California Water Service Group — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. The company provides regulated water and related services in California, Washington, New Mexico, and Hawaii, plus non-regulated services. Results are seasonal, with water use and revenue generally higher in warmer months. Dollar figures below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Operating revenue | $147.7 | $125.6 |
| Operating expenses | $144.8 | $132.5 |
| Operating income (loss) | $2.9 | $(6.9) |
| Operating margin | 2.0% | (5.5%) |
| Net loss | $(3.0) | $(20.3) |
| Diluted loss per share | $(0.06) | $(0.42) |
| Net cash from operations | $30.0 | $4.1 |
| Utility plant expenditures | $66.8 | $65.3 |
Revenue rose 17.7% year over year. Operating expenses increased 9.3%, including depreciation and amortization of $27.0 million versus $24.5 million. Net interest expense was essentially unchanged at $9.9 million. Cash and cash equivalents were $84.4 million at March 31, 2021; current assets were $302.4 million and current liabilities were $655.5 million.
Long-term debt, net, was $781.0 million, with $5.1 million of current maturities and $435.0 million of short-term borrowings, for approximately $1.22 billion of total debt. Revolver availability was $115 million under $550 million of facilities; the company reported compliance with financial covenants. Stockholders’ equity was $929.8 million. The quarterly dividend was $0.23 per share.
Material changes and drivers
- The $17.3 million improvement in net loss was principally associated with the CPUC’s December 2020 approval of Cal Water’s 2018 general rate case (GRC), including the return of regulatory mechanisms not recorded in Q1 2020 while the case was pending.
- Q1 2021 revenue included $6.4 million of cumulative GRC and other rate relief and a $7.6 million net increase from regulatory mechanisms. The company also recorded $55.6 million of IRMA regulatory-asset revenue related to the difference between final and interim rates for January 2020 through January 2021; this is a significant timing-related item, not a recurring quarterly run rate.
- Revenue growth also reflected $2.2 million of WRAM revenue, $4.1 million of MCBA revenue, and $2.5 million of IRMA revenue in the quarter. WRAM and MCBA revenue were not recorded in Q1 2020 because the GRC was unresolved.
- Higher administrative and other operating costs included $2.1 million of increased uninsured loss costs, $2.7 million of costs associated with deferred WRAM revenue, and higher retirement and treatment costs. Depreciation increased mainly due to prior capital additions.
- Net other income improved to $4.0 million from a $3.5 million loss, mainly reflecting a $5.1 million decrease in unrealized losses on benefit-plan investments and lower periodic benefit costs.
Outlook, risks, and contingencies
- No specific earnings guidance was provided. Management estimated 2021 utility-plant expenditures of $270–$300 million and expected to fund investment through a relatively balanced mix of long-term debt and equity. Construction work in progress was $198.7 million.
- Cal Water expected to file its next GRC application in Q2 2021. April 2021 advice letters sought recovery or refund of a net $39.6 million of 2020 WRAM/MCBA under-collections through customer surcharges and surcredits.
- Cal Water had agreed to issue $280 million of First Mortgage Bonds, expected May 11, 2021: $130 million at 2.87% due 2051 and $150 million at 3.02% due 2061. Proceeds were intended to refinance existing indebtedness and for general corporate purposes.
- Management said COVID-19 had not significantly affected operations through April 29, 2021, but customer shutoffs and agency collections remained suspended. The company increased its credit-loss allowance to $5.7 million from $5.2 million at year-end and anticipated higher customer write-offs than historical experience.
- California snowpack was below average at quarter-end: Northern Sierra water content was 67% of long-term averages, with central and southern Sierra at 64% and 42%. Management believed supplies would be adequate in 2021 and beyond, but water availability, weather, conservation, and groundwater sustainability requirements remain relevant risks.
- Other risks include regulatory decisions and rate recovery, the CPUC’s policy limiting proposals for fully decoupled WRAMs in future GRC filings, purchased-water and power costs, climate-related losses, water-quality requirements, and litigation. The company recorded $4.6 million of liabilities for known legal matters versus $2.6 million at year-end; management did not expect existing matters to materially affect results, cash flows, or financial position.
Key facts for investors to verify
- How much of the revenue and loss improvement reflects the one-time GRC/IRMA catch-up versus ongoing rates and operations.
- Timing and collection of regulatory balancing-account balances, including the $69.7 million undercollected WRAM/MCBA balance and the proposed customer recovery or refunds.
- Progress on the next GRC, future regulatory treatment of revenue decoupling, and the effect on earnings and cash conversion.
- Execution and funding of the $270–$300 million capital program, including bond issuance, equity needs, and short-term borrowing levels.
- Customer payment trends, allowance adequacy, drought and water-supply conditions, and exposure to uninsured losses and litigation.