California Water Service Group — Q1 2012 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. The company provides regulated water and related services in California, Washington, New Mexico, and Hawaii, alongside non-regulated services. Results are seasonal, with water use and earnings generally higher in warmer, drier months.
Key financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Operating revenue | $116.7 million | $98.1 million |
| Net operating income | $6.6 million | $9.9 million |
| Net income | $1.1 million | $2.7 million |
| Diluted EPS | $0.03 | $0.07 |
| Operating margin | 5.7% | 10.1% |
| Net margin | 0.9% | 2.8% |
| Cash from operations | $22.9 million | $24.6 million |
| Utility plant expenditures | $28.7 million | $24.5 million |
- Revenue rose 19%, driven by increased usage (including a regulatory deferral adjustment) and rate increases. The filing attributes $16.5 million of the increase to usage and $5.7 million to rate increases, partly offset by a $3.6 million net change in actual-versus-adopted results and other items.
- Operating expenses increased 25% to $110.1 million. Water production costs rose 22% to $39.0 million, largely reflecting higher purchased-water prices and 12% higher production volume. Administrative and other operating expenses also increased, including employee benefit, wage, conservation, and regulatory-balancing-account costs.
- Q1 2012 included a $1.7 million unrealized gain on benefit-plan insurance investments, versus a $0.5 million gain a year earlier. Net interest expense declined 13% to $6.7 million.
- Cash and equivalents were $16.0 million at March 31, down from $27.2 million at year-end. Operating cash flow was below capital spending, resulting in negative operating-cash-flow less utility-plant-expenditures of approximately $5.7 million.
- Long-term debt, including current maturities, was approximately $487.7 million; short-term borrowings were $50.8 million, up from $47.1 million at year-end. Total capitalization was $925.8 million and stockholders’ equity was $444.7 million.
Changes, outlook, and management commentary
- Net income declined mainly because Q1 2011 included a nonrecurring $1.6 million income-tax adjustment that reduced tax expense. The 2012 result also reflected higher operating expenses, partly offset by rate increases and the WRAM/MCBA adjustment.
- A CPUC decision issued April 19, 2012 shortened amortization periods for specified undercollected California WRAM/MCBA balances and authorized collection of year-end undercollections. This allowed the company to recognize $8.8 million of revenue and $7.1 million of associated costs in Q1, increasing pretax income by about $1.6 million. Management expected the change to improve 2012 cash flows. At March 31, net undercollected WRAM/MCBA receivables totaled $50.7 million.
- Management estimated a 2012 effective tax rate of 38%–42%. The company expected to file its next California general rate case on July 2, 2012, with any resulting rate changes expected to take effect January 1, 2014. No specific earnings guidance was provided.
- The 2012 capital budget was stated as approximately $100–$125 million; elsewhere, the company-funded plan was described as approximately $120–$125 million. Q1 capital spending was $28.7 million. Management anticipated funding future capital needs through a relatively balanced mix of long-term debt and equity.
- The company reported $349.2 million of available revolving-credit capacity and said it met all borrowing covenants. The facilities mature in 2016; the disclosed covenant limits include a maximum total capitalization ratio of 66.7% and minimum interest coverage of 3.0. Actual ratios were 45.2% and 4.75, respectively.
- The board declared a second-quarter dividend of $0.1575 per share. The annualized rate was $0.63 per share; the company stated a long-term goal of a 60% payout ratio through earnings growth.
- California snowpack and rainfall accumulation for the 2011–2012 water year was 53% of normal as of April 1. Management nevertheless expected supplies to be adequate to meet demand in 2012 and beyond.
Risks, contingencies, and other matters
- Results depend materially on regulatory decisions, including rate relief and recovery of balancing-account amounts. Other cited risks include weather and conservation-driven usage changes, purchased-water and power costs, access to capital and interest rates, water quality and environmental requirements, labor and benefit costs, and customer collection trends.
- The company has groundwater-contamination litigation and remediation matters. Management said the ultimate resolution of ordinary-course disputes was not expected to materially affect financial position, results, or cash flows, but MTBE proceeds and their regulatory treatment remain uncertain.
- A proposed $2.1 million ratepayer settlement concerning the non-regulated service-line business remained subject to CPUC approval; the company had recorded a corresponding regulatory liability in 2011. A petition to revise the low-income assistance program’s surcharges and recover its accumulated undercollection had not been resolved.
- The California Franchise Tax Board was auditing the company’s 2008 and 2009 state tax returns; management did not expect a material adverse impact. The filing reported no material change in contractual obligations outside the ordinary course.
- Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the shortened WRAM/MCBA collection timelines produce the expected cash recovery, and the remaining regulatory receivable balance and collection schedule.
- Whether higher purchased-water, benefit, wage, conservation, and maintenance costs continue to pressure operating margins.
- Actual capital spending versus the filing’s differing 2012 budget descriptions, and the funding mix for planned investment.
- Outcomes and timing of the California cost-of-capital proceeding, the 2012 general rate case, the Hawaii rate case, and pending service-line and low-income-program matters.
- Water-supply conditions, customer usage, and the impact of weather and conservation on revenue and cash flow.