Business context and reporting period
American States Water Company (AWR) filed this combined Form 10-K with wholly owned Golden State Water Company (GSWC) for the fiscal year ended December 31, 2015. AWR reports water and electric utility operations and contracted services. GSWC serves California water and electric customers; AWR’s ASUS subsidiaries operate and maintain water and wastewater systems at U.S. military bases under long-term contracts.
Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Operating revenue | $458.6 | $465.8 | -1.5% |
| Operating income | $118.5 | $119.0 | -0.5% |
| Net income | $60.5 | $61.1 | -0.9% |
| Diluted EPS | $1.60 | $1.57 | +1.9% |
| Operating margin | 25.8% | 25.6% | +0.2 percentage points |
| Net margin | 13.2% | 13.1% | +0.1 percentage points |
| Net cash from operating activities | $95.1 | $163.3 | -41.7% |
| Cash capital expenditures | $87.3 | $72.6 | +$14.8 |
| Long-term debt, net of current portion | $325.5 | $325.8 | - |
At year-end, cash and cash equivalents were $4.4 million, and AWR had $28.0 million drawn on its $100.0 million revolving credit facility, with $61.6 million available after outstanding letters of credit. Total assets were $1.35 billion and shareholders’ equity was $465.9 million. AWR reported a 59% equity/41% debt capitalization mix. The company was in compliance with its credit-facility covenants.
Water and electric gross margins, the company’s non-GAAP operating measures, were $239.5 million (72.9%) and $21.5 million (59.6%), respectively, versus $240.4 million (73.6%) and $19.8 million (57.5%) in 2014. AWR declared dividends of $0.874 per share for 2015, up from $0.831.
For fourth-quarter 2015, AWR reported revenue of $110.1 million, operating income of $21.9 million, net income of $11.6 million and diluted EPS of $0.31. Fourth-quarter 2014 comparatives were $109.9 million, $25.4 million, $13.5 million and $0.35, respectively.
Material changes versus the prior comparable period
- Contracted-services revenue fell 10.2% to $94.1 million as major construction projects completed in 2014 did not recur. This was partly offset by $3.0 million of retroactive revenue from U.S. government price redeterminations approved in 2015. ASUS received about $50 million of new construction awards in the third quarter, most expected to be completed in 2016.
- Water revenue rose 0.6% to $328.5 million, mainly from approved rate increases. Billed water consumption fell about 16%, largely due to drought conservation; the WRAM mechanism limits the direct revenue effect, but recognition timing and cash collection were affected. A $45.2 million net WRAM/MCBA regulatory asset was reported at year-end, and $1.4 million of 2015 under-collections was not recognized as revenue because estimated recovery exceeded the applicable 24-month recognition window.
- Electric revenue increased 4.8% to $36.0 million. Higher usage and rate increases lifted revenue; program costs partly offset the effect on earnings.
- Operating cash flow declined sharply, reflecting lower customer billings and increased WRAM regulatory assets, as well as timing of ASUS construction billings and receipts. Lower income-tax payments partly offset the decline.
- Diluted EPS increased despite lower net income, with share repurchases reducing weighted-average diluted shares. AWR repurchased approximately 1.9 million shares in 2015 for $72.9 million; both authorized repurchase programs were completed.
Outlook, risks, contingencies and unusual items
- Management estimated 2016 GSWC company-funded capital expenditures of $85 million to $95 million, subject to the pending water rate case. A final decision was expected by the end of the second quarter of 2016, with rates retroactive to January 1, 2016. The filing provides no company-wide EPS or revenue guidance.
- California drought restrictions, extended through October 31, 2016, require water-use reductions and may increase supply costs, conservation-related demand pressure and drought-response spending. GSWC was authorized to track incremental drought costs for possible future recovery; recovery was not assured.
- The City of Claremont is pursuing eminent domain acquisition of GSWC’s water system, serving about 11,000 customers and with a net book value of approximately $49.3 million. GSWC is contesting the action; management could not predict the outcome. A right-to-take trial was scheduled for June 2016. A potential Ojai acquisition was also disclosed, with outcome uncertain.
- Other principal risks include CPUC rate-setting and cost-recovery decisions, aging infrastructure and maintenance needs, groundwater contamination, water-supply availability, wildfire insurance costs in the electric service area, and delays, cost disallowances or termination under military contracts. U.S. government price redeterminations and equitable-adjustment approvals affect ASUS results and cash flow.
- GSWC recorded a $7.1 million unrealized loss on fixed-price purchased-power contracts, deferred through a regulatory memorandum account; it did not affect earnings. The Chadron remediation liability was estimated at $1.4 million, with ultimate costs subject to uncertainty; management considered rate recovery probable.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and AWR’s internal controls.
Most important facts for investors to verify
- Whether the pending water rate case and WRAM/MCBA balances are approved and recovered on the expected timetable, including the unrecognized $1.4 million.
- Whether drought restrictions, water-supply costs and reduced consumption continue to pressure operating cash flow and utility investment needs.
- The outcome and potential financial effect of Claremont’s condemnation case and any further Ojai action.
- Whether ASUS receives timely price redeterminations and collects construction-related receivables, and whether new project awards translate into earnings and cash flow.
- Liquidity and financing needs given low year-end cash, capital spending plans, debt covenants, dividend commitments and completed share repurchases.