California Water Service Group — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. The company provides regulated water and related services in California, Washington, New Mexico, and Hawaii, plus non-regulated services. It reports one operating segment. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $175.5 | $179.0 | $301.0 | $305.1 |
| Operating income | $12.5 | $27.0 | $5.6 | $27.5 |
| Net income (loss) | $5.3 | $17.0 | $(15.0) | $9.4 |
| Diluted EPS | $0.11 | $0.35 | $(0.31) | $0.19 |
- Revenue declined 2.0% in Q2 and 1.3% for the first half. Management attributed the first-half decline principally to the delayed California 2018 General Rate Case (GRC) decision and the resulting absence of certain regulatory balancing-account revenue.
- Operating margin, calculated as operating income divided by revenue, was approximately 7.1% in Q2 2020 versus 15.1% in Q2 2019, and 1.9% for the first half versus 9.0%. First-half net margin was approximately -5.0% versus 3.1%.
- Q2 operating expenses rose 7.2% to $163.0 million; first-half expenses rose 6.4% to $295.5 million. Water production costs increased 10.1% in Q2 and 13.5% year to date, largely from wholesale water rates, usage, and production mix. Depreciation also rose with capital additions.
- Six-month net income included a $4.0 million unrealized loss on certain benefit-plan investments; Q2 included a $3.0 million unrealized gain. These items affected comparisons between periods.
Cash flow, debt, and liquidity
- First-half operating cash flow was $20.0 million, down from $43.4 million. Utility plant expenditures were $133.5 million, compared with $121.9 million; the company also paid $37.7 million for the Rainier View acquisition. Operating cash flow less utility plant expenditures was therefore approximately negative $113.5 million, before acquisition spending.
- Cash and cash equivalents were $114.4 million at June 30, up from $42.7 million at year-end 2019. Current assets were $266.9 million and current liabilities $577.6 million.
- Short-term borrowings increased to $375.1 million from $175.1 million at year-end. Long-term debt, net, was $785.3 million, with $21.9 million of current maturities. The company issued no long-term debt in the first half; it used revolving credit, equity proceeds, and operating cash to fund operations and investment.
- Revolving credit availability at June 30 was $44.9 million for the parent and $130.0 million for Cal Water. The company reported compliance with credit covenants and access to the undrawn facilities. Average borrowing rates on its credit lines were 2.13% for the first half, versus 3.33% a year earlier.
- At-the-market stock sales raised $37.1 million net in the first half. Dividends paid were $20.7 million; quarterly dividends were $0.2125 per share. Management’s long-term dividend payout objective is 60% of net income, supported by future earnings growth.
Material developments, outlook, and risks
- California GRC delay: As of July 30, 2020, the CPUC had not resolved the 2018 GRC. Existing rates continued as interim rates from January 1, 2020, and differences from ultimately approved rates are being tracked for later recovery. The CPUC extended the decision deadline to September 30, 2020; management expected a decision in Q3. Continued delay was expected to significantly affect Q3 operating results.
- Management estimated that approval of its proposed GRC settlement and positions would have added $29.1 million of Q2 operating revenue and $45.8 million for the first half, before tax, including delayed rate increases and disputed regulatory mechanisms. These are management estimates of amounts not recorded as reported revenue; disputed-mechanism amounts would be recognized if approved. The filing states that interim-rate differences are expected to be collected through customer surcharges over 12 months.
- COVID-19 had not significantly affected operations through July 30, 2020, but the company stopped customer shutoffs for nonpayment, increased its credit-loss allowance, and cited possible customer payment difficulties and employee or facility disruptions as risks. It also deferred some WRAM recovery to avoid bill increases during the pandemic.
- Capital plan: Estimated 2020 utility plant expenditures are $260 million to $290 million. The company anticipates funding future plant needs through a relatively balanced mix of long-term debt and equity; financing could become more difficult or costly amid capital-market disruption.
- Acquisition: Washington Water took control of Rainier View Water on June 1, 2020, expanding its operations. The $37.7 million cash acquisition added $28.5 million of preliminary goodwill, subject to refinement as certain intangible-asset valuations are completed.
- Management said water supplies should meet customer demand during 2020 and beyond, but disclosed unusually low Sierra snowpack readings as of June 2020. Other risks include regulatory outcomes, cost recovery, water availability and quality, commodity and power costs, climate and natural disasters, and cybersecurity. The filing provides no earnings or revenue guidance.
- Contingencies include groundwater-contamination litigation and other ordinary-course legal matters. The company recorded $2.9 million for known legal matters and did not expect their resolution, after existing reserves, to materially affect its financial position, results, or cash flows. It was also working with state regulators on a $121.0 million customer net tax refund related to the Tax Cuts and Jobs Act; final adjustments depend on regulatory decisions.
Important facts for investors to verify
- Timing and final terms of the 2018 GRC decision, including treatment of disputed WRAM, MCBA, pension, and health-cost mechanisms and recovery of interim-rate differences.
- How the reported loss and weak operating cash flow compare with eventual rate recovery, and the extent to which higher water, pension, maintenance, and credit-loss costs persist.
- Debt and liquidity needs against the $260 million to $290 million 2020 capital-spending estimate, including remaining revolver capacity and future debt or equity financing.
- Customer payment trends, credit-loss provisions, and any continuing effects of COVID-19 on collections, operations, or capital markets.
- Final acquisition accounting for Rainier View, water-supply conditions, and regulatory resolution of the customer tax refund and other material proceedings.