Business context and reporting period
California Water Service Group’s Form 10-K covers the fiscal year ended December 31, 2021. The holding company provides regulated water and wastewater services and related non-regulated services across five states, serving approximately 547,600 customer connections. California generated 91.9% of consolidated operating revenue; the company reports one operating segment.
Financial performance and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Operating revenue | $790.9 million | $794.3 million |
| Net operating income | $126.8 million | $136.7 million |
| Net income attributable to Group | $101.1 million | $96.8 million |
| Diluted earnings per share | $1.96 | $1.97 |
| Cash from operating activities | $231.7 million | $117.9 million |
| Utility plant expenditures | $293.2 million | $298.7 million |
| Cash and cash equivalents at year-end | $78.4 million | $44.6 million |
| Short-term borrowings at year-end | $35.0 million | $370.0 million |
| Long-term debt, net, at year-end | $1,055.8 million | $781.1 million |
| Total equity at year-end | $1,183.0 million | $921.3 million |
Operating margin, calculated as net operating income divided by revenue, was approximately 16.0% in 2021 versus 17.2% in 2020; net margin was approximately 12.8% versus 12.2%. The company reported a 9.6% return on average equity, down from 11.4%. Its capitalization mix was 52.7% equity and 47.3% long-term debt at year-end.
Operating cash flow increased largely because the company billed the interim-rate receivable recorded in 2020 and reduced pension and post-retirement benefit funding. The company issued $280 million of first mortgage bonds and raised $195.9 million net through its at-the-market equity program, which concluded in the fourth quarter. It sold approximately 3.29 million shares in 2021. The $550 million revolving credit facilities mature in March 2024; covenant tests were met at year-end.
Material changes versus the prior year
- Revenue declined $3.4 million, or 0.4%, even though revenue from customer contracts rose to $765.7 million from $697.6 million. Regulatory balancing-account revenue fell to $25.2 million from $96.7 million, principally reflecting lower recorded balancing-account revenue and deferrals.
- Net income rose $4.3 million, while diluted EPS decreased one cent as the weighted-average share count increased. Management cited rate increases, lower income-tax expense and reduced credit-loss expense as benefits, partly offset by higher depreciation, wages, taxes, uninsured losses and financing costs.
- Operating expenses increased to $664.1 million from $657.6 million. Depreciation and amortization rose $10.2 million; purchased-water expense declined $5.1 million, while purchased power and pump taxes increased.
- Cash from operations nearly doubled; year-end revolving-credit borrowings fell by $335 million. Long-term debt increased by approximately $275 million, and total equity rose partly due to share issuance.
- Acquisitions included the Kapalua water and wastewater systems in Hawaii and majority ownership of Texas wastewater developer BVRT. Texas Water’s BVRT utilities served or were contracted to serve more than 3,800 connections, with estimated potential build-out above 61,000.
Outlook, risks and unusual items
- Regulatory outlook: Cal Water’s 2021 California rate-case filing seeks authorization for $1.0 billion of infrastructure investment for 2022–2024 and proposed annual revenue increases of $80.5 million in 2023, $43.6 million in 2024 and $43.2 million in 2025. These requests were pending; management estimated average residential bills would rise by less than $5 per month if approved as filed. The CPUC’s decision was expected to affect rates beginning in 2023. A separate cost-of-capital decision was expected in the third quarter of 2022.
- Capital and dividends: Management expects capital expenditures to increase over the next five years and anticipates funding long-term needs with operating cash flow, debt and equity. The 2021 dividend was $0.92 per share; the board declared a $0.25 quarterly dividend in January 2022, an indicated annual rate of $1.00.
- Water supply: Management expected supplies to be adequate in 2022 and beyond, while acknowledging possible future rationing. California snowpack at December 31, 2021 was reported at 51% of the long-term average in the northern Sierra. Drought, climate change, groundwater regulation, wholesaler prices and availability remain risks.
- Regulatory and operating risks: Earnings and recovery of infrastructure and operating costs depend on state commission decisions. California’s move away from full WRAM decoupling for future rate cases may affect revenue stability beginning in 2023. Other material risks include water-quality compliance and contamination, wildfire and inverse-condemnation exposure, power interruptions, aging infrastructure, cybersecurity, and delays or disallowances in rate recovery.
- COVID-19 and unusual items: Management reported no significant pandemic impact on operations in 2021, but continued suspension of customer shutoffs for nonpayment and uncertainty about customers’ ability to pay. Cal Water reported $20.8 million of eligible pandemic-era arrearages and received the full amount in January 2022 for customer-account credits. The 2021 income-tax expense was unusually low, reflecting customer refunds of excess deferred federal taxes and other tax effects.
- Contingencies and reporting: The company recorded a $3.5 million liability for known legal matters and stated that remaining matters were not expected to materially affect results, financial position or cash flows. The prior $85 million TCP settlement had been fully used for remediation by year-end. The auditor issued unqualified opinions on the financial statements and internal controls, while identifying rate-regulation accounting judgments as a critical audit matter.
Important facts for investors to verify
- Progress and final CPUC decisions on Cal Water’s 2021 general rate case, proposed rate increases, and $1.0 billion investment plan.
- Whether the decline in regulatory balancing-account revenue and the changes to California revenue mechanisms affect future earnings or cash collections.
- Funding and execution of the rising capital program, including the balance between debt and equity issuance and potential shareholder dilution.
- Water availability, drought and groundwater conditions, supplier costs, and the adequacy of rate recovery for related expenses.
- Collection trends after pandemic-era shutoff protections, and the timing and application of the $20.8 million arrearage-program funds.
- Acquisition integration and development progress at BVRT and Hawaii systems, including regulatory approvals and build-out assumptions.