American States Water Company (AWR) — 2016 Form 10-K
Business context and period. This combined annual report covers AWR and its wholly owned utility subsidiary, Golden State Water Company (GSWC), for the fiscal year ended December 31, 2016. AWR reports water, electric and contracted-services segments. GSWC supplies water to California customers and electricity in the Big Bear area; AWR’s ASUS subsidiaries operate and upgrade water and wastewater systems at U.S. military installations under long-term contracts.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| AWR operating revenue | $436.1 million | $458.6 million |
| Operating income | $114.7 million | $118.5 million |
| Net income | $59.7 million | $60.5 million |
| Diluted EPS | $1.62 | $1.60 |
| Cash from operating activities | $96.9 million | $95.1 million |
| Capital expenditures | $129.9 million | $87.3 million |
| Dividends per common share | $0.914 | $0.874 |
- Revenue fell 4.9%, operating income fell 3.2%, and net income fell 1.2%; diluted EPS increased 1.3%, aided in part by fewer weighted-average shares following prior-year repurchases.
- Water revenue declined 7.8% to $302.9 million, while contracted-services revenue rose 3.5% to $97.4 million. Electric revenue was nearly flat at $35.8 million.
- Water gross margin, a non-GAAP measure used by management, declined to $229.6 million from $239.5 million. Electric gross margin increased to $22.8 million from $21.5 million.
- Cash and cash equivalents were $0.4 million at year-end. AWR had $90.0 million drawn on its $150.0 million revolving facility and $9.9 million of letters of credit outstanding, leaving $50.1 million available.
- Long-term debt, net of issuance costs and current maturities, was $321.0 million; short-term bank borrowings were $90.0 million. Total assets were $1.47 billion and shareholders’ equity was $494.3 million.
Material changes and management commentary
- The CPUC’s December 2016 water general rate case decision set rates for 2016–2018, retroactive to January 1, 2016. Adopted 2016 revenues were lower than 2015, reflecting lower allowed supply costs, a revised depreciation study and cost-containment adjustments; related expense reductions partly offset the revenue decline. GSWC recorded a $9.5 million regulatory asset for the difference between interim and final rates, with recovery expected through surcharges.
- Water-segment diluted EPS decreased from $1.19 to $1.17, principally reflecting lower adopted gross margin and about $4.0 million of additional condemnation-related legal and outside-service costs. Electric-segment diluted EPS rose from $0.07 to $0.10; contracted-services EPS rose from $0.32 to $0.33.
- Operating cash flow increased modestly, but capital expenditures rose substantially. AWR expects company-funded capital expenditures of approximately $110–$120 million in 2017 and anticipates additional external financing; management said GSWC may issue long-term debt depending on market conditions.
- AWR was awarded a 50-year Eglin Air Force Base water and wastewater contract, with an initial estimated value of approximately $510 million, subject to asset-inventory adjustments and annual price adjustments. Operations were expected to begin in spring 2017.
- California drought conditions had improved substantially by February 2017, but certain service areas remained subject to mandatory conservation measures and groundwater-supply uncertainty. GSWC reported that 2016 water deliveries were 55% groundwater and 45% wholesale purchases or surface-water diversions.
- AWR’s board declared a first-quarter 2017 dividend of $0.242 per share. The company reported more than 76 consecutive years of dividends; future payments remain subject to earnings, financial condition, regulatory requirements and board discretion.
Risks, contingencies and unusual items
- Results and cash flow depend on CPUC rate decisions, timely cost recovery, water availability and quality, conservation-related usage, supply costs, aging infrastructure and substantial capital needs. WRAM and supply-cost balancing mechanisms mitigate some earnings variability, but collection timing affects cash flow.
- Military-contract results depend on U.S. government appropriations, timely price redeterminations and equitable adjustments, cost estimates, audits, payments and contract performance. Contracts may be terminated for government convenience or default; AWR guarantees ASUS contract performance.
- The City of Claremont’s attempt to acquire GSWC’s water system was rejected by a trial court in December 2016; the city appealed in February 2017. A separate eminent-domain proceeding concerns GSWC’s Ojai system, with outcome not predictable.
- GSWC recorded an estimated $1.4 million liability for remaining cleanup at the Chadron Plant; management believes recovery through rates is probable, but actual remediation costs may vary.
- Other material exposures include wildfire and natural-disaster losses, groundwater contamination, environmental and water-quality compliance, cybersecurity, pension assumptions, regulatory disallowances and possible delays in government payments. A $4.9 million unrealized loss on purchased-power contracts was deferred through a regulatory account and did not affect earnings.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting for AWR and GSWC as of year-end.
Most important facts for investors to verify
- How the CPUC rate decision, 2017 surcharges and subsequent rate-case actions translate into realized revenue, collections and operating cash flow.
- Whether the forecast $110–$120 million of 2017 company-funded capital spending is achieved and how it is financed, including any long-term debt issuance.
- Actual timing and economics of the Eglin contract startup, asset inventory, price adjustments and construction work.
- Developments in the Claremont appeal and Ojai condemnation case, including potential legal costs, asset valuation and recoverability.
- Water-supply conditions, conservation requirements, purchased-water mix and the collectability and timing of WRAM/MCBA balances.
- Changes in revolving-credit availability, borrowing costs, debt covenants and the subsidiary cash flows supporting AWR dividends.