Business context and reporting period
American States Water Company (AWR) filed this unaudited Form 10-Q for the quarter ended March 31, 2021. AWR operates regulated water and electric utilities and contracted water and wastewater services for U.S. military installations. Its principal subsidiary, Golden State Water Company (GSWC), serves California water customers; electric operations are now reported through AWR subsidiary Bear Valley Electric Service, Inc. (BVESI), following a July 2020 reorganization.
Financial performance
Unless noted otherwise, amounts below are AWR consolidated and compare the three months ended March 31, 2021 with the same period in 2020. Dollar amounts are in millions.
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Operating revenue | $117.1 | $109.1 | +7.3% |
| Operating income | $30.3 | $25.7 | +18.0% |
| Net income | $19.3 | $14.1 | +36.9% |
| Diluted EPS | $0.52 | $0.38 | +$0.14 |
| Operating cash flow | $24.7 | $15.7 | +$9.0 |
| Capital expenditures | $37.1 | $33.5 | +$3.5 |
Water revenue rose 5.0% to $75.0 million; electric revenue rose 5.2% to $11.5 million; contracted-services revenue rose 14.3% to $30.5 million. AWR’s reported water gross margin, a non-GAAP measure, was $56.1 million, up 4.7%; electric gross margin was $7.8 million, up 0.4%. Operating margin was approximately 25.9% of revenue, compared with 23.6% a year earlier.
At March 31, 2021, AWR reported cash of $7.0 million, total assets of $1.79 billion, long-term debt of $440.3 million, and bank notes payable of $129.0 million. Current assets were $118.9 million versus current liabilities of $113.0 million. Cash declined from $36.7 million at year-end 2020, reflecting operating, investing and financing outflows. Net cash used in financing was $17.5 million, including $12.4 million of dividends. AWR declared dividends of $0.335 per share for the quarter, versus $0.305 in Q1 2020.
Material changes versus the prior period
- Net income increased by $5.2 million. Management cited higher regulated water margins from authorized rates, greater contracted-services construction activity, and a swing in retirement-plan investment results: Q1 2021 recorded a gain, while Q1 2020 included a $2.4 million loss. The comparison therefore includes a significant non-operating investment effect.
- Contracted-services revenue and earnings benefited partly from the timing of construction work; management expects the timing-related increase to reverse over the remainder of 2021.
- Operating cash flow improved as collections from utility customers recovered from pandemic-related disruption in 2020. Investing outflows increased, mainly due to regulated-utility capital spending; financing cash flow shifted from a $16.8 million inflow to a $17.5 million outflow, principally because AWR paid down its revolving credit facility.
- GSWC’s standalone comparison is affected by the July 2020 transfer of electric operations to BVESI: GSWC’s Q1 2020 results include electric operations, while Q1 2021 results do not. AWR consolidated results include the electric business in both periods.
Outlook, commentary, risks and unusual items
- Management expects 2021 regulated-utility company-funded capital expenditures of $120 million to $135 million. It expects the 2021 water rate step increase to add approximately $11.1 million to water gross margin compared with 2020. This is not a consolidated EPS forecast; management expects contracted services to contribute $0.45 to $0.49 per share in 2021.
- GSWC’s pending 2022–2024 water rate case includes requested capital budgets of approximately $450.6 million, with a decision expected in Q4 2021. The 2021 water rate increases took effect January 1. Management cautions that potential changes to WRAM/MCBA mechanisms after 2024 could increase earnings volatility and affect recovery of authorized margins.
- COVID-19 protections include suspensions of service disconnections for nonpayment. AWR recorded approximately $5.7 million of pandemic-related incremental costs as regulatory assets, believing recovery is probable. The protections and customer arrears may affect collections and borrowing needs.
- Drought is a material operating risk. As of late April, the filing reported below-average precipitation and snowpack, with substantial portions of California in severe or extreme drought. Reduced supplies, restrictions, or more costly replacement water could affect costs and liquidity; GSWC said some local restrictions remained in place.
- Other risks include water-quality requirements and PFAS treatment costs, wildfire mitigation and safety obligations for BVESI, utility rate and cost-recovery decisions, and the timing of U.S. government contract adjustments and construction awards for ASUS.
- In April 2021, a proposed CPUC decision denied BVESI recovery of $455,000 in 2019 storm costs. BVESI intends to pursue recovery; if unsuccessful, the amount would be charged to earnings. GSWC also planned to redeem $28 million of 9.56% notes on May 24, 2021, with an $840,000 redemption premium, using AWR credit-facility funding pending planned new debt issuance in 2022.
- S&P affirmed AWR and GSWC at A+ in March 2021 but revised both outlooks to negative. Management said available operating cash flow, revolving credit facilities and capital-market access should support operations and financing needs. The filing reports no significant change in risk factors from the 2020 Form 10-K.
Important facts for investors to verify
- Whether the expected $11.1 million water-margin increase and the 2022–2024 rate case deliver the anticipated recovery and returns.
- Trends in customer collections, delinquent accounts, COVID-19 cost recovery and use of credit facilities as customer protections end.
- Water availability, drought restrictions, purchased-water costs and the potential for further emergency measures.
- Whether ASUS construction activity and contract adjustments sustain the reported growth, given management’s warning that Q1 timing differences may reverse.
- The outcome of BVESI’s $455,000 storm-cost recovery matter and the financial effects of the planned high-coupon debt redemption.
- Debt funding needs for the capital program, the negative S&P outlook, and the sustainability of dividend growth and cash generation.