California Water Service Group — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. The company provides regulated water and related services in California, Washington, New Mexico, and Hawaii, alongside non-regulated utility services. Results are seasonal and first-quarter performance is not indicative of a full year.
Key financial results
Amounts below are in millions of dollars, except per-share amounts and percentages.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $122.0 | $121.7 | +$0.3 |
| Operating expenses | $114.0 | $115.5 | -$1.5 |
| Net operating income | $8.1 | $6.3 | +$1.8 |
| Net income (loss) | $1.1 | ($0.8) | +$1.9 |
| Diluted EPS | $0.02 | ($0.02) | +$0.04 |
| Operating margin (operating income / revenue) | 6.6% | 5.2% | +1.4 percentage points |
| Net cash from operating activities | $14.3 | $31.5 | -$17.2 |
| Utility plant expenditures | $51.9 | $56.5 | -$4.6 |
- Revenue was nearly flat. Management cited authorized rate increases, partly offset by reduced water usage, lower balancing-account revenue, and greater deferral of revenue. The $3.3 million decrease in accrued unbilled revenue was mainly related to lower usage.
- Operating expenses declined 1.3%. Administrative and general plus other operations costs fell $5.7 million, reflecting lower health care, drought-program, conservation, and other costs, partly offset by wage and uninsured-loss increases. Water production costs rose $1.0 million, principally due to higher wholesale water rates.
- Depreciation and amortization rose $3.2 million to $19.2 million, largely due to capital additions. Net interest expense increased $0.9 million to $8.2 million, reflecting credit-line borrowing, debt issued in 2016, and lower capitalized interest.
- At March 31, 2017, cash was $12.0 million, compared with $25.5 million at year-end 2016. Total debt, including current maturities and short-term borrowings, was approximately $688.0 million: $557.9 million of long-term debt including current maturities and $130.1 million of short-term borrowings. Short-term borrowings increased from $97.1 million at December 31, 2016.
- Available revolving credit was $94.9 million at the parent and $225.0 million at Cal Water. The company reported compliance with credit-facility covenants. The filing does not provide a single headline liquidity ratio.
- Quarterly dividends declared were $0.18 per share, up from $0.1725 in Q1 2016.
Material changes and notable items
- The company returned to quarterly profitability from a year-earlier loss. Management attributed the improvement principally to rate increases and lower operating expenses, including a $1.8 million reduction in California drought-program incremental costs. The new allowance for equity funds used during construction and share-based-payment accounting changes also contributed; higher depreciation and interest partially offset gains.
- Operating cash flow fell to $14.3 million from $31.5 million. Management cited the absence of $11.5 million of drought surcharge billings recorded in Q1 2016 and $6.6 million of prepayments for water charges and property taxes in Q1 2017, as well as working-capital timing. Cash flow is seasonal.
- Effective January 1, 2017, Cal Water began recording an allowance for equity funds used during construction, following CPUC authorization. Q1 included $0.8 million of equity allowance; the comparable 2016 period had none. Adoption of updated share-based-payment guidance also generated a $0.5 million tax benefit.
- Regulatory assets were $367.5 million at quarter-end, including pension and retiree health balances and WRAM/MCBA receivables. These balances depend on regulatory recovery and timing.
Outlook, regulation, risks, and contingencies
- The company estimates 2017 utility plant expenditures of $200–$220 million and expects future utility investment to be funded through a relatively balanced mix of long-term debt and equity. Management expects ongoing capital needs to exceed internally generated funds after dividends.
- The CPUC-approved 2015 general rate case authorized about $45 million of gross revenue increase beginning January 1, 2017, with additional increases of up to $17.2 million in 2018 and $16.3 million in 2019, subject to an earnings test. It authorized $658.8 million of California system improvements over 2016–2018.
- In April 2017, Cal Water and three other utilities requested a 10.75% return on equity and a 53.4% equity capital structure for 2018. A CPUC decision was anticipated by year-end; the request is not an approved outcome.
- Cal Water reported a $25.8 million net under-collection in its 2016 annual WRAM/MCBA true-up, to be collected through customer surcharges over 12-, 18-, and longer-than-18-month periods; rates became effective April 15, 2017.
- The 2017 budget and forecasts are subject to execution, permitting, construction-resource, and regulatory timing. Risks include commission rate decisions, water usage and conservation, weather and climate, water quality and environmental requirements, purchased-water and power costs, groundwater regulation, labor matters, financing costs, and litigation.
- Management believed water supplies would be adequate for 2017 and beyond. California snowpack and rainfall were reported at 167% of normal as of March 31, 2017; drought emergency status ended in 54 of 58 counties, while two Cal Water districts remained under drought declarations.
- The company has a 50-year agreement to acquire and operate the Travis Air Force Base water system beginning in 2018, subject to CPUC approval. It anticipates about $12.7 million of initial improvements and about $52 million of investment over the contract term.
- Known legal-matter liabilities were $6.4 million at March 31, 2017. Management did not expect existing disputes, after reserves, to materially affect financial position, results, or cash flows. Commitments were reported as having no significant change from year-end.
Important facts for investors to verify
- Whether authorized rate increases and WRAM/MCBA collections are realized on schedule, and how regulatory deferrals affect revenue and cash conversion.
- Whether operating cash flow can support the $200–$220 million 2017 capital program while limiting additional borrowing and preserving dividend capacity.
- Progress and cost of the capital program, regulatory approvals, and the proposed 2018 cost of capital; the requested return on equity is not yet approved.
- Trends in customer usage, drought conditions, purchased-water costs, and groundwater availability and regulation.
- Recovery timing and assumptions underlying regulatory assets, pension and postretirement obligations, and legal contingencies.