California Water Service Group — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. The company provides regulated water and related services in California, Washington, New Mexico, and Hawaii, alongside non-regulated utility services. Results are seasonal: management cautions that winter-quarter results are not indicative of full-year performance.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Operating revenue | $132.2 million | $122.0 million |
| Operating expenses | $124.2 million | $111.5 million |
| Net operating income | $8.1 million | $10.6 million |
| Net income (loss) | $(2.5) million | $1.1 million |
| Diluted earnings (loss) per share | $(0.05) | $0.02 |
| Operating cash flow | $28.3 million | $14.3 million |
| Utility plant expenditures | $70.7 million | $51.9 million |
- Revenue increased 8.4%, while operating expenses rose 11.4%. Operating margin was approximately 6.1%, versus 8.6% a year earlier; net margin was approximately negative 1.9%, versus positive 0.9%.
- Management attributed the $3.6 million decline in net income mainly to a $1.5 million reduction in unrealized income on benefit-plan investments, $0.8 million of higher uninsured water-main-break costs, and $0.7 million less unbilled revenue accrual. Other pressures included higher depreciation, wages, property taxes, and interest.
- Revenue benefited from rate changes and regulatory balancing mechanisms. General rate relief was partly offset by the new cost-of-capital and tax-accounting memorandum accounts. Higher purchased water costs also increased both expenses and related balancing-account revenue.
Cash, debt, and liquidity
- Cash and cash equivalents were $34.7 million at quarter-end, down from $94.8 million at December 31, 2017; cash, cash equivalents, and restricted cash totaled $35.3 million.
- Interest-bearing debt included $275.1 million of short-term borrowings, $5.9 million of current long-term debt, and $515.7 million of long-term debt excluding current maturities.
- Current assets were $165.8 million and current liabilities were $464.3 million. The company had $275.1 million outstanding on revolving facilities and reported remaining availability of $94.9 million at the parent and $80.0 million at Cal Water.
- The company repaid $10.2 million of long-term debt during the quarter. Net cash used in financing was $17.6 million, including $9.0 million in dividends paid. The declared quarterly dividend was $0.1875 per share, up from $0.1800 in Q1 2017.
- Capital spending is substantial: management estimates 2018 company-funded utility plant expenditures of $200 million to $220 million. It expects to fund future plant needs with a relatively balanced mix of long-term debt and equity. The company was in compliance with credit-facility covenants at March 31.
Regulation, outlook, and risks
- The CPUC’s 2018–2020 cost-of-capital decision set Cal Water’s authorized return on equity at 9.20% and return on rate base at 7.48%, both below prior levels; management estimates the decision reduces 2018 adopted revenue by about $6.7 million. A memorandum account tracks the rate impact pending rate changes.
- Cal Water’s next general rate case filing was expected in July 2018. April 2018 WRAM/MCBA filings sought recovery of a net $50.1 million under-collection through customer surcharges; new rates became effective April 15, 2018. Recovery of $3.2 million in 2016–2017 drought expenses was requested and remained subject to Commission approval.
- The estimated combined effective income tax rate for 2018 was 23%–25%. TCJA-related balances remained provisional. The company was working with regulators to finalize a ratepayer net refund of $108 million related to the 2017 deferred-tax remeasurement.
- Management expected available groundwater and purchased supplies to meet demand in 2018 and beyond, but California snowpack was only 57% of long-term average as of March 30, 2018; two Cal Water districts remained under declared drought conditions. Purchased-water costs and water availability remain sensitivities.
- Other disclosed risks include regulatory decisions and rate recovery timing, water-quality and environmental requirements, weather and conservation-driven usage changes, financing costs, labor matters, and litigation. The company recorded a $6.9 million liability for known legal matters and said it did not expect existing matters, net of reserves, to materially affect results or cash flows.
- No material change to contractual obligations or risk factors was reported. The company adopted ASC 606 in Q1; it said adoption did not significantly affect the financial statements. No specific earnings guidance was provided.
- Separately, the company disclosed an all-cash proposal to acquire SJW Group for $68.25 per share, valued at approximately $1.9 billion including assumed debt. SJW’s board had rejected the proposal.
Important facts for investors to verify
- Whether higher rates and balancing-account recoveries offset rising water production, labor, depreciation, and financing costs.
- The timing and amount of customer surcharges, rate-case decisions, cost-of-capital effects, and the proposed $108 million tax-related refund.
- Funding for the $200 million–$220 million 2018 capital program, access to revolving credit, and resulting debt and equity needs.
- Water-supply conditions, drought-related expense recovery, and the effect of weather and conservation on demand.
- Any further developments concerning the rejected SJW acquisition proposal and its potential financing implications.