Business Overview
American States Water Company (AWR) has long been a stalwart in the water utility industry, providing reliable and essential services to customers across California and beyond. As the water sector navigates a dynamic landscape shaped by emerging challenges and technological advancements, AWR's unwavering commitment to infrastructure investment, regulatory compliance, and shareholder value has positioned it as a steady industry leader.
Founded in 1929 and headquartered in San Dimas, California, AWR has a rich history of serving communities through its two primary subsidiaries - Golden State Water Company (GSWC) and Bear Valley Electric Service, Inc. (BVES). GSWC, the company's water utility, provides water service to approximately 264,600 customer connections across more than 80 communities in California, while BVES distributes electricity to around 24,800 customers in the Big Bear Lake region.
Historical Development
AWR's journey began as a water utility, with GSWC steadily expanding its operations through acquisitions and expansions to become one of the largest regulated water utilities in California. In 1998, the company diversified its portfolio by entering the electric utility business with the acquisition of BVES, broadening its customer base and revenue streams.
In addition to its regulated utility operations, AWR's American States Utility Services, Inc. (ASUS) subsidiary manages water and wastewater systems at various U.S. military bases under long-term privatization contracts. This diversified business model has allowed AWR to cultivate a unique expertise in serving both municipal and government customers.
The early 2000s presented challenges for AWR as it navigated the complex regulatory environment in California. The company worked closely with the California Public Utilities Commission (CPUC) to secure necessary rate approvals and address customer concerns regarding rising utility rates. Despite these hurdles, AWR maintained its focus on infrastructure investment and reliable service delivery, which has contributed to its long-standing success and reputation in the industry.
Financials
AWR's financial performance has been a testament to its operational excellence and strategic foresight. As of the latest reporting period, the company boasted a net income of $124.9 million and revenue of $595.7 million. The company's water segment, which accounts for the lion's share of its operations, generated $324.7 million in revenues, while the electric segment contributed $29.9 million. The contracted services segment, represented by ASUS, added $97.7 million to the top line.
Notably, AWR's return on equity (ROE) stands at a robust 13.45%, outpacing the industry average of 11.21%. This metric underscores the company's efficiency in utilizing shareholder funds to drive profitable growth. Additionally, AWR maintains a healthy debt-to-capital ratio of 52.88%, indicating prudent financial management and a strong balance sheet.
In the most recent fiscal year (2023), AWR reported revenue of $595.70 million and net income of $124.92 million. Operating cash flow stood at $67.68 million, while free cash flow was negative at -$120.86 million. For the most recent quarter (Q3 2024), the company reported revenue of $161.78 million, representing a year-over-year growth of 6.6%. Net income for the quarter was $35.83 million, showing a 13.5% increase compared to the same period last year. The increase in revenue was largely attributed to third-year rate increases in the Water segment and higher management fees in the Contracted Services segment.
Liquidity
One of the hallmarks of AWR's success has been its unwavering commitment to dividend growth. The company has paid dividends to shareholders every year since 1931 and has increased the dividends received by shareholders each calendar year for 70 consecutive years - an impressive feat that places it among an exclusive group of companies on the New York Stock Exchange. The company's quarterly dividend rate has grown at a compound annual growth rate (CAGR) of 8.8% over the last five years and is on pace to achieve an 8.0% CAGR in calendar year dividend payments for the ten-year period ended 2024.
AWR maintains a strong liquidity position with a debt-to-equity ratio of 1.07 and $16.47 million in cash and cash equivalents. The company has access to significant credit facilities, including a $165 million unsecured revolving credit facility for AWR, a $200 million unsecured revolving credit facility for GSWC, and a $65 million revolving credit facility for BVES. The current ratio stands at 0.69, while the quick ratio is 0.64, indicating the company's ability to meet its short-term obligations.
Industry Challenges and Company Response
However, AWR's journey has not been without its challenges. The water industry as a whole has grappled with a confluence of issues, including aging infrastructure, emerging contaminants, and the looming threat of climate change. These factors have necessitated significant capital investment and operational adaptations, which AWR has proactively addressed.
In 2024, AWR's regulated utilities reached landmark settlement agreements with the California Public Utilities Commission (CPUC) for both its water and electric operations. The water segment settlement authorizes GSWC to invest approximately $573.1 million in capital infrastructure over the next three-year period, while the electric segment settlement grants BVES the ability to invest $75.6 million, including $23.1 million in advice letter capital projects.
These settlements not only underscore AWR's collaborative approach with regulators but also reflect the company's commitment to strengthening its infrastructure and enhancing service reliability for its customers. The significant capital investment plans are poised to drive further growth and solidify AWR's position as a leader in the water utility space.
Growth and Future Outlook
Furthermore, AWR's contracted services segment, ASUS, has continued to demonstrate resilience and growth potential. During the first nine months of 2024, ASUS was awarded a record-high $54 million in new capital upgrade construction projects, a substantial increase from the $25.2 million awarded for the full year of 2023. This surge in contract awards underscores the segment's ability to secure valuable opportunities and contribute to AWR's overall earnings.
Looking ahead, AWR's guidance for the full year of 2024 projects that the contracted services segment will contribute $0.54 to $0.57 per share, up from the previous range of $0.50 to $0.54 per share. This upward revision reflects the stronger-than-anticipated performance of the new military base operations and the company's ability to effectively integrate and manage these new assets. For 2025, AWR projects ASUS will contribute $0.59 to $0.63 per share, indicating continued growth in this segment.
AWR also projects to invest $210 million to $230 million on capital expenditures for its regulated utilities in 2024. Assuming the settlement agreement for the Bear Valley Electric general rate case is approved, AWR estimates the impact related to 2023 and 2024 to be a combined $0.05 to $0.07 per share.
Despite the industry's challenges, AWR has demonstrated its resilience and adaptability. The company's prudent financial management, commitment to infrastructure investment, and success in navigating the regulatory landscape have all contributed to its position as a trusted and admired player in the water utility sector.
As the water industry continues to evolve, driven by the need for sustainable solutions and the adoption of innovative technologies, AWR is well-poised to capitalize on these trends. The company's focus on providing reliable and high-quality water and electric services, coupled with its diversified business model and strong capital structure, make it an attractive investment opportunity for those seeking stability and long-term growth potential in the ever-changing utility landscape.
AWR's regulated water utility subsidiary, GSWC, has seen its average water rate base grow at a CAGR of 10.3% from 2018 to 2024, reaching $1.36 billion in 2024. This growth in the rate base, combined with the company's consistent dividend increases and its ability to secure new contracts and capital projects, positions AWR for continued success in the coming years.