American States Water Company — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter filing; fourth-quarter results are noted below. AWR is the parent of Golden State Water Company (GSWC) and American States Utility Services (ASUS). GSWC operates regulated California water and electric utilities; ASUS provides contracted water and wastewater services at U.S. military installations.
Financial results and position
Unless otherwise stated, amounts are for AWR consolidated and in millions of dollars; per-share amounts are diluted.
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenue | $473.9 | $436.8 | +8.5% |
| Operating income | $127.1 | $101.0 | +25.8% |
| Net income | $84.3 | $63.9 | +32.1% |
| Diluted EPS | $2.28 | $1.72 | +$0.56 |
| Cash from operations | $116.9 | $136.8 | −14.6% |
| Capital expenditures | $151.9 | $126.6 | +$25.4 |
Operating margin was approximately 26.8%, compared with 23.1% in 2018. Cash from operations less capital expenditures was negative approximately $35.1 million in 2019. Fourth-quarter revenue was $113.0 million and net income $16.7 million, versus $111.0 million and $13.8 million, respectively, in fourth-quarter 2018; diluted EPS was $0.45 versus $0.37.
- Business segments: Water revenue was $319.8 million (+8.3%); electric revenue was $39.5 million (+15.1%); contracted-services revenue was $114.5 million (+6.8%). Segment diluted EPS was $1.61 for water, $0.15 for electric excluding the prior-year retroactive rate-case benefit, and $0.47 for contracted services.
- Utility gross margins: Water gross margin, a company-defined non-GAAP measure, increased 6.1% to $228.1 million. Electric gross margin increased 25.0% to $26.6 million.
- Balance sheet and debt: Total assets were $1.64 billion and common equity $601.5 million. Long-term debt carrying value was $281.0 million; bank borrowings were $205.0 million. Cash was $1.3 million. Current assets were $122.5 million and current liabilities $116.0 million.
- Liquidity and financing: AWR’s revolving credit facility had $225 million of capacity and $205 million outstanding at year-end. A lender commitment received in February 2020 provided an option to increase capacity to $260 million through year-end 2020, after which capacity was to revert to $200 million. AWR and GSWC were rated A+ by S&P; GSWC was rated A2 by Moody’s.
- Shareholder returns: Dividends paid were $1.16 per share, up from $1.06 in 2018. The board approved a first-quarter 2020 dividend of $0.305 per share.
Material changes and key drivers
- Net income growth reflected CPUC-approved water rates effective retroactively from January 1, 2019, higher electric rates, and growth in contracted services. Fort Riley operations began in July 2018; ASUS also benefited from approved contract price adjustments.
- In May 2019, the CPUC approved GSWC’s water rate case for 2019–2021, authorizing about $334.5 million of infrastructure investment. Adopted water gross margin increased about $7.1 million for 2019 versus the 2018 adopted level; new rates increased gross margin about $10.4 million for 2020. A further potential increase of about $11.4 million in 2021 is subject to an earnings test and inflation adjustments.
- The August 2019 electric rate-case decision was retroactive to January 1, 2018. AWR recorded about $2.3 million of pretax revenue for 2018 in 2019, equivalent to about $0.04 per share. The decision also authorized approximately $44 million of safety and reliability capital projects over the rate cycle through 2022.
- Water billed consumption declined about 6%, but WRAM mechanisms mitigate the direct earnings effect of usage changes. Purchased-water share rose to 44% from 41%, partly because several wells were out of service. AWR refunded about $7.2 million to water customers in 2019 related to Tax Act over-collections.
- Operating cash flow declined despite higher earnings, reflecting lower water usage, rate-case timing, the customer refund, and working-capital timing. Increased capital spending was funded in part by higher credit-facility borrowings; GSWC repaid $40 million of debt that matured in March 2019.
Outlook, risks and unusual items
- GSWC estimated company-funded 2020 capital expenditures of $120–$135 million. Management expects capital spending to remain above depreciation and anticipates additional external financing; GSWC intended to issue long-term debt in 2020 to reduce intercompany borrowings and fund investment.
- GSWC planned to file its next water general rate case in July 2020. AWR said regulatory approval and timely recovery of operating costs and capital investment are important to earnings and cash flow.
- Principal risks include California wildfire exposure and possible inverse-condemnation liability; public-safety power shutoffs; drought, changing water availability and higher supply costs; water-quality regulation, including PFAS; CPUC rate decisions and cost-recovery delays; aging infrastructure; and access to capital.
- ASUS depends primarily on the U.S. government and its long-term military-base contracts. Contracts may be terminated for convenience or default; price adjustments, reimbursements and construction payments may be delayed or disputed. Remaining performance obligations were $3.2 billion, recognized over contract terms of 36–50 years, but are subject to termination provisions.
- Other notable items: 2019 included a $1.1 million reduction in water administrative expense following approval to recover previously incurred costs. AWR’s 2017 comparison included an $8.3 million pretax gain on the Ojai water-system sale. At year-end, the Chadron cleanup liability was estimated at $1.3 million, with management expecting CPUC rate-base recovery. GSWC had removed some wells from service amid PFAS monitoring and expected additional treatment costs; the filing does not quantify those future costs.
- The auditor issued an unqualified opinion on AWR’s consolidated financial statements and found AWR’s internal control over financial reporting effective. Critical audit matters included estimates of costs to complete military construction contracts and judgments about recovery or refund of regulatory balances.
Important facts for investors to verify
- Whether the 2020–2021 water-rate increases and WRAM/MCBA balances are recovered on schedule, and the outcome of the next water rate case.
- Whether projected capital spending, planned GSWC debt issuance and the expanded credit-facility option proceed as described, and how financing affects interest expense and leverage.
- The extent and recoverability of costs tied to wildfire mitigation, power shutoffs, PFAS and other water-quality requirements.
- ASUS’s collection of government receivables and approval of contract price adjustments, and whether estimated construction costs remain consistent with contract profitability.