AMERICAN STATES WATER CO quarterly report, Q2 FY2021

American States Water Company (AWR) — Q2 2021 Form 10-Q

Business context and reporting period

Quarter ended June 30, 2021; comparisons are with the corresponding 2020 periods. AWR’s businesses are regulated water and electric utilities in California and contracted water and wastewater services at U.S. military installations. This combined filing also reports separately on Golden State Water Company (GSWC), AWR’s water utility subsidiary. Amounts below are in millions unless stated otherwise.

Comparability note: GSWC transferred its electric utility assets to AWR subsidiary BVESI on July 1, 2020. AWR consolidated results include the electric segment in both comparison periods, but GSWC’s 2020 comparative results include electric operations while its 2021 results do not.

Financial performance and condition

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Revenue	$128.4	$121.3	$245.5	$230.4
Operating income	$37.8	$35.7	$68.2	$61.4
Net income	$26.6	$25.6	$45.8	$39.7
Diluted EPS	$0.72	$0.69	$1.24	$1.07

Q2 revenue increased 5.9%, operating income 6.0%, and net income 3.8% year over year. Six-month revenue rose 6.6%, operating income 11.0%, net income 15.5%, and diluted EPS 15.9%.
Q2 segment revenue: water $91.6 million, electric $8.1 million, and contracted services $28.7 million. Six-month revenue was $166.7 million, $19.6 million, and $59.2 million, respectively.
Management’s non-GAAP water gross margin was $66.0 million in Q2, up 5.0%; electric gross margin was $5.7 million, up 2.6%. For the first six months, water gross margin was $122.2 million, up 4.9%, and electric gross margin was $13.5 million, up 1.3%.
Six-month operating cash flow was $41.1 million, versus $46.3 million. Capital expenditures were $76.1 million, leaving operating cash flow less capital expenditures of approximately negative $35.0 million. Cash fell to $5.4 million from $36.7 million at year-end.
At June 30, AWR had $412.3 million of long-term debt, $0.4 million current long-term debt, and $188.0 million of bank notes payable. Cash was $5.4 million; current assets were $136.3 million and current liabilities $111.4 million. Bank facility usage included $162 million under AWR’s $200 million facility and $26 million under BVESI’s $35 million facility.
Common equity was $664.1 million. AWR paid $0.670 per share in dividends in the first half, versus $0.610 in 2020.

Material changes and management commentary

Water revenue growth principally reflected CPUC-approved 2021 rate increases; billed water consumption rose 12% in Q2 and 8% for the first half, partly due to warmer, drier weather. The WRAM generally limits the effect of consumption changes on recorded revenue.
Water supply costs rose faster than water revenue: first-half water supply costs increased 5.9%, while water gross margin increased 4.9%. Several wells being out of service drove a higher purchased-water share than adopted; the water supply balancing account had a $6.3 million under-collection at June 30.
Contracted-services revenue grew 11.2% in the first half, reflecting more construction activity and management-fee adjustments. Segment earnings also benefited from lower legal and outside-service costs. Management cautioned that construction activity and related earnings may not continue at current levels.
Interest expense increased 8.1% in the first half, primarily due to higher borrowing to support capital investment. GSWC redeemed $28 million of 9.56% private-placement notes in May, paying an $840,000 premium that was deferred as a regulatory asset. The redemption was funded through borrowing from AWR.
Management expects regulated-utility company-funded capital expenditures of $125–$135 million in 2021. It expects contracted services to contribute $0.45–$0.49 per share for 2021; no consolidated full-year EPS guidance is stated here.
On July 27, 2021, the board approved a 9% increase in the quarterly dividend, from $0.335 to $0.365 per share, payable September 1, subject to the stated record date.

Outlook, risks, and contingencies

California drought conditions were a significant operating risk. Management reported below-average snowpack and precipitation and nearly 90% of California in extreme drought as of July 27, 2021. Mandatory conservation measures, higher-cost replacement supplies, or reduced customer collections could affect liquidity; GSWC said it would need CPUC approval before mandatory customer cutbacks.
COVID-19 disconnection moratoria increased delinquent customer receivables and borrowing needs. Approximately $6.7 million of incremental pandemic costs were recorded as regulatory assets pending recovery. Water disconnections remained restricted until further CPUC guidance or February 1, 2022; electric disconnections were restricted through September 30, with actual disconnections under payment plans not expected until approximately December 1, 2021. State relief funding may reduce amounts recoverable from customers.
GSWC’s 2022–2024 water rate case requested approximately $450.6 million of capital budgets over three years. Hearings were deferred to October 2021, and a final decision might come after year-end; any new rates would be retroactive to January 1, 2022. GSWC also requested a 10.5% return on equity in its cost-of-capital proceeding, with a decision scheduled for Q4 2021.
Future water rate cases may not retain WRAM and MCBA mechanisms after 2024. Management warned that replacement mechanisms could increase earnings volatility and may result in less or more than full recovery of authorized water gross margin.
BVESI’s wildfire-mitigation costs and investments are subject to review. Separately, the CPUC denied recovery of $455,000 of 2019 storm costs; BVESI plans to reapply, but failure to obtain recovery would result in an earnings charge.
GSWC reported an estimated $1.3 million of additional environmental cleanup costs, which management believes probable of recovery in rates. Routine litigation was not believed material. AWR and GSWC retained S&P A+ ratings, but S&P changed both outlooks to negative; Moody’s retained GSWC’s A2 rating with a stable outlook.
Management stated that operating cash flows, credit facilities, and access to capital markets should be adequate for normal operations and planned financing needs. It also expects interest expense to rise as capital investment and external financing needs increase.

Important facts for investors to verify

Progress, timing, and final rate outcomes for GSWC’s water general rate case and cost-of-capital proceeding.
Whether drought conditions, water-supply costs, and conservation actions affect customer collections, regulatory recovery, or margins.
Recovery of COVID-19 memorandum-account costs after offsets for state and federal customer-bill relief and payment plans.
BVESI’s wildfire-plan cost review and outcome of its renewed request for recovery of the $455,000 storm costs.
Execution of the $125–$135 million regulated capital program, resulting borrowing and interest costs, and availability of external financing given the negative S&P outlook.
Whether contracted-services construction activity and the stated $0.45–$0.49 per-share contribution outlook are achieved.