California Water Service Group — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results; the company operates regulated and non-regulated water and related utility services in California, Washington, New Mexico, and Hawaii. Water demand and earnings are seasonal, generally higher in warm, dry months.
Financial performance
Amounts below are in millions of dollars, except per-share data. Comparisons are with the corresponding 2018 periods.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $232.5 | $221.3 | $537.7 | $530.8 |
| Net operating income | $51.6 | $47.3 | $79.1 | $84.0 |
| Net income | $42.4 | $36.2 | $51.8 | $50.2 |
| Diluted EPS | $0.88 | $0.75 | $1.08 | $1.04 |
| Operating margin | 22.2% | 21.4% | 14.7% | 15.8% |
| Net margin | 18.2% | 16.3% | 9.6% | 9.5% |
Margins are calculated as operating income or net income divided by operating revenue. For the nine-month period, operating income fell despite modest revenue growth; net income increased slightly, with improved other income partly offsetting higher operating and interest costs.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $128.3 million, up from $119.5 million. Utility plant expenditures were $194.9 million, down from $212.9 million; operating cash flow did not cover this investment.
- Cash, cash equivalents, and restricted cash totaled $51.8 million at September 30. Current assets were $212.1 million versus current liabilities of $333.9 million.
- Long-term debt, net, was $807.5 million; current maturities were $5.3 million and short-term borrowings were $155.1 million. These reported debt categories total approximately $967.9 million, versus approximately $880.0 million at December 31, 2018.
- In June, Cal Water issued $400 million of first mortgage bonds, with maturities from 2029 to 2059 and coupons of 3.40% to 4.17%. Proceeds were used to repay short-term borrowings and redeem $300 million of bonds. Nine-month net interest expense increased to $30.7 million from $28.8 million.
- Revolving credit facilities total $550 million, with $394.9 million available at September 30. The company reported compliance with credit covenants. Management expects to fund future utility investment through a mix of debt and equity.
- Dividends paid in the first nine months totaled $28.5 million. The declared fourth-quarter dividend was $0.1975 per share.
Material changes and drivers
- Q3 revenue rose 5.1% and net income rose 17.3%. Management cited rate increases, a $5.5 million increase in accrued unbilled revenue, lower business-development expenses, and increased construction allowances. Higher depreciation, wages, power-shutoff and wildfire-management costs, and property taxes partly offset these benefits.
- Nine-month revenue increased 1.3%, while net operating income declined 5.9%. Rate increases and lower business-development expenses supported earnings; higher depreciation, wages, outside services, property taxes, wildfire-related costs, and interest expense weighed on results.
- Nine-month revenue from customer contracts declined to $499.8 million from $515.6 million, while regulatory balancing-account revenue increased to $37.8 million from $15.2 million. Lower customer usage reduced balancing-account revenue associated with water-production costs, and some revenue was deferred because expected collection was beyond 24 months.
- The company corrected an immaterial computational error in 2018 pension and health-care balancing-account revenue. The corrected 2018 comparative amounts are used here; the error did not affect customer billings or cash collected.
Outlook, regulatory matters, and risks
- Management estimated 2019 utility plant expenditures of $250 million to $260 million. Construction work in progress was $266 million at September 30.
- A proposed California GRC settlement, filed October 8, was subject to CPUC approval. If approved, it would support $609 million to $628 million of new projects for 2019–2021, plus approximately $200 million of previously begun projects; planned investment would total approximately $809 million to $828 million. A decision was expected in late 2019, with new rates expected in January 2020. These amounts and timing were conditional, not final authorization.
- On October 31, the company established an at-the-market equity program to sell up to $300 million of common stock over three years, subject to market conditions. Proceeds are intended for general corporate purposes; issuance may dilute existing shareholders.
- Management identified risks including regulatory decisions and rate recovery, water availability and conservation, weather and climate events, wildfires and public-safety power shutoffs, water-quality and environmental requirements, and cyber and operational security. Costs from PSPS preparation were $0.5 million for both the quarter and nine-month period; recovery-account approval was pending.
- The company reported that water supplies were expected to meet demand during 2019 and beyond. Its estimates and forward-looking statements remain subject to regulatory, weather, usage, and other uncertainties.
- The company said disclosure controls were effective at the reasonable-assurance level and described remediation of a previously reported material weakness. It reported no material change to the risk factors in its 2018 Form 10-K.
Key facts for investors to verify
- Whether and on what terms the CPUC approved the GRC settlement, including resulting rates and capital-investment authorizations.
- How customer usage, regulatory balancing accounts, and deferred revenue affect future reported revenue and cash collection.
- Capital-spending needs and funding mix, including actual issuance under the $300 million equity program and potential dilution.
- Debt levels, borrowing costs, credit-facility availability, covenant compliance, and cash flow relative to planned capital expenditures and dividends.
- Developments in PSPS and wildfire preparedness, regulatory cost recovery, water supply and quality, and other disclosed operational risks.
- The corrected 2018 comparative figures and continued operation of the controls established to address the prior material weakness.