California Water Service Group — Q3 2023 Form 10-Q
Business context and reporting period. The company provides regulated water and wastewater services and related non-regulated services across California, Washington, New Mexico, Hawaii, and Texas. This unaudited filing covers the three and nine months ended September 30, 2023. Results are seasonal, with water use and revenue generally higher in warm, dry months.
Financial results and position
Unless noted otherwise, amounts are in millions.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $255.0 | $266.3 | $580.1 | $645.5 |
| Net operating income | $43.5 | $64.9 | $41.9 | $101.4 |
| Net income attributable to Group | $34.4 | $55.9 | $21.8 | $76.4 |
| Diluted EPS | $0.60 | $1.03 | $0.38 | $1.41 |
| Net operating margin | 17.1% | 24.4% | 7.2% | 15.7% |
Cash flow and investment: Nine-month operating cash flow was $143.5, down from $199.8. Utility plant expenditures were $274.1, up from $222.1; investing cash outflow was $279.6. Financing provided $120.1, including $112.7 net proceeds from at-the-market stock sales. Cash, cash equivalents, and restricted cash totaled $69.1 at September 30, versus $85.0 at year-end 2022.
Debt and liquidity: Long-term debt, including current maturities, was approximately $1,053.7; short-term borrowings were $115.0, compared with $70.0 at December 31, 2022. The company reported $485.0 of unused capacity on its $600.0 revolving facilities and compliance with covenants. Interest expense for the first nine months rose 12.7% to $37.5, mainly because of higher short-term borrowing rates and larger line-of-credit balances.
Balance sheet: Total assets were $4,041.4, including net utility plant of $3,248.3. Total equity was $1,415.0. The quarterly dividend was $0.26 per share; the Board declared another $0.26 dividend payable November 17, 2023.
Material changes versus the prior comparable period
- Q3 revenue fell 4.3% and attributable net income fell $21.4, or about 38%; diluted EPS declined from $1.03 to $0.60. Operating expenses rose 5.0% to $211.5.
- Nine-month revenue declined 10.1% and attributable net income fell $54.7. Customer usage was down 5.6%, which management attributed primarily to higher winter precipitation in California and conservation.
- A major year-over-year revenue difference reflects the expiration of California’s WRAM and MCBA mechanisms at the end of 2022. No WRAM revenue was recorded in 2023, compared with $34.4 in Q3 2022 and $45.7 in the first nine months of 2022.
- California’s delayed 2021 General Rate Case (GRC) decision meant that the company recorded no benefit from proposed rate relief or related mechanisms in the first nine months of 2023. Management estimated the delay reduced operating revenue by $60–$93 for the nine-month period, including $16–$18 related to drought-response revenue; the Q3 estimate was $14–$27, including $5–$5.5 related to drought response. These are management estimates, not recognized revenue.
- Operating cash flow declined, while capital expenditures increased. The company also issued more shares through its at-the-market program: $112.7 net proceeds in the first nine months of 2023 versus $57.1 in 2022.
Outlook, risks, contingencies, and unusual items
- Regulatory outlook: The CPUC extended the deadline for the 2021 GRC decision to December 31, 2023; timing remained uncertain. Management expected any cumulative adjustment to be recorded when approvals are received. In October 2023, Cal Water sought 2024 cost-of-capital rates that it estimated could increase adopted annual revenue by about $10.0, subject to the GRC outcome.
- Capital and financing: The company proposed $1.0 billion of California water infrastructure investment for 2022–2024; the capital program may change with GRC approvals. On October 6, 2023, Cal Water applied for authorization to issue up to $1.3 billion of additional debt and equity securities for 2024–2026 investment.
- PFAS: If proposed federal PFAS rules are adopted in their current form, management estimates about $200.0 of capital investment would be required, with three years to comply. Cal Water sought CPUC authority to track related capital costs.
- Water supply and usage: Management believed supplies would be adequate to meet demand, but results and costs remain exposed to weather, drought, conservation, water availability, and water-quality requirements. California moved from Stage 2 to Stage 1 water restrictions in May 2023.
- Other exposure: Risks include regulatory recovery and rate decisions, higher purchased-water and power costs, interest rates, climate events, litigation, and market-driven gains or losses on non-qualified benefit-plan investments. Management reported $5.6 of liabilities for known legal matters before insurance recoveries and did not expect existing legal matters to materially affect results.
- Unusual comparisons: Nine-month net other income benefited from a $0.7 unrealized gain on non-qualified benefit-plan investments, versus a $9.3 unrealized loss in the prior-year period. The 2022 comparative equity balances were restated for an immaterial prior-period regulatory-liability error, reducing retained earnings and equity by $11.1; the filing says customer billings and refunds were unaffected.
- Controls: Management said disclosure controls were effective and that it remediated the material weakness in internal control reported at December 31, 2022. There were no material changes to the company’s stated risk factors.
- Guidance: The filing does not provide a clear earnings or EPS forecast. Management’s estimates of rate-related revenue, PFAS investment, and capital plans depend on regulatory outcomes and other assumptions.
Important facts for investors to verify
- Whether and when the CPUC issues the 2021 GRC decision, and what rates, revenue recovery, and retroactive adjustments it authorizes.
- Whether proposed MWRAM, ICBA, and drought-response recoveries are approved, and their timing and customer-billing effects.
- How the $274.1 year-to-date utility investment program is funded, including future debt and equity issuance, borrowing costs, and dilution.
- Whether proposed PFAS requirements are finalized and whether the estimated $200.0 capital need is recoverable in customer rates.
- Whether customer usage, cash flow, and water-supply conditions recover or remain pressured by weather and conservation.
- The effect of the 2023 equity issuance and higher financing costs on per-share earnings, liquidity, and dividend capacity.