California Water Service Group — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; unaudited. The company provides regulated water and related services in California, Washington, New Mexico, and Hawaii, alongside non-regulated services. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $158.4 | $154.6 | $268.9 | $266.0 |
| Net operating income | $23.3 | $20.8 | $24.4 | $26.6 |
| Net income | $17.2 | $13.5 | $11.7 | $12.4 |
| Diluted EPS | $0.36 | $0.28 | $0.24 | $0.28 |
| Operating margin | 14.7% | 13.4% | 9.1% | 10.0% |
| Net margin | 10.8% | 8.7% | 4.3% | 4.7% |
Q2 revenue rose 2.5% and net income increased $3.7 million year over year. Six-month revenue rose 1.1%, while net income declined $0.7 million. The water business is seasonal, and management cautions that interim results are not necessarily indicative of full-year performance.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $43.2 million, up from $36.8 million. Utility plant expenditures were $57.0 million, versus $66.2 million; cash dividends paid were $15.5 million.
- Cash and equivalents were $29.7 million at June 30, 2014, compared with $27.5 million at year-end 2013.
- Short-term borrowings increased to $81.2 million from $46.8 million. Long-term debt, including current maturities, was $429.9 million; combined reported borrowings were approximately $511.1 million.
- The company reported $319 million of availability under its revolving credit facilities and compliance with credit covenants. Its 2014 capital expenditure budget was approximately $110–$130 million.
- Net WRAM/MCBA receivables were $53.0 million, up from $46.3 million at year-end. These regulatory balances are subject to recovery timing and can require financing in the interim.
Material changes and management commentary
- Q2 earnings benefited from a $2.5 million one-time tax benefit and a $4.3 million increase in estimated unbilled revenue, reflecting higher consumption near quarter-end. Management said the unbilled revenue estimate does not affect WRAM balances.
- For the first half, the unbilled revenue estimate increased pretax income by $1.7 million. Higher production, maintenance, depreciation, wage, health-care, and uninsured-loss costs weighed on results.
- Water production costs rose 4% in Q2 and 6% for the first half, mainly due to wholesale water price increases. Depreciation and maintenance costs also increased. Lower net interest expense partly offset cost pressure.
- Dividends declared were $0.1625 per share per quarter, versus $0.16 in 2013. Management stated a long-term goal of a 60% payout ratio, to be achieved through earnings growth.
Outlook, regulation, and risks
- Management expected a 2014 effective tax rate of 37%–41% and believed water supplies would be adequate to meet demand in 2014 and beyond. California precipitation was below normal; statewide snowpack and rainfall accumulation for the 2013–14 water year stood at 59% of normal as of July 1, 2014.
- On July 21, after quarter-end, the CPUC issued a proposed decision authorizing California rate increases of $45.3 million (9.2%) for 2014, $10.1 million (1.9%) for 2015, and $10.0 million (1.8%) for 2016. The decision also proposed $448.9 million of California infrastructure investment over 2013–2015, including $125.8 million potentially recoverable through advice letters. The company expected a final decision in Q3 2014; these were proposed, not final, rates at filing.
- The company identified regulatory decisions and timing, water availability and quality, conservation and weather-driven usage, purchased water and power costs, access to capital and interest rates, litigation, and employee and compliance matters as risks. Management reported no material changes to the risk factors in its 2013 Form 10-K.
- Known legal matters were accrued at $2.5 million, compared with $1.3 million at year-end. Management did not expect existing disputes, after reserves, to materially affect financial position, results, or cash flows. Hawaii and California tax-related audits were ongoing; management did not expect their resolution to have a material impact.
Important facts for investors to verify
- Whether the CPUC finalized the proposed California rate decision, and the timing and realized amount of rate recovery.
- Whether the $53.0 million WRAM/MCBA receivable is collected on schedule and how regulatory deferrals affect reported revenue and cash flow.
- Whether short-term borrowings, capital expenditures, and pension and retiree-benefit contributions remain within liquidity plans.
- How drought conditions, conservation, water-supply costs, and customer usage affect operations and earnings.
- The sustainability of earnings excluding the one-time tax benefit and the quarter-end unbilled revenue estimate.