American States Water Company — FY2017 Form 10-K
Business and reporting period: The combined filing covers American States Water Company (AWR) and Golden State Water Company (GSWC) for the year ended December 31, 2017. AWR operates regulated water and electric utilities through GSWC and provides water and wastewater services at U.S. military bases through ASUS. GSWC serves California customers; its rates are regulated by the CPUC. The filing also presents unaudited quarterly results, including the fourth quarter.
Financial performance and position
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Operating revenue | $440.6 million | $436.1 million | +1.0% |
| Operating income | $127.1 million | $114.7 million | +10.8% |
| Operating margin | 28.8% | 26.3% | +2.5 percentage points |
| Net income | $69.4 million | $59.7 million | +16.1% |
| Diluted EPS | $1.88 | $1.62 | +$0.26 |
| Cash from operations | $144.6 million | $96.9 million | +$47.6 million |
| Capital expenditures | $113.1 million | $129.9 million | −$16.7 million |
Segment revenue: Water was $306.3 million (+1.1%); electric was $34.0 million (−5.0%); contracted services was $100.3 million (+3.0%). Water gross margin rose 0.7% to $231.2 million, while electric gross margin fell 8.2% to $20.9 million.
Quarterly context: Fourth-quarter 2017 AWR revenue was $104.2 million, operating income $22.0 million, net income $12.9 million and diluted EPS $0.35. Fourth-quarter 2016 figures were $106.8 million, $22.1 million, $11.2 million and $0.30, respectively. The filing notes seasonality; earnings comparisons also reflect tax and other unusual items.
Balance sheet and liquidity: At December 31, 2017, AWR had total assets of $1.417 billion, shareholders’ equity of $529.9 million, long-term debt of $321.0 million and bank borrowings of $59.0 million. Current assets were $155.5 million versus current liabilities of $156.7 million; cash was $0.2 million. AWR had $84.7 million available under its $150 million revolving facility after borrowings and letters of credit. The facility was due to expire in May 2018; management intended to renew it. AWR reported compliance with debt covenants and S&P ratings of A+ for AWR and GSWC; Moody’s affirmed GSWC at A2 with a positive outlook.
Dividends: AWR paid $0.994 per share in 2017, up from $0.914 in 2016. Total shareholder dividends were $36.4 million.
Material changes and unusual items
- GSWC sold its Ojai water system by eminent domain for $34.3 million in June 2017, recording an $8.3 million pretax gain, or approximately $0.13 per share. Proceeds helped repay short-term borrowings.
- The Ojai sale, the gain, and a $1.8 million Claremont litigation-cost reimbursement contributed to reported water-segment results. CPUC approval also enabled recognition of $1.5 million in drought-cost recovery.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21%. GSWC remeasured regulated deferred tax liabilities downward by about $90.1 million, offset by a regulatory liability rather than earnings. The tax law affected segment earnings and is expected to lower customer rates; management also expects lower operating cash flow from the lower tax rate and elimination of utility bonus depreciation.
- Cash from operations increased substantially, reflecting CPUC-approved surcharges, tax refunds and timing of receipts for military-base construction work. Investing outflows declined partly because of the Ojai sale proceeds.
Outlook, commentary and risks
- GSWC expected 2018 company-funded capital expenditures of $110–$120 million. AWR said capital spending would remain significant and anticipated continued use of external financing.
- Third-year water-rate increases effective January 1, 2018 were expected to add about $4.5 million to adopted water gross margin. Separately, a CPUC proposed cost-of-capital decision recommended lower water returns; if adopted, management estimated an approximately $9.5 million annual reduction in GSWC’s revenue requirement beginning in 2018. A final decision was expected in March 2018.
- GSWC had pending water and electric rate cases. Its 2019–2021 water case included requested capital budgets averaging about $125 million annually; a decision was scheduled for the fourth quarter of 2018. The electric rate case decision was expected in 2018.
- ASUS began operating at Eglin Air Force Base in June 2017 under a 50-year contract valued at approximately $702.4 million. It was awarded a 50-year Fort Riley contract with an initial value of approximately $601.4 million and expected to begin operations in 2018 after transition. Contract values are subject to adjustments; government termination, payment delays, cost overruns and delayed price adjustments are risks.
- Key utility risks include CPUC rate-setting and cost-recovery delays, drought and water-supply availability and cost, conservation-driven demand, aging infrastructure, environmental compliance and wildfire exposure in the electric territory. Insurance may not cover all wildfire losses or be available at acceptable cost.
- Claremont paid $2.0 million toward a $7.6 million judgment; the remaining $5.9 million is subject to quarterly interest-only payments over 12 years and may be forgiven in 2030 if settlement conditions are met. GSWC said it would recognize future payments as collected. Chadron cleanup costs were estimated at $1.3 million, with recovery in rates considered probable. The filing reports no expected material effect from other routine litigation.
Important facts for investors to verify
- Whether the CPUC’s proposed water cost-of-capital decision was adopted, and its actual effect on rates and earnings.
- Whether the May 2018 revolving-credit facility was renewed and how financing needs, interest expense and covenant headroom evolve.
- Execution of GSWC’s capital program and recovery of supply-cost and regulatory-account balances through customer rates.
- Water availability and purchased-water costs, particularly if dry conditions persist; the filing reported a 15% initial 2018 State Water Project allocation, subject to revision.
- ASUS’s transition and performance at Fort Riley and Eglin, including contract adjustments, construction economics and timely U.S. government payments.
- Progress on the Claremont settlement payments and any further condemnation actions, as well as wildfire insurance availability and potential exposure.