gross margin in 2019. The CPUC final decision on the general rate case issued in May 2019 also allows for an additional increase of approximately $11.4 million in 2021, subject to the results of an earnings test and changes to the forecasted inflationary index values.
Cost of Capital Proceeding
Investor-owned water utilities serving California are required to file their cost of capital applications on a triennial basis, with the next scheduled filing required to have taken place on May 1, 2020 and to be effective for the years 2021 - 2023. In January 2020, GSWC, along with the three other water utilities, requested an extension of the date by which each of them must file its 2020 cost of capital applications. In March 2020, the CPUC approved the request, postponing the filing date by one year until May 1, 2021, with a corresponding effective date of January 1, 2022. The CPUC also approved the joint parties’ request to leave the current Water Cost of Capital Mechanism in place, but there will be no changes to the companies’ rate of return on rate base during the one-year extension, regardless of what the mechanism might otherwise indicate.
GSWC’s current authorized rate of return on rate base is 7.91%, based on its weighted cost of capital, which will continue in effect through December 31, 2021. The 7.91% return on rate base includes a return on equity of 8.9%, an embedded cost of debt of 6.6%, and a capital structure with 57% equity and 43% debt.
Finance Application
In November 2019, GSWC filed a finance application with the CPUC requesting, among other things, authorization to issue additional long-term debt and equity securities not to exceed $465 million to support its water operations. On April 27, 2020, the assigned administrative law judge at the CPUC issued a proposed decision approving GSWC’s request. A final decision is expected during the second quarter of 2020. Upon approval, GSWC expects to issue long-term debt and use the proceeds to pay down intercompany borrowings and to fund operations and capital expenditures.
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Electric Segment:
Recent Changes in Rates
On August 15, 2019, the CPUC issued a final decision on a general rate case which, among other things, increases the adopted electric gross margin by $1.2 million for 2020, by $1.1 million for 2021, and by $1.0 million for 2022 (the electric rate increases are not subject to an earnings test).
Application to Transfer Electric Utility Operations to New Subsidiary:
GSWC filed applications with the CPUC and the FERC in December 2018 and July 2019, respectively, to transfer the assets and liabilities of the BVES division of GSWC to Bear Valley Electric Service, Inc., a newly created separate legal entity that will be a stand-alone subsidiary of AWR. Due to the differences in operations, regulations, and risks, management believes that operating its electric business in a separate legal entity and stand-alone subsidiary of AWR is in the best interests of the customers, employees, and the communities served. The FERC and CPUC approved GSWC's application for reorganization in October and December of 2019, respectively. On April 30, 2020, the FERC also approved Bear Valley Electric Service Inc.'s application for market-based rate authority with an accompanying tariff. The reorganization plan is pending the completion of certain closing procedures to effectuate the transfer of assets and liabilities. When completed, the reorganization plan is not expected to result in a substantive change to AWR's operations and business segments.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Regulatory Matters” section of the Registrant’s Form 10-K for the year-ended December 31, 2019 for a discussion of other regulatory matters.
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Environmental Matters
GSWC is required to comply with the safe drinking water standards established by the U.S. Environmental Protection Agency (“US EPA”) and the Division of Drinking Water ("DDW"), under the State Water Resources Control Board (“SWRCB”). The US EPA regulates contaminants that may have adverse health effects that are known or likely to occur at levels of public health concern, and the regulation of which will provide a meaningful opportunity for health risk reduction. The DDW, acting on behalf of the US EPA, administers the US EPA’s program in California. Similar state agencies administer these rules in the other states in which Registrant operates.
GSWC currently tests its water supplies and water systems according to, among other things, requirements listed in the Federal Safe Drinking Water Act (“SDWA”). In compliance with the SDWA and to assure a safe drinking water supply to its customers, GSWC has incurred operating costs for testing to determine the levels, if any, of the constituents in its sources of supply and additional expense to treat contaminants in order to meet federal and state maximum contaminant level standards and consumer demands. GSWC expects to incur additional capital costs as well as increased operating costs to maintain or improve the quality of water delivered to its customers in light of anticipated stress on water resources associated with watershed and aquifer pollution, as well as to meet future water quality standards. The CPUC ratemaking process provides GSWC with the opportunity to recover prudently incurred capital and operating costs in future filings associated with achieving water quality standards. Management believes that such incurred and expected future costs will be authorized for recovery by the CPUC.
Drinking Water Notifications Levels:
In July 2018, DDW issued drinking water notification levels for certain fluorinated organic chemicals used to make certain fabrics and other materials, and used in various industrial processes. These chemicals were also present in certain fire suppression agents. These chemicals are referred to as perfluoroalkyl substances (PFAS). Notification levels are health-based advisory levels established for contaminants in drinking water for which maximum contaminant levels have not been established. The US EPA has also established health advisory levels for these compounds. Notification to consumers is required when the advisory levels or notification levels are exceeded. Assembly Bill 756, signed into law in July 2019 and effective in January 2020, requires, among other things, additional notification requirements for water systems detecting levels of PFAS above certain levels. GSWC is in the process of collecting and analyzing samples for PFAS under the direction of DDW. GSWC has removed some wells from service, and expects to incur additional costs to treat impacted wells. GSWC has provided customers with information regarding PFAS detection, and provided updated information via its website. In February 2020, DDW established new response levels for two of the PFAS compounds - 10 parts per trillion for perfluorooctanoic acid (PFOA) and 40 parts per trillion for perfluorooctanesulfonic acid (PFOS).
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters” section of the Registrant’s Form 10-K for the year-ended December 31, 2019 for a discussion of environmental matters applicable to GSWC and ASUS and its subsidiaries.
Water Supply
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—California Drought” section of the Registrant’s Form 10-K for the year-ended December 31, 2019 for a discussion of water supply issues. The discussion below focuses on significant matters and changes since December 31, 2019.
Drought Impact:
In May 2018, the California Legislature passed two bills that provide a framework for long-term water-use efficiency standards and drought planning and resiliency. The initial steps for implementing this legislation have been laid out in a summary document by the California Department of Water Resources ("DWR") and the State Water Resources Control Board ("SWRCB"). Over the next several years, State agencies, water suppliers and other entities will be working to meet the requirements and implement plans. A notable milestone is the establishment of an indoor water use standard of 55 gallons per capita per day (gpcd) until 2025, at which time the standard may be reduced to 52.5 gpcd or a new standard as recommended by DWR.
California's recent period of multi-year drought resulted in reduced recharge to the state's groundwater basins. GSWC utilizes groundwater from numerous groundwater basins throughout the state. Several of these basins, especially smaller basins, experienced lower groundwater levels because of the drought. Several of GSWC's service areas rely on groundwater as their only source of supply. Given the critical nature of the groundwater levels in California’s Central Coast area, GSWC implemented mandatory water restrictions in certain service areas, in accordance with CPUC procedures. In the event of water supply shortages beyond the locally available supply, GSWC would need to transport additional water from other areas, increasing the cost of water supply.
Precipitation levels to date in 2020 have been below normal, with statewide snowpack at about 64% of average. As of April 28, 2020, the U.S. Drought Monitor reported that approximately 42% of California was considered in a "Moderate Drought" and approximately 20% in a "Severe Drought", as compared to zero percent in both categories one year ago. If dry conditions
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continue or get worse, the SWRCB or other regulatory agencies may impose emergency drought actions. Due to local conditions, water-use restrictions and allocations remain in place for customers in some of GSWC’s service areas. GSWC continues to assess water supply conditions and water-use restrictions in these service areas and will make appropriate adjustments as needed
Metropolitan Water District/ State Water Project:
GSWC supplements groundwater production with wholesale purchases from the Metropolitan Water District of Southern California ("MWD") member agencies. Water supplies available to the MWD through the State Water Project ("SWP") vary from year to year based on several factors. Every year, the California Department of Water Resources ("DWR") establishes the SWP allocation for water deliveries to state water contractors. DWR generally establishes a percentage allocation of delivery requests based on several factors, including weather patterns, snow-pack levels, reservoir levels and biological diversion restrictions. The SWP is a major source of water for the MWD. In January 2020, DWR adjusted the SWP delivery allocation at 15 percent of requests for the 2020 calendar year.
New Accounting Pronouncements
Registrant is subject to newly issued requirements as well as changes in existing requirements issued by the Financial Accounting Standards Board. See Note 1 of the Unaudited Notes to Consolidated Financial Statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Registrant is exposed to certain market risks, including fluctuations in interest rates, commodity price risk, primarily relating to changes in the market price of electricity at GSWC's electric division, and other economic conditions. Market risk is the potential loss arising from adverse changes in prevailing market rates and prices.
The quantitative and qualitative disclosures about market risk are discussed in Item 7A-Quantitative and Qualitative Disclosures About Market Risk, contained in Registrant’s Annual Report on Form 10-K for the year ended December 31, 2019.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities and Exchange Act of 1934 (the “Exchange Act”), we have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness, as of the end of the fiscal quarter covered by this report, of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) and 15d-15(e) promulgated by the SEC under the Exchange Act. Based upon that evaluation, the CEO and the CFO concluded that disclosure controls and procedures, as of the end of such fiscal quarter, were adequate and effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended March 31, 2020, that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
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PART II
Item 1. Legal Proceedings
Registrant is subject to ordinary routine litigation incidental to its business, some of which may include claims for compensatory and punitive damages. No legal proceedings are pending, which are believed to be material. Management believes that rate recovery, proper insurance coverage and reserves are in place to insure against, among other things, property, general liability, employment, and workers’ compensation claims incurred in the ordinary course of business. Insurance coverage may not cover certain claims involving punitive damages.
Item 1A. Risk Factors
Except for risks associated with uncertainties arising from the COVID-19 pandemic, there have been no significant changes in the risk factors disclosed in our 2019 Annual Report on Form 10-K. Some of the risks due to the COVID-19 pandemic that have been identified by management to date include uncertainties arising out of:
• | the impact of the COVID-19 pandemic on the ability of GSWC and the Military Privatization Subsidiaries to continue to operate, repair, maintain and improve their infrastructure and to provide utility services to their customers in the ordinary course while keeping their employees and customers and the communities and military bases on which they operate safe; the extent of this impact will depend, in part, on the degree to which federal, state and local governments restrict business and personal activities, the associated level of compliance by businesses and citizens and the degree to which “flattening the curve” is successful; |
• | the impact of the COVID-19 pandemic on the ability of the supply chains of GSWC and the Military Privatization Subsidiaries to continue to provide necessary supplies and equipment to them and the ability of the subcontractors of GSWC and the Military Privatization Subsidiaries and other service providers to continue to provide services to them in the ordinary course; the extent of this impact will depend, in part, on the nature and effectiveness of government assistance to businesses and the length of time on which government restrictions on business activities remain in place and the extent of adverse health impacts on any affected businesses due to COVID-19; |
• | the potential reduction to earnings and liquidity resulting from delinquent payments from utility customers affected by the economic slowdown caused by the COVID-19 pandemic; |
• | the impact of COVID-19 on financial markets, which could negatively impact the ability of Registrant and its subsidiaries to obtain capital on reasonable terms and at reasonable rates; |
• | the reduction in the fair value of plan assets in the pension and other retirement plans due to the significant negative impact of COVID-19 on financial markets; |
• | possible increases in customer dissatisfaction due to the temporary closure of payment offices, increase in customer wait times due to increases in customer calls and general anxiety due to personal circumstances arising from the COVID-19 pandemic; and |
• | uncertainties regarding actions that may be taken by the CPUC relating to such matters as recovery of amounts in the CEMA account, the recovery of costs of funding the pension and other retirement plans, delays in making capital improvements or changes in cost of capital. |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The shareholders of AWR have approved the material features of all equity compensation plans under which AWR directly issues equity securities. The following table provides information about repurchases of Common Shares by AWR during the first quarter of 2020:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number of Shares That May Yet Be Purchased under the Plans or Programs (1)(3) | |||||||||
January 1 – 31, 2020 | 479 | $ | 87.42 | — | — | ||||||||
February 1 – 29, 2020 | 311 | $ | 89.84 | — | — | ||||||||
March 1 – 30, 2020 | 17,614 | $ | 76.83 | — | — | ||||||||
Total | 18,404 | (2) | $ | 77.33 | — | ||||||||
(1) None of the common shares were purchased pursuant to any publicly announced stock repurchase program.
(2) Of this amount, 14,729 Common Shares were acquired on the open market for employees pursuant to the Company's 401(k) plan and the remainder was acquired on the open market for participants in the Common Share Purchase and Dividend Reinvestment Plan.
(3) Neither the 401(k) plan nor the Common Share Purchase and Dividend Reinvestment Plan contain a maximum number of common shares that may be purchased in the open market.
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosure
Not applicable
Item 5. Other Information
(a) | On April 30, 2020, AWR's Board of Directors approved a second quarter dividend of $0.305 per share on AWR's Common Shares. Dividends on the Common Shares will be paid on June 1, 2020 to shareholders of record at the close of business on May 15, 2020. |
(b) | There have been no material changes during the first quarter of 2020 to the procedures by which shareholders may nominate persons to the Board of Directors of AWR. |
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Item 6. Exhibits
(a) The following documents are filed as Exhibits to this report:
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
4.1 | ||
4.2 | ||
10.1 | Second Sublease dated October 5, 1984 between Golden State Water Company and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Registration Statement on Form S-2, Registration No. 33-5151 | |
10.2 | Note Agreement dated as of May 15, 1991 between Golden State Water Company and Transamerica Occidental Life Insurance Company incorporated herein by reference to Registrant's Form 10-Q with respect to the quarter ended June 30, 1991 (File No. 1-14431) | |
10.3 | Schedule of omitted Note Agreements, dated May 15, 1991, between Golden State Water Company and Transamerica Annuity Life Insurance Company, and Golden State Water Company and First Colony Life Insurance Company incorporated herein by reference to Registrant's Form 10-Q with respect to the quarter ended June 30, 1991 (File No. 1-14431) | |
10.4 | ||
10.5 | Agreement for Financing Capital Improvement dated as of June 2, 1992 between Golden State Water Company and Three Valleys Municipal Water District incorporated herein by reference to Registrant's Form 10-K with respect to the year ended December 31, 1992 (File No. 1-14431) | |
10.6 | ||
10.7 | ||
10.8 | ||
10.9 | ||
10.10 | ||
10.11 | ||
10.12 | ||
10.13 | ||
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10.14 | ||
10.15 | ||
10.16 | ||
10.17 | ||
10.18 | ||
10.19 | ||
10.20 | ||
10.21 | ||
10.22 | ||
10.23 | ||
10.24 | ||
10.25 | ||
10.26 | ||
10.27 | ||
10.28 | ||
10.29 | ||
10.30 | ||
10.31 | ||
10.32 | ||
31.1 | ||
31.1.1 | ||
31.2 | ||
31.2.1 | ||
32.1 | ||
32.2 | ||
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101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | XBRL Taxonomy Extension Schema (3) | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase (3) | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase (3) | |
101.LAB | XBRL Taxonomy Extension Label Linkbase (3) | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase (3) | |
(1) Filed concurrently herewith
(2) Management contract or compensatory arrangement
(3) Furnished concurrently herewith
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and as its principal financial officer.
AMERICAN STATES WATER COMPANY (“AWR”): | |||
By: | /s/ EVA G. TANG | ||
Eva G. Tang | |||
Senior Vice President - Finance, Chief Financial | |||
Officer, Corporate Secretary and Treasurer | |||
GOLDEN STATE WATER COMPANY (“GSWC”): | |||
By: | /s/ EVA G. TANG | ||
Eva G. Tang | |||
Senior Vice President - Finance, Chief Financial | |||
Officer and Secretary | |||
Date: | May 4, 2020 | ||
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Exhibit 31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for AWR
I, Robert J. Sprowls, certify that:
1) I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2020 of American States Water Company (referred to as “the Registrant”);
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4) The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
5) The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls over financial reporting.
Dated: | May 4, 2020 | By: | /s/ ROBERT J. SPROWLS | |
Robert J. Sprowls | ||||
President and Chief Executive Officer | ||||
Exhibit 31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for AWR
I, Eva G. Tang, certify that:
1) I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2020 of American States Water Company (referred to as “the Registrant”);
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4) The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
5) The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls over financial reporting.
Dated: | May 4, 2020 | By: | /s/ EVA G. TANG | |
Eva G. Tang | ||||
Senior Vice President-Finance, Chief Financial | ||||
Officer, Corporate Secretary and Treasurer | ||||
Exhibit 31.1.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for GSWC
I, Robert J. Sprowls, certify that:
1) I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2020 of Golden State Water Company (referred to as “GSWC”);
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of GSWC as of, and for, the periods presented in this report;
4) GSWC’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for GSWC and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to GSWC, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of GSWC’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in GSWC’s internal control over financial reporting that occurred during GSWC’s most recent fiscal quarter (GSWC’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, GSWC’s internal control over financial reporting.
5) GSWC’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the GSWC’s auditors and the audit committee of GSWC’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the GSWC’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in GSWC’s internal controls over financial reporting.
Dated: | May 4, 2020 | By: | /s/ ROBERT J. SPROWLS | |
Robert J. Sprowls | ||||
President and Chief Executive Officer | ||||
Exhibit 31.2.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for GSWC
I, Eva G. Tang, certify that:
1) I have reviewed this quarterly report on Form 10-Q for the period March 31, 2020 of Golden State Water Company (referred to as “GSWC”);
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of GSWC as of, and for, the periods presented in this report;
4) GSWC’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for GSWC and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to GSWC, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of GSWC’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in GSWC’s internal control over financial reporting that occurred during GSWC’s most recent fiscal quarter (GSWC’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, GSWC’s internal control over financial reporting.
5) GSWC’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to GSWC’s auditors and the audit committee of GSWC’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect GSWC’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in GSWC’s internal controls over financial reporting.
Dated: | May 4, 2020 | By: | /s/ EVA G. TANG | |
Eva G. Tang | ||||
Senior Vice President-Finance, Chief Financial | ||||
Officer and Secretary | ||||
Exhibit 32.1
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)
In connection with the Quarterly Report of American States Water Company and Golden State Water Company (the “Registrant”) on Form 10-Q for the quarter ended March 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert J. Sprowls, Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
/s/ ROBERT J. SPROWLS | |||
Robert J. Sprowls | |||
President and Chief Executive Officer | |||
Date: | May 4, 2020 | ||
Exhibit 32.2
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)
In connection with the Quarterly Report of American States Water Company and Golden State Water Company (the “Registrant”) on Form 10-Q for the quarter ended March 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eva G. Tang, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
/s/ EVA G. TANG | |||
Eva G. Tang | |||
Senior Vice President-Finance, Chief Financial Officer, | |||
Corporate Secretary and Treasurer | |||
Date: | May 4, 2020 | ||