California Water Service Group — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. The company provides regulated water and related services in California, Washington, New Mexico, and Hawaii, alongside non-regulated services. Results are seasonal, and first-quarter performance is not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $121.7 million | $122.0 million | Down $0.3 million, less than 1% |
| Operating expenses | $115.5 million | $114.5 million | Up $1.0 million |
| Net operating income | $6.3 million | $7.5 million | Down 16% |
| Net income (loss) | $(0.8) million | $1.6 million | Declined $2.4 million |
| Diluted earnings (loss) per share | $(0.02) | $0.03 | Declined $0.05 |
| Operating margin | Approximately 5.2% | Approximately 6.1% | Lower |
| Net cash from operations | $31.0 million | $26.9 million | Up $4.1 million |
| Utility plant expenditures | $56.5 million | $35.0 million | Up $21.4 million |
Water production costs fell $4.1 million (9%), mainly reflecting a 12% reduction in water production. Administrative and other operating expenses increased, including drought-program costs, while maintenance expense rose 36% to $6.1 million. Net interest expense increased 12% to $7.3 million.
At March 31, cash and cash equivalents were $30.9 million, versus $8.8 million at year-end 2015. Current assets were $148.5 million and current liabilities $158.1 million. Long-term debt, including current maturities, totaled $564.0 million; short-term borrowings were $34.5 million. The company reported $115.5 million available on its $150 million parent-company revolving line and $300 million available on Cal Water’s $300 million line. It was in compliance with credit-facility covenants.
Q1 dividends declared were $0.1725 per share. The board declared a second-quarter dividend of $0.1675 per share, payable May 23, 2016. The filing reports book value of $13.19 per share at quarter-end.
Material changes and drivers
- The company moved from prior-year quarterly net income to a loss, attributing the change principally to increased incremental drought costs, maintenance expense, and interest expense.
- Revenue was nearly flat: rate changes, usage, and other items added about $10.0 million, offset primarily by a $9.7 million decrease in MCBA revenue as drought-related conservation reduced consumption and production costs, and a $1.7 million decrease in other balancing-account revenue.
- Rates increased revenue by an estimated $6.1 million, including purchased-water offsets, escalation increases, and rate-base offsets. The filing says California drought restrictions reduce water usage and operating cash flows.
- Net cash from operations improved year over year, but investment in utility plant increased substantially. Financing cash flow included approximately $50 million of net proceeds from the March bond sale.
Outlook, regulatory matters, and risks
- Capital spending: Management budgeted company-funded utility plant expenditures of $180 million to $210 million for 2016. Construction work in progress was $171.9 million at March 31, versus $108.1 million a year earlier. Management expects ongoing plant needs to require long-term debt and equity financing in a relatively balanced approach.
- California rates: The pending 2015 general rate case seeks increases of $94.8 million in 2017, $23.0 million in 2018, and $22.6 million in 2019, and requests approval for $693 million of investment over 2016–2018. Any resulting rate change was expected to take effect January 1, 2017; the requests remain subject to regulatory review.
- Water restrictions and supply: State-required water-use reductions were extended through October 31, 2016. Management reported California snowpack and rainfall at 125% of normal as of April 1, but said further precipitation was needed to mitigate drought conditions. It believed supply would be adequate to meet demand in 2016 and beyond, while water budgets were expected to continue.
- Balancing accounts: The company reported $33.6 million of undercollected net WRAM/MCBA receivables at March 31, 2016, compared with $48.2 million a year earlier. In April, it filed to recover a net $20.4 million undercollection through 12- and 18-month surcharges or surcredits.
- Other regulatory proceedings: Hawaii Water’s Ka’anapali rate case seeks $1.7 million of annual revenue, with rates anticipated in Q4 2016 if approved. The filing describes other Hawaii rate decisions and rate phases taking effect in February 2016.
- Contingencies and risks: The company recorded $3.4 million for known legal matters and said resolution of existing matters was not expected to materially affect its financial position, results, or cash flows. Risks include regulatory timing and decisions, drought and weather, conservation-related usage changes, water quality and environmental requirements, and financing costs. No material changes to the 2015 Form 10-K risk factors were reported.
- Unusual item: The company completed implementation of a new customer care and billing system during the quarter and stated that related controls were effective. Management estimated a 37% effective tax rate for fiscal 2016.
Important facts for investors to verify
- Progress and outcomes of the California general rate case, including the requested rate increases and capital investment approval.
- Whether drought restrictions, customer conservation, and drought-related costs affect usage, revenue, cash generation, and water supply beyond the period reported.
- Recovery timing and customer impacts of the $20.4 million WRAM/MCBA net undercollection, along with the status of the larger recorded balancing-account receivables.
- Funding needs for the $180–$210 million 2016 plant-spending budget, debt levels, revolving-credit usage, covenant compliance, and future debt or equity issuance.
- The filing reports Q1 dividends declared of $0.1725 per share but a later board declaration of $0.1675 for Q2; investors may wish to confirm the applicable dividend amount and timing.