American States Water Company (AWR) Form 10-Q Summary
Period: Quarter and six months ended June 30, 2012. The combined, unaudited filing covers AWR and its wholly owned regulated subsidiary, Golden State Water Company (GSWC). AWR also operates American States Utility Services (ASUS), which provides water and wastewater services at military bases.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $114.3 million | $109.8 million | $221.0 million | $204.1 million |
| Operating income | $30.1 million | $29.1 million | $53.5 million | $47.1 million |
| Income from continuing operations | $15.1 million | $12.7 million | $25.2 million | $19.7 million |
| Net income | $15.1 million | $16.0 million | $25.2 million | $23.6 million |
| Diluted EPS, continuing operations | $0.79 | $0.68 | $1.32 | $1.05 |
| Diluted EPS, total | $0.79 | $0.85 | $1.32 | $1.25 |
- Revenue increased 4.1% in Q2 and 8.2% year to date. Six-month contracted-services revenue rose 33.2% to $54.9 million, primarily from construction work at Fort Bragg; water and electric revenue also increased, including from approved rate changes.
- Continuing-operations income rose 18.5% in Q2 and 28.0% year to date. Total net income comparisons are affected by the 2011 discontinued operations and sale of Chaparral City Water Company (CCWC), which contributed $3.2 million in Q2 and $3.9 million for the first half of 2011.
- Q2 water gross margin, a non-GAAP measure, was $57.5 million, up 0.5%; its margin percentage was 71.0% versus 71.3%. Electric gross margin was $5.1 million, up 10.6%; its margin percentage was 61.1% versus 60.0%. For the first half, water gross margin rose 2.0% to $107.0 million and electric gross margin rose 10.9% to $11.3 million.
- Operating cash flow for the first half was $63.9 million, versus $32.9 million in 2011. Construction expenditures were $29.4 million, compared with $37.3 million. Cash and cash equivalents were $25.9 million at June 30, 2012, up from $1.3 million at year-end.
- At June 30, AWR reported long-term debt of $341.5 million and current maturities of $0.2 million; there were no bank borrowings. Current assets were $175.9 million and current liabilities $99.6 million. The $100 million revolving credit facility had $81.8 million available after $18.2 million of letters of credit. S&P affirmed AWR and GSWC at A+ with a stable outlook.
- Capital expenditures for 2012 were estimated at $70–$80 million. Quarterly dividends declared were $0.28 per share for the first half; AWR declared a subsequent quarterly dividend of $0.355 per share, payable on or about September 1, 2012.
Material changes and management commentary
- Water earnings benefited from CPUC-approved 2012 rate increases. Higher operating costs, particularly depreciation from utility-plant additions, partially offset the benefit. Management noted 2012 is the final year of the current water rate-case cycle.
- ASUS results improved with Fort Bragg construction activity. A contract modification and revised cost estimates added $0.82 million of pretax operating income in Q2 2012; the 2011 comparison included a separate $2.9 million pretax benefit from revised project cost estimates. The major pipeline project is expected to finish in early 2014.
- GSWC’s July 2012 cost-of-capital decision approved a 9.99% return on equity and an 8.64% weighted cost of capital, retroactive to January 1, 2012. GSWC recorded a $0.381 million reduction in Q2 interest expense and is to refund customers approximately $0.408 million. Management expected the water cost-of-capital mechanism could lower ROE by about 50–60 basis points from January 2013, based on then-available bond-rate data.
- A proposed water general rate-case settlement, filed with the CPUC in June, would provide approximately $9 million in additional annual revenue starting in 2013, followed by proposed increases of $8 million in 2014 and $6.5 million in 2015. It remained subject to CPUC approval and an acceptable resolution of WRAM issues. A separate BVES rate case sought approximately $1.3 million of additional annual revenue beginning in 2013.
- GSWC had $38.3 million of net WRAM/MCBA regulatory assets. Surcharges to recover these balances were in place; the CPUC’s revised surcharge cap does not apply to 2012 and prior-year balances but is expected to apply to 2013 balances. Regulatory accounting and recovery timing are important to reported results and cash flow.
Risks, contingencies and unusual items
- The CPUC rehearing and audit concerning the La Serena plant project, deferred rate-case costs and affiliate cost allocations remained unresolved. Management could not estimate any potential loss. Separate independent procurement-practice audits under a prior settlement could lead to further cost disallowances; outcomes were not estimable.
- GSWC’s prior contractor settlement requires $9.5 million of customer refunds over 12–36 months and $3.0 million of rate-base and other rate adjustments. Refunds of $1.2 million had been made in the first half of 2012.
- Municipal acquisition activity continued in Claremont and Ojai; Apple Valley had also studied a potential acquisition. No formal condemnation proceedings were reported. Any taking would involve valuation and compensation, but timing and outcome are uncertain.
- Groundwater contamination litigation involving perchlorate and VOCs, the Santa Maria groundwater-basin appeal, and routine litigation remain potential exposures. The filing states that GSWC cannot estimate a loss range for the contamination matter. A Chadron site remediation liability of $1.2 million was accrued, with recovery in rates considered probable by management.
- Military-base contracts depend on timely price redeterminations and equitable adjustments; government audits may delay them, and costs may be disallowed. Construction-related revenue and earnings may vary with contract modifications and project activity.
- Water availability, drought and other weather events, water-quality and environmental requirements, regulatory decisions, infrastructure costs, power prices, financing access, and the ability to recover costs through rates are principal disclosed risks. AWR’s $100 million credit facility was scheduled to expire May 27, 2013; AWR planned a new securities registration statement before its existing shelf expired in August 2012.
Important facts for investors to verify
- Whether the CPUC approved the water GRC settlement and resolved the related WRAM questions, and the final rates and effective dates.
- Actual 2012 capital expenditures and funding needs, along with the status of AWR’s replacement shelf registration and GSWC’s requested financing authorization.
- Collections of WRAM/MCBA balances and any resulting effects on cash flow, regulatory assets and future surcharge limits.
- Outcomes of the La Serena rehearing and procurement audits, and any additional customer refunds or cost disallowances.
- Progress on military-contract price redeterminations, Fort Bragg construction and related estimate changes; these contributed materially to contracted-services growth.
- Developments in potential municipal acquisitions, groundwater litigation and remediation, and water-supply conditions.