AMERICAN STATES WATER CO annual report, FY2013

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American States Water Company (AWR) — FY 2013 Form 10-K

Business context and reporting period. This combined annual filing covers AWR and its wholly owned subsidiary Golden State Water Company (GSWC) for the year ended December 31, 2013; it also reports unaudited quarterly results. AWR operates regulated water and electric utilities through GSWC and contracted water and wastewater services through ASUS, primarily at U.S. military installations.

Financial results and liquidity

  • FY 2013 revenue: $472.1 million, up 1.1% from $466.9 million. Water revenue was $320.1 million (+4.7%), electric revenue $38.4 million (+3.7%), and contracted-services revenue $113.5 million (-8.4%).
  • Profit: Operating income was $119.1 million (+7.2%); net income was $62.7 million (+15.8%). Diluted EPS was $1.61 versus $1.41 in 2012, restated for the September 2013 two-for-one stock split.
  • Margins: Operating margin was approximately 25.2%, compared with 23.8% in 2012; net margin was approximately 13.3%, versus 11.6%. Utility gross margin, a company-defined non-GAAP measure, rose to $238.1 million for water (74.4% margin versus 72.0%) and $22.8 million for electric (59.5% versus 59.1%).
  • Cash flow: Operating cash flow was $135.7 million, up from $101.5 million. Capital expenditures were $97.4 million; investing cash outflow was $98.8 million and financing cash outflow was $22.2 million. Higher operating cash flow was principally associated with customer surcharges and recoveries; cash collections and construction billing timing also affect results.
  • Debt and liquidity: At year-end, cash was $38.2 million. Long-term debt, including current maturities, totaled $332.4 million; current assets were $191.6 million and current liabilities $100.9 million. AWR had no borrowings on its $100 million revolving facility, with $81.9 million available after outstanding letters of credit. AWR and GSWC were in compliance with debt covenants; ratings were A+ from S&P and A2 for GSWC from Moody’s, both with stable outlooks.
  • Fourth quarter: AWR revenue was $109.9 million, operating income $21.7 million, net income $11.8 million and diluted EPS $0.30. In Q4 2012, the respective amounts were $111.5 million, $21.1 million, $10.3 million and $0.27.

Material changes versus 2012

  • Water earnings per diluted share increased to $1.19 from $0.90, supported mainly by CPUC-approved rates effective January 1, 2013 and lower depreciation rates. The water rate decision authorized about $10 million of additional annual revenue versus 2012 adopted levels; surcharges recovering previously incurred costs generally increased revenue and expense equally.
  • Contracted-services revenue declined as construction activity at Fort Bliss and Fort Bragg slowed amid weather and permitting delays. Contracted-services EPS fell to $0.30 from $0.39; management expected delayed projects to advance or complete in 2014.
  • Electric EPS declined to $0.06 from $0.12, reflecting higher operating expenses and a lower recovery of certain renewable-procurement costs than in 2012.
  • Consolidated operating cash flow improved, while capital expenditures increased from $68.1 million to $97.4 million. AWR’s annual dividend declared per share rose to $0.760 from $0.635.

Outlook, commentary, risks and unusual items

  • Outlook and investment: The filing gives no quantified consolidated earnings or revenue guidance. GSWC expected capital spending of approximately $80–$90 million in 2014 and an average of about $85 million annually over 2013–2015, excluding work funded by others. Management planned to file its next water general rate case in 2014 for rates expected from 2016; a decision on the pending electric rate case was expected in 2014. AWR stated it intended to continue quarterly dividends, subject to earnings, financial condition, regulation and board discretion.
  • Drought and supply risk: California declared a drought emergency in January 2014. The State Water Project allocation was reduced to zero in January; management said near-term supplies were believed sufficient but warned that persistent dryness could prompt mandatory conservation, higher supply costs and customer impacts. GSWC supplied about 60% of 2013 demand from groundwater and roughly 35% from wholesale purchases.
  • Regulation and recovery: Results and cash flows depend on CPUC rate decisions and collection of regulatory-account balances. Net regulatory assets were approximately $122.7 million at year-end. WRAM/MCBA surcharges and other recovery mechanisms can delay cash collection; the CPUC limits annual net WRAM/MCBA surcharges to 10% of the last authorized revenue requirement.
  • Contracted-services exposure: The military contracts are long-term, fixed-price arrangements subject to periodic price redetermination, audits and possible termination by the U.S. government. Several price filings were pending; delays, cost disallowances, construction overruns or delayed federal payments could affect earnings and cash flows. AWR guarantees performance of ASUS contracts.
  • Other contingencies and items: Claremont and the Ojai area pursued potential acquisition of GSWC systems through condemnation-related processes; the outcome of the Ojai litigation was uncertain, with a decision expected in Q2 2014. An unusual methane-and-water release at an out-of-service well led to evacuation and capping work; management could not predict whether further claims would be filed. Four Barstow perchlorate lawsuits were dismissed in 2013 without appeal. AWR recorded a $1.5 million cumulative employee-benefit tax benefit, most relating to prior periods and dependent in part on planned amended returns. Bonus depreciation expired at the end of 2013 and was expected to increase tax payments in 2014 and later, subject to possible tax-method changes.
  • 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 drought conditions, zero State Water Project allocation and declining groundwater levels lead to restrictions, supply-cost increases or reduced water use, and how quickly costs are recovered from customers.
  • Timing and outcome of the GSWC electric rate case, the next water rate case, and collection of regulatory assets and customer surcharges.
  • Progress and profitability of delayed military-base construction projects, as well as outcomes and timing of outstanding price redeterminations and equitable-adjustment requests.
  • Whether the $1.5 million tax benefit and other tax deductions are sustained when amended returns are filed, and the actual cash-tax effect after bonus depreciation expired.
  • Developments in the Ojai and Claremont condemnation matters, procurement audits, and the unresolved potential claims related to the well incident.