California Water Service Group — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The company provides regulated water and related services in California, Washington, New Mexico and Hawaii, plus non-regulated services. Results are unaudited. Water demand and earnings are seasonal and generally higher in warm, dry months.
Key financial results
Amounts in millions, except per-share data. Figures may not sum due to rounding.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $154.6 | $143.6 | $266.0 | $260.3 |
| Operating expenses | $133.8 | $123.9 | $239.4 | $234.1 |
| Net operating income | $20.8 | $19.6 | $26.6 | $26.2 |
| Net income | $13.5 | $13.0 | $12.4 | $14.1 |
| Diluted EPS | $0.28 | $0.31 | $0.28 | $0.34 |
| Net interest expense | $7.3 | $6.9 | $14.8 | $13.6 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $36.8 | $32.1 |
Q2 operating margin was approximately 13.4% versus 13.7%; first-half operating margin was approximately 10.0% versus 10.1%. The filing does not provide a clear company-defined margin measure.
Balance sheet, liquidity and capital
- At June 30, cash was $38.7 million; current assets were $164.1 million and current liabilities $196.2 million.
- Long-term debt, including current maturities, was $478.7 million; short-term borrowings were $28.8 million. Combined debt was approximately $507.6 million, down from approximately $570.7 million at year-end 2012.
- Revolving credit facilities total $400 million. Available capacity was reported as $371.2 million; the company met its covenants. Its capitalization ratio was 51.9% against a 66.7% covenant ceiling, and its interest coverage ratio slightly exceeded five against a minimum of three.
- Six-month utility plant expenditures were $66.2 million. The 2013 capital budget was approximately $120–$130 million. Operating cash flow did not cover capital spending and dividends.
- In March, the company issued 5.75 million shares, raising $105.8 million net. It used $93.3 million in April to repay parent and Cal Water credit-line borrowings. Shares outstanding increased to 47.7 million at June 30 from 41.9 million at year-end.
- The quarterly dividend was $0.16 per share, versus $0.1575 a year earlier. The board declared another $0.16 dividend for Q3.
Period changes and operating drivers
- Q2 revenue rose 8%, primarily on higher customer usage and rates. Management cited a $11.8 million increase in usage and other revenue, including a $3.6 million increase in accrued unbilled revenue. Water production volume rose 5% year over year.
- Q2 net income increased modestly, but diluted EPS fell because weighted-average shares rose to 47.8 million from 41.9 million, following the equity issuance. Higher production costs, property taxes, wages and benefits, depreciation, and lower capitalized interest partly offset revenue gains.
- First-half revenue increased 2%, but net income fell 11%. Management attributed much of the decline to a prior-year benefit: reversal of deferred WRAM revenue and related MCBA costs added about $1.1 million to first-half 2012 net income. First-half production costs rose $9.7 million, mainly from wholesale water prices and increased usage.
- First-half net cash from operations improved to $36.8 million from $32.1 million; investing cash use was $66.7 million. Cash was approximately unchanged from year-end, reflecting financing activity including the equity offering.
Outlook, regulation and risks
- Management expected a 2013 effective tax rate of 38%–42% and forecast company-funded capital spending of $120–$130 million. No specific earnings or revenue guidance was provided.
- The California GRC application sought rate increases of $92.7 million in 2014, $17.2 million in 2015 and $16.9 million in 2016. These are requested amounts, not approved outcomes; a decision was pending, with proposed new rates expected from January 1, 2014.
- Cal Water was collecting $23.6 million of WRAM/MCBA undercollections through customer surcharges. Total net undercollected balances were $44.2 million at June 30; most were expected to be recovered over 18 months or less. Recovery timing and regulatory authorization affect cash flow.
- Management believed water supplies would be adequate for 2013 and beyond. California precipitation was below average for the first half; reported snowpack and precipitation accumulation for the 2012–13 water year was 91% of normal as of July 1.
- New chromium-6 standards could require additional treatment, operating costs or capital spending in some districts. Recovery of resulting costs through customer rates is not assured. The 2013 capital budget may not include significant future compliance costs.
- Other exposures include regulatory decisions and rate timing, purchased-water and power costs, weather and conservation, interest rates, pension funding, and litigation. The company reported $1.0 million of liabilities for known legal matters and did not expect existing disputes to materially affect results. The IRS was auditing 2010 and 2011 returns; management did not expect a material adverse impact.
- CEO Peter C. Nelson resigned as an officer and employee effective July 31, 2013, and was to remain non-executive chairman. Martin A. Kropelnicki was appointed CEO effective September 1, 2013.
Investor verification priorities
- Track the California GRC decision and compare authorized rates with requested increases and the company’s capital plan.
- Verify collection timing and financing cost for the $44.2 million WRAM/MCBA undercollection.
- Assess the effect of chromium-6 standards on required investment, operating costs and rate recovery.
- Monitor wholesale water prices, customer usage, weather, and whether higher revenue converts into earnings and cash flow.
- Review the impact of the equity issuance on per-share earnings and the company’s future debt-and-equity financing mix.
- Check upcoming debt maturities, including $40 million of Cal Water first mortgage bonds due in Q4 2013, and pension contributions; estimated 2013 contributions were $31.3 million for pensions and $9.6 million for other postretirement benefits.