American States Water Company (AWR) — 2021 Form 10-K
Reporting period: Year ended December 31, 2021; filed February 22, 2022. This is an annual report, not a standalone fourth-quarter report. AWR reports water, electric and contracted-services segments; the filing also includes separate financial statements for Golden State Water Company (GSWC).
Business context
AWR provides regulated water service in California through GSWC, electric service in the Big Bear area through BVESI, and water and wastewater services at U.S. military installations through ASUS and its subsidiaries. At year-end, the regulated utilities served 262,770 water and 24,656 electric customers. Military-base contracts generally run for 50 years, but the U.S. government may terminate them for convenience.
Financial performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Operating revenue | $498.9 million | $488.2 million | +2.2% |
| Operating income | $141.0 million | $130.5 million | +8.0% |
| Net income | $94.3 million | $86.4 million | +9.2% |
| Diluted EPS | $2.55 | $2.33 | +$0.22 |
| Operating cash flow | $115.6 million | $122.2 million | -$6.6 million |
| Capital expenditures | $144.5 million | $130.4 million | +$14.1 million |
Consolidated operating margin was approximately 28.3% and net margin approximately 18.9% (calculated from reported figures). Revenue by segment was $347.1 million water (+5.0%), $38.3 million electric (+3.6%) and $113.4 million contracted services (-6.0%). Segment operating income was $107.6 million water, $10.7 million electric and $22.7 million contracted services.
Water segment diluted EPS rose to $1.87 from $1.66. It included $4.3 million of gains on retirement-plan investments, or $0.08 per share; excluding those gains, management reported adjusted water-segment EPS of $1.79 versus $1.60. Electric segment EPS was $0.21 versus $0.20, and contracted-services EPS was $0.48 versus $0.47. The segment EPS presentation is non-GAAP; consolidated diluted EPS is GAAP.
Cash and cash equivalents ended the year at $5.0 million, down from $36.7 million. Investing activities used $145.1 million, principally reflecting capital spending; financing activities used $2.3 million. Total debt was approximately $621.7 million, comprising $415.8 million of GSWC debt before issuance costs and $205.5 million drawn on revolving facilities. AWR had $174.5 million drawn on its $200 million facility, and BVESI had $31.0 million drawn on its $35 million facility. The BVESI borrowing was classified as current and was expected to be repaid with long-term debt issuance in the first half of 2022. The filing states that management expects operating cash flows, credit facilities and capital-market access to support liquidity and capital needs.
AWR paid $1.40 per share in 2021 dividends, up from $1.28 in 2020. The board approved a $0.365-per-share first-quarter 2022 dividend. AWR reported 67 consecutive years of annual dividend increases and a long-term objective of dividend growth above 7% annually.
Material changes and notable items
- Water revenue increased mainly due to CPUC-approved rate increases; billed water consumption was slightly higher. Supply costs increased, largely from greater purchased-water use and wholesale-price increases, with regulatory balancing mechanisms generally passing these costs through to customers.
- Electric revenue rose with authorized rates, partly offset by a 2% decline in usage. Higher power costs were largely addressed through a CPUC-approved balancing account.
- Contracted-services revenue declined with lower construction activity, partly offset by higher management fees after economic price adjustments. ASUS received approximately $17.3 million in new construction awards during 2021.
- GSWC redeemed $28 million of 9.56% notes in May 2021, paying an $840,000 premium recorded as a regulatory asset. Interest expense was partly offset by lower borrowing rates following the redemption.
- Regulated utility capital expenditures were $150.6 million in 2021. The company projects $140 million to $160 million of company-funded regulated-utility capital spending in 2022, including about $13 million for BVESI wildfire mitigation.
Outlook, risks and contingencies
- Rates and regulatory recovery: A proposed settlement in GSWC’s 2022–2024 water rate case would authorize about $404.8 million of capital investment over three years. Subject to final CPUC approval, it indicates 2022 adopted revenue about $30.3 million above 2021 adopted revenue and supply costs about $9.7 million higher. Three issues remained unresolved, and the final decision was pending. GSWC also requested a 10.5% return on equity and an 8.18% return on rate base in its cost-of-capital proceeding. These are requests, not approved outcomes.
- Water mechanisms: GSWC may use WRAM and MCBA mechanisms through 2024. Current CPUC decisions do not permit their continuation in the next rate case for 2025–2027; replacement mechanisms could increase earnings volatility and affect the extent or timing of cost recovery. GSWC challenged the related CPUC decision, and the outcome was uncertain.
- Drought and wildfire: Management cited California drought and water-supply uncertainty, including a zero initial State Water Project allocation for 2022 that was later raised to 15%. Water restrictions remained in some GSWC service areas. BVESI incurs wildfire-mitigation costs that are not in rates pending future CPUC review; recovery, wildfire liability, insurance availability and public-safety power shutoffs are risks.
- COVID-19, inflation and supply chain: Customer delinquencies, construction-material and labor inflation, and supply-chain constraints could pressure liquidity or delay projects. COVID-related costs were tracked in regulatory accounts for possible future recovery, subject to CPUC approval and required offsets. GSWC received $9.5 million in state customer-bill relief in January 2022; BVESI received $321,000 in February 2022.
- Contracted services: The U.S. government is ASUS’s primary customer. Delays in contract price adjustments, approvals, appropriations or payments; fixed-price cost overruns; audits; and government termination rights could affect earnings and cash flows. Remaining performance obligations were $3.3 billion, recognized over contract terms of 33–47 years, but contracts may be terminated early.
- Other exposures: GSWC estimated $1.3 million of remaining environmental remediation costs at a former underground fuel-tank site. BVESI continued seeking recovery of about $455,000 in winter-storm costs after an initial CPUC denial; an unfavorable outcome would require a write-off. The company also identified water-quality, cyber-security, pension, regulatory and natural-disaster risks.
Management reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and AWR’s internal controls. The auditor identified accounting for regulatory assets and liabilities as a critical audit matter, citing the judgment required to assess the likelihood and timing of recovery or refunds.
Important facts for investors to verify
- Final CPUC decisions and actual rate implementation for GSWC’s 2022–2024 case and cost-of-capital request, including unresolved issues and whether proposed revenues and investments are approved.
- BVESI’s repayment or refinancing of the $31.0 million revolving-facility balance, and AWR’s renewal or replacement of its $200 million facility before its May 2023 maturity.
- Whether planned 2022 capital spending proceeds on schedule and within budget amid inflation and supply-chain constraints, and the timing of wildfire-cost recovery.
- Cash collection and bad-debt trends after pandemic bill relief, and CPUC treatment of remaining COVID-19 memorandum-account balances.
- Water-supply conditions and restrictions, changes to WRAM/MCBA recovery after 2024, and the eventual outcome of the winter-storm cost recovery request.