California Water Service Group — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter results are noted below. The company provides regulated water and wastewater services and related nonregulated services, primarily in California. California accounted for approximately 94% of consolidated operating revenue; the group served about 500,700 customers at year-end.
Financial performance
| Metric | 2012 | 2011 |
|---|---|---|
| Operating revenue | $560.0 million | $501.8 million |
| Net operating income | $73.8 million | $67.2 million |
| Net income | $48.8 million | $37.7 million |
| Diluted EPS | $1.17 | $0.90 |
| Cash from operations | $131.9 million | $111.3 million |
| Capital expenditures | $127.7 million | $118.5 million |
| Cash and cash equivalents at year-end | $38.8 million | $27.2 million |
| Long-term debt, including current maturities | $481.3 million | $488.2 million |
| Short-term borrowings | $89.5 million | $47.1 million |
- Revenue rose 11.6%; net income increased 29.5%. Net operating income was about 13.2% of revenue and net income about 8.7%.
- Operating cash flow exceeded capital expenditures by approximately $4.2 million. The company funded investment using operating cash, revolving-credit borrowings and developer contributions.
- Current assets were $146.6 million versus current liabilities of $243.1 million. The company reported $89.5 million drawn on revolving credit facilities and said it remained in compliance with facility covenants. Total facilities were up to $400 million, with terms through June 2016.
- Common equity was 49.6% of capitalization and long-term debt 50.4%. The company paid $0.63 per share in dividends for 2012; the board declared a 2013 quarterly dividend of $0.16 per share.
Material changes and unusual items
- 2012 revenue growth reflected $28.9 million of rate increases, $12.0 million from net revenue changes including recognition of previously deferred WRAM revenue, and other factors. Customer usage increased, and estimated water production rose 4.6% to 125.9 billion gallons.
- Net income benefited from a $6.2 million one-time income-tax benefit related to prior-year state repairs-and-maintenance deductions; a $2.5 million unrealized gain on benefit-plan life-insurance investments; and recognition of $12.9 million of deferred 2011 WRAM revenue with $10.5 million of associated costs. The WRAM recognition therefore contributed about $2.4 million before tax.
- Purchased-water expense increased 13.2% to $161.3 million; total water-production expense increased 11.5% to $202.6 million. The filing says these costs are generally recovered through regulatory mechanisms, though recovery timing can affect cash flow.
- Operating cash flow improved year over year, partly due to rate increases, lower income-tax payments, and faster collection of balancing-account receivables. Short-term borrowings nevertheless increased, supporting operations and capital projects.
- Fourth-quarter revenue was $121.5 million, net income $5.0 million and diluted EPS $0.12, versus $103.0 million, $1.9 million and $0.04, respectively, in fourth-quarter 2011.
Outlook, risks and contingencies
- The 2012 California general rate case requested annual rate increases of $92.7 million for 2014, $17.2 million for 2015 and $16.9 million for 2016; these were requests, not approved increases. The filing expected any resulting changes to take effect January 1, 2014. A separate rate mechanism reduced authorized 2013 revenue by $3.8 million.
- Management estimated 2013 capital expenditures of $120 million to $130 million and expected capital spending to remain at broadly similar levels over the following five years. It planned to finance long-term needs with a mix of debt, equity and operating cash flow.
- Management believed water supplies would be adequate for 2013 and beyond, but noted that water-year precipitation and snowpack were below normal and that rationing could be required. Wholesale water prices, supply availability, weather and water quality remain important risks.
- Key exposures include regulatory decisions and delays in rate recovery, rising purchased-water and labor costs, seasonal cash-flow needs, environmental and water-quality requirements, contamination litigation, pension funding, and dependence on California. The company also disclosed substantial long-term water-purchase and benefit obligations.
- A proposed $2.1 million ratepayer settlement relating to the former service-line protection business remained subject to CPUC approval; management anticipated a decision in the first quarter of 2013. The company also described ongoing groundwater-contamination matters, but said other legal matters were not expected to materially affect its financial position, results or cash flows, taking existing reserves into account.
- The pension plan was underfunded: projected pension benefit obligation was $402.1 million and plan assets were $202.9 million at year-end. Estimated 2013 contributions were $35.7 million for pension plans and $8.9 million for other postretirement benefits.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Investor verification priorities
- Check the final CPUC decisions and timing for the California general rate case, the 2013 return-on-equity adjustment and the proposed $2.1 million settlement.
- Assess whether WRAM/MCBA receivables are collected on schedule: the net receivable was $46.1 million at year-end, including $12.1 million long term.
- Verify the cash-flow and earnings effects of tax deductions and other nonrecurring benefits, including whether 2012 profitability is a sustainable baseline.
- Review the funding plan for the $120–$130 million 2013 capital budget, debt maturities, revolving-credit usage and pension contributions.
- Monitor water supply conditions, wholesale-cost changes, water-quality matters and potential regulatory recovery of related costs.