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AWR > SEC Filings for AWR > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for AMERICAN STATES WATER CO

Form 10-Q for AMERICAN STATES WATER CO


5-Nov-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, and 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 discussion 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:
(i) through delivering potable water to homes and businesses in various parts of California, (ii) 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 (iii) 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 debt and equity 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 Third Quarter Results by Segment



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



                                                     Diluted Earnings per Share
                                                           3 Months Ended
                                                 9/30/2012     9/30/2011    CHANGE

Water                                            $     0.71    $     0.64   $  0.07
Electric                                               0.05          0.05         -
Contracted services                                    0.21          0.13      0.08
AWR (parent)                                              -          0.01     (0.01 )
Totals from continuing operations, as reported   $     0.97    $     0.83   $  0.14


Table of Contents

For the three months ended September 30, 2012, diluted earnings per share from water operations increased $0.07 to $0.71 per share as compared to $0.64 per share for the three months ended September 30, 2011. Impacting the comparability of the two periods were the following items:

An increase in the water gross margin of approximately $1.3 million, or $0.04 per share, during the three months ended September 30, 2012 as compared to the same period in 2011 due primarily to rate increases in 2012 approved by the CPUC to recover infrastructure improvements and operating costs.

A decrease in operating expenses (other than supply costs) by approximately $268,000, or $0.01 per share, due primarily to a decrease in administrative and general expenses resulting from lower outside service costs, labor and other employee related costs. These decreases were partially offset by an increase in depreciation expense resulting from additions to utility plant.

An overall decrease in interest expense (net of interest income and other non-operating items) of $800,000, or $0.02 per share, due primarily to: (i) a decrease in short-term bank borrowings; (ii) higher interest income earned on regulatory assets and a refund claim currently under review by the Internal Revenue Service; and (iii) gains recorded on one of GSWC's investments.

For the three months ended September 30, 2012 and 2011, diluted earnings from electric operations remained flat at $0.05 per share.

For the three months ended September 30, 2012, fully diluted earnings from contracted services increased by $0.08 per share to $0.21 per share as compared to the same period in 2011 due primarily to a higher construction dollar margin at the Fort Bragg military base in North Carolina and the military bases in Virginia resulting from an increase in construction activities at these bases.

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

                                 Operating Revenues                         Pretax Operating Income
                      3 Months     3 Months                         3 Months     3 Months
                       Ended        Ended         $         %        Ended        Ended         $        %
                     9/30/2012    9/30/2011     CHANGE    CHANGE   9/30/2012    9/30/2011    CHANGE    CHANGE

Water                $   90,604   $   89,570   $  1,034      1.2 % $   28,355   $   26,752   $ 1,603      6.0 %
Electric                  8,549        8,744       (195 )   -2.2 %      1,606        1,648       (42 )   -2.5 %
Contracted
services                 34,368       21,395     12,973     60.6 %      6,545        4,025     2,520     62.6 %
AWR (parent)                  -            -          -        -          (26 )         (5 )     (21 )  420.0 %
Totals from
continuing
operations           $  133,521   $  119,709   $ 13,812     11.5 % $   36,480   $   32,420   $ 4,060     12.5 %


Table of Contents

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
                                                      9 Months Ended
                                                 9/30/2012     9/30/2011    CHANGE

Water                                            $     1.55    $     1.44   $  0.11
Electric                                               0.20          0.12      0.08
Contracted services                                    0.55          0.31      0.24
AWR (parent)                                              -          0.01     (0.01 )
Totals from continuing operations, as reported   $     2.30    $     1.88   $  0.42

For the nine months ended September 30, 2012, diluted earnings per share contributed by the water segment were $1.55 per share as compared to $1.44 per share for the same period in 2011. The significant items in the water segment between the two periods were:

An increase in the water gross margin of $3.5 million, or $0.10 per share, during the nine months ended September 30, 2012 primarily as the result of CPUC-approved third year rate increases effective January 1, 2012 to recover infrastructure improvements and operating costs.

An increase in operating expenses (other than supply costs) by approximately $2.5 million, or $0.08 per share, due primarily to increases in:
(i) depreciation expense resulting from additions to utility plant; (ii) other operation expenses due, in large part, to higher labor and other employee benefits, conservation costs and bad debt expense; and (iii) property and other taxes related to franchise fees. These increases were partially offset by a decrease in administrative and general expenses resulting primarily from lower outside service costs.

An overall decrease in interest expense (net of interest income and other non-operating items) of approximately $2.4 million, or $0.07 per share, primarily due to lower short-term bank borrowing and the recording of a $381,000 reduction in interest expense in connection with the CPUC's final decision issued in July 2012 on the water cost of capital proceeding. In addition, included in the nine months ended September 30, 2011 results was an interest charge of $553,000 related to the redemption of $22.0 million of GSWC's 7.65% Medium-Term Notes that did not recur in 2012. This charge was reversed in the fourth quarter of 2011 and was capitalized to be amortized over the life of new notes pursuant to the cost of capital settlement at the time.

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

For the nine months ended September 30, 2012, fully diluted earnings from GSWC's electric operations increased by $0.08 per share as compared to the same period in 2011, due primarily to: (i) the CPUC's approval of GSWC's application to recover $1.2 million, or $0.04 per share, in legal and outside service costs previously incurred in connection with our efforts to procure renewable energy resources; (ii) an increase in the electric gross margin of $1.1 million, or $0.03 per share; and (iii) a decrease in the effective income tax rate increasing earnings by approximately $0.02 per share. These increases were partially offset by an increase in other operating expenses (excluding the $1.2 million recovery of legal costs discussed above), which decreased earnings by $0.01 per share.

For the nine months ended September 30, 2012, fully diluted earnings from contracted services increased by $0.24 per share as compared to the same period in 2011 due primarily to a higher construction dollar margin at the Fort Bragg military base in North Carolina, the military bases in Virginia and at Andrews Air Force Base in Maryland resulting from an increase in construction activities at these bases. At Fort Bragg, there continues to be significant progress made on a major water and wastewater pipeline replacement project estimated to be substantially completed by the end of 2013.


Table of Contents

The table below sets forth the year-to-date results by business segment for continuing operations (dollars in thousands):

                                Operating Revenues                          Pretax Operating Income
                     9 Months     9 Months                         9 Months     9 Months
                      Ended        Ended         $         %        Ended        Ended         $         %
                    9/30/2012    9/30/2011     CHANGE    CHANGE   9/30/2012    9/30/2011     CHANGE    CHANGE

Water               $  237,447   $  234,047   $  3,400      1.5 % $   65,872   $   64,964   $    908      1.4 %
Electric                27,735       27,178        557      2.0 %      6,946        4,829      2,117     43.8 %
Contracted
services                89,298       62,620     26,678     42.6 %     17,275        9,820      7,455     75.9 %
AWR (parent)                 -            -          -        -         (121 )        (59 )      (62 )  105.1 %
Totals from
continuing
operations          $  354,480   $  323,845   $ 30,635      9.5 % $   89,972   $   79,554   $ 10,418     13.1 %

Discontinued Operations:

Net income from discontinued operations for the nine months ended September 30, 2011 was $3.9 million, due primarily to the gain on sale of CCWC of $2.2 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.


Table of Contents

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

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