American States Water Company — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; the filing also includes unaudited fourth-quarter data. The combined filing covers American States Water Company (AWR) and its regulated subsidiary Golden State Water Company (GSWC). AWR operates water, electric and contracted-services businesses; GSWC serves California water and electric customers, while ASUS provides utility services at U.S. military installations.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| AWR operating revenue | $465.8 million | $472.1 million | -1.3% |
| Operating income | $119.0 million | $119.1 million | Essentially unchanged |
| Net income | $61.1 million | $62.7 million | -2.6% |
| Diluted EPS | $1.57 | $1.61 | -$0.04 |
| Cash from operations | $163.3 million | $135.7 million | +$27.6 million |
| Capital expenditures | $72.6 million | $97.4 million | -$24.8 million |
AWR’s operating margin was approximately 25.6% and net margin approximately 13.1%. Water revenue rose 2.0% to $326.7 million; electric revenue fell 10.5% to $34.4 million; contracted-services revenue declined 7.8% to $104.7 million. Water gross margin increased 0.9% to $240.4 million, while electric gross margin decreased 13.5% to $19.8 million.
Fourth-quarter AWR revenue was $109.9 million versus $109.9 million in 2013; operating income was $25.4 million versus $21.7 million, and net income was $13.5 million versus $11.8 million. Fourth-quarter EPS was $0.35 versus $0.30. ASUS recorded about $1.6 million of additional revenue on completion of a Fort Bragg construction project.
At year-end, AWR reported cash of $76.0 million, total assets of $1.378 billion, shareholders’ equity of $506.8 million, and long-term debt of $325.8 million, plus $0.3 million current maturities. The $100 million revolving facility had no borrowings outstanding and $88.8 million available after letters of credit. AWR reported covenant compliance and a 0.40-to-1.00 debt ratio under the facility. AWR paid $32.1 million in shareholder dividends and repurchased $17.2 million of shares in 2014; annual dividends declared were $0.831 per share.
GSWC’s FY 2014 revenue was $361.1 million, operating income $99.7 million and net income $47.9 million, compared with $358.5 million, $102.3 million and $48.6 million, respectively, in 2013. Its year-end long-term debt was $325.8 million.
Material changes versus the prior year
- AWR revenue decreased primarily because contracted-services construction activity declined and electric revenue was lower; water revenue growth partly offset these decreases.
- Operating income was flat, but net income and EPS declined, reflecting higher income-tax expense and changes in segment contributions. The 2013 comparison benefited from one-time water-rate-case cost recoveries and a parent-company tax benefit not repeated in 2014.
- Contracted-services earnings included approximately $1.7 million of retroactive revenue from approved military-contract price redeterminations and additional revenue at Fort Bragg. These benefits partly offset reduced construction activity.
- Operating cash flow increased, mainly due to receipts for military-base construction work. Capital spending fell amid project delays; management expects spending to increase in 2015.
- GSWC redeemed $15 million of higher-rate notes and issued $15 million of 3.45% notes due 2029. Interest expense declined year over year.
Outlook, risks and unusual items
- Outlook: No specific consolidated earnings or EPS guidance is provided. Management estimated 2015 company-funded capital expenditures of $85–$95 million. 2015 water rate increases were expected to add about $1.8 million to water gross margin versus 2014; approved electric base revenues were expected to add about $0.4 million versus 2014.
- Drought and supply: California’s prolonged drought, low reservoir and snowpack levels, possible supply restrictions and mandatory conservation could raise sourcing and operating costs or constrain supply. GSWC had implemented Stage II shortage plans and asked customers to conserve; further restrictions or rationing could follow if dry conditions persist. Water consumption fell 2.8% in 2014, although revenue-decoupling mechanisms mitigate the direct revenue effect.
- Regulation and recovery: Results depend on CPUC rate decisions and timely recovery of costs. AWR reported net regulatory assets of approximately $125.7 million, whose recovery depends on regulatory treatment. GSWC’s pending water rate case covers 2016–2018 and requested capital budgets averaging about $90 million annually.
- Audit and legal contingencies: A draft CPUC procurement audit alleged material noncompliance with procurement requirements and company policies during 1994–2006, focusing on documentation. GSWC disputed aspects of the findings; the final report and potential disallowances or penalties were unresolved, and management could not estimate a loss range. Claremont filed an eminent-domain lawsuit to acquire a system with an approximately $47.7 million net book value serving about 11,000 customers; GSWC intends to contest it. Ojai condemnation litigation remained on appeal, with other municipalities considering acquisitions.
- Other unusual exposures: GSWC accrued $1.4 million for remaining remediation at the Chadron site, with recovery in rates considered probable by management. A $3.3 million unrealized loss on new purchased-power contracts was deferred through a regulatory account and did not affect earnings. AWR’s pension and post-retirement obligations increased amid a lower discount rate and updated mortality assumptions; management expected at least $6.0 million of pension contributions in 2015.
- Contracted services: Military contracts are long-term but can be terminated by the U.S. government; payment timing, periodic price redeterminations, audits, cost disallowances and firm-fixed-price construction overruns may affect cash flow and profitability. Approximately $27 million of new construction projects were awarded in 2014, but management cautioned that future construction activity may vary.
Important facts for investors to verify
- Track the final CPUC procurement-audit findings and any resulting disallowances, penalties or rate-case effects.
- Monitor California drought conditions, water allocations, conservation requirements, supply costs and GSWC’s ability to recover costs through rates.
- Follow the Claremont condemnation case, the Ojai appeal and any further municipal acquisition actions.
- Assess whether 2015 capital spending stays within the $85–$95 million estimate and how it is funded, alongside debt maturities and dividend capacity.
- Review the timing and approval of GSWC’s 2016–2018 rate case and ASUS contract redeterminations, construction awards and collections.
- Check pension funding and regulatory-asset recovery assumptions; the filing does not quantify a potential loss for the procurement audit or condemnation matters.