American States Water Company (AWR) — Q3 2021 Form 10-Q
Business context and reporting period. This unaudited combined filing covers AWR and its wholly owned water utility, Golden State Water Company (GSWC), for the quarter and nine months ended September 30, 2021. AWR operates regulated water and electric utilities and contracted water and wastewater services at U.S. military bases. The electric business was transferred from GSWC to AWR subsidiary BVESI in July 2020, making GSWC year-over-year comparisons that include electric results in early 2020 not directly comparable. AWR consolidated comparisons include the electric business in both periods.
Financial performance
| AWR consolidated | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Operating revenue | $136.8m | $133.7m | $382.2m | $364.0m |
| Operating income | $42.8m | $39.8m | $111.0m | $101.2m |
| Net income | $28.2m | $26.5m | $74.0m | $66.2m |
| Diluted EPS | $0.76 | $0.72 | $2.00 | $1.79 |
| Operating margin | 31.3% | 29.8% | 29.0% | 27.8% |
Revenue and earnings drivers. Q3 revenue rose 2.3% and net income 6.1%; nine-month revenue rose 5.0% and net income 11.8%. Water revenue growth reflected CPUC-approved rate increases; billed water consumption was slightly lower in Q3 but up 4% year to date, partly due to warmer, drier weather. Electric revenue benefited from new rates, while contracted-services revenue fell in Q3 on lower construction activity but increased year to date. Nine-month contracted-services earnings also benefited from construction timing, higher management fees and lower expenses. Water supply costs and operating expenses increased, while lower maintenance costs and Q3 interest expense helped results. Nine-month other income included $2.3m of retirement-plan investment gains, versus $1.3m in 2020.
Cash flow, capital spending and liquidity. For the first nine months, operating cash flow was $81.9m, down from $87.8m; capital expenditures were $106.7m, up from $94.8m. Cash declined to $7.1m from $36.7m at year-end 2020. Current assets were $143.7m versus current liabilities of $151.1m. At September 30, AWR reported $412.1m of long-term debt, $28.0m of current bank borrowings at BVESI and $162.0m outstanding under AWR’s credit facility. Management expects 2021 regulated-utility company-funded capital expenditures of $130m–$140m and expects to use operating cash, credit facilities and capital markets to fund needs. Long-term debt carrying value was $412.1m; the filing estimates GSWC long-term debt fair value at $502.0m, excluding debt issuance costs.
Margins and dividends. Q3 and nine-month operating margins, calculated from reported GAAP results, were approximately 31.3% and 29.0%, respectively. AWR paid $0.365 per share for the Q3 dividend, up from $0.335 a year earlier, and declared a further $0.365 dividend for December 2021.
Material changes, outlook and risks
- Rates and returns: GSWC’s 2022–2024 water general rate case was largely settled in principle, but several issues remain; a final CPUC decision was not expected by year-end 2021, with any new rates effective retroactively from January 1, 2022. GSWC requested a 10.5% return on equity and 8.18% overall return on rate base in its cost-of-capital proceeding; a decision was expected in the first half of 2022. Management says capital spending at regulated utilities is expected to remain above depreciation.
- Segment outlook: Management expects contracted services to contribute $0.45–$0.49 per share in 2021. AWR did not provide full-year consolidated EPS guidance in the supplied filing text. ASUS had $3.3bn of remaining performance obligations over military contracts with 33–47 years remaining; contracts may be terminated by the U.S. government for convenience. New construction awards and contract adjustments may vary.
- Drought and supply: California’s 2021 water year was the second driest on record; the State Water Project allocation was 5%, and a 2022 allocation of zero was possible. GSWC implemented voluntary conservation and mandatory 20% reductions in some service areas. Lower water availability, higher purchased-water costs and further restrictions could affect operations and liquidity; conservation-related costs are tracked for potential recovery.
- COVID-19 and collections: Service-disconnection moratoria increased delinquent customer receivables and borrowing needs. Approximately $8.5m of COVID-related costs were recorded as regulatory assets, subject to future recovery and offsets for customer payments and government assistance. Water disconnections were suspended until no earlier than February 1, 2022 or further CPUC guidance; electric disconnections under payment plans were not to occur before December 1, 2021. State relief funding for overdue water and electric bills was expected to reach utilities in late 2021 or early 2022.
- Regulatory and unusual items: GSWC redeemed $28m of 9.56% notes early in May 2021, paying an $840,000 premium deferred as a regulatory asset. BVESI’s $7.9m unrealized gain on power contracts was offset through a regulatory account and did not affect earnings. The CPUC denied recovery of approximately $455,000 of BVESI storm costs; BVESI refiled in October 2021, and failure to recover would require a write-off. Review of BVESI wildfire-mitigation costs and investments remained in progress; approximately $2.2m of related expenses were recorded as regulatory assets.
- Other risks and financing: S&P affirmed A+ ratings for AWR and GSWC but revised both outlooks to negative; Moody’s maintained GSWC’s A2 rating with a stable outlook. Management anticipates increased external financing needs and potentially higher interest expense. Other exposures include water quality and PFAS treatment costs, pension obligations, electric commodity prices, regulatory recovery, and timing of U.S. government payments and contract adjustments. Management reported no significant risk-factor changes from the 2020 Form 10-K and no pending legal proceedings believed material.
Key investor verification points
- Track CPUC decisions on GSWC’s 2022–2024 rate case and cost-of-capital request, including timing and authorized returns.
- Assess drought severity, water availability, purchased-water costs, conservation measures and the potential effects on customer demand and liquidity.
- Monitor customer arrears, government bill-relief receipts, and whether COVID-related regulatory assets are ultimately recoverable.
- Review BVESI’s storm-cost recovery application and wildfire-plan audit outcomes, including potential regulatory-asset write-offs.
- Compare ongoing operating cash generation with the $130m–$140m regulated-utility capital-spending outlook and monitor credit-facility use, refinancing needs and credit outlooks.
- Separate recurring contracted-services earnings from construction timing, new awards and U.S. government contract adjustments; confirm progress against the disclosed 2021 segment outlook.