American States Water Company (AWR) — Q1 2013 10-Q
Reporting period: Three months ended March 31, 2013. The combined, unaudited filing covers AWR and its wholly owned regulated utility subsidiary, Golden State Water Company (GSWC). AWR also operates American States Utility Services (ASUS), which provides water and wastewater services at U.S. military installations.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenue | $110.6 | $106.9 | +3.4% |
| Operating income | $28.0 | $23.4 | +19.7% |
| Income before taxes | $22.7 | $17.7 | +28.0% |
| Net income | $13.5 | $10.1 | +33.1% |
| Diluted EPS | $0.69 | $0.53 | +$0.16 |
| Operating margin | 25.3% | 21.9% | +3.4 percentage points |
| Cash from operations | $31.0 | $26.6 | +$4.4 |
| Construction expenditures | $18.4 | $15.0 | +$3.4 |
- Revenue comprised water of $69.2 million (+4.6%), electric of $10.7 million (-0.7%), and contracted services of $30.6 million (+2.4%). Water-rate increases drove most of the revenue growth.
- Water gross margin increased 7.5% to $53.5 million, with margin rising to 77.2% from 75.2%. Electric gross margin fell 5.1% to $5.9 million, with margin declining to 54.8% from 57.4%.
- Operating expenses declined 1.1% to $82.6 million. Lower supply-cost balancing-account expenses, recovery of previously expensed costs, and lower depreciation more than offset higher purchased-water, administrative, and maintenance costs.
- Cash and cash equivalents were $32.8 million at March 31, 2013, versus $23.5 million at year-end 2012. Net cash used in financing was $3.3 million, including $6.8 million of dividends paid.
- Total debt was approximately $335.8 million, comprising $332.4 million long-term and $3.4 million current debt. AWR reported no borrowings on its $100 million revolving credit facility at quarter-end; $18.2 million of letters of credit left $81.8 million available.
- Quarterly dividends declared were $0.355 per share, up from $0.28 a year earlier. AWR subsequently declared another $0.355 quarterly dividend for payment June 1, 2013.
Material changes and management commentary
- On May 9, 2013, after quarter-end, the CPUC issued its final water general rate case decision for 2013–2015. Rates were retroactive to January 1, and the decision’s effects were reflected in Q1 results. Management estimated approximately $10 million of additional 2013 annual water revenue versus 2012 adopted revenues and a $14 million, or 6.6%, increase in adopted water gross margin.
- The decision contributed a reported $7.2 million pretax increase to Q1 operating income, or approximately $0.22 per share: $2.9 million from water-rate changes, $1.2 million from lower depreciation rates, and $3.1 million from recovery of previously incurred costs. The cost recovery and depreciation reductions are not necessarily recurring at the same level.
- GSWC recorded a $7.3 million regulatory asset for the Q1 difference between interim and final water rates; a surcharge to recover the difference was expected in Q2. Water consumption billed in Q1 declined about 4%, but management said the CPUC-approved WRAM mechanism limited the earnings effect.
- Management expected capital expenditures to average approximately $85 million annually over the next three years. It anticipated the need for additional external capital and higher future interest costs, while expecting construction-related capital costs to continue to be recovered through rates.
- The $100 million revolving credit facility was due to expire May 27, 2013; management expected a replacement facility before expiration. AWR and GSWC had S&P A+ ratings with stable outlooks, and GSWC had a Moody’s A2 rating with stable outlook.
- Q1 operating cash flow benefited primarily from tax refunds related to an IRS-approved accounting method change, so the improvement should not be treated as wholly recurring.
Risks, contingencies, and unusual items
- Four toxic-tort lawsuits filed in March 2013 relate to perchlorate detected in a Barstow production well in 2010. GSWC disputed the claims; management did not consider a loss probable but could not estimate any loss or range.
- Claremont had expressed interest in acquiring GSWC’s local water system, and the Casitas Municipal Water District pursued steps toward potential acquisition of the Ojai system. GSWC challenged the Ojai district’s proposed funding approach in court; outcomes remained uncertain.
- California water supply conditions were a risk: Sierra snowpack was reported at 52% of normal, and the State Water Project’s projected 2013 allocation was reduced to 35%. GSWC believed supplies would be adequate, but continued dry conditions could lead MWD to impose mandatory rationing in its service territories.
- Other exposures include CPUC rate-case outcomes and cost recovery, a pending electric general rate case, renewable procurement obligations, water quality and environmental requirements, and timing or adequacy of price redeterminations under military-base contracts. ASUS contracts are subject to audits, price adjustments, and potential cost disallowances.
- GSWC accrued $1.2 million for estimated remaining remediation at its Chadron plant site; the ultimate cost could differ. Management expected the additional costs to be recoverable through rates.
- GSWC carried a $44.4 million net WRAM/MCBA regulatory asset. Recovery periods for most balances were 18–24 months, and a regulatory surcharge cap would apply to 2013 balances filed in 2014.
- The filing reported no significant changes to previously disclosed risk factors and no material changes to contractual obligations since year-end 2012.
Important facts for investors to verify
- Confirm the realized revenue and earnings effects of the May 2013 water-rate decision, including how much of the Q1 benefit came from one-time cost recoveries and lower depreciation.
- Track CPUC implementation and recovery of the $7.3 million retroactive rate amount, WRAM/MCBA balances, and any surcharge limitations.
- Check renewal of the revolving credit facility before its May 27, 2013 expiration and monitor capital spending, financing needs, and interest costs.
- Monitor water availability and any changes in State Water Project allocations, conservation requirements, or customer demand.
- Follow the Barstow litigation, potential municipal acquisition or condemnation efforts in Claremont and Ojai, and the BVES rate case and related regulatory disputes.
- Assess ASUS contract price redeterminations, government approvals and audits, and military-base construction activity for their effects on margins and cash collection.