American States Water Company — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing. The combined filing covers American States Water Company (AWR) and subsidiary Golden State Water Company (GSWC); amounts below are AWR consolidated unless specified. Dollar figures are in millions except per-share data.
Business context
AWR operates regulated water and electric utilities through GSWC and contracted water and wastewater services through American States Utility Services and its subsidiaries. GSWC served 255,657 water and 23,379 electric customers at year-end. Contracted services are provided mainly under 50-year U.S. government military-base contracts. The filing also reports results for GSWC separately.
Key financial results
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Operating revenue | $466.9 | $419.9 | +11.2% |
| Operating income | $111.1 | $95.1 | +16.8% |
| Income from continuing operations | $54.1 | $42.0 | +28.9% |
| Net income | $54.1 | $45.9 | +18.1% |
| Diluted EPS from continuing operations | $2.82 | $2.23 | +$0.59 |
| Operating cash flow | $101.5 | $80.2 | +$21.3 |
| Capital expenditures | $68.1 | $80.3 | -$12.2 |
Operating margin was approximately 23.8%, up from 22.6%. Water gross margin, a company-defined non-GAAP measure, was $220.1 million (72.0% of water revenue), versus $214.2 million (71.3%). Electric gross margin was $21.9 million (59.1%), versus $20.5 million (56.6%). These gross-margin measures exclude several operating expenses and are not substitutes for GAAP operating income.
Segment diluted EPS from continuing operations: water $1.80 versus $1.66; electric $0.24 versus $0.18; contracted services $0.78 versus $0.38. AWR paid $1.27 per share in dividends for 2012, up from $1.10.
Balance sheet and liquidity
At December 31, 2012, AWR reported total assets of $1,280.9 million, shareholders’ equity of $454.6 million, long-term debt of $332.5 million and current maturities of long-term debt of $3.3 million. Cash and cash equivalents were $23.5 million, compared with $1.3 million a year earlier. Current assets were $184.0 million and current liabilities $93.7 million. Cash flow from operations less capital expenditures was approximately $33.4 million.
No borrowings were outstanding under AWR’s $100 million revolving credit facility at year-end; $18.2 million of letters of credit left $81.8 million available. The facility was due to expire in May 2013, and management expected to extend and amend it before expiry. AWR and GSWC had S&P ratings of A+ with stable outlook; GSWC’s Moody’s rating was A2, stable. GSWC redeemed $8 million of 7.55% notes in October 2012. Its long-term debt carrying amount was $332.5 million; estimated fair value was $456.8 million.
Material changes and drivers
- Contracted-services revenue increased 49.0% to $124.0 million, mainly from greater military-base construction and renewal/replacement work. Construction expenses rose 61.8% to $82.0 million. Management cautioned that construction activity and related earnings may not recur at the same level.
- Water revenue rose 1.8% to $305.9 million, principally from CPUC-approved rate increases. Billed water usage increased 4.8%, but remained below adopted consumption; the WRAM mechanism mitigates the earnings effect of usage variances.
- Electric revenue increased 2.1% to $37.0 million, primarily from approved rate increases; billed usage fell 2.6%, with the revenue adjustment mechanism limiting earnings impact.
- Operating expenses increased 9.5%, including higher purchased-water costs, depreciation and construction expenses. Administrative and general expense declined 4.7%; maintenance expense declined 8.5%.
- Cash from operations increased, reflecting higher rates and recovery surcharges, lower tax payments associated with accelerated depreciation, and stronger contracted-services construction activity and collections. Capital spending was lower partly because pending utility rate cases had not been finalized.
- 2011 included $3.8 million of discontinued-operations income, including the gain on the May 2011 sale of Chaparral City Water Company. There was no discontinued-operations income in 2012.
Outlook, regulatory matters and risks
- Management expected average capital expenditures of approximately $85 million annually over the next three years, primarily for GSWC water-supply and distribution facilities. ASUS expected approximately $79 million of construction costs in 2013, funded by the U.S. government.
- A proposed water general-rate-case settlement was expected to provide about $10.9 million of additional annual revenue in 2013 versus 2012 adopted revenue, with proposed further increases in 2014 and 2015. It remained subject to CPUC approval and resolution of WRAM issues. Interim water rates effective January 1, 2013 did not increase over 2012 rates while the decision was pending.
- GSWC filed a 2013–2016 electric rate case; a decision was expected in the second half of 2013. Its requested return was 9.81%, versus a then-authorized 9.15%.
- The CPUC’s July 2012 water cost-of-capital decision authorized a 9.99% return on equity and an 8.64% weighted cost of capital, retroactive to January 1, 2012. Following a bond-rate mechanism adjustment, GSWC sought a 56-basis-point reduction in water ROE to 9.43% for 2013 rates.
- GSWC recorded a $416,000 pretax charge in 2012 for costs and related revenues expected to be disallowed in a CPUC rehearing settlement. A prior CPUC decision required $9.5 million in customer refunds and a $3.0 million rate-base and other rate adjustment; $3.2 million of refunds were made in 2012. Three independent procurement-practice audits over ten years could result in further cost disallowances; their outcome and any loss were not estimable.
- Key risks include CPUC rate decisions and recovery timing, water availability and quality, drought and conservation, aging infrastructure and capital needs, rising environmental compliance costs, and customer or governmental challenges to utility ownership. Claremont offered to acquire GSWC’s system serving about 11,000 customers; GSWC rejected the offer. A potential Ojai acquisition effort also continued, involving about 3,000 customers.
- Military-contract risks include delayed price redeterminations or equitable adjustments, government audits or cost disallowances, funding and payment delays, termination rights, and fixed-price construction overruns. Management said sequestration was not expected to immediately affect existing services but could delay funding, payments, price decisions, new construction work or future contract awards.
- Water contamination and remediation matters include affected wells in several service areas. GSWC estimated $1.2 million of additional Chadron-site cleanup costs and recorded a corresponding regulatory asset, while noting the ultimate amount could vary. GSWC also had a $2.0 million remaining Aerojet settlement receivable at year-end.
- Management identified potential exposure from pension assumptions and market returns; the pension and post-retirement plans were underfunded. Expected 2013 pension contributions were approximately $6.6 million. Renewable-energy compliance, electricity-price exposure, cyber incidents and natural disasters were also cited risks.
PricewaterhouseCoopers issued unqualified opinions on AWR’s and GSWC’s financial statements. AWR’s internal control over financial reporting was audited and found effective; management also concluded AWR and GSWC disclosure controls and internal financial controls were effective at year-end.
Important facts for investors to verify
- Whether and when the CPUC approved the pending water and electric rate cases, including the WRAM settlement conditions and permitted recovery amounts.
- Whether AWR renewed or replaced the revolving credit facility before its May 2013 expiration and on what terms.
- Whether military-base construction volumes, contract price adjustments and government collections sustained the 2012 earnings contribution.
- Results of GSWC’s independent procurement audits and any additional customer refunds, cost disallowances or rate-base reductions.
- Progress and potential costs or service impacts from groundwater contamination, environmental rules, and water-supply constraints.
- Developments in the Claremont and Ojai acquisition efforts and any associated condemnation proceedings.
- Whether pension funding needs, capital spending and debt financing remained consistent with management’s stated expectations.