California Water Service Group — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The unaudited consolidated results cover regulated and non-regulated water and related utility services in California, Washington, New Mexico, and Hawaii. Results are seasonal: usage and revenue are generally higher in warm, dry months.
Key financial metrics
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $179.0 | $174.9 | $305.1 | $309.5 |
| Net operating income | $27.0 | $26.8 | $27.5 | $36.7 |
| Net income | $17.0 | $14.8 | $9.4 | $14.0 |
| Diluted EPS | $0.35 | $0.31 | $0.19 | $0.29 |
| Operating margin | 15.1% | 15.3% | 9.0% | 11.8% |
| Net margin | 9.5% | 8.5% | 3.1% | 4.5% |
- Cash flow: Six-month operating cash flow was $43.4 million, down from $49.6 million. Utility plant expenditures were $121.9 million versus $133.9 million, making operating cash flow less plant spending negative $78.5 million. Cash, cash equivalents, and restricted cash ended at $55.1 million.
- Debt and liquidity: At June 30, long-term debt was $807.7 million, current maturities $5.3 million, and short-term borrowings $165.1 million. Total current assets of $206.0 million compared with current liabilities of $331.4 million. The company had $385.0 million available on its $550 million revolving facilities and reported compliance with their covenants.
- Capital and dividends: Total assets were $2.965 billion; stockholders’ equity was $723.2 million. The first-half dividend was $0.395 per share. Construction work in progress was $254.1 million.
Changes versus comparable periods
- Q2 revenue rose 2.3% and net income increased $2.2 million year over year. Rate increases and lower business-development expenses contributed; higher operating and interest expenses partly offset the improvement.
- First-half revenue fell 1.4% and net income declined $4.6 million. Management cited a $6.9 million reduction in unbilled revenue accrual, lower MCBA revenue, higher operating costs and interest expense. Rate increases and lower business-development expenses partly offset these effects.
- For the first half, operating expenses increased 1.8% to $277.7 million; net interest expense increased 16.0% to $21.5 million. Water production costs declined 2.4%, mainly with lower customer usage.
- Prior-year comparative results were corrected for an immaterial computational error in pension and health-care balancing-account revenue. The correction increased reported 2018 Q2 revenue by $2.3 million and first-half revenue by $4.6 million; it did not affect customer billings, cash collected, or operating cash flow.
Outlook, commentary, and risks
- No explicit earnings guidance was provided. Management expects to fund future utility-plant needs with a relatively balanced mix of debt and equity and expects long-term financing to remain necessary given planned capital spending.
- Cal Water’s pending California rate case requested $828.5 million of infrastructure investment for 2019–2021 and proposed revenue increases of $50.7 million in 2020, $31.5 million in 2021, and $33.0 million in 2022 versus last authorized revenue. A decision was expected by year-end 2019, with rate changes expected January 1, 2020; these were proposals, not approved increases.
- The company issued $400 million of First Mortgage Bonds in June, with maturities in 2029, 2049, and 2059 and coupon rates of 3.40%, 4.07%, and 4.17%. Proceeds were used to reduce short-term borrowing and redeem $300 million of bonds; the company also repaid $100 million of maturing long-term debt during the half year.
- Management identified potential impacts from regulatory decisions and rate recovery, water supply and conservation, weather and natural disasters, wildfire-related Public Safety Power Shutoffs, water-quality requirements, power interruptions, and cybersecurity. Management believed water supplies would be adequate to meet demand during 2019 and beyond.
- The company was continuing regulatory work on a $107 million customer net refund related to federal tax changes. Known legal-matter liabilities were $2.7 million; management did not expect the resolution of existing matters, after reserves, to materially affect financial results or cash flows.
- Management reported disclosure controls were effective at the reasonable-assurance level as of June 30, 2019, following remediation work on a previously disclosed material weakness. The filing reported no material change in risk factors from the 2018 Form 10-K.
Important facts for investors to verify
- Progress and final outcome of the California general rate case, including the approved capital plan and rates.
- How weather, customer usage, unbilled-revenue accruals, and balancing-account recoveries affect subsequent-period revenue and cash collection.
- Capital spending, refinancing needs, short-term borrowing levels, and compliance with credit-facility covenants.
- Regulatory disposition of the proposed tax-related customer refund and any developments in contamination or other legal matters.