California Water Service Group — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results. The company provides regulated water and wastewater services across five states, alongside related non-regulated services. Water use and earnings are seasonal, generally higher in warm, dry months.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $266.3m | $256.7m | $645.5m | $617.6m |
| Operating expenses | $201.4m | $185.6m | $544.1m | $501.3m |
| Net operating income | $64.9m | $71.2m | $101.4m | $116.3m |
| Operating margin | 24.4% | 27.7% | 15.7% | 18.8% |
| Net income attributable to California Water Service Group | $55.9m | $62.4m | $76.4m | $97.6m |
| Diluted EPS | $1.03 | $1.20 | $1.41 | $1.91 |
Revenue rose 3.7% in Q3 and 4.5% year to date, while attributable net income fell about 10% and 22%, respectively. Rate increases supported revenue, but expense growth outpaced revenue growth.
- Cash flow: Nine-month operating cash flow was $199.8m, versus $179.2m. Investing used $228.4m, including $222.1m of utility-plant expenditures; the resulting operating-cash-flow less utility-plant-expenditure measure was approximately negative $22.2m. Financing provided $61.4m. Period-end cash and restricted cash totaled $113.4m.
- Debt and liquidity: At September 30, long-term debt, including current maturities, was about $1.060bn; short-term borrowings were $70m. Cash and cash equivalents were $90.5m, plus $23.0m restricted cash. The company reported $80m available on its $150m facility and $400m available on Cal Water’s $400m facility, and was in compliance with debt covenants.
- Balance sheet: Total assets were $3.806bn and total equity was $1.278bn. Utility plant, net, was $2.988bn. The current ratio was approximately 1.05.
- Shareholder returns and financing: The company raised $57.1m net from its at-the-market equity program in the first nine months. Shares outstanding rose to 54.824m from 53.716m at year-end 2021. Quarterly dividends were $0.25 per share; the board declared the same amount for Q4.
Material changes and drivers
- Q3 operating revenue increased $9.6m, led by $12.3m of rate increases and a $3.4m increase in accrued unbilled revenue, partly offset by lower regulatory-balancing-account revenue and deferred revenue.
- Year-to-date operating expenses increased $42.8m. Notable increases included other operations ($18.6m), administrative and general ($6.6m), water production ($6.5m), and depreciation and amortization ($4.9m). Purchased power costs increased, while purchased water production volume was lower.
- Management attributed much of the year-to-date earnings decline to $11.4m lower unrealized gains on non-qualified benefit-plan investments, a $9.4m decrease in accrued unbilled revenue, and higher operating expenses. The company also recorded a $2.7m gain on company-owned life insurance.
- Operating cash flow benefited from a net $17.2m received under California’s Water Arrearages Payment Program. Accounts receivable more than 60 days past due fell to $15.8m from $26.2m at December 31, 2021, largely following application of program funds.
Outlook, regulation, and risks
- No quantified earnings or EPS guidance is provided. Management said it expects the year-over-year difference in accrued unbilled revenue to be below $2m by year-end and expects water supplies to meet demand for the rest of 2022 and thereafter.
- The CPUC’s decision on the 2021 general rate case was expected in Q4 2022, though timing was uncertain. Management anticipated partial interim rate increases effective January 1, 2023. The company proposed $1.0bn of California water-infrastructure investment for 2022–2024; capital spending depends partly on regulatory outcomes.
- The pending cost-of-capital case was also expected to receive a CPUC decision in Q4 2022. If specified cost-of-debt changes were applied retroactively under the company’s proposed equity structure, 2022 annual revenue could be reduced by $11m; the company had not reserved for that outcome.
- California drought restrictions were at Stage 2 across Cal Water service areas. Reported snowpack was substantially below long-term averages, although management considered available groundwater and purchased supplies adequate. Drought, conservation, water availability, weather, and purchased water and power costs remain relevant risks.
- Market volatility can materially affect reported results through unrealized gains or losses on non-qualified benefit-plan investments. Other identified risks include regulatory decisions and cost recovery, inflation and interest rates, climate-related events, and litigation. Management said COVID-19 had not significantly affected operations through October 27, 2022, but future effects remained uncertain.
- A Texas subsidiary committed $21.5m toward a water-supply pipeline project; the amount was held in restricted cash pending expected transfer in Q4. The agreement includes a limited company guarantee. A $6.0m liability was recorded for known legal matters; management did not expect existing disputes, after reserves, to materially affect the company.
Important facts for investors to verify
- Final CPUC decisions and effective rates for the 2021 general rate case and cost-of-capital proceeding, including any retroactive impact.
- Whether planned infrastructure spending can be funded on acceptable terms without undue dilution or higher financing costs.
- Recovery timing and collectability of regulatory balancing-account receivables, including the $94.8m net WRAM/MCBA receivable balance cited by management.
- Changes in drought conditions, water supply, customer usage, purchased water and power costs, and unbilled-revenue estimates.
- The effect of benefit-plan investment volatility and other unusual items on reported earnings and cash flow.