California Water Service Group — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results. The company provides regulated water services in California, Washington, New Mexico, and Hawaii, plus non-regulated utility-related services. Water sales are seasonal and typically higher in warm, dry months.
Financial performance
Amounts in millions, except per-share data; comparisons are with the corresponding 2013 period.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $191.2 | $184.4 | $460.1 | $450.4 |
| Net operating income | $40.8 | $35.8 | $65.3 | $62.4 |
| Net income | $33.7 | $29.2 | $45.3 | $41.6 |
| Diluted EPS | $0.70 | $0.61 | $0.95 | $0.90 |
| Net interest expense | $7.0 | $7.1 | $20.5 | $21.9 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $100.2 | $101.9 |
| Utility plant expenditures | Not stated for quarter | Not stated for quarter | $86.3 | $94.8 |
Operating margin was approximately 21.4% in Q3 2014 versus 19.4% in Q3 2013, and 14.2% for the first nine months versus 13.8%. Nine-month diluted EPS was $0.95 versus $0.90; basic EPS was $0.95 versus $0.91. Dividends declared were $0.1625 per share in Q3 and $0.4875 for the nine-month period.
Balance sheet and liquidity
- At September 30, cash was $29.5 million; current assets were $177.3 million and current liabilities were $215.4 million. The current ratio was approximately 0.82.
- Long-term debt, including current maturities, was $429.4 million; short-term borrowings were $61.7 million. Combined debt was approximately $491.2 million, up from about $480.9 million at year-end 2013.
- Stockholders’ equity was $622.3 million, compared with $598.8 million at December 31, 2013. Net utility plant was $1.56 billion.
- Cash declined by $1.7 million after operating cash flow of $100.2 million, investing outflows of $89.1 million, and financing outflows of $9.1 million. Financing included $99.9 million of short-term borrowing and $85.0 million of repayments.
- Available capacity on the revolving credit facilities was reported at $338 million; the company said it was in compliance with credit covenants. The average borrowing rate for the first nine months was 1.16%.
Changes and management commentary
- Q3 revenue rose 3.7% and net income increased $4.5 million. Management attributed the earnings improvement principally to the California 2012 General Rate Case (GRC); the GRC and related regulatory mechanisms contributed $8.5 million to Q3 net income. Lower administrative and other operating costs, interest, and property taxes also helped, partly offset by higher income taxes, maintenance, and depreciation.
- Nine-month revenue increased 2.2% and net income rose $3.8 million. Management cited rate increases and regulatory mechanisms, partly offset by higher income taxes, depreciation, and maintenance.
- The GRC decision, issued August 14, 2014, authorized California rate increases of $45.3 million (9.2%) for 2014, followed by $10.1 million (1.9%) for 2015 and $10.0 million (1.8%) for 2016. New rates took effect August 29. A $30.6 million interim-rate receivable was authorized for recovery through surcharges over three years.
- Water production was down 12% in Q3 and 6% for the first nine months year over year. This lowered Q3 water production costs, while nine-month production costs increased 1%, mainly due to higher pump taxes and well production in affected areas.
- Nine-month maintenance expense rose 15% and depreciation and amortization rose 7%. Net interest expense declined 6%, primarily after $40 million of first-mortgage bonds matured in Q4 2013.
- WRAM revenue fell year over year, partly offset by higher MCBA adjustments. Management described a shift from consumption-based revenue toward fixed service charges under the GRC rate design.
Outlook, risks, and contingencies
- The 2014 company-funded capital expenditure budget was approximately $110–$130 million; management expected future capital needs to be funded through a relatively balanced mix of long-term debt and equity. No formal earnings guidance is stated in the provided filing text.
- The company estimated its 2014 effective tax rate at 34%. Estimated 2014 cash contributions were $26.8 million to pension plans and $9.6 million to other postretirement plans.
- California precipitation was below normal; snowpack and rainfall accumulation for the 2013–2014 water year was reported at 63% of normal as of October 1, 2014. Management believed available groundwater and wholesale supplies would be adequate to meet demand. Drought, conservation, weather, supply availability, water quality requirements, and supplier costs remain relevant risks.
- Regulatory outcomes and timing of rate relief are significant risks. Other disclosed risks include interest rates and capital-market access, litigation, environmental and water-quality compliance, labor and benefit costs, customer usage and collections, and cyber-security and operational disruptions.
- The company was seeking regulatory treatment for several matters, including a proposed Selma groundwater surcharge and an asbestos litigation memorandum account. The CPUC had not yet determined disposition of a potential $1.0–$1.5 million bonus-depreciation-related surcredit.
- Management said ordinary-course litigation was not expected to materially affect the company’s financial position, results, or cash flows, taking existing reserves into account. The recorded liability for known legal matters was $2.7 million at September 30, 2014. State tax audits were ongoing; management did not expect their resolution to have a material impact.
- Management reported disclosure controls were effective at the reasonable-assurance level and stated there were no material changes in risk factors from the 2013 Form 10-K.
Most important facts for investors to verify
- How the GRC-approved rates and the $30.6 million interim-rate surcharge recovery affect revenue, cash collection, and earnings in subsequent periods.
- Whether water conservation and below-normal precipitation affect demand, water sourcing costs, and regulatory balancing-account recoveries.
- Capital spending against the $110–$130 million budget, and the amount and terms of future debt or equity financing.
- Growth and collection timing of regulatory balancing-account receivables, including the $44.5 million net WRAM/MCBA receivable at September 30.
- Developments in the Selma surcharge, asbestos memorandum-account request, tax audits, and other legal or regulatory matters.