Business context and reporting period
American States Water Company (AWR) filed this unaudited combined Form 10-Q with wholly owned Golden State Water Company (GSWC) for the quarter ended March 31, 2012. AWR’s businesses comprise regulated California water and electric utility operations through GSWC and contracted water and wastewater services for the U.S. government through ASUS. AWR sold Chaparral City Water Company in May 2011; its first-quarter 2011 results are reported as discontinued operations.
Key financial results
Amounts are in millions except per-share data. Comparisons are with the three months ended March 31, 2011.
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenue | $106.6 | $94.3 | +13.1% |
| Operating income | $23.4 | $18.0 | +29.9% |
| Income from continuing operations | $10.1 | $7.0 | +45.4% |
| Net income | $10.1 | $7.6 | +33.3% |
| Diluted EPS | $0.53 | $0.40 | Continuing-operations EPS: $0.53 vs. $0.37 |
| Cash from operations | $26.6 | $20.8 | +$5.8 |
| Construction expenditures | $15.0 | $17.5 | -$2.5 |
Operating margin was approximately 21.9% of revenue, versus 19.1% a year earlier; net margin was approximately 9.5%, versus 8.0%. Operating cash flow less construction expenditures was approximately $11.6 million, compared with $3.3 million in Q1 2011. AWR declared dividends of $0.28 per common share, up from $0.26.
Balance sheet and liquidity at March 31, 2012
AWR reported cash of $6.6 million, current assets of $171.9 million, current liabilities of $107.4 million, and total assets of $1.247 billion. Long-term debt was $340.4 million, with $0.2 million current; there were no bank borrowings outstanding. The $100 million revolving credit facility had $81.8 million available after $18.2 million of letters of credit. Shareholders’ equity was $415.0 million. The filing notes that GSWC’s current liabilities may exceed current assets at times and says internal cash generation and available financing are expected to support working capital and capital needs.
Material changes and drivers
- Contracted-services revenue rose 55.2% to $29.9 million, mainly from higher Fort Bragg pipeline replacement construction activity after favorable weather. Contracted-services diluted EPS increased to $0.15 from $0.04.
- Water revenue rose 2.5% to $66.0 million. CPUC-approved rate increases and a 7% increase in billed water use lifted water margin to $49.5 million from $47.7 million; water diluted EPS edged down to $0.28 from $0.29 as higher operating costs and depreciation offset the margin gain.
- Electric diluted EPS increased to $0.11 from $0.04. A CPUC approval allowed recovery of $1.2 million of prior renewable-procurement legal and outside-service costs, reducing Q1 expenses by about $0.04 per share; electric margin also improved by $0.6 million.
- Interest expense increased $0.3 million, principally reflecting $62 million of long-term notes issued in April 2011. AWR’s 2011 discontinued-operation earnings of $0.6 million did not recur.
Outlook, commentary and risks
- Management estimated 2012 capital expenditures of approximately $70–$80 million, primarily for GSWC infrastructure. No specific earnings or EPS guidance is provided.
- Management expects GSWC capital investment to remain above depreciation and anticipates higher future interest costs as external funding needs grow. AWR stated it expects access to financing, while noting capital-market conditions could constrain funding or prompt temporary reductions in capital spending.
- GSWC filed water general rate cases in 2011 seeking annual revenue increases of $31.3 million in 2013, followed by additional increases in 2014 and 2015; these are requests, not approved rates. A separate BVES rate case seeks a $4.0 million annual increase from 2013. The proposed water cost-of-capital settlement would set a 9.99% return on equity and 8.64% weighted cost of capital; CPUC action was expected by the end of Q2 2012.
- An April 2012 CPUC decision revised WRAM/MCBA recovery periods and set a future surcharge cap. GSWC reported a $40.6 million net WRAM/MCBA regulatory asset at quarter-end and approximately $36 million of balances then subject to surcharges. Recovery timing and regulatory decisions may affect cash flows.
- ASUS’ military-base contracts are long-term fixed-price contracts with periodic price redeterminations. DCAA accounting-system findings led to corrective measures and a re-audit; some price filings were postponed. Contract adjustments, government audits, construction levels and cost recovery remain uncertainties.
- Other material exposures include independent procurement audits that could lead to further cost disallowances, unresolved groundwater-contamination litigation, a $1.2 million estimated remaining Chadron remediation liability, and possible municipal acquisition or condemnation activity affecting certain service areas. Management could not estimate potential losses for several proceedings.
- Water supply depends on weather and state and regional water systems. In April 2012, California’s Department of Water Resources raised its projected 2012 State Water Project allocation from 50% to 60% of requested deliveries. BVES had not met interim renewable-energy procurement targets; management expected any penalty to be waived, and no loss provision was recorded.
Most important facts for investors to verify
- Whether the requested GSWC and BVES rate increases and the cost-of-capital settlement were approved, and how the WRAM/MCBA recovery rules affect collections.
- Whether Fort Bragg construction activity and ASUS price redeterminations sustain contracted-services earnings and cash flow beyond this quarter.
- Whether the procurement audits, La Serena rehearing, groundwater cases and other contingencies result in additional disallowances, refunds or costs.
- Whether the $70–$80 million 2012 capital program can be funded while maintaining liquidity, debt capacity and the declared dividend.
- How much of Q1 earnings growth reflects recurring utility operations versus the $1.2 million cost recovery and unusually high contracted construction activity.