California Water Service Group — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. The company provides regulated water and related services across California, Washington, New Mexico, Hawaii, and Texas, alongside non-regulated services. Results are seasonal: usage and revenue are generally higher in warmer, drier months, so Q1 results are not necessarily indicative of full-year performance.
Financial performance
- Revenue: $173.0 million, up $25.3 million (17.1%) from $147.7 million. The increase included $9.4 million from lower deferral of revenue, $5.2 million from rate increases, and higher balancing-account revenue and prior-year acquisitions. Regulatory balancing-account revenue was $14.1 million versus $1.2 million.
- Profit and margins: Operating income was $9.1 million versus $2.9 million; operating margin was approximately 5.3% versus 2.0%. Net income attributable to the Group was $1.1 million, or $0.02 per diluted share, compared with a $3.0 million loss, or $(0.06) per diluted share. Consolidated net income was $0.9 million, including a $0.2 million loss attributable to noncontrolling interests.
- Expenses: Operating expenses rose 13.2% to $163.9 million. Water production costs increased 12.2% to $61.5 million, principally from higher purchased-water volumes and wholesale rates. Administrative and other operating costs also increased, including labor and costs associated with deferred revenue.
- Cash flow and investment: Operating cash flow was $54.2 million, up from $30.0 million, largely reflecting $20.8 million received under California’s Water Arrearages Payment Program. Utility plant expenditures were $68.5 million. Cash, cash equivalents, and restricted cash totaled $71.9 million at quarter-end.
- Debt and liquidity: Long-term debt, including current maturities, was approximately $1.061 billion; short-term borrowings were $50.0 million, up from $35.0 million at year-end. The company reported $500 million of total revolving credit capacity, with $500 million available at March 31, and said it was compliant with its covenants. Total current assets were $272.5 million and current liabilities were $281.8 million.
- Other: The quarterly dividend was $0.25 per share, versus $0.23 a year earlier. Utility plant was $4.261 billion gross and $2.887 billion net.
Changes and drivers versus Q1 2021
- Net income attributable to the Group improved by $4.1 million. Management cited rate increases, prior-year acquisitions, lower revenue deferrals, and a larger income tax benefit, partly offset by higher employee costs, depreciation, and interest expense.
- Net interest expense increased 10.1% to $10.9 million, primarily to support capital investment. Net other income fell to $2.7 million from $4.0 million, chiefly due to a $3.3 million decrease in the value of non-qualified benefit plan investments.
- Operating cash flow benefited from the arrearage-program receipt; aged receivables over 60 days declined to $15.3 million from $26.2 million at December 31, 2021, mainly due to program funds applied to customer accounts.
Outlook, regulatory matters, and risks
- The company proposed $1.0 billion of water infrastructure investment for 2022–2024. Q1 utility plant expenditures were $68.5 million; management said the 2022 California capital program may change depending on the pending general rate case.
- Management expects to fund future utility plant needs through a relatively balanced mix of debt and equity and expects to renew its at-the-market equity program, planned at up to $350 million over three years. No earnings guidance was provided.
- Cal Water’s 2021 California general rate case was under review, with settlement discussions and hearings anticipated in Q2 2022; resulting rates were not expected before January 1, 2023. A decision on the 2022–2024 cost-of-capital application was expected in the latter half of 2022. Outcomes of regulatory proceedings may affect rates and recovery of costs.
- California drought restrictions were at Stage 2 in 12 service areas. Northern Sierra snowpack was reported at 30% of its long-term average, though management believed available groundwater and wholesale supplies would meet 2022 demand. Water availability, drought, climate events, conservation, and purchased-water and power costs remain relevant risks.
- Management said COVID-19 had not significantly affected operations through April 28, 2022, but noted uncertainty. Nonpayment shutoffs had resumed in New Mexico and Hawaii, with resumption in California and Washington planned for Q2 2022.
- Known legal matters carried a $5.4 million liability at March 31, 2022, versus $3.5 million at year-end. Management did not expect the ultimate resolution of existing disputes to materially affect financial position, results, or cash flows. Groundwater-contamination litigation and recovery of related costs remain contingencies.
Important facts for investors to verify
- Progress and outcomes of the California general rate case and cost-of-capital proceeding, including timing and approved rates.
- Whether balancing-account receivables are collected as expected and how much financing cost they require; the filing reports $79.6 million of net WRAM/MCBA receivables.
- Capital spending, funding needs, and the proposed renewal and size of the at-the-market equity program.
- Effects of drought, water supply conditions, and wholesale water and power cost increases on operations and customer rates.