California Water Service Group — Q2 2021 Form 10-Q
Business and period: Water and wastewater utility holding company operating in California, Washington, New Mexico, Hawaii, and Texas. This unaudited filing covers the quarter and six months ended June 30, 2021. Results are seasonal, with usage and revenue generally higher in warm, dry months.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $213.1 million | $175.5 million | $360.9 million | $301.0 million |
| Net income attributable to Group | $38.2 million | $5.3 million | $35.2 million | Loss of $15.0 million |
| Diluted EPS | $0.75 | $0.11 | $0.69 | Loss of $0.31 |
| Net operating income | $42.2 million | $12.5 million | $45.2 million | $5.6 million |
Operating margin was approximately 19.8% in Q2 2021 versus 7.1% in Q2 2020, and 12.5% for the first half of 2021 versus 1.9% in the prior-year period. The company reported $67.7 million of operating cash flow for the first half, compared with $20.0 million a year earlier. Utility plant expenditures were $138.5 million, leaving operating cash flow less plant expenditures at negative $70.9 million before other investing activity.
At June 30, cash and cash equivalents were $66.5 million. Current assets were $305.6 million and current liabilities were $362.4 million. Short-term borrowings were $145.0 million; long-term debt, net, was $1,059.9 million, with $5.2 million of current maturities. The company had $405 million available on its revolving facilities and stated it was in compliance with financial covenants. Total equity was $1,002.3 million.
Changes and drivers
- Revenue rose 21.4% in Q2 and 19.9% in the first half. Management attributed the earnings improvement primarily to the CPUC’s December 2020 decision on Cal Water’s 2018 General Rate Case (GRC), which restored rate increases and regulatory mechanisms not recognized in the comparable 2020 periods.
- Q2 results included $7.9 million of cumulative GRC rate relief and an $18.0 million increase in regulatory-mechanism net revenue versus Q2 2020. First-half results included $14.3 million of GRC rate relief and a $25.6 million increase in regulatory-mechanism net revenue.
- Customer usage increased 9.8% in Q2 and 5.5% for the first half. Accrued unbilled revenue increased $10.9 million in Q2 and $14.5 million for the first half year over year; management noted that seasonality and unbilled days are key drivers.
- Operating expenses increased 4.8% in Q2 and 6.8% for the first half, slower than revenue growth. Higher water production costs, wages, depreciation, and property taxes were among the offsets to earnings gains. First-half net other income also benefited from lower pension-related costs and a $3.1 million increase in unrealized gains on certain benefit-plan investments.
Outlook, risks, and notable items
- Management estimated 2021 utility plant expenditures of $270 million to $300 million. Cal Water’s July 2021 GRC filing requested $1.0 billion of infrastructure investment for 2022–2024 and revenue increases of $80.5 million in 2023, $43.6 million in 2024, and $43.2 million in 2025; these proposals remain subject to CPUC review, with changes expected to take effect in 2023.
- The company issued $280 million of first-mortgage bonds in May 2021, bearing 2.87% and 3.02% interest and maturing in 2051 and 2061. Proceeds were used to refinance existing indebtedness and for general corporate purposes. It also raised $61.6 million net through its at-the-market stock program during the first half.
- Management said COVID-19 had not significantly affected operations through July 29, 2021, but customer shutoffs for nonpayment and agency collection activity remained suspended. The allowance for credit losses was $6.4 million at June 30, up from $5.2 million at year-end; management expected elevated customer write-offs.
- California drought conditions were notable: reported Sierra snowpack water content was 0%–5% of long-term averages. Management nevertheless expected groundwater and purchased supplies to meet customer demand in 2021 and beyond. Water availability, conservation, climate and wildfire-related exposure, purchased-water and power costs, and regulatory decisions remain important risks.
- Hawaii Water took control of Kapalua water and wastewater systems on May 1, and Texas Water became the majority owner of BVRT in May. A proposed Hawaii wastewater utility acquisition remained subject to customary closing conditions, including regulatory approval.
- The company recognized a $55.7 million IRMA regulatory asset and corresponding revenue related to the delayed 2018 GRC rate implementation. Regulatory asset recovery timing and regulatory approvals are material to reported results and cash flows. Management stated that ordinary-course litigation, after considering reserves, was not expected to materially affect the company.
Investor verification priorities
- Separate recurring operating performance from GRC catch-up revenue, balancing-account recoveries, and higher unbilled revenue.
- Track CPUC decisions on the 2021 GRC, proposed rate increases, and recovery timing for regulatory balances.
- Verify execution of the $270 million–$300 million capital program and how it is funded through debt, equity, and internally generated cash.
- Monitor customer collections, credit-loss provisions, drought and water-supply conditions, and purchased-water costs.
- Review debt levels, revolving-credit availability, covenant compliance, and the economics and regulatory status of acquisitions.