Table of Contents

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the quarterly period ended March 31, 2013

 

or

 

o

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the transition period from                    to                   

 

Commission file number   001-14431

 

American States Water Company

(Exact Name of Registrant as Specified in Its Charter)

 

California

 

95-4676679

(State or Other Jurisdiction of Incorporation or Organization)

 

(IRS Employer Identification No.)

 

630 E. Foothill Blvd, San Dimas, CA

 

91773-1212

(Address of Principal Executive Offices)

 

(Zip Code)

 

(909) 394-3600

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Commission file number   001-12008

 

Golden State Water Company

(Exact Name of Registrant as Specified in Its Charter)

 

California

 

95-1243678

(State or Other Jurisdiction of Incorporation or Organization)

 

(IRS Employer Identification No.)

 

630 E. Foothill Blvd, San Dimas, CA

 

91773-1212

(Address of Principal Executive Offices)

 

(Zip Code)

 

(909) 394-3600

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

American States Water Company

 

Yes x No o

Golden State Water Company

 

Yes x No o

 

Indicate by check mark whether Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files).

 

American States Water Company

 

Yes x No o

Golden State Water Company

 

Yes x No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

American States Water Company

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting company o

 

Golden State Water Company

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x

 

Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

 

American States Water Company

 

Yes ¨ Nox

Golden State Water Company

 

Yes ¨ Nox

 

As of May 7, 2013, the number of Common Shares outstanding, of American States Water Company was 19,284,804 shares. As of May 7, 2013, all of the 146 outstanding Common Shares of Golden State Water Company were owned by American States Water Company.

 

Golden State Water Company meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form, in part, with the reduced disclosure format for Golden State Water Company.

 

 

 



Table of Contents

 

AMERICAN STATES WATER COMPANY

and

GOLDEN STATE WATER COMPANY

FORM 10-Q

 

INDEX

 

Part I

Financial Information

 

 

 

 

Item 1:

Financial Statements

1

 

 

 

 

Consolidated Balance Sheets of American States Water Company as of March 31, 2013 and December 31, 2012

4

 

 

 

 

Consolidated Statements of Income of American States Water Company for the Three Months Ended March 31, 2013 and 2012

6

 

 

 

 

Consolidated Statements of Cash Flow of American States Water Company for the Three Months Ended March 31, 2013 and 2012

7

 

 

 

 

Balance Sheets of Golden State Water Company as of March 31, 2013 and December 31, 2012

8

 

 

 

 

Statements of Income of Golden State Water Company for the Three Months Ended March 31, 2013 and 2012

10

 

 

 

 

Statements of Cash Flow of Golden State Water Company for the Three Months Ended March 31, 2013 and 2012

11

 

 

 

 

Notes to Consolidated Financial Statements

12

 

 

 

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

40

 

 

 

Item 4:

Controls and Procedures

40

 

 

 

Part II

Other Information

 

 

 

 

Item 1:

Legal Proceedings

41

 

 

 

Item 1A:

Risk Factors

41

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

41

 

 

 

Item 3:

Defaults Upon Senior Securities

41

 

 

 

Item 4:

Mine Safety Disclosure

41

 

 

 

Item 5:

Other Information

42

 

 

 

Item 6:

Exhibits

42

 

 

 

 

Signatures

45

 



Table of Contents

 

PART I

 

Item 1. Financial Statements

 

General

 

The basic financial statements included herein have been prepared by Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.

 

Certain information and footnote disclosures normally included in financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments consisting of normal recurring items and estimates necessary for a fair statement of results for the interim period have been made.

 

It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto in the latest Annual Report on Form 10-K of American States Water Company and its wholly owned subsidiary, Golden State Water Company.

 

Filing Format

 

American States Water Company (hereinafter “AWR”) is the parent company of Golden State Water Company (hereinafter “GSWC”) and American States Utility Services, Inc. (hereinafter “ASUS”) and its subsidiaries.

 

This quarterly report on Form 10-Q is a combined report being filed by two separate Registrants: AWR and GSWC. For more information, please see Note 1 of the Notes to Consolidated Financial Statements and the heading entitled General in Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations. References in this report to “Registrant” are to AWR and GSWC collectively, unless otherwise specified. GSWC makes no representations as to the information contained in this report relating to AWR and its subsidiaries, other than GSWC.

 

Forward-Looking Information

 

This Form 10-Q and the documents incorporated herein contain forward-looking statements intended to qualify for the “safe harbor” from liability established by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based on current estimates, expectations and projections about future events and assumptions regarding these events and include statements regarding management’s goals, beliefs, plans or current expectations, taking into account the information currently available to management.  Forward-looking statements are not statements of historical facts.  For example, when we use words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “may” and other words that convey uncertainty of future events or outcomes, we are making forward-looking statements.  We are not able to predict all the factors that may affect future results.  We caution you that any forward-looking statements made by us are not guarantees of future performance and those actual results may differ materially from those in our forward-looking statements.  Some of the factors that could cause future results to differ materially from those expressed or implied by our forward-looking statements, or from historical results, include, but are not limited to:

 

·                  The outcome of pending and future regulatory, legislative or other proceedings, investigations or audits, including decisions in our general rate cases and the results of independent audits of our construction contracting procurement practices or other independent audits of our costs

 

·                  Changes in the policies and procedures of the California Public Utilities Commission (“CPUC”)

 

·                  Timeliness of CPUC action on rates

 

·                  Our ability to efficiently manage capital expenditures and operating and maintenance expenses within CPUC authorized levels and timely recovery of our costs through rates

 

·                  The impact of increasing opposition to GSWC rate increases on our ability to recover our costs through rates and on the size of our customer base

 

·                  Our ability to forecast the costs of maintaining GSWC’s aging water and electric infrastructure

 

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Table of Contents

 

·                  Our ability to recover increases in permitting costs and in costs associated with negotiating and complying with the terms of our franchise agreements with cities and counties and other demands made upon us by the cities and counties in which GSWC operates

 

·                  Changes in accounting valuations and estimates, including changes resulting from changes in our assessment of anticipated recovery of regulatory assets, liabilities and revenues subject to refund or regulatory disallowances

 

·                  Changes in environmental laws and water and wastewater quality requirements and increases in costs associated with complying with these laws and requirements

 

·                  Availability of water supplies, which may be adversely affected by changes in weather patterns, contamination and court decisions or other governmental actions restricting use of water from the Colorado River, transportation of water to GSWC’s service areas through the California State Water Project or pumping of groundwater

 

·                  Our ability to obtain adequate, reliable and cost-effective supplies of chemicals, electricity, fuel, water and other raw materials that are needed for our water and wastewater operations

 

·                  Our ability to recover the costs associated with the contamination of GSWC’s groundwater supplies from parties responsible for the contamination or through the ratemaking process and the time and expense incurred by us in obtaining recovery of such costs

 

·                  Adequacy of our power supplies for GSWC’s Bear Valley Electric Service division and the extent to which we can manage and respond to the volatility of electric and natural gas prices

 

·                  Our ability to comply with the CPUC’s renewable energy procurement requirements

 

·                  Changes in GSWC customer demand due to unanticipated population growth or decline, changes in climate conditions, general economic and financial market conditions, cost increases and conservation

 

·                  Changes in accounting treatment for regulated utilities

 

·                  Changes in estimates used in ASUS’s revenue recognition under the percentage of completion method of accounting for our construction activities at our contracted services business

 

·                  Termination, in whole or in part, of our contracts to provide water and/or wastewater services at military bases for the convenience of the U.S. government or for default

 

·                  Delays in filing for or obtaining redetermination of prices or equitable adjustments to our prices on our contracts to provide water and/or wastewater services at military bases

 

·                  Disallowance of costs on our contracts to provide water and/or wastewater services at military bases as a result of audits, cost review or investigations by contracting agencies

 

·                  Inaccurate assumptions used in preparing bids in our contracted services business

 

·                  Failure of the collection or sewage systems that we operate on military bases resulting in untreated wastewater or contaminants spilling into nearby properties, streams or rivers

 

·                  Failure to comply with the terms of our military privatization contracts

 

·                  Failure of any of our subcontractors to perform services for us in accordance with the terms of our military privatization contracts

 

·                  Implementation, maintenance and upgrading of our information technology systems

 

·                  General economic conditions which may impact our ability to recover infrastructure investments and operating costs from customers

 

·                  Explosions, fires, accidents, mechanical breakdowns, the disruption of information technology and telecommunication systems, human error and similar events that may occur while operating and maintaining water and electric systems in California or operating and maintaining water and wastewater systems on military bases under varying geographic conditions

 

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Table of Contents

 

·                  The impact of storms, earthquakes, floods, mudslides, drought, wildfires, disease and similar natural disasters, or acts of terrorism or vandalism, that affect customer demand or that damage or disrupt facilities, operations or information technology systems owned by us, our customers or third parties on whom we rely

 

·                  Potential costs, lost revenues, or other consequences resulting from misappropriation of assets or sensitive information, corruption of data, or operational disruption in connection with a cyber attack or other cyber incident

 

·                  Restrictive covenants in our debt instruments or changes to our credit ratings on current or future debt that may increase our financing costs or affect our ability to borrow or make payments on our debt

 

·                  Our ability to access capital markets and other sources of credit in a timely manner on acceptable terms

 

Please consider our forward-looking statements in light of these risks (which are more fully disclosed in our 2012 Annual Report on Form 10-K) as you read this Form 10-Q.  We qualify all of our forward-looking statements by these cautionary statements.

 

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Table of Contents

 

AMERICAN STATES WATER COMPANY

CONSOLIDATED BALANCE SHEETS

ASSETS

(Unaudited)

 

(in thousands)

 

March 31,
2013

 

December 31,
2012

 

Property, Plant and Equipment

 

 

 

 

 

Regulated utility plant, at cost

 

$

1,367,474

 

$

1,351,086

 

Non utility property, at cost

 

9,329

 

9,021

 

Total

 

1,376,803

 

1,360,107

 

Less - Accumulated depreciation

 

(447,265

)

(442,316

)

Net property, plant and equipment

 

929,538

 

917,791

 

 

 

 

 

 

 

Other Property and Investments

 

 

 

 

 

Goodwill

 

1,116

 

1,116

 

Other property and investments

 

13,835

 

13,755

 

Total other property and investments

 

14,951

 

14,871

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

32,794

 

23,486

 

Accounts receivable — customers (less allowance for doubtful accounts of $753 in 2013 and $797 in 2012)

 

17,315

 

19,491

 

Unbilled revenue

 

14,522

 

16,147

 

Receivable from the U.S. government (less allowance for doubtful accounts of $0 in 2013 and $8 in 2012)

 

5,377

 

12,905

 

Other accounts receivable (less allowance for doubtful accounts of $413 in 2013 and $423 in 2012)

 

5,467

 

7,062

 

Income taxes receivable

 

1,675

 

16,547

 

Materials and supplies, at average cost

 

7,210

 

5,348

 

Regulatory assets — current

 

34,376

 

32,336

 

Prepayments and other current assets

 

4,251

 

4,391

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

42,154

 

37,703

 

Deferred income taxes — current

 

8,731

 

8,617

 

Total current assets

 

173,872

 

184,033

 

 

 

 

 

 

 

Regulatory and Other Assets

 

 

 

 

 

Regulatory assets

 

150,853

 

143,679

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

1,065

 

436

 

Receivable from the U.S. government (less allowance for doubtful accounts of $0 in 2013 and 2012)

 

3,812

 

4,535

 

Deferred income taxes

 

11

 

11

 

Other

 

15,412

 

15,587

 

Total regulatory and other assets

 

171,153

 

164,248

 

 

 

 

 

 

 

Total Assets

 

$

1,289,514

 

$

1,280,943

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

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Table of Contents

 

AMERICAN STATES WATER COMPANY

CONSOLIDATED BALANCE SHEETS

CAPITALIZATION AND LIABILITIES

(Unaudited)

 

(in thousands)

 

March 31,
2013

 

December 31,
2012

 

Capitalization

 

 

 

 

 

Common shares, no par value

 

$

249,874

 

$

249,322

 

Earnings reinvested in the business

 

211,847

 

205,257

 

Total common shareholders’ equity

 

461,721

 

454,579

 

Long-term debt

 

332,446

 

332,463

 

Total capitalization

 

794,167

 

787,042

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Long-term debt — current

 

3,383

 

3,328

 

Accounts payable

 

46,605

 

40,569

 

Income taxes payable

 

750

 

511

 

Accrued other taxes

 

4,125

 

8,167

 

Accrued employee expenses

 

10,952

 

9,919

 

Accrued interest

 

6,240

 

3,909

 

Unrealized loss on purchased power contracts

 

1,540

 

3,060

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

2,702

 

12,572

 

Other

 

13,547

 

11,662

 

Total current liabilities

 

89,844

 

93,697

 

 

 

 

 

 

 

Other Credits

 

 

 

 

 

Advances for construction

 

70,580

 

70,781

 

Contributions in aid of construction - net

 

109,923

 

106,450

 

Deferred income taxes

 

142,598

 

142,597

 

Unamortized investment tax credits

 

1,859

 

1,881

 

Accrued pension and other postretirement benefits

 

73,718

 

71,618

 

Other

 

6,825

 

6,877

 

Total other credits

 

405,503

 

400,204

 

 

 

 

 

 

 

Commitments and Contingencies (Note 8)

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

1,289,514

 

$

1,280,943

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

5



Table of Contents

 

AMERICAN STATES WATER COMPANY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS

ENDED MARCH 31, 2013 AND 2012

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands, except per share amounts)

 

2013

 

2012

 

Operating Revenues

 

 

 

 

 

Water

 

$

69,233

 

$

66,201

 

Electric

 

10,734

 

10,813

 

Contracted services

 

30,585

 

29,878

 

Total operating revenues

 

110,552

 

106,892

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

10,732

 

9,552

 

Power purchased for pumping

 

1,639

 

1,556

 

Groundwater production assessment

 

3,187

 

3,323

 

Power purchased for resale

 

3,680

 

3,191

 

Supply cost balancing accounts

 

1,371

 

3,437

 

Other operation expenses

 

5,454

 

7,426

 

Administrative and general expenses

 

17,907

 

16,829

 

Depreciation and amortization

 

9,816

 

10,490

 

Maintenance

 

3,934

 

3,331

 

Property and other taxes

 

4,148

 

4,105

 

ASUS construction expenses

 

20,733

 

20,285

 

Net gain on sale of property

 

(12

)

 

Total operating expenses

 

82,589

 

83,525

 

 

 

 

 

 

 

Operating Income

 

27,963

 

23,367

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(5,778

)

(6,070

)

Interest income

 

187

 

215

 

Other, net

 

342

 

229

 

Total other income and expenses

 

(5,249

)

(5,626

)

 

 

 

 

 

 

Income from operations before income tax expense

 

22,714

 

17,741

 

 

 

 

 

 

 

Income tax expense

 

9,249

 

7,626

 

 

 

 

 

 

 

Net Income

 

$

13,465

 

$

10,115

 

 

 

 

 

 

 

Weighted Average Number of Common Shares Outstanding

 

19,265

 

18,831

 

Basic Earnings Per Common Share

 

$

0.69

 

$

0.53

 

 

 

 

 

 

 

Weighted Average Number of Diluted Shares

 

19,311

 

18,973

 

Fully Diluted Earnings Per Common Share

 

$

0.69

 

$

0.53

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.355

 

$

0.280

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

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Table of Contents

 

AMERICAN STATES WATER COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands)

 

2013

 

2012

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

13,465

 

$

10,115

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

10,066

 

11,067

 

Provision for doubtful accounts

 

188

 

653

 

Deferred income taxes and investment tax credits

 

270

 

(2

)

Stock-based compensation expense

 

661

 

542

 

Other — net

 

(172

)

(140

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable — customers

 

1,998

 

911

 

Unbilled revenue

 

1,625

 

(781

)

Other accounts receivable

 

1,585

 

1,989

 

Receivable from the U.S. government

 

8,251

 

(5,110

)

Materials and supplies

 

(1,862

)

(1,727

)

Prepayments and other current assets

 

140

 

(1,480

)

Regulatory assets — supply cost balancing accounts

 

1,371

 

3,437

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

(5,080

)

(1,362

)

Other assets (including other regulatory assets)

 

(13,147

)

(5,697

)

Accounts payable

 

2,229

 

2,745

 

Income taxes receivable/payable

 

15,111

 

7,603

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

(9,870

)

(1,154

)

Accrued pension and other postretirement benefits

 

3,021

 

3,145

 

Other liabilities

 

1,155

 

1,836

 

Net cash provided

 

31,005

 

26,590

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Construction expenditures

 

(18,425

)

(14,967

)

Proceed from sale of property

 

12

 

 

Net cash used

 

(18,413

)

(14,967

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from issuance of Common Shares and stock option exercises

 

625

 

1,403

 

Receipt of advances for and contributions in aid of construction

 

4,151

 

538

 

Refunds on advances for construction

 

(430

)

(499

)

Repayments of long-term debt

 

(22

)

(65

)

Net change in notes payable to banks

 

 

(2,000

)

Dividends paid

 

(6,838

)

(5,277

)

Other — net

 

(770

)

(480

)

Net cash used

 

(3,284

)

(6,380

)

Net increase in cash and cash equivalents

 

9,308

 

5,243

 

Cash and cash equivalents, beginning of period

 

23,486

 

1,315

 

Cash and cash equivalents, end of period

 

$

32,794

 

$

6,558

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

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Table of Contents

 

GOLDEN STATE WATER COMPANY

BALANCE SHEETS

ASSETS

(Unaudited)

 

(in thousands)

 

March 31,
2013

 

December 31,
2012

 

Utility Plant

 

 

 

 

 

Utility plant, at cost

 

$

1,367,474

 

$

1,351,086

 

Less - Accumulated depreciation

 

(442,648

)

(437,949

)

Net utility plant

 

924,826

 

913,137

 

 

 

 

 

 

 

Other Property and Investments

 

11,673

 

11,590

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

32,135

 

22,578

 

Accounts receivable-customers (less allowance for doubtful accounts of $753 in 2013 and $797 in 2012)

 

17,315

 

19,491

 

Unbilled revenue

 

14,522

 

16,147

 

Inter-company receivable

 

5,330

 

2,508

 

Other accounts receivable (less allowance for doubtful accounts of $371 in 2013 and $380 in 2012)

 

3,926

 

6,377

 

Income taxes receivable from Parent

 

2,788

 

16,442

 

Materials and supplies, at average cost

 

2,324

 

2,244

 

Regulatory assets — current

 

34,376

 

32,336

 

Prepayments and other current assets

 

3,618

 

4,162

 

Deferred income taxes — current

 

7,682

 

7,577

 

Total current assets

 

124,016

 

129,862

 

 

 

 

 

 

 

Regulatory and Other Assets

 

 

 

 

 

Regulatory assets

 

150,853

 

143,679

 

Other accounts receivable

 

1,445

 

1,445

 

Other

 

14,153

 

14,339

 

Total regulatory and other assets

 

166,451

 

159,463

 

 

 

 

 

 

 

Total Assets

 

$

1,226,966

 

$

1,214,052

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

 

GOLDEN STATE WATER COMPANY

BALANCE SHEETS

CAPITALIZATION AND LIABILITIES

(Unaudited)

 

(in thousands)

 

March 31,
2013

 

December 31,
2012

 

Capitalization

 

 

 

 

 

Common shares, no par value

 

$

231,309

 

$

231,480

 

Earnings reinvested in the business

 

188,648

 

184,777

 

Total common shareholder’s equity

 

419,957

 

416,257

 

Long-term debt

 

332,446

 

332,463

 

Total capitalization

 

752,403

 

748,720

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Long-term debt — current

 

3,383

 

3,328

 

Accounts payable

 

31,829

 

27,292

 

Accrued other taxes

 

3,628

 

7,720

 

Accrued employee expenses

 

9,552

 

8,786

 

Accrued interest

 

6,240

 

3,909

 

Unrealized loss on purchased power contracts

 

1,540

 

3,060

 

Other

 

13,462

 

11,606

 

Total current liabilities

 

69,634

 

65,701

 

 

 

 

 

 

 

Other Credits

 

 

 

 

 

Advances for construction

 

70,580

 

70,781

 

Contributions in aid of construction — net

 

109,923

 

106,450

 

Deferred income taxes

 

142,083

 

142,082

 

Unamortized investment tax credits

 

1,859

 

1,881

 

Accrued pension and other postretirement benefits

 

73,718

 

71,618

 

Other

 

6,766

 

6,819

 

Total other credits

 

404,929

 

399,631

 

 

 

 

 

 

 

Commitments and Contingencies (Note 8)

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

1,226,966

 

$

1,214,052

 

 

The accompanying notes are an integral part of these financial statements

 

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GOLDEN STATE WATER COMPANY

STATEMENTS OF INCOME

FOR THE THREE MONTHS

ENDED MARCH 31, 2013 AND 2012

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands)

 

2013

 

2012

 

Operating Revenues

 

 

 

 

 

Water

 

$

69,233

 

$

66,201

 

Electric

 

10,734

 

10,813

 

Total operating revenues

 

79,967

 

77,014

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

10,732

 

9,552

 

Power purchased for pumping

 

1,639

 

1,556

 

Groundwater production assessment

 

3,187

 

3,323

 

Power purchased for resale

 

3,680

 

3,191

 

Supply cost balancing accounts

 

1,371

 

3,437

 

Other operation expenses

 

4,797

 

6,649

 

Administrative and general expenses

 

14,234

 

13,696

 

Depreciation and amortization

 

9,522

 

10,220

 

Maintenance

 

3,493

 

2,940

 

Property and other taxes

 

3,716

 

3,743

 

Total operating expenses

 

56,371

 

58,307

 

 

 

 

 

 

 

Operating Income

 

23,596

 

18,707

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(5,748

)

(6,009

)

Interest income

 

178

 

210

 

Other, net

 

342

 

229

 

Total other income and expenses

 

(5,228

)

(5,570

)

 

 

 

 

 

 

Income from operations before income tax expense

 

18,368

 

13,137

 

 

 

 

 

 

 

Income tax expense

 

7,663

 

5,755

 

 

 

 

 

 

 

Net Income

 

$

10,705

 

$

7,382

 

 

The accompanying notes are an integral part of these financial statements

 

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GOLDEN STATE WATER COMPANY

STATEMENTS OF CASH FLOW

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands)

 

2013

 

2012

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

10,705

 

$

7,382

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

9,772

 

10,797

 

Provision for doubtful accounts

 

188

 

619

 

Deferred income taxes and investment tax credits

 

279

 

(5

)

Stock-based compensation expense

 

400

 

341

 

Other — net

 

(159

)

(174

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable — customers

 

1,998

 

911

 

Unbilled revenue

 

1,625

 

(781

)

Other accounts receivable

 

2,441

 

1,543

 

Materials and supplies

 

(80

)

(77

)

Prepayments and other current assets

 

544

 

(1,273

)

Regulatory assets — supply cost balancing accounts

 

1,371

 

3,437

 

Other assets (including other regulatory assets)

 

(13,102

)

(5,615

)

Accounts payable

 

730

 

(2,633

)

Inter-company receivable/payable

 

(2,822

)

(502

)

Income taxes receivable/payable from/to Parent

 

13,654

 

5,760

 

Accrued pension and other postretirement benefits

 

3,021

 

3,145

 

Other liabilities

 

808

 

1,614

 

Net cash provided

 

31,373

 

24,489

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Construction expenditures

 

(18,111

)

(14,479

)

Net cash used

 

(18,111

)

(14,479

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Receipt of advances for and contributions in aid of construction

 

4,151

 

538

 

Refunds on advances for construction

 

(430

)

(499

)

Repayments of long-term debt

 

(22

)

(65

)

Dividends paid

 

(6,800

)

(5,000

)

Other — net

 

(604

)

(389

)

Net cash used

 

(3,705

)

(5,415

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

9,557

 

4,595

 

Cash and cash equivalents, beginning of period

 

22,578

 

 

Cash and cash equivalents, end of period

 

$

32,135

 

$

4,595

 

 

The accompanying notes are an integral part of these financial statements

 

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AMERICAN STATES WATER COMPANY AND SUBSIDIARIES

AND

GOLDEN STATE WATER COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 — Summary of Significant Accounting Policies:

 

Nature of Operations: American States Water Company (“AWR”) is the parent company of Golden State Water Company (“GSWC”) and American States Utility Services, Inc. (“ASUS”) (and its subsidiaries, Fort Bliss Water Services Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”), Old Dominion Utility Services, Inc. (“ODUS”), Palmetto State Utility Services, Inc. (“PSUS”) and Old North Utility Services, Inc. (“ONUS”)).  The subsidiaries of ASUS may be collectively referred to herein as the “Military Utility Privatization Subsidiaries.”

 

GSWC is a public utility engaged principally in the purchase, production, distribution and sale of water in California serving approximately 256,000 customers. GSWC also distributes electricity in several San Bernardino County mountain communities in California serving approximately 23,000 customers through its Bear Valley Electric Service (“BVES”) division. The California Public Utilities Commission (“CPUC”) regulates GSWC’s water and electric businesses, including properties, rates, services, facilities and other matters, and transactions by GSWC with its affiliates.  AWR’s assets and operating income are primarily those of GSWC.

 

ASUS performs water and wastewater services, including the operation, maintenance, renewal and replacement of water and/or wastewater systems on a contract basis. Through its wholly owned subsidiaries, ASUS operates and maintains the water and/or wastewater systems at various military bases pursuant to 50-year firm, fixed-price contracts, which are subject to periodic price redeterminations and modifications for changes in circumstances, and changes in laws and regulations. There is no direct regulatory oversight by the CPUC over AWR or the operation, rates or services provided by ASUS or any of its wholly owned subsidiaries.

 

Basis of Presentation: The consolidated financial statements and notes thereto are being presented in a combined report being filed by two separate Registrants: AWR and GSWC. References in this report to “Registrant” are to AWR and GSWC, collectively, unless otherwise specified.  Certain prior period amounts have been reclassified to conform to the 2013 financial statement presentation.

 

The consolidated financial statements of AWR include the accounts of AWR and its subsidiaries, all of which are wholly owned. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Inter-company transactions and balances have been eliminated in the AWR consolidated financial statements.

 

The consolidated financial statements included herein have been prepared by Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The December 31, 2012 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal, recurring items and estimates necessary for a fair statement of the results for the interim periods, have been made. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2012 filed with the SEC.

 

GSWC’s Related Party Transactions: GSWC and other subsidiaries provide and receive various services to and from their parent, AWR, and among themselves. In addition, AWR has a $100.0 million syndicated credit facility. AWR borrows under this facility and provides funds to its subsidiaries, including GSWC, in support of their operations.  The interest rate charged to GSWC and other affiliates is sufficient to cover AWR’s interest cost under the credit facility. GSWC also allocates certain corporate office administrative and general costs to its affiliate, ASUS, using allocation factors approved by the CPUC.  Amounts owed to GSWC by its parent, AWR, or for allocated expenses are included in inter-company receivables as of March 31, 2013 and December 31, 2012.

 

Sales and Use Taxes:  GSWC bills certain sales and use taxes levied by state or local governments to its customers. Included in these sales and use taxes are franchise fees, which GSWC pays to various municipalities

 

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(based on ordinances adopted by these municipalities) in order to use public right of way for utility purposes. GSWC bills these franchise fees to its customers based on a CPUC-authorized rate. These franchise fees, which are required to be paid regardless of GSWC’s ability to collect from the customer, are accounted for on a gross basis. GSWC’s franchise fees billed to customers and recorded as operating revenue were approximately $811,000 and $784,000 for the three months ended March 31, 2013 and 2012, respectively. When GSWC acts as an agent, and the tax is not required to be remitted if it is not collected from the customer, the taxes are accounted for on a net basis.

 

Depending on the state in which the operations are conducted, ASUS and its subsidiaries are also subject to certain state non-income tax assessments generally computed on a “gross receipts” or “gross revenues” basis.  These non-income tax assessments are required to be paid regardless of whether the subsidiary is reimbursed by the U.S. government for these assessments under its 50-year contracts with the U.S. government.  The non-income tax assessments are accounted for on a gross basis and totaled $162,000 and $155,000 during the three months ended March 31, 2013 and 2012, respectively.

 

Accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on Registrant’s consolidated financial statements upon adoption.

 

Note 2 — Regulatory Matters:

 

In accordance with accounting principles for rate-regulated enterprises, Registrant records regulatory assets, which represent probable future recovery of costs from customers through the ratemaking process, and regulatory liabilities, which represent probable future refunds that are to be credited to customers through the ratemaking process. At March 31, 2013, Registrant had approximately $75.4 million of regulatory assets, net of regulatory liabilities not accruing carrying costs. Of this amount, $51.6 million relates to the underfunded positions of the pension and other post-retirement obligations, $16.0 million relates to deferred income taxes representing accelerated tax benefits flowed through to customers, which will be included in rates concurrently with recognition of the associated future tax expense, and $1.5 million relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on GSWC’s purchase power contract over the life of the contract. The remainder relates to other items that do not provide for or incur carrying costs.

 

Regulatory assets represent costs incurred by GSWC for which it has received or expects to receive rate recovery in the future. In determining the probability of costs being recognized in other periods, GSWC considers regulatory rules and decisions, past practices, and other facts or circumstances that would indicate if recovery is probable. If the CPUC determined that a portion of GSWC’s assets were not recoverable in customer rates, GSWC would be required to determine if it had suffered an asset impairment that would require a write-down in the assets’ valuation. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:

 

(dollars in thousands)

 

March 31,
 2013

 

December 31,
2012

 

Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account

 

$

44,449

 

$

42,574

 

Base Revenue Requirement Adjustment Mechanism

 

7,270

 

6,833

 

Costs deferred for future recovery on Aerojet case

 

15,831

 

16,030

 

Pensions and other post-retirement obligations (Note 7)

 

56,484

 

56,894

 

Flow-through taxes, net (Note 6)

 

16,010

 

16,415

 

General rate case memorandum accounts

 

11,427

 

4,495

 

Other regulatory assets

 

40,280

 

40,332

 

Various refunds to customers

 

(6,522

)

(7,558

)

Total

 

$

185,229

 

$

176,015

 

 

Regulatory matters are discussed in detail in the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2012 filed with the SEC. The discussion below focuses on significant matters and changes since December 31, 2012.

 

Alternative-Revenue Programs:

 

GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC using the Water Revenue Adjustment Mechanism (“WRAM”) and Modified Cost Balancing Account (“MCBA”) accounts approved by the CPUC.  GSWC has implemented surcharges to recover all of its WRAM balances, net of the MCBA.  The recovery or refund of the WRAM is netted against the MCBA over- or under-collection for the corresponding rate-making area and is interest bearing at the current 90-day commercial paper rate.   For the three months ended March 31, 2013 and 2012, surcharges of $3.6 million and $3.4 million, respectively, were billed to customers to decrease previously incurred under-collections in the WRAM, net of MCBA accounts.  For the three months ended March 31, 2013, the WRAM and MCBA accounts also reflect the effects of the authorized 2013 adopted revenue and supply cost amounts approved in the CPUC’s final decision issued in May 2013 on GSWC’s water general rate case, discussed later under General Rate Case Memorandum

 

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AccountsAs of March 31, 2013, GSWC has a net aggregated regulatory asset of $44.4 million which is comprised of a $61.9 million under-collection in the WRAM accounts and $17.5 million over-collection in the MCBA accounts.

 

Based on CPUC guidelines, recovery periods relating to the majority of GSWC’s WRAM/MCBA balances range between 18 and 24 months.  In April 2012, the CPUC issued a final decision which, among other things, set the recovery periods for under-collection balances that are up to 15% of adopted annual revenues at 18 months or less.  In addition to adopting a new amortization schedule, the final decision sets a cap on total net WRAM/MCBA surcharges in any given calendar year of 10% of the last authorized revenue requirement. The cap is effective following the first test year of each applicant’s pending or next general rate case.  For GSWC, the cap will be applied to its 2013 WRAM balances filed in early 2014.  The cap requirement set forth in the final decision will not impact GSWC’s 2012 and prior year WRAM/MCBA balances.

 

For BVES, the CPUC approved the Base Revenue Requirement Adjustment Mechanism (“BRRAM”), which adjusts certain revenues to adopted levelsIn March 2013, the CPUC approved surcharges for recovery of BVES’ 2012 BRRAM balance. The CPUC approved a 36-month surcharge, with the amounts collected through December 2014 to be applied to the 2012 BRRAM under-collection.  Surcharges collected during the remainder of the 36-month period will recover a $1.6 million increase in the BVES revenue requirement representing the difference between the allocated general office costs authorized by the CPUC in its November 2010 decision on the Region II, Region III and general office rate case, and what was then in BVES’ rates for allocated general office costs.  As authorized by the CPUC, the $1.6 million was combined in the BRRAM for recovery through the surcharge; however, these costs are not considered an alternative revenue program.

 

General Rate Case Memorandum Accounts:

 

The balance in the general rate case memorandum accounts represents the revenue differences between interim rates and final rates authorized by the CPUC due to delays in receiving decisions on various general rate case applications. As of March 31, 2013, there is an aggregate of $11.4 million in the general rate case memorandum accounts, the majority of which is for retroactive rate increases effective January 1, 2013, as a result of the final decision issued by the CPUC in May 2013 on GSWC’s general rate case.

 

On May 9, 2013, the CPUC issued a final decision on GSWC’s general water rate case approving new rates for 2013 — 2015 at GSWC’s three water regions and the general office. The new rates were retroactive to January 1, 2013 and have been reflected in the 2013 first quarter results.  Accordingly, for the three months ended March 31, 2013, GSWC recorded a $7.3 million regulatory asset representing the difference between interim rates and the final rates authorized by the CPUC for the period January 1, 2013 through March 31, 2013. A surcharge to recover this difference is expected to be implemented during the second quarter of 2013.

 

Other Regulatory Assets:

 

Among other things, the final CPUC decision issued in May 2013 approved the recovery of various memorandum accounts which tracked certain previously incurred costs.  As a result, for the three months ended March 31, 2013, GSWC recorded $3.2 million in other regulatory assets, the majority of which was reflected as a decrease in certain operating expenses related to the approval of these memorandum accounts in the final decision.

 

Other Regulatory Matters:

 

CPUC Rehearing Matter:

 

In July 2011, the CPUC issued an order granting DRA’s request to rehear certain issues from the Region II, Region III and general office rate case approved in November 2010.  Among the issues in the rehearing was the La Serena plant improvement project included in rate base totaling approximately $3.5 million.  As a result of the CPUC’s decision in November 2010, GSWC had recorded a pretax charge of $2.2 million during 2010, which included the disallowance of a portion of the La Serena capital costs and the related revenues earned on those capital

 

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costs to be refunded to customers.  In March 2013, GSWC and DRA reached a settlement agreement, subject to CPUC approval, to resolve all the issues in the rehearing.  In March 2013, GSWC filed for CPUC approval of the settlement agreement. In anticipation of this settlement, GSWC recorded an additional pretax charge of $416,000 in 2012, representing disallowed plant improvement project costs and related revenues earned on those costs that it expects will be refunded to customers based upon the terms of the settlement being discussed. The settlement agreement, if approved, would resolve all issues arising from the rehearing.

 

BVES General Rate Case

 

In February 2012, BVES filed its general rate case (“GRC”) for new rates in years 2013 through 2016.  In August 2012, the Division of Ratepayer Advocates (“DRA”) issued its report on the GRC.  Included in DRA’s recommendations was a $2.0 million retroactive ratemaking proposal to increase BVES’ accumulated depreciation balance to reflect adopted depreciation expense for the years 2009 through 2012 rather than actual depreciation expense as recorded in accordance with GAAP.  DRA also recommended that one-half of deferred rate case costs be borne by shareholders, rather than entirely by customers, as has been authorized by the CPUC in prior rate cases.  As of March 31, 2013, GSWC has a $2.2 million regulatory asset representing deferred rate case costs for the current BVES general rate case, which the CPUC has historically allowed utilities to recover. If DRA prevails, GSWC may be required to record a charge to adjust accumulated depreciation and to write-off half of its deferred rate case costs. GSWC believes DRA’s recommendations are without merit and intends to vigorously defend its positions.  At this time, GSWC does not believe a potential loss is probable, but is unable to predict the final outcome of these matters in the pending rate case.

 

Hearings on BVES’s GRC, including the matters discussed above, were held in September 2012.  In November 2012, GSWC filed a motion to introduce new information regarding the results of a study on mandatory testing recently received on BVES’s transmission and distribution poles.  Bringing this new study data to the CPUC will help support the requests for capital expenditures. The administrative law judge assigned to this GRC re-opened the record to receive additional testimony on this study, and to conduct additional evidentiary hearings.  DRA has challenged the results of the study, and requested that BVES provide additional information.  A proposed decision for this GRC is now expected later in 2013.

 

Renewable Portfolio Standard

 

In December 2011, a new renewable standards procurement standards (“RPS”) law went into effect which changed, among other things, the prior RPS requirement based upon annual procurement targets to multi-year procurement targets.  Under the new RPS law, BVES must procure sufficient RPS-eligible resources to meet: (i) any RPS procurement requirement deficit for any year prior to 2011, and (ii) RPS procurement requirements for the 2011 — 2013 compliance period by no later than December 31, 2013.  BVES’ latest RPS reports under the new law were submitted to the CPUC in December 2012, and did not reflect any RPS procurement deficiencies nor any potential or actual penalties.  Accordingly, no provision for loss has been recorded in the financial statements as of March 31, 2013.

 

In December 2012, GSWC entered into a ten-year agreement with a third party to purchase renewable energy credits (“RECs”). Under the terms of the agreement, which is subject to CPUC approval, GSWC would purchase approximately 582,000 RECs over a ten-year period which would be used towards meeting the CPUC’s RPS procurement requirements.  In February 2013, GSWC filed for CPUC approval of this agreement.

 

In November 2011, GSWC filed for CPUC approval for the purchase of RECs from the Los Angeles County Sanitation District.  In July 2012, the CPUC approved the purchase.  BVES intends to apply these RECS towards either its pre-2011 RPS requirements or its 2011-2013 requirements  The RECs will be included as part of the electric supply cost balancing account when the RECs are applied towards the RPS requirements during the fourth quarter of 2013.

 

Note 3 — Earnings per Share/Capital Stock:

 

In accordance with the accounting guidance for participating securities and earnings per share (“EPS”), Registrant uses the “two-class” method of computing EPS. The “two-class” method is an earnings allocation formula that determines EPS for each class of common stock and participating security. AWR has participating securities related to its stock-based awards that earn dividend equivalents on an equal basis with AWR’s Common Shares (the “Common Shares”).  In applying the “two-class” method, undistributed earnings are allocated to both common shares and participating securities.

 

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Table of Contents

 

The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding for calculating basic net income per share:

 

Basic:

 

For The Three Months
Ended March 31,

 

(in thousands, except per share amounts)

 

2013

 

2012

 

Net income

 

$

13,465

 

$

10,115

 

Less: (a)

Distributed earnings to common shareholders

 

6,839

 

5,273

 

 

Distributed earnings to participating securities

 

107

 

35

 

Undistributed earnings

 

6,519

 

4,807

 

 

 

 

 

 

 

(b)

Undistributed earnings allocated to common shareholders

 

6,419

 

4,775

 

 

Undistributed earnings allocated to participating securities

 

100

 

32

 

Total income available to common shareholders, basic (a)+(b)

 

$

13,258

 

$

10,048

 

 

 

 

 

 

 

Weighted average Common Shares outstanding, basic

 

19,265

 

18,831

 

Basic earnings per Common Share

 

$

0.69

 

$

0.53

 

 

Diluted EPS is based upon the weighted average number of Common Shares, including both outstanding shares and shares potentially issuable in connection with stock options granted under Registrant’s 2000 and 2008 Employee Plans, and the 2003 Directors Plan, and net income. At March 31, 2013 and 2012, there were 176,048 and 566,406 options outstanding, respectively, under these Plans. At March 31, 2013 and 2012, there were also 145,208 and 147,078 restricted stock units outstanding, respectively.

 

The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding for calculating diluted net income per share:

 

Diluted:

 

For The Three Months
Ended March 31,

 

(in thousands, except per share amounts)

 

2013

 

2012

 

Common shareholders earnings, basic

 

$

13,258

 

$

10,048

 

Undistributed earnings for dilutive stock options

 

 

32

 

Total common shareholders earnings, diluted

 

$

13,258

 

$

10,080

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

19,265

 

18,831

 

Stock-based compensation (1)

 

46

 

142

 

Weighted average common shares outstanding, diluted

 

19,311

 

18,973

 

 

 

 

 

 

 

Diluted earnings per Common Share

 

$

0.69

 

$

0.53

 

 


(1)       In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 176,048 and 456,318  stock options at March 31, 2013 and 2012, respectively, were deemed to be outstanding in accordance with accounting guidance on earnings per share.  All of the 145,208 and 147,078 restricted stock units at March 31, 2013 and 2012, respectively, were included in the calculation of diluted EPS for the three months ended March 31, 2013 and 2012.

 

No stock options outstanding as of March 31, 2013 had an exercise price greater than the average market price of AWR’s Common Shares for the three months ended March 31, 2013. As of March 31, 2012, 110,013 stock options were outstanding but not included in the computation of diluted EPS because the related option exercise price was greater than the average market price of AWR’s Common Shares for the three months ended March 31, 2012.  There were 75 stock options outstanding at March 31, 2012, but not included in the computation of diluted EPS because they were anti-dilutive. There were no stock options outstanding at March 31, 2013 that were anti-dilutive.

 

During the three months ended March 31, 2013 and 2012, Registrant issued 46,293 and 69,512 Common Shares, for approximately $625,000 and $1,403,000, respectively, under Registrant’s Common Share Purchase and Dividend Reinvestment Plan (“DRP”), the 401(k) Plan, the 2000 and 2008 Employee Plans, and the 2003 Directors Plan. In addition, Registrant purchased 42,597 and 221,932 Common Shares on the open market during the three months ended March 31, 2013 and 2012, respectively, under Registrant’s 401(k) Plan and the DRP. The Common Shares purchased by Registrant were used to satisfy the requirements of these plans.

 

During the three months ended March 31, 2013 and 2012, AWR paid quarterly dividends of approximately $6.8 million, or $0.355 per share, and $5.3 million, or $0.28 per share, respectively.

 

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Note 4 — Derivative Instruments:

 

GSWC purchases certain power at a fixed cost depending on the amount of power and the period during which the power is purchased under a purchased power contract.  The contract is subject to the accounting guidance for derivatives and requires mark-to-market derivative accounting.   The CPUC has authorized GSWC to establish a regulatory asset and liability memorandum account to offset the entries required by the accounting guidance.  Accordingly, all unrealized gains and losses generated from the purchased power contract are deferred on a monthly basis into a non-interest bearing regulatory memorandum account that tracks the changes in fair value of the derivative throughout the term of the contract, having no impact on GSWC’s earnings. Upon expiration of the purchased power contract, the balance in this regulatory memorandum account will be zero.  As of March 31, 2013 there was a $1.5 million cumulative unrealized loss which has been included in the memorandum account.

 

In January 2012, GSWC executed a new purchased power master agreement. The agreement is subject to CPUC approval. If approved, GSWC will be able to purchase 12 megawatts (“MWs”) of base load energy at a fixed price to be negotiated upon CPUC approval of the agreement. GSWC plans to file for approval of the agreement with the CPUC in the second quarter of 2013.  GSWC also intends to request CPUC approval of a regulatory asset and liability memorandum account for the new contract to offset the entries required by the accounting guidance on derivatives.

 

The accounting guidance for fair value measurements applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Under the accounting guidance, GSWC makes fair value measurements that are classified and disclosed in one of the following three categories:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability, or

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

Registrant’s valuation model utilizes various inputs that include quoted market prices for energy over the duration of the contract. The market prices used to determine the fair value for this derivative instrument were estimated based on independent sources such as broker quotes and publications that are not observable in or corroborated by the market.  Registrant receives one broker quote to determine the fair value of its derivative instrument.  When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3. Accordingly, the valuation of the derivative on Registrant’s purchased power contract has been classified as Level 3 for all periods presented.

 

The following table presents changes in the fair value of the derivative for the three months ended March 31, 2013 and 2012.

 

 

 

For the Three Months Ended March 31,

 

(dollars in thousands)

 

2013

 

2012

 

Balance, at beginning of the period

 

$

(3,060

)

$

(7,611

)

Unrealized gain on purchased power contracts

 

1,520

 

105

 

Balance, at end of the period

 

$

(1,540

)

$

(7,506

)

 

Note 5 — Fair Value of Financial Instruments:

 

For cash and cash equivalents, accounts receivable, accounts payable and short-term debt, the carrying amount is assumed to approximate fair value due to the short-term nature of the amounts. The table below estimates the fair value of long-term debt held by GSWC. Rates available to GSWC at March 31, 2013 and December 31, 2012 for debt with similar terms and remaining maturities were used to estimate fair value for long-term debt. The interest rates used for the March 31, 2013 valuation increased as compared to December, 31, 2012, decreasing the fair value of long-term debt as of March 31, 2013. Changes in the assumptions will produce differing results.

 

 

 

March 31, 2013

 

December 31, 2012

 

(dollars in thousands)

 

Carrying Amount

 

Fair Value

 

Carrying Amount

 

Fair Value

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt—GSWC

 

$

335,829

 

$

425,443

 

$

335,791

 

$

456,792

 

 

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As previously discussed in Note 4, the accounting guidance for fair value measurements establishes a framework for measuring fair value and requires fair value measurements to be classified and disclosed in one of three levels. The following tables set forth by level, within the fair value hierarchy, GSWC’s long-term debt measured at fair value as of March 31, 2013:

 

(dollars in thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Long-term debt—GSWC

 

 

$

425,443

 

 

$

425,443

 

 

Note 6 — Income Taxes:

 

As a regulated utility, GSWC treats certain temporary differences as flow-through adjustments in computing its income tax provision consistent with the income tax approach approved by the CPUC for ratemaking purposes. Flow-through adjustments increase or decrease tax expense in one period, with an offsetting decrease or increase occurring in another period. Giving effect to these temporary differences as flow-through adjustments typically results in a greater variance between the effective tax rate (“ETR”) and the statutory federal income tax rate in any given period than would otherwise exist if GSWC were not required to account for its income taxes as a regulated enterprise.  The GSWC ETRs deviated from the statutory rate primarily due to state taxes and differences between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements (principally plant-, rate-case- and compensation-related items), as well as nondeductible permanent items.

 

Changes in Tax Law:

 

In January 2013, the American Taxpayer Relief Act of 2012 extended 50% bonus depreciation for qualifying property through 2013.  Although this law change reduces AWR’s current taxes payable, it does not reduce its total income tax expense or ETR.

 

Note 7 — Employee Benefit Plans:

 

The components of net periodic benefit costs, before allocation to the overhead pool, for Registrant’s pension plan, postretirement plan, and Supplemental Executive Retirement Plan (“SERP”) for the three months ended March 31, 2013 and 2012 are as follows:

 

 

 

Pension Benefits

 

Other
Postretirement
Benefits

 

SERP

 

(dollars in thousands)

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

Components of Net Periodic Benefits Cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,864

 

$

1,719

 

$

106

 

$

112

 

$

201

 

$

183

 

Interest cost

 

1,731

 

1,676

 

113

 

136

 

129

 

122

 

Expected return on plan assets

 

(1,893

)

(1,636

)

(95

)

(90

)

 

 

Amortization of transition

 

 

 

105

 

105

 

 

 

Amortization of prior service cost (benefit)

 

30

 

30

 

(50

)

(50

)

40

 

40

 

Amortization of actuarial loss

 

711

 

778

 

 

 

85

 

77

 

Net periodic pension cost under accounting standards

 

2,443

 

2,567

 

179

 

213

 

455

 

422

 

Regulatory adjustment — deferred

 

(510

)

(566

)

 

 

 

 

Total expense recognized, before allocation to overhead pool

 

$

1,933

 

$

2,001

 

$

179

 

$

213

 

$

455

 

$

422

 

 

Registrant expects to contribute approximately $6.6 million and $150,000 to the pension and postretirement medical plans in 2013, respectively.  No contributions were made to these plans during the three months ended March 31, 2013.  In April 2013, Registrant contributed $2.1 million to the pension plan.

 

Regulatory Adjustment:

 

In May 2013, the CPUC issued a final decision that once again authorized GSWC to establish a two-way balancing account for its water regions and the general office to track differences between the forecasted annual pension expenses adopted in rates and the actual annual expense recorded by GSWC in accordance with the accounting guidance for pension costs.  As of March 31, 2013, GSWC has included a $4.9 million under-collection in the two-way pension balancing account recorded as a regulatory asset (Note 2).

 

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Note 8 — Contingencies:

 

Barstow Perchlorate Contamination:

 

On March 8, 2013, the Company was served with four toxic tort lawsuits arising out of the November 19, 2010 detection of perchlorate in one of GSWC’s active production wells in the Barstow service area. The plaintiffs assert that they were affected by the perchlorate, claim negligence by GSWC and seek, among other things, punitive and compensatory damages. GSWC is the only named defendant in all four lawsuits. GSWC believes that these lawsuits are without merit and intends to vigorously defend itself in this matter.  At this time, management is unable to estimate a loss or range of loss, if any, resulting from these pending lawsuits, but does not believe a loss is probable.

 

Condemnation of Properties:

 

The laws of the State of California provide for the acquisition of public utility property by governmental agencies through their power of eminent domain, also known as condemnation, where doing so is necessary and in the public interest. In addition, these laws provide: (i) that the owner of utility property may contest whether the condemnation is actually necessary and in the public interest, and (ii) that the owner is entitled to receive the fair market value of its property if the property is ultimately taken.

 

The City of Claremont (“Claremont”) located in GSWC’s Region III, has expressed various concerns to GSWC about rates charged by GSWC and the effectiveness of the CPUC’s rate-setting procedures. In January 2012, the Claremont City council members directed staff to pursue analyses required for potential acquisition of the water system and allocated funds from its general reserve for such analyses. In November 2012, Claremont made an offer to acquire GSWC’s water system servicing Claremont. GSWC rejected the offer and informed the City that the system is not for sale.  Claremont continues to express a desire to potentially take the system by eminent domain; however, Claremont and GSWC have agreed to hold meetings to further discuss alternatives, rates and other concerns of the City. GSWC serves approximately 11,000 customers in Claremont.

 

In April 2011, an organization called Ojai FLOW (Friends of Locally Owned Water) started a local campaign for the Casitas Municipal Water District (“CMWD”) to purchase GSWC’s Ojai water system.  In March 2013, the CMWD passed resolutions authorizing the establishment of a Community Facilities District (“CFD”) and, among other things, authorized a special election for the purposes of levying a special tax via the Mello-Roos Community Facilities District Act of 1982 (“Mello-Roos Act”).  The special tax would be used to provide funding for the potential acquisition of GSWC’s Ojai system by eminent domain. On March 26, 2013, GSWC filed a petition in the Superior Court, Ventura County which, among other things, challenges the CMWD’s ability to utilize the Mello-Roos Act to fund such action.  At this time, GSWC is unable to predict the outcome of that petition. GSWC serves approximately 3,000 customers in Ojai.

 

Except for the City of Claremont and the City of Ojai, Registrant is currently not involved in activities related to the potential condemnation of any of its water customer service areas or in its BVES customer service area. No formal condemnation proceedings have been filed against any of the Registrant’s service areas during the past three years.

 

Santa Maria Groundwater Basin Adjudication:

 

In 1997, the Santa Maria Valley Water Conservation District (“plaintiff”) filed a lawsuit against multiple defendants, including GSWC, the City of Santa Maria, and several other public water purveyors. The plaintiff’s lawsuit sought an adjudication of the Santa Maria Groundwater Basin (the “Basin”). A stipulated settlement of the lawsuit has been reached and was approved by the courts in February 2008.  Among other things, the settlement, which was also approved by the CPUC in May 2013, preserves GSWC’s historical pumping rights and secures supplemental water rights for use in case of drought or other reductions in the natural yield of the Basin.  GSWC, under the stipulation, has a right to 10,000 acre-feet of groundwater replenishment provided by the Twitchell Project, a storage and flood control reservoir project operated by the plaintiff.

 

The court judgment also awarded GSWC prescriptive rights to groundwater against the non-stipulating parties and granted GSWC the right to use the Basin for temporary storage and to recapture 45 percent of the return flows that are generated from its importation of State Water Project water.  Pursuant to this judgment, the court retained jurisdiction over all of the parties to make supplemental orders or to amend the judgment as necessary.  In

 

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March 2008, the non-stipulating parties filed notices of appeal.  In November 2012, the Appellate Court upheld the Santa Maria judgment, with a remand to the trial court to clarify the narrow issue that non-stipulating parties retained their overlying rights.  There is no dispute on this clarification and the required filings will be made with the court in 2013.  In December 2012, the Appellate Court further modified the decision clarifying the basis for the overdraft finding that precipitated the prescriptive right finding.  In December 2012, the non-stipulating parties filed a request with the California Supreme Court for a review of the Appellate Court findings.   In February 2013, the California Supreme Court denied the parties’ request for review of the Appellate Court findings.

 

Environmental Clean-Up and Remediation:

 

Chadron Plant: GSWC has been involved in environmental remediation and clean-up at a plant site (“Chadron Plant”) that contained an underground storage tank which was used to store gasoline for its vehicles. This tank was removed from the ground in July 1990 along with the dispenser and ancillary piping. Since then, GSWC has been involved in various remediation activities at this site.  Recent site assessments have been conducted which showed that there was more gasoline at higher concentrations spread over a larger area than previously measured. Remediation is estimated to take two more years, followed by at least one year of monitoring and reporting.  As of March 31, 2013, the total spent to clean-up and remediate GSWC’s plant facility was approximately $3.5 million, of which $1.5 million has been paid by the State of California Underground Storage Tank Fund. Amounts paid by GSWC have been included in rate-base and approved by the CPUC for recovery.

 

As of March 31, 2013, GSWC has an accrued liability for the estimated additional cost of $1.2 million to complete the clean-up at the site. The ultimate cost may vary as there are many unknowns in remediation of underground gasoline spills and this is an estimate based on currently available information. Management also believes it is probable that the estimated additional costs will be approved in rate base by the CPUC.

 

Other Litigation:

 

Registrant is also subject to other ordinary routine litigation incidental to its business. Management believes that rate recovery, proper insurance coverage and reserves are in place to insure against property, general liability and workers’ compensation claims incurred in the ordinary course of business. Registrant is unable to predict an estimate of the loss, if any, resulting from any pending suits or administrative proceedings.

 

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Note 9 — Business Segments:

 

AWR has three reportable segments, water, electric and contracted services, whereas GSWC has two segments, water and electric. AWR has no material assets other than its investments in its subsidiaries on a stand-alone basis.  All activities of GSWC are geographically located within California.

 

Activities of ASUS and its subsidiaries are conducted in California, Georgia, Maryland, New Mexico, North Carolina, South Carolina, Texas and Virginia.  Each of ASUS’s wholly-owned subsidiaries is regulated by the state in which the subsidiary primarily conducts water and/or wastewater operations.  Fees charged for operations and maintenance, and renewal and replacement services are based upon the terms of the contracts with the U.S. government which have been filed with the commissions in the states in which ASUS’s subsidiaries are incorporated.

 

The tables below set forth information relating to GSWC’s operating segments, ASUS and its subsidiaries, and other matters. Total assets by segment are not presented below, as certain of Registrant’s assets are not tracked by segment. The utility plants are net of respective accumulated provisions for depreciation. Capital additions reflect capital expenditures paid in cash and exclude property installed by developers and conveyed to GSWC.

 

 

 

As Of And For The Three Months Ended March 31, 2013

 

 

 

GSWC

 

ASUS

 

AWR

 

Consolidated

 

(dollars in thousands)

 

Water

 

Electric

 

Contracts

 

Parent

 

AWR

 

Operating revenues

 

$

69,233

 

$

10,734

 

$

30,585

 

$

 

$

110,552

 

Operating income

 

21,763

 

1,833

 

4,367

 

 

27,963

 

Interest expense, net

 

5,194

 

376

 

60

 

(39

)

5,591

 

Utility Plant

 

883,863

 

40,963

 

4,712

 

 

929,538

 

Depreciation and amortization expense (1)

 

8,930

 

592

 

294

 

 

9,816

 

Income tax expense

 

6,941

 

722

 

1,666

 

(80

)

9,249

 

Capital additions

 

17,878

 

233

 

314

 

 

18,425

 

 

 

 

As Of And For The Three Months Ended March 31, 2012

 

 

 

GSWC

 

ASUS

 

AWR

 

Consolidated

 

(dollars in thousands)

 

Water

 

Electric

 

Contracts

 

Parent

 

AWR

 

Operating revenues

 

$

66,201

 

$

10,813

 

$

29,878

 

$

 

$

106,892

 

Operating income (loss)

 

14,851

 

3,856

 

4,741

 

(81

)

23,367

 

Interest expense, net

 

5,406

 

393

 

54

 

2

 

5,855

 

Utility Plant

 

853,533

 

39,526

 

4,776

 

 

897,835

 

Depreciation and amortization expense (1)

 

9,597

 

623

 

270

 

 

10,490

 

Income tax expense

 

4,355

 

1,400

 

1,829

 

42

 

7,626

 

Capital additions

 

13,940

 

539

 

488

 

 

14,967

 

 


(1)         Depreciation computed on GSWC’s transportation equipment of $250,000 and $577,000 for the three months ended March 31, 2013 and 2012, respectively, is recorded in administrative and general expenses.

 

The following table reconciles total utility plant (a key figure for rate-making) to total consolidated assets (in thousands):

 

 

 

March 31,

 

 

 

2013

 

2012

 

Total utility plant

 

$

929,538

 

$

897,835

 

Other assets

 

359,976

 

348,794

 

Total consolidated assets

 

$

1,289,514

 

$

1,246,629

 

 

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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 and ASUS and its subsidiaries.  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 gross 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 section titled “Summary of First Quarter Results by Segment.

 

Overview

 

Registrant’s revenues, operating income and cash flows are earned primarily through delivering potable water to homes and businesses in California and the delivery of electricity in the Big Bear area of San Bernardino County. 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.

 

Through its contracted services business, Registrant’s revenues, operating expenses and cash flows are also earned by providing water and/or wastewater services, including the operation, maintenance, renewal and replacement of the water and/or wastewater systems, at various military installations pursuant to 50-year firm, fixed-price contracts. The contract price for each of these contracts is subject to 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.

 

On May 9, 2013, the CPUC issued a final decision on GSWC’s general water rate case approving new rates for 2013 — 2015 at GSWC’s three water regions and the general office.  The new rates are retroactive to January 1, 2013 and are expected to generate approximately $10 million in additional annual revenues in 2013 as compared to 2012 adopted revenues.  The 2013 adopted water gross margin is projected to increase by approximately $14 million, or 6.6%, as compared to the 2012 adopted water gross margin.  The new rates have been reflected in the results of operations for the first quarter of 2013.  Among other things, the final decision also reduced the overall composite depreciation rates and approved the recovery of various memorandum accounts which tracked certain costs that were previously expensed as incurred.   As a result, for the three months ended March 31, 2013, GSWC recorded a decrease of approximately $3.0 million in certain operating expenses related to the approval of these memorandum accounts in the final decision.

 

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The pretax impact of the final decision related to the first quarter of 2013 is summarized as follows (in thousands, except per share amounts):

 

 

 

Pretax Income

 

EPS

 

Increase in water gross margin due to rate changes

 

$

2,928

 

$

0.09

 

Decrease in depreciation due to lower composite rates*

 

1,244

 

0.04

 

One-time recovery of previously incurred costs**

 

3,057

 

0.09

 

Pretax operating income increase

 

$

7,229

 

$

0.22

 

 


* $0.01 per share decreased administrative and general expenses

**$0.01 per share impacted the water gross margin

 

Summary of First Quarter Results by Segment

 

The table below sets forth the first quarter diluted earnings per share by business segment:

 

 

 

Diluted Earnings per Share

 

 

 

3 Months Ended

 

 

 

 

 

3/31/2013

 

3/31/2012

 

CHANGE

 

 

 

 

 

 

 

 

 

Water

 

$

0.51

 

$

0.28

 

$

0.23

 

Electric

 

0.04

 

0.11

 

(0.07

)

Contracted services

 

0.14

 

0.15

 

(0.01

)

AWR (parent)

 

 

(0.01

)

0.01

 

Consolidated diluted earnings per share, as reported

 

$

0.69

 

$

0.53

 

$

0.16

 

 

For the three months ended March 31, 2013, diluted earnings per share from the water segment increased by $0.23 to $0.51 per share, as compared to $0.28 per share for the same period of 2012.  Impacting the comparability of the two periods were the following items:

 

·                  An increase in the water gross margin of approximately $3.7 million, or $0.11 per share, during the three months ended March 31, 2013 as compared to the same period in 2012, due primarily to new rates effective January 1, 2013 approved by the CPUC on May 9, 2013, as discussed above. There was also an increase in the water gross margin of approximately $361,000, or $0.01 per share, due to rate increases for certain pre-approved capital projects filed with the CPUC during 2012 and 2013.

 

·                  A decrease in operating expenses (other than supply costs) of $3.2 million, or $0.10 per share, during the three months ended March 31, 2013, due in large part, to the CPUC’s approval of memorandum accounts totaling $2.7 million, or $0.08 per share, primarily for certain previously expensed operating costs, and the approval of lower depreciation expense resulting from a decrease in the composite rates, as discussed above.  Excluding the impact of these memorandum accounts and the lower depreciation expense, operating expenses increased by approximately $674,000, or $0.02 per share, due primarily to increases in: (i) maintenance expense for planned maintenance work, and (ii) administrative and general expenses related to legal and other outside services costs.  These increases were partially offset by a decrease in operation expenses resulting primarily from lower bad debt expense.

 

·                   An overall decrease in interest expense (net of interest income and other non-operating items) of $323,000, or $0.01 per share, due primarily to GSWC’s October 2012 redemption of $8.0 million of its 7.55% notes, and lower short-term bank loan balances during the first three months of 2013.

 

·                   A decrease in the effective income tax rate for the three months ended March 31, 2013 as compared to the same period in 2012, increasing earnings by $0.01 per share.  The change in the tax rate is primarily due to changes between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements.

 

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For the three months ended March 31, 2013, diluted earnings from electric operations decreased by $0.07 per share due, in large part, to CPUC approval in March 2012 for the recovery of legal and outside services costs previously expensed as incurred during the period September 1, 2007 through March 31, 2011 in connection with GSWC’s efforts to procure renewable energy resources.  As a result, GSWC recorded a $1.2 million, or $0.04 per share, reduction in operating expenses in 2012, with no similar decrease during the three months ended March 31, 2013.  Excluding the impact of this item, diluted earnings from electric operations decreased by $0.03 per share due primarily to: (i) a decrease in the electric gross margin of $317,000, or $0.01 per share, as compared to the same period in 2012, (ii) an increase of approximately $457,000, or $0.01 per share, in other operating expenses resulting from higher legal and other outside services incurred in connection with the pending rate case, and higher maintenance costs during the three months ended March 31, 2013, and (iii) an increase in the effective income tax rate for the three months ended March 31, 2013 as compared to the same period in 2012, decreasing earnings by $0.01 per share.

 

GSWC’s electric division continues its efforts to comply with the renewable energy portfolio standards.  In March 2013, GSWC filed an application with the CPUC to recover additional costs incurred from April 1, 2011 through December 31, 2012 totaling approximately $835,000, which have been expensed as incurred.  In May 2013, the CPUC approved the recovery of these additional costs and accordingly, GSWC will record a regulatory asset and a corresponding decrease to legal and outside services costs during the second quarter of 2013.

 

For the three months ended March 31, 2013, diluted earnings from contracted services remained relatively unchanged as compared to prior year. There was an increase in renewal and replacement work at Fort Bliss in Texas and Fort Jackson in South Carolina under the terms of the respective 50-year contracts with the U.S. government which was offset by a decrease in construction activity at Fort Bragg in North Carolina.

 

The following discussion and analysis provide information on AWR’s consolidated operations and where necessary, includes specific references to AWR’s individual segments and/or other subsidiaries: GSWC and ASUS and its subsidiaries.

 

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Table of Contents

 

Consolidated Results of Operations — Three Months Ended March 31, 2013 and 2012 (amounts in thousands, except per share amounts):

 

 

 

3 Months

 

3 Months

 

 

 

 

 

 

 

Ended

 

Ended

 

$

 

%

 

 

 

3/31/2013

 

3/31/2012

 

CHANGE

 

CHANGE

 

OPERATING REVENUES

 

 

 

 

 

 

 

 

 

Water

 

$

69,233

 

$

66,201

 

$

3,032

 

4.6

%

Electric

 

10,734

 

10,813

 

(79

)

-0.7

%

Contracted services

 

30,585

 

29,878

 

707

 

2.4

%

Total operating revenues

 

110,552

 

106,892

 

3,660

 

3.4

%

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Water purchased

 

10,732

 

9,552

 

1,180

 

12.4

%

Power purchased for pumping

 

1,639

 

1,556

 

83

 

5.3

%

Groundwater production assessment

 

3,187

 

3,323

 

(136

)

-4.1

%

Power purchased for resale

 

3,680

 

3,191

 

489

 

15.3

%

Supply cost balancing accounts

 

1,371

 

3,437

 

(2,066

)

-60.1

%

Other operation expenses

 

5,454

 

7,426

 

(1,972

)

-26.6

%

Administrative and general expenses

 

17,907

 

16,829

 

1,078

 

6.4

%

Depreciation and amortization

 

9,816

 

10,490

 

(674

)

-6.4

%

Maintenance

 

3,934

 

3,331

 

603

 

18.1

%

Property and other taxes

 

4,148

 

4,105

 

43

 

1.0

%

ASUS construction expenses

 

20,733

 

20,285

 

448

 

2.2

%

Gain on sale of property

 

(12

)

 

(12

)

100

%

Total operating expenses

 

82,589

 

83,525

 

(936

)

-1.1

%

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

27,963

 

23,367

 

4,596

 

19.7

%

 

 

 

 

 

 

 

 

 

 

OTHER INCOME AND EXPENSES

 

 

 

 

 

 

 

 

 

Interest expense

 

(5,778

)

(6,070

)

292

 

-4.8

%

Interest income

 

187

 

215

 

(28

)

-13.0

%

Other, net

 

342

 

229

 

113

 

49.3

%

 

 

(5,249

)

(5,626

)

377

 

-6.7

%

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE

 

22,714

 

17,741

 

4,973

 

28.0

%

Income tax expense

 

9,249

 

7,626

 

1,623

 

21.3

%

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

13,465

 

$

10,115

 

$

3,350

 

33.1

%

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.69

 

$

0.53

 

$

0.16

 

30.2

%

 

 

 

 

 

 

 

 

 

 

Fully diluted earnings per common share

 

$

0.69

 

$

0.53

 

$

0.16

 

30.2

%

 

25



Table of Contents

 

Operating Revenues:

 

General

 

Registrant relies upon rate approvals by the CPUC to recover operating expenses and to provide for a return on invested and borrowed capital used to fund utility plant for GSWC. Registrant relies on price redeterminations and equitable adjustments by the U.S. government in order to recover operating expenses and provide a profit margin for ASUS.  If adequate rate relief and price redeterminations and adjustments are not granted in a timely manner, operating revenues and earnings can be negatively impacted.  ASUS’s earnings have also been positively impacted by additional construction projects at the Military Utility Privatization Subsidiaries.

 

Water

 

For the three months ended March 31, 2013, revenues from water operations increased $3.0 million to $69.2 million, as compared to $66.2 million for the three months ended March 31, 2012.  The increase in water revenues is primarily due to higher water rates approved by the CPUC effective January 1, 2013 in connection with the general rate case for all three water regions and the general office, as previously discussed. The revenue increase adopted by the CPUC for 2013 is approximately $10 million over 2012 on a normalized sales basis.

 

Billed water consumption for the first quarter of 2013 decreased by approximately 4.0% as compared to the same period in 2012. A change in consumption does not have a significant impact on earnings due to the CPUC-approved Water Revenue Adjustment Mechanism (“WRAM”) account in place in all three water regions. GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC in the WRAM accounts as regulatory assets or liabilities.

 

Electric

 

For the three months ended March 31, 2013, revenues from electric operations decreased slightly to $10.7 million compared to $10.8 million for the same period in 2012In February 2012, GSWC filed its BVES rate case for rates in years 2013 through 2016. If rates are approved as filed, the rate increases are expected to generate approximately $1.3 million in annual revenues on a normalized sales basis.  A final decision on this rate case is expected from the CPUC in late 2013.

 

Billed electric usage increased by 4.5% during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012.  Due to the CPUC approved Base Revenue Requirement Adjustment Mechanism, which adjusts certain revenues to adopted levels authorized by the CPUC, this change in usage did not have a significant impact on earnings.

 

Contracted Services

 

Revenues from contracted services are composed of construction revenues (including renewals and replacements) and management fees for operating and maintaining the water and/or wastewater systems at military bases.  For the three months ended March 31, 2013, revenues from contracted services were $30.6 million as compared to $29.9 million for the three months ended March 31, 2012. There was an increase in renewal and replacement work at Fort Bliss in Texas and Fort Jackson in South Carolina under the terms of the respective 50-year contracts with the U.S. government. This increase was primarily offset by a decrease in construction activity at Fort Bragg in North Carolina, largely due to favorable weather conditions experienced during the first quarter of 2012, which allowed for more construction to be performed during that period.  Weather conditions for the three months ended March 31, 2013 were not as favorable.

 

Operating Expenses:

 

Supply Costs

 

Supply costs for the water segment consist of purchased water, purchased power for pumping, groundwater production assessments and water supply cost balancing accounts. Supply costs for the electric segment consist of purchased power for resale, the cost of natural gas used by BVES’ generating unit and the electric supply cost balancing account. Water and electric gross margins are computed by taking total revenues, less total supply costs. Registrant uses these gross margins and related percentages as an important measure in evaluating its operating results. Registrant believes this measure is a useful internal benchmark in evaluating the utility business performance within its water and electric segments. Registrant reviews these measurements regularly and compares

 

26



Table of Contents

 

them to historical periods and to its operating budget as approved. However, this measure, which is 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, which is determined in accordance with GAAP.

 

Total supply costs comprise the largest segment of total operating expenses. Supply costs accounted for approximately 25% of total operating expenses for the three months ended March 31, 2013 and 2012.

 

The table below provides the amount of increases (decreases), percent changes in supply costs, and margins during the three months ended March 31, 2013 and 2012 (amounts in thousands):

 

 

 

3 Months

 

3 Months

 

 

 

 

 

 

 

Ended

 

Ended

 

$

 

%

 

 

 

3/31/2013

 

3/31/2012

 

CHANGE

 

CHANGE

 

WATER OPERATING REVENUES (1)

 

$

69,233

 

$

66,201

 

$

3,032

 

4.6

%

WATER SUPPLY COSTS:

 

 

 

 

 

 

 

 

 

Water purchased (1)

 

$

10,732

 

$

9,552

 

$

1,180

 

12.4

%

Power purchased for pumping (1)

 

1,639

 

1,556

 

83

 

5.3

%

Groundwater production assessment (1)

 

3,187

 

3,323

 

(136

)

-4.1

%

Water supply cost balancing accounts (1)

 

203

 

2,018

 

(1,815

)

-89.9

%

TOTAL WATER SUPPLY COSTS

 

$

15,761

 

$

16,449

 

$

(688

)

-4.2

%

WATER GROSS MARGIN (2)

 

$

53,472

 

$

49,752

 

$

3,720

 

7.5

%

PERCENT MARGIN - WATER

 

77.2

%

75.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ELECTRIC OPERATING REVENUES (1)

 

$

10,734

 

$

10,813

 

$

(79

)

-0.7

%

ELECTRIC SUPPLY COSTS:

 

 

 

 

 

 

 

 

 

Power purchased for resale (1)

 

$

3,680

 

$

3,191

 

$

489

 

15.3

%

Electric supply cost balancing accounts (1)

 

1,168

 

1,419

 

(251

)

-17.7

%

TOTAL ELECTRIC SUPPLY COSTS

 

$

4,848

 

$

4,610

 

$

238

 

5.2

%

ELECTRIC GROSS MARGIN (2)