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AWR > SEC Filings for AWR > Form 10-Q on 6-Aug-2012All Recent SEC Filings

Show all filings for AMERICAN STATES WATER CO

Form 10-Q for AMERICAN STATES WATER CO


6-Aug-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion and analysis provides information on AWR's consolidated operations and assets and where necessary, includes specific references to AWR's individual segments and/or other subsidiaries: GSWC, ASUS and its subsidiaries, or AWR's former subsidiary, CCWC. Included in the following analysis is a discussion of water and electric gross margins. Water and electric gross margins are computed by taking total revenues, less total supply costs. Registrant uses these margins and related percentages as important measures in evaluating its operating results. Registrant believes these measures are useful internal benchmarks in evaluating the performance of GSWC. The discussions and tables included in the following analysis also present Registrant's operations in terms of earnings per share by business segment. Registrant believes that the disclosure of earnings per share by business segment provides investors with clarity surrounding the performance of its differing services and information that could be indicative of future performance for each business segment. Registrant reviews these measurements regularly and compares them to historical periods and to its operating budget as approved. However, these measures, which are not presented in accordance with Generally Accepted Accounting Principles ("GAAP"), may not be comparable to similarly titled measures used by other entities and should not be considered as an alternative to operating income or earnings per share, which are determined in accordance with GAAP. A reconciliation of water and electric gross margins to the most directly comparable GAAP measures are included in the table under the section titled "Operating Expenses: Supply Costs." Reconciliations to AWR's diluted earnings per share are included in the discussions under the sections titled "Summary Results by Segment."

Overview

Registrant's revenues, operating income and cash flows are earned primarily through delivering potable water to homes and businesses, through its contracted services business for the operation and maintenance and renewal and replacement of water and/or wastewater systems for the U.S. government at various military bases, and through the delivery of electricity in the Big Bear area of San Bernardino County, California. Rates charged to GSWC customers are determined by the CPUC. These rates are intended to allow recovery of operating costs and a reasonable rate of return on capital. Registrant plans to continue to seek additional rate increases in future years from the CPUC to recover operating and supply costs and receive reasonable returns on invested capital. Capital expenditures in future years at GSWC are expected to remain at much higher levels than depreciation expense. When necessary, Registrant obtains funds from external sources in the capital markets and through bank borrowings.

All of the current operation and maintenance contracts with the U.S. government are 50-year firm, fixed-price contracts with prospective price redeterminations. Additional revenues generated by contract operations are primarily dependent on new construction activities under contract modifications. As a result, ASUS is subject to risks that are different than those of GSWC.

Some of the factors that affect Registrant's financial performance are described in Item 1. Financial Statements, Forward-Looking Statements.

Summary of Second Quarter Results by Segment



The table below sets forth the second quarter diluted earnings per share by
business segment from continuing operations:



                                                     Diluted Earnings per Share
                                                      3 Months Ended
                                                 6/30/2012     6/30/2011    CHANGE

Water                                            $     0.56    $     0.51   $  0.05
Electric                                               0.04          0.03      0.01
Contracted services                                    0.19          0.14      0.05
Totals from continuing operations, as reported   $     0.79    $     0.68   $  0.11


Table of Contents

For the three months ended June 30, 2012, diluted earnings per share from water operations increased $0.05 to $0.56 per share as compared to $0.51 per share for the three months ended June 30, 2011. Impacting the comparability of the two periods were the following items:

An increase in the water gross margin of approximately $305,000, or $0.01 per share, during the three months ended June 30, 2012 as compared to the same period in 2011 due primarily to CPUC-approved third year rate increases for Regions II and III effective January 1, 2012. It is also worth noting that 2012 is the last year of a rate case cycle for all of GSWC's water regions, since rate increases are typically lowest in the final year of a rate case cycle.

An increase in operating expenses (other than supply costs) by approximately $1.0 million, or $0.03 per share, due primarily to increases in:
(i) other operation expenses of $306,000 due to higher labor and other employee benefits, and conservation costs, and (ii) depreciation expense of $651,000 resulting from additions to utility plant.

An overall decrease in interest expense (net of interest income) of $1.3 million, or $0.04 per share, due primarily to lower short-term bank borrowings and the recording of a $381,000 reduction in interest expense in connection with the CPUC's final decision on the water cost of capital proceeding, as further discussed under the Regulatory Matters section. In addition, included in the three months ended June 30, 2011 results were interest charges totaling $553,000 related to the redemption of $22.0 million of GSWC's 7.65% Medium-Term Notes, which did not recur in 2012.

A decrease in the effective tax rate increased earnings by approximately $0.03 per share during the second quarter of 2012 primarily resulting from changes between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements, and changes in certain permanent items.

For the three months ended June 30, 2012, diluted earnings from electric operations were $0.04 per share as compared to $0.03 per share for the same period of 2011. An increase in the electric gross margin of $492,000, or $0.02 per share, as compared to the same period in 2011, was partially offset by a $249,000, or $0.01 per share increase in operating expenses.

For the three months ended June 30, 2012, diluted earnings from contracted services increased by $0.05 per share as compared to the same period in 2011 due primarily to an increase in construction activities at Fort Bragg in North Carolina. There was a receipt of a contract modification and revisions in cost estimates during the second quarter of 2012 for Fort Bragg, which resulted in additional pretax operating income of $820,000. These increases were partially offset by a $2.9 million increase in pretax operating income recorded during the second quarter of 2011 due to a change in estimated costs related to a pipeline project at Fort Bragg.

The tables below set forth summaries of the second quarter results of continuing operations by business segment (dollars in thousands):

                                Operating Revenues                        Pretax Operating Income
                     3 Months     3 Months                        3 Months     3 Months
                      Ended        Ended         $        %        Ended        Ended         $        %
                    6/30/2012    6/30/2011    CHANGE    CHANGE   6/30/2012    6/30/2011    CHANGE    CHANGE

Water               $   80,886   $   80,151   $   735      0.9 % $   22,666   $   23,364   $  (698 )   -3.0 %
Electric                 8,373        7,710       663      8.6 %      1,484        1,241       243     19.6 %
Contracted
services                25,052       21,968     3,084     14.0 %      5,989        4,537     1,452     32.0 %
AWR (parent)                 -            -         -        -          (14 )         (3 )     (11 )  366.7 %
Totals from
continuing
operations          $  114,311   $  109,829   $ 4,482      4.1 % $   30,125   $   29,139   $   986      3.4 %

Discontinued Operations:

Net income from discontinued operations for the three months ended June 30, 2011 was $3.2 million, due primarily to the gain on sale of CCWC of $2.3 million, net of taxes and transaction costs, or $0.12 per share. Excluding the gain on sale, there was also net income of $0.9 million from CCWC's operations for the two months of operations during the three months ended June 30, 2011.


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Summary of Year-to-Date Results by Segment



The table below sets forth the year-to-date diluted earnings per share by
business segment from continuing operations, as reported:



                                        Diluted Earnings per Share
                                         6 Months Ended
                                    6/30/2012     6/30/2011    CHANGE

Water                               $     0.83    $     0.80   $  0.03
Electric                                  0.15          0.07      0.08
Contracted services                       0.34          0.18      0.16
Totals from continuing operations   $     1.32    $     1.05   $  0.27

For the six months ended June 30, 2012, diluted earnings per share contributed by the water segment were $0.83 per share as compared to $0.80 per share for the same period in 2011. Once again, it is worth noting that 2012 is the last year of a rate case cycle for all of GSWC's water regions. The significant items in the water segment between the two periods were:

An increase in the water gross margin of $2.1 million, or $0.07 per share, during the six months ended June 30, 2012 primarily as the result of CPUC-approved third year rate increases for Regions II and III effective January 1, 2012.

An increase in operating expenses (other than supply costs) by approximately $2.8 million, or $0.09 per share, due primarily to increases in:
(i) other operation expenses of $1.2 million due in large part to higher labor and other employee benefits, conservation costs and bad debt expense, and
(ii) depreciation expense of $1.3 million resulting from additions to utility plant.

An overall decrease in interest expense (net of interest income) of approximately $1.0 million, or $0.03 per share, primarily due to interest costs totaling $553,000 incurred in 2011 related to the redemption of $22.0 million of GSWC's 7.65% Medium-Term Notes. In addition, in June 2012 GSWC recorded a reduction in interest expense totaling $381,000 to reflect the CPUC's final decision on the water cost of capital proceeding, as further discussed under the Regulatory Matters section.

A decrease in the effective income tax rate during the six months ended June 30, 2012 as compared to the same period in 2011, increasing earnings by approximately $0.02 per share primarily resulting from changes between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements, and changes in certain permanent items.

For the six months ended June 30, 2012, diluted earnings from electric operations increased by $0.08 per share as compared to the same period in 2011 due, in large part, to the CPUC's approval of GSWC's application to recover $1.2 million in legal and outside services costs incurred from September 2007 through March 2011 in connection with its efforts to procure renewable energy resources. As a result, in March 2012 GSWC recorded a $1.2 million, or $0.04 per share, reduction in legal and outside services costs which had previously been expensed as incurred. Excluding the impact of this item, electric earnings increased by $0.04 per share during the six months ended June 30, 2012 due primarily to an increase in the electric gross margin of $1.1 million, or $0.03 per share, as compared to the same period in 2011, and a decrease in the effective income tax rate increasing earnings by approximately $0.01 per share.

For the six months ended June 30, 2012, diluted earnings from contracted services increased by $0.16 per share as compared to the same period in 2011 due primarily to an increase in construction activities at Fort Bragg in North Carolina. There was significant progress made on a major water and wastewater pipeline replacement project as a result of better than expected weather conditions at Fort Bragg during the first several months of 2012. This project is estimated to be completed in early 2014. There was also a receipt of a contract modification and revisions in cost estimates during the second quarter of 2012 for Fort Bragg, which resulted in additional pretax operating income of $820,000. The increase in construction activities was partially offset by a $2.9 million increase in pretax operating income recorded during the second quarter of 2011 due to a change in estimated costs related to the pipeline project at Fort Bragg.


Table of Contents

The tables below set forth summaries of the year-to-date results by business segment of continuing operations (dollars in thousands):

                               Operating Revenues                          Pretax Operating Income
                    6 Months     6 Months                          6 Months     6 Months
                     Ended        Ended         $         %         Ended        Ended         $        %
                   6/30/2012    6/30/2011     CHANGE    CHANGE    6/30/2012    6/30/2011    CHANGE    CHANGE

Water              $  146,843   $  144,477   $  2,366      1.6 %  $   37,517   $   38,212   $  (695 )   -1.8 %
Electric               19,186       18,434        752      4.1 %       5,340        3,181     2,159     67.9 %
Contracted
services               54,930       41,225     13,705     33.2 %      10,730        5,795     4,935     85.2 %
AWR (parent)                -            -          -        -           (95 )        (54 )     (41 )   75.9 %
Totals from
continuing
operations         $  220,959   $  204,136   $ 16,823      8.2 %  $   53,492   $   47,134   $ 6,358     13.5 %

Discontinued Operations:

Net income from discontinued operations for the six months ended June 30, 2011 was $3.9 million, due primarily to the gain on sale of CCWC of $2.3 million, net of taxes and transaction costs, or $0.12 per share. Excluding the gain on sale, there was also net income of $1.6 million from CCWC's operations for the first five months of 2011.

The following discussion and analysis provides information on AWR's consolidated operations and where necessary, includes specific references to AWR's individual segments and/or other continuing subsidiaries: GSWC and ASUS and its subsidiaries, and the discontinued operations of CCWC.


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Consolidated Results of Operations - Three Months Ended June 30, 2012 and 2011 (dollars in thousands, except per share amounts):

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