California Water Service Group — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited results; amounts below are in millions unless stated otherwise. The company provides regulated water and related services across California, Washington, New Mexico and Hawaii, and reports one operating segment. Results are seasonal, with water use and revenue generally lower in winter.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Operating revenue | $126.1 | $134.6 |
| Operating expenses | $125.6 | $124.7 |
| Net operating income | $0.5 | $9.8 |
| Net loss | $(7.6) | $(0.8) |
| Loss per diluted share | $(0.16) | $(0.02) |
| Cash from operating activities | $20.1 | $28.3 |
| Utility plant expenditures | $59.9 | $70.7 |
- Revenue declined 6.3%. Management attributed the reduction mainly to lower customer usage and a $7.1 million decrease in accrued unbilled revenue, as well as lower MCBA revenue and increased revenue deferrals. Rate increases partly offset these declines.
- Operating expenses increased $0.9 million. Higher wages, conservation program costs, outside services, maintenance, depreciation and property taxes were partly offset by lower water production costs and lower employee benefit costs.
- Net interest expense rose 17.7% to $10.2 million, primarily because of financing needs for capital investment and operations and higher short-term rates. A $3.4 million increase in unrealized gains on certain benefit-plan investments partly offset the earnings pressure.
- At March 31, cash and cash equivalents were $60.2 million. Current liabilities were $384.0 million, including $125.1 million of short-term borrowings; current assets were $192.7 million.
- Long-term debt was $710.6 million and current maturities were $105.0 million. Including short-term borrowings, reported debt balances totaled approximately $940.7 million. Total capitalization was $1.425 billion.
- Operating cash flow fell to $20.1 million. The company used $59.9 million for utility plant expenditures and received $52.9 million net from financing activities, including $60.0 million of short-term borrowing. Dividends paid were $9.5 million.
Material changes and notable items
- Net loss increased by $6.9 million year over year; the filing identifies lower accrued unbilled revenue and operating cost increases not fully offset by rate relief as key factors. The company noted that California’s tiered rate structure concentrates revenue increases in higher-usage summer months, while many expenses occur throughout the year.
- Short-term borrowings increased from $65.1 million at year-end 2018 to $125.1 million at March 31, 2019. The company entered into new revolving credit agreements on March 29, 2019, with aggregate initial capacity of $550 million and terms through March 29, 2024. At quarter-end, stated availability was $424.9 million; the company reported compliance with its financial covenants.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing $13.8 million of lease assets and liabilities. The filing says the standard otherwise had no material impact on the remaining financial statements.
- The company corrected an immaterial computational error in the Q1 2018 comparative financial statements related to authorized pension and health-care balancing-account revenue. The correction improved prior-period revenue and net income but did not affect billings or cash collected.
- Management reported remediation actions for a material weakness in internal control disclosed at year-end 2018. A revised monthly control over health-care and pension balancing accounts was tested and found operating effectively as of March 31, 2019; a further control for GRC settlements and decisions was designed.
Outlook, regulation and risks
- No specific earnings guidance is provided. Management said water supplies should be adequate to meet demand in 2019 and beyond; California snowpack was above long-term averages as of February 5, 2019.
- Cal Water’s pending California general rate case seeks approval for $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. Management expected any resulting rate changes to take effect January 1, 2020; approval and amounts remain subject to regulatory review.
- Cal Water reported a net $29.2 million under-collection in 2018 WRAM/MCBA accounts for recovery from customers through surcharges and surcredits. The company also continued work with regulators on a customer net refund of $107.0 million related to federal tax changes; the final treatment depends on regulatory decisions.
- A $100.0 million Cal Water bond maturity was due in Q2 2019; management expected to use its credit line until long-term financing could be arranged. Management expects future utility investment needs to require a balanced mix of debt and equity, as internally generated funds after dividends have not covered capital needs.
- Key disclosed risks include regulatory timing and outcomes, recovery of costs, water availability and quality, weather and climate events, conservation-related usage changes, infrastructure and cyber security, labor matters, financing costs, and litigation. Management did not expect existing legal matters, after reserves, to materially affect results, financial position or cash flows.
Important facts for investors to verify
- Progress and final outcomes of the California GRC, including authorized capital spending, revenue increases and effective dates.
- Collection timing for WRAM/MCBA balances and the final regulator-approved amount and timing of customer tax refunds.
- Funding and refinancing of the $100 million bond maturity, subsequent borrowing levels, and compliance with credit-facility covenants.
- Whether seasonal usage and accrued unbilled revenue normalize in warmer quarters, and how operating costs and interest expense develop.
- Execution of the proposed infrastructure program and related capital funding, plus continued effectiveness of the remediated financial-reporting controls.