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Impact Of COVID On Water Utility Earnings, Capex Spending Varies

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Impact Of COVID On Water Utility Earnings, Capex Spending Varies

Investors were focused on the impact the COVID-19 public health emergency was having on water utilities as companies reported second-quarter earnings. For most companies, increased residential demand coupled with lower expenses offset the declines in commercial and industrial usage. Capital expenditure forecasts remained largely intact, although a handful of companies did lower their 2020 spending expectations.

Describing the current situation, California Water Service Group President and CEO Marty Kropelnicki, stated that "[w]hile the company has experienced some individual project slowdowns, we've seen other things like our main replacement program being able to accelerate. And so over all, we have remained on track, at least as of right now, midyear 2020. Of course that could change depending on how things go with the virus and if there's any more pending shutdowns that could affect our overall ability to get capital invested and put into the ground."

Mixed earnings impact of COVID at the largest water utilities

Historically, American Water Works Co. Inc. and Essential Utilities Inc., which both have multistate footprints that are concentrated in the mid-Atlantic and Midwest regions, have experienced similar variability as it relates to the impact weather and precipitation have on earnings results. Surprisingly, the impact of COVID on earnings in the second quarter varied.

Essential Utilities Chairman, President and CEO Chris Franklin stated that "we did not experience an overall negative impact to revenue from COVID-19. Year-over-year water usage was up slightly over last year, but where the water consumption occurred changed dramatically. With many customers working from home and favorable weather conditions, residential usage was very strong, up nearly 10%, which offset significant declines in most of our other customer classes. While commercial and industrial are suffering, it appears that both indoor and outdoor usage at our customers' homes are strong."

American Water estimated that COVID had been a 5-cent drag to earnings year-to-date. CFO Susan Hardwick, explained that "[t]he total estimated impact of the lost demand, foregone revenue and increased cost is estimated at about $21 million, which equates to about $15 million after-tax or $0.09 per share before considering the accounting for future recovery."

The company has recorded a $12 million net regulatory asset. American Water experienced a 10% increase in residential usage, which offset "significant declines" in the other customer classes. The two utilities have a similar customer mix, with 56% of 2019 operating revenue stemming from residential customers at American Water and 58% of regulated revenue coming from that customer class at Essential.

It is unclear if customer mix explains the difference in this earnings impact. The companies have a similar amount of regulated revenue stemming from residential customers, but the profile of their other customer classes differ. Residential customers represent 56% of regulated revenue at American Water and 58% at Essential Utilities in 2019. At American Water, the commercial customer class represents 21% and the industrial customer class generates 4% of regulated revenue. At Essential Utilities, commercial customers generated 16.4% of revenue and industrial water represented just 3.4%. Essential Utilities' wastewater business is a larger revenue contributor at almost 12% compared to 5% at American Water.

The considerable earnings decline experienced at California Water is associated with delays in the California Public Utilities Commission finalizing the company's 2018 general rate case. Analysts anticipate this could present a further headwind until a final decision is reached. However, there is little impact to full-year 2020 earnings estimates as the rate increase would be retroactive to Jan 1.

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2020 capex forecasts revised downward

American States Water Co. lowered its stated 2020 capex range for the second consecutive quarter, which is now projected to be between $105 million to $120 million. Previously, the company had anticipated spending $115 million and $130 million on capex. On the company's earnings conference call, CEO and President Robert Sprowls attributed the revision to "struggles ... getting projects permitted because of the pandemic" and "construction projects that would temporarily shut off water to customers."

SJW Group lowered its 2020 capex forecast to $200 million to $225 million, after having signaled during its first-quarter earnings call that the company's capex forecast for 2020 was likely a bit high. This is largely a timing issue, as the company affirmed that it would be able to complete the $320 million three year capital program authorized in San Jose Water's most recent general rate case.

Middlesex Water Co. lowered its 2020 capital spending forecast by $5 million to $119 million. This investment level is still well above past years and is driven by its $70 million upgrade of the Carl J. Olsen water treatment plant in Edison, N.J., which started in October 2019 and is anticipated to be completed in mid-2021. The company anticipates spending approximately $180 million for capital projects in 2021 and 2022.

Capex forecasts at the two largest utilities, American Water and Essential Utilities remain unchanged. These multistate utilities have been able to reallocate their capital spending across their operating footprint and can reprioritize projects based on the easing of state stay-at-home restrictions.

As shown in the table below, capex spending year-to-date as a percentage of total anticipated annual capital expenditures is not materially different compared to previous years.

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