California Water Service Group — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Financial statements are unaudited. The company provides regulated water and related services in California, Washington, New Mexico and Hawaii, alongside non-regulated services. Results are seasonal; first-quarter results are not necessarily indicative of full-year performance.
Financial performance and position
- Revenue: Operating revenue was $122.0 million, up $11.5 million, or 10%, from $110.5 million. Management attributed much of the increase to the 2012 California general rate case’s shift toward fixed service charges, along with rate increases and regulatory balancing-account activity.
- Profit and margins: Net income was $1.6 million, or $0.03 per diluted share, compared with a $5.5 million loss, or $0.11 loss per diluted share, in Q1 2014. Net operating income rose to $7.5 million from $1.2 million. Calculated net margin was approximately 1.3%, versus negative 5.0%; operating margin was approximately 6.1%, versus 1.0%.
- Expenses: Operating expenses increased 5% to $114.5 million. Water production costs were nearly flat at $45.2 million; administrative and general expense increased, while maintenance and depreciation declined. Pension and other postretirement benefit costs were higher.
- Cash flow and capital spending: Operating cash flow was $26.9 million, compared with $10.5 million. Utility plant expenditures were $35.0 million, up from $24.6 million, so operating cash flow did not cover reported investment spending. Cash increased to $33.3 million from $19.6 million at year-end.
- Debt and liquidity: Total interest-bearing debt, including current maturities and short-term borrowings, was approximately $534.7 million, versus $505.0 million at December 31, 2014. Short-term borrowings rose $30.0 million to $109.1 million. The company reported $33.3 million in cash and $340.9 million of unused revolving credit availability. It was in compliance with credit covenants.
- Equity and dividends: Stockholders’ equity was $620.7 million, down from $626.6 million. The quarterly dividend declared was $0.1675 per share, compared with $0.1625 a year earlier.
Material changes versus Q1 2014
- Net income improved by $7.1 million, primarily reflecting the 2012 California general rate case decision approved in 2014 and reductions in other operating, depreciation, maintenance and net interest expenses.
- Revenue increased 10%; management cited higher fixed service-charge revenue and regulatory balancing accounts. WRAM revenue fell $3.9 million, partly offset by a $3.4 million increase in the MCBA adjustment.
- Operating cash flow rose substantially, while utility plant spending also increased. Short-term borrowings were $30.0 million higher than at year-end.
- Net periodic pension and other postretirement benefit costs increased. The company contributed $5.5 million to pension plans in the quarter and estimated 2015 contributions of $31.2 million to pension plans and $15.0 million to other postretirement plans.
Outlook, regulation and risks
- Capital and tax outlook: The 2015 company-funded capital expenditure budget was $125 million to $145 million. Management anticipated funding future capital needs through a relatively balanced mix of long-term debt and equity. The company estimated a 39% effective tax rate for 2015.
- Rates and regulatory recovery: Cal Water’s 2012 general rate case authorized annual revenue increases of $10.1 million for 2015 and $10.0 million for 2016; the final rates took effect in August 2014. In January 2015, Cal Water filed for escalation increases in 16 districts, with $4.8 million in associated annual adopted gross revenue. In April 2015, it filed to recover a net $30.5 million 2014 WRAM/MCBA undercollection through customer surcharges.
- Drought developments after quarter-end: On April 1, 2015, California’s Governor ordered an aggregate 25% reduction in urban water use through February 2016. Draft state regulations indicated Cal Water district conservation targets ranging from 8% to 36%. The company expected related incremental expenses and customer penalties to be tracked in a memorandum account for future recovery. Management believed available supplies would meet 2015 demand, but California precipitation was below normal and snowpack and rainfall were reported at 63% of normal as of April 1.
- Other regulatory matters: Washington Water received approval for a $1.7 million annual revenue increase effective February 1, 2015. Hawaii rate cases remained at various stages, including a Kona filing for which the company was seeking settlement.
- Contingencies: The company recorded $2.6 million for known legal matters and disclosed $1.5 million of reasonably possible losses above accruals. Management did not consider existing legal matters likely to materially affect the company. No probable loss was accrued for asbestos cases.
- Key risks: Results depend on regulatory decisions and recovery timing, customer water use and conservation, weather and water supply, purchased water and power costs, access to capital and interest rates, pensions, litigation, and environmental and water-quality requirements. Management cautioned that forward-looking statements are not guarantees.
Important facts for investors to verify
- Whether approved and requested rate actions, including recovery of the $30.5 million WRAM/MCBA undercollection, translate into timely cash collection.
- How mandatory drought conservation targets affect water use, revenue, operating costs and regulatory balancing accounts.
- Whether capital spending remains within the $125 million–$145 million company-funded budget and how it is financed.
- Whether pension funding and benefit costs, short-term borrowing levels and liquidity remain consistent with management’s expectations.
- The status and potential financial effect of pending regulatory proceedings and legal matters; the filing does not provide a clear outcome for several proceedings.