California Water Service Group — Q1 2020 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. The company provides regulated water and wastewater services in California, Washington, New Mexico, and Hawaii, plus non-regulated services. Results are seasonal; first-quarter performance is not necessarily indicative of the full year.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Operating revenue | $125.6 million | $126.1 million |
| Operating income (loss) | ($6.9) million | $0.5 million |
| Net loss | ($20.3) million | ($7.6) million |
| Diluted loss per share | ($0.42) | ($0.16) |
| Operating cash flow | $4.1 million | $20.1 million |
| Utility plant expenditures | $65.3 million | $59.9 million |
Operating margin was approximately negative 5.5%, versus positive 0.4% in Q1 2019; net margin was approximately negative 16.2%, versus negative 6.1%. These are calculated from reported revenue and income figures.
- Operating expenses rose 5.5% to $132.5 million. Water production costs increased $8.4 million (18.4%), primarily from higher wholesale water rates and greater purchased-water production. Depreciation increased $2.1 million, and pension benefit costs increased $2.2 million.
- Revenue declined $0.5 million (0.4%). Higher usage, rates, and unbilled revenue were offset by the lack of recorded WRAM, MCBA, pension, and health balancing-account revenue while the California 2018 General Rate Case (GRC) remained unresolved, as well as revenue deferrals.
- Cash provided by operations fell $16.1 million year over year, including $7.9 million of pension contributions in Q1 2020 versus none in Q1 2019. Investing cash outflow was $65.3 million; financing provided $158.9 million, principally from increased revolving-credit borrowings.
Liquidity and capitalization
- At March 31, 2020, cash and cash equivalents were $140.4 million (cash, cash equivalents, and restricted cash totaled $141.0 million), versus $42.7 million and $43.3 million, respectively, at year-end 2019.
- Short-term borrowings increased to $335.1 million from $175.1 million; long-term debt, net, was $786.5 million. Current maturities were $21.9 million. The company reported $214.9 million of remaining availability on its revolving facilities and compliance with financial covenants.
- Total assets were $3.24 billion and stockholders’ equity was $755.1 million. The company paid $10.3 million in dividends and issued $6.0 million net of commissions through its at-the-market stock program.
Outlook, regulatory matters, and risks
- The CPUC had not issued a decision on the 2018 GRC as of April 30, 2020. Interim existing rates were in effect from January 1, 2020; the company expected differences from ultimately approved rates to be recovered through customer surcharges. Management estimated that its proposed settlement, if approved, would have added $15.4 million of operating revenue and reduced operating expenses by $1.7 million for Q1. The CPUC could approve the settlement or reach a different decision.
- Management said the GRC delay materially affected interim revenue, operating results, and EPS, and warned continued delay would significantly affect Q2 results. The company sought a final decision by July 1, 2020, while proposing that rate increases be deferred until January 1, 2021.
- Management estimated 2020 utility plant expenditures of $260 million to $290 million. Proposed GRC capital investments for 2019–2021 were approximately $809 million to $828 million, subject to CPUC approval. Estimated 2020 cash contributions were $38.0 million to pension plans and $7.5 million to other postretirement plans.
- COVID-19 had not significantly affected operations through April 30, 2020, but its ultimate effects were uncertain. The company suspended customer shutoffs for nonpayment and adjusted WRAM recovery timing amid the pandemic. Risks include customer payment deterioration, employee or facility disruptions, more difficult or costly financing, and regulatory delays. The company borrowed to bolster liquidity.
- Other matters include a suspended CPUC review of the proposed PFAS memorandum account, ongoing groundwater-contamination litigation, and a $107.0 million customer net refund related to tax reform still being finalized with state regulators. Management did not expect the CARES Act to have a material financial-statement effect as of March 31.
Important facts for investors to verify
- Whether and when the CPUC resolves the GRC, approves the settlement, and permits recovery of interim-rate differences and disputed balancing-account amounts.
- How much deferred or unrecognized WRAM/MCBA revenue is ultimately recoverable, and on what timetable.
- Whether COVID-related nonpayment, suspended shutoffs, and the allowance for credit losses materially affect collections and liquidity.
- Funding needs for the planned capital program, including reliance on revolving credit, future debt or equity issuance, and covenant headroom.
- Developments in PFAS cost recovery, water supply and quality requirements, and the customer tax-refund process.