California Water Service Group — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company provides regulated water and wastewater services in California, Washington, New Mexico, and Hawaii, alongside related non-regulated services. Results are seasonal, with generally higher revenue and income in warmer months. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $304.1 | $232.5 | $605.2 | $537.7 |
| Net operating income | $106.1 | $51.6 | $111.6 | $79.1 |
| Net income | $96.4 | $42.4 | $81.3 | $51.8 |
| Diluted EPS | $1.94 | $0.88 | $1.66 | $1.08 |
| Operating cash flow | Not presented separately | Not presented separately | $96.7 | $128.3 |
Revenue increased 30.8% in Q3 and 12.5% for the nine-month period. Net operating income margin was approximately 34.9% in Q3 versus 22.2% a year earlier, and 18.4% for nine months versus 14.7%. The marked profit improvement primarily reflects regulatory revenue recorded based on a CPUC administrative law judge’s proposed decision, rather than solely underlying operating growth.
- Q3 operating expenses rose 9.4% to $198.0 million; nine-month expenses increased 7.6% to $493.5 million. Nine-month water production costs rose 10.3%, mainly from higher wholesale water rates, customer usage, and changes in water sourcing.
- Net interest expense was $10.5 million in Q3, up 13.4%; for nine months it was $30.8 million, broadly flat year over year.
- Nine-month effective income tax rate was 11.6%, down from 21.9%, primarily due to tax repair benefits and amortization of excess deferred taxes associated with the proposed rate-case decision.
Cash, debt, and investment
- Cash and cash equivalents were $113.3 million at September 30, 2020, versus $42.7 million at December 31, 2019. Current assets were $305.8 million and current liabilities $603.8 million.
- Short-term borrowings increased to $375.1 million from $175.1 million at year-end. Long-term debt, including current maturities, was approximately $806.9 million. The company reported $174.9 million of available capacity on its revolving credit facilities and compliance with covenants.
- Nine-month operating cash flow of $96.7 million was below the prior-year $128.3 million. Utility plant expenditures were $221.3 million, versus $194.9 million; the company estimated 2020 expenditures of $260–$290 million.
- Financing cash flow included $270.0 million of short-term borrowing and $57.3 million of net proceeds from at-the-market stock issuance. The company paid $31.2 million in dividends during the period.
Material changes and notable items
- Cal Water recorded $37.6 million of interim rate recovery revenue for the first nine months, along with changes to balancing-account revenue. The proposed decision also supported continued decoupling and certain cost-balancing accounts. The decision was not final when the filing was signed.
- Revenue from customer contracts was $222.5 million in Q3 and $529.8 million for nine months; regulatory balancing-account revenue was $81.6 million and $75.4 million, respectively. The substantial Q3 regulatory revenue reflects the delayed 2018 California General Rate Case (GRC) decision and related accounting recognition.
- Washington Water acquired Rainier View Water on June 1 for $37.6 million. The acquisition added about 18,500 customer connections; $27.7 million of goodwill was recorded, subject to valuation refinement.
- Shares outstanding increased to 49.84 million from 48.53 million at year-end, primarily reflecting equity issuance. Book value per share was $17.86, compared with $16.07 at year-end.
Outlook, risks, and contingencies
- GRC approval: The CPUC’s proposed decision was subject to adoption no earlier than November 19, 2020. Management considered adoption without material change probable, but a materially different final decision could require fourth-quarter adjustments and materially reduce full-year 2020 revenue and net operating income.
- COVID-19 and collections: Management said the pandemic had not significantly affected operations through November 6, 2020, but increased its credit-loss allowance to $2.7 million after a $2.9 million provision. Customer disconnections and agency collection activity were suspended, with the company anticipating the suspension through April 1, 2021. Further effects on collections, liquidity, and operations remained uncertain.
- Regulatory outlook: A CPUC decision bars full decoupling proposals in Cal Water’s next GRC; the company expects this to apply to its 2021 filing and could increase revenue volatility beginning in 2023. It planned to pursue appeal options.
- Capital and funding: Management expects continued substantial utility investment and a relatively balanced debt-and-equity funding approach. COVID-related market disruption could make financing more difficult or expensive.
- Other matters: The filing identifies water supply, water quality and environmental rules, power interruptions, climate and natural-disaster exposure, regulatory cost recovery, and acquisition integration among key risks. Management did not expect known legal matters, net of reserves, to materially affect results; recorded legal liabilities were $2.4 million.
Key facts for investors to verify
- Whether the CPUC adopted the 2018 GRC proposed decision as issued, and the final treatment of balancing accounts and interim rate recovery.
- How much of the reported earnings increase reflects regulatory accruals and other timing effects versus recurring operating performance.
- Customer payment trends, credit-loss provisions, and the financial effects of continued limits on disconnections and collections.
- Funding needs and leverage as planned capital spending proceeds, including use of revolving credit and additional equity issuance.
- Final valuation of Rainier View’s acquired assets and liabilities, including goodwill, and progress on other proposed acquisitions.