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October 01, 2016 at 08:00 PM
Richard A. Verdi
Ladenburg Thalmann
212-409-2060
[email protected]
Solid second-quarter 2016 (Q2’16) results are reported as American States Water beats estimates: Sales of $112.0 million surpassed our $109.0 million estimate for AWR, driven mainly by American States Utility Services’ (ASUS) revenue outperformance.
American States Utility Services delivered Q2 sales of $23.2 million, outperforming our estimate by $5.4 million. This was counterbalanced by a top-line shortfall in Golden State Water Co.’s (GSWC) sales relative to our forecast as revenue for both the water and electric units declined year over year. Contrarily, consolidated cost of goods and services was beneath our estimate, permitting consolidated gross profit of $90.3 million to surpass our forecast by $7.1 million. Golden States Water operating expense matched our estimate, offset by American States Utility Services’ operating expense missing our estimate; as a result, consolidated operating expense of $58.6 million missed our $54.2 million projection.
Despite the total operating expense miss, we view the outcome positively since it suggests the additional expense was incurred to support future American States Utility Services growth, while also implying to us AWR is properly managing expenses of the regulated business. With items below the line broadly meeting our expectations, AWR beat our $0.39 diluted EPS forecast by $0.06.
Daniel Ford, CFA
Barclays
212-526-0836
[email protected]
The rate-case resolution is getting closer, American States Utility Services gets a new contract, and American States Water reports solid earnings: AWR is still awaiting a final rate order in California for its general rate case covering 2016 through 2018. To that end, the company has settled with the California Public Utilities Commission’s Office of Ratepayer Advocates on nearly all operating expenses and consumption levels.
The adopted revenues for 2016 are expected to be lower than in 2015 based on lower supply costs (consumption driven), lower depreciation and amortization from an updated depreciation study, and lower other-operating expenses resulting from cost management. The expectation is that the final rate order will occur this year and will be retroactive to January 1, 2016.
American States Utility Services was awarded a 50-year contract with Eglin Air Force Base to operate, maintain, and provide construction services for the water and wastewater systems. The estimated contract value is $510 million over the 50-year period. The expectation is for a 10-month transition period.
The company expects that this contract could add 2-3 cents in EPS on an annualized basis, with upside for additional capital work. This contract award shows the continued competitiveness of American States Utility Services. The company is actively engaged in bidding on new bases along with developing opportunities for new construction work on currently contracted bases. ASUS has two price redeterminations expected in the third quarter, which should provide enhanced cost recovery.
AWR reported Q2 EPS of $0.45 vs consensus expectations of $0.44. By segment, Water was up 3 cents as compared to Q2’15, American States Utility Services was up 1 cent, and Electric and Parent were both flat to Q2’15.
For Water, the main drivers were recognition of the 2015 Water Revenue Adjustment Mechanism [in California], lower operating expenses, lower interest expense and a lower income tax rate partially offset by higher legal and outside services.
For American States Utility Services, the main drivers were higher construction activity (consistent with expectations from the Q1 call), partially offset by operating expense and a higher effective income tax rate. The expectation remains for ASUS’ EPS to be in the range of $0.28-$0.32 for 2016.
