American States Water Company (AWR) — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. AWR reports water, electric and contracted-services segments; its regulated water and electric utilities serve California, while contracted services operate water and wastewater systems at U.S. military installations.
Financial results and liquidity
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Operating revenue | $488.2 million | $473.9 million | +3.0% |
| Operating income | $130.5 million | $127.1 million | +2.7% |
| Net income | $86.4 million | $84.3 million | +2.5% |
| Diluted EPS | $2.33 | $2.28 | +$0.05 |
| Operating cash flow | $122.2 million | $116.9 million | +$5.3 million |
- Segment revenue: water $330.6 million, electric $37.0 million and contracted services $120.6 million. Water revenue rose 3.4%; contracted-services revenue rose 5.3%; electric revenue fell 6.4%, partly reflecting prior-year retroactive rate-case revenue.
- Water gross margin, a company-defined non-GAAP measure, increased 4.2% to $237.6 million. Electric gross margin declined 1.1% to $26.3 million.
- Q4 2020 revenue was $124.2 million, net income $20.2 million and diluted EPS $0.54, compared with $113.0 million, $16.7 million and $0.45 in Q4 2019.
- Cash flow: investing used $131.6 million and financing provided $44.8 million. Year-end cash was $36.7 million, versus $1.3 million a year earlier.
- Year-end current assets were $157.1 million and current liabilities $118.6 million. Long-term debt was $440.3 million; bank borrowings were $134.2 million, including $114.0 million under AWR’s facility and $20.2 million under BVESI’s facility. AWR’s $200 million revolver expires in May 2023; BVESI’s facility is $35 million.
- Total assets were $1.792 billion and shareholders’ equity $641.7 million. Dividends paid were $1.28 per share, up from $1.16 in 2019.
Material changes and notable items
- On July 1, 2020, GSWC transferred its electric utility assets and liabilities to BVESI, which became a direct AWR subsidiary. The common-control reorganization generated no gain or loss, but electric operations are included in GSWC results only through June 30, 2020; AWR’s consolidated results include them for the full year.
- GSWC issued $160 million of unsecured notes in July: $85 million at 2.17% due 2030 and $75 million at 2.90% due 2040. Proceeds helped repay intercompany borrowings and reduce AWR credit-facility borrowings.
- Water-segment diluted EPS increased to $1.66 from $1.61, primarily reflecting authorized rate increases. Adjusted electric EPS was $0.20 versus $0.15 in 2019, excluding the prior-year retroactive rate-case benefit. Contracted-services EPS was $0.47 in both years.
- Operating cash flow improved, but customer receivables were affected by pandemic-related payment pressures and the suspension of service disconnections. The company recorded $4.4 million of COVID-related costs in regulatory memorandum accounts for potential future recovery, without a 2020 earnings impact.
Outlook, risks and contingencies
- Management estimated 2021 regulated-utility company-funded capital expenditures of $120–$135 million, including about $12.2 million for electric wildfire mitigation. AWR expects capital needs to require continued external financing.
- Water rates effective January 1, 2021 were expected to add approximately $11.1 million to adopted water gross margin. GSWC’s pending 2022–2024 rate case requested about $450.6 million in capital budgets; a decision was scheduled for Q4 2021.
- California’s CPUC decision may prevent continued use of GSWC’s WRAM and MCBA mechanisms in rate cases for 2025–2027. Replacing them could increase earnings volatility and affect recovery of authorized margins; rehearing applications were pending. Management said the outcome was uncertain.
- Key risks include California drought and water-supply constraints, wildfire exposure and potential limits or delays in cost recovery, water-quality compliance including PFAS, regulatory rate decisions, and pandemic-related bad debt and cash-flow effects. Military contracts are long term but may be terminated by the U.S. government; price adjustments, construction payments and cost recovery may be delayed or disputed.
- GSWC estimated $1.3 million of remaining remediation costs at a former underground gasoline-tank site and believed recovery through rates was probable. The filing states routine litigation was not expected to have a material effect.
- AWR’s board approved a Q1 2021 dividend of $0.335 per share. Management stated a long-term dividend-growth objective above 7% annually; future dividends remain subject to earnings, financial condition and other factors.
- Auditors issued unqualified opinions on AWR’s and GSWC’s financial statements. AWR’s internal control over financial reporting was also found effective; the auditors identified rate-regulation accounting as a critical audit matter because recovery judgments require significant estimates.
Important facts for investors to verify
- Track the outcome and timing of GSWC’s water rate case, the cost-of-capital proceeding and rehearing applications concerning WRAM/MCBA treatment.
- Monitor customer delinquencies, regulatory approval and collection of COVID-19 memorandum-account costs, and resulting borrowing needs.
- Compare planned versus actual capital spending, especially wildfire mitigation, and confirm timely recovery of those investments in rates.
- Assess drought conditions, purchased-water mix and costs, PFAS treatment requirements, and the potential effect on service and operating costs.
- Review debt balances, credit-facility availability, covenant compliance and the funding needs associated with the capital program and dividend policy.
- Distinguish AWR consolidated electric results from GSWC standalone results after the July 2020 reorganization when making year-over-year comparisons.