Drought, Delays, Not Drying Investor Appetite for American States Water

On the floor, these seem like difficult instances for traders in San Dimas-based water utility holding firm American States Water Co.
Its water utility subsidiary, Golden State Water, has a number of programs alongside California’s Central Coast, one of many areas hardest hit by the extended drought, which in flip has compelled utilities to pay extra for imported water.

Even tougher is a year-long delay in Golden State Water’s curiosity case earlier than the California Public Utilities Commission. The case goals to set water costs for this 12 months by 2024. But as 2022 attracts to an in depth, the case remains to be earlier than the fee and a choice is not anticipated till the primary quarter of subsequent 12 months. That robbed the corporate of about $30 million in extra income it had deliberate for this 12 months.

Assuming the fee ultimately approves the value improve package deal, Golden State might be allowed to retrospectively apply the surcharge improve to buyer payments subsequent 12 months, though that will not make its clients joyful.

Additionally, one of many firm’s pension plans suffered a $1 million loss within the third quarter, additional weighing on the underside line.

Still, traders have been bullish on American States Water shares for the previous few months, sending the share worth up 28% to $99.47 on November 25 — slightly below the all-time excessive of $103 hit on December 31 – earlier than drifting down barely resulting from revenue taking. The inventory closed at $97.99 on Nov. 30 — down about 5% year-to-date and from its all-time excessive.

For comparability, the S&P Global Water Index Exchange Traded Fund — which features a vary of water utility and associated shares — is down about 20% year-to-date. And the S&P 500 itself is down about 17% over that interval.

One analyst stated the important thing to investor sentiment for American States Water is a comparatively clear stability sheet. The firm’s whole debt to whole property ratio was 0.35 within the third quarter.

“AWR has the strongest balance sheet in the industry (high investment-grade credit metrics, no parent debt, etc., including no need for external equity over our five-year guidance,” stated Jonathan Reeder, an fairness analyst at Wells Fargo Securities, in an October report by American States Water: “We believe this is an important distinction during the current disruption in capital markets.”

Additionally, Reeder stated traders are optimistic the Public Utilities Commission will maintain on to a tentative settlement settlement it reached with Golden State Water in late 2021 that might enable the utility to earn $30 in extra income in 2022 Millions of {dollars} over the present allowable quantity to attain no less than that rather more in 2023 and 2024.

As a outcome, Reeder stated, laying out bullish sentiment amongst traders, the corporate is more and more standing out as a horny funding vis-à-vis an general market and utility sector that has underperformed to date this 12 months.

While American States Water stated in its third-quarter earnings launch on Nov. 10 that it expects a choice from the Public Utilities Commission on the tariff case by the top of the 12 months, a spokesman famous that the fee subsequently prolonged the deadline to mid-February. While a choice remains to be potential this month, it now seems extra doubtless within the subsequent quarter.

dividend king

There’s one other issue that pulls income-seeking traders to American States Water: dividend payouts. While most utilities pay dividends to traders, American States Water stands out because the so-called Dividend King. The firm has elevated quarterly dividend payouts yearly for 68 consecutive years. That’s the longest streak of any publicly traded firm within the nation, greater than well-known corporations identified for paying dividends like Cincinnati, Ohio-based Proctor & Gamble Co. (66 consecutive years of dividend will increase), St. Paul, Minn .-based 3M Co. (age 64) and Atlanta-based Coca Cola Co. (age 60).

While American States Water’s present annual dividend of $1.53 per share is probably not the best, and equates to a payout of about 1.5%, given its observe report, a shareholder can doubtless anticipate that payout to proceed indefinitely yearly time will increase.

However, Reeder itself shouldn’t be optimistic about American States Water within the brief time period. In late October, he downgraded the inventory from “equal weight” to “underweight,” arguing that the latest rise within the share worth has prompted it to be considerably overvalued.

“As a result of the outperformance, AWR shares are now trading at a 10-15% P/E premium to peer water companies,” he stated within the Oct. 20 downgrade report. “While we don’t disagree that a relative premium multiple is warranted, given a projected growth rate that’s relatively consistent with that of the competition, it’s arguably a little high.”

results of drought

Regarding the drought, which has lower water allocations for nearly each water company within the state, Golden State Water has known as in its share of provide cuts, notably within the hardest-hit Central Coast area.

US States Chief Executive Robert Sprowls, in response to emailed questions, stated his water utility Golden State Water needed to pay larger charges for water it imports into its service space, although he did not disclose how a lot larger these charges had been charges had been.
As in a lot of the state, the cornerstone of the utility’s response to this provide scarcity has been targeted on decreasing clients’ water use.

Sprowls stated in his responses that Golden State’s water clients rose to the problem.
“We are very encouraged by the response from our customers in the coastal areas,” he stated. “In the month of October, our coastal system customers saved an average of 18% compared to October 2020.”

Overall, Sprowls stated, Golden State Water clients have lowered their water use sufficient to satisfy Gov. Gavin Newsom’s name for a 15% discount from 2020 ranges.
Regarding the upper value of imported water, Sprowls stated that below Public Utilities Commission guidelines, the utility can recoup the elevated value of imported water from its clients. This is finished by way of a particular accrual account that’s maintained for future billing expenses.

As the drought continues, Sprowls stated in feedback in the course of the firm’s convention name with analysts, “Golden State Water will continue to work with its local suppliers to assess water supply conditions and water use restrictions in its service areas and make appropriate adjustments as needed.”

American States Water has two different subsidiaries along with Golden States Water. One of those is a small utility that provides the Big Bear Lake space within the San Bernardino Mountains. Much like its greater electrical utility cousin, Southern California Edison, this utility has been attempting to strengthen its transmission grid in recent times to scale back the danger of wildfires.

fee improve

Commenting to analysts on the earnings name, Sprowls stated the utility filed its fee with the Public Utilities Commission in August; The utility is trying to improve electrical energy charges to offset larger capital expenditures.

The different subsidiary is an unregulated entity that gives operations, upkeep and building administration providers for water distribution, wastewater assortment and remedy amenities situated at 11 navy bases throughout the nation below 50-year privatization contracts with the federal authorities.

Sprowls stated that unit is combating provide chain disruptions and rising building prices, partially offset by larger administration charge income.

Nonetheless, Sprowls stated on the convention name that he is assured the unit will develop its enterprise and, in flip, its contribution to the corporate’s general earnings per share over time.

“We remain confident that our proven track record of managing water and wastewater services for military bases since 2004 will allow us to compete effectively for military base contracts in the future,” stated Sprowls.