California Water Service Group — Q1 2013 Form 10-Q
Business context and reporting period. The company provides regulated water and related services in California, Washington, New Mexico and Hawaii, alongside nonregulated services. This unaudited filing covers the three months ended March 31, 2013; results are seasonal and winter-quarter performance is not indicative of a full year.
Financial performance and position
Amounts below are in millions except per-share data. Comparisons are with Q1 2012; balance-sheet comparisons are with December 31, 2012.
| Metric | Q1 2013 / March 31, 2013 | Prior comparable |
|---|---|---|
| Operating revenue | $111.4 | $116.7 |
| Operating expenses | $105.7 | $110.1 |
| Net operating income | $5.8; 5.2% operating margin | $6.6; 5.7% operating margin |
| Net income (loss) | $(1.1); $(0.03) per diluted share | $1.1; $0.03 per diluted share |
| Operating cash flow | $19.5 | $22.9 |
| Utility plant expenditures | $32.1 | $28.7 |
| Cash and cash equivalents | $127.7 | $38.8 |
| Long-term debt, including current maturities | $480.9 | $481.3 |
| Short-term borrowings | $93.3 | $89.5 |
| Stockholders’ equity | $572.2 | $473.7 |
Including short-term borrowings, reported debt was approximately $574.2 million. The March 31 cash balance included net proceeds from a March equity offering; in April the company used $93.3 million of offering proceeds to repay outstanding borrowings on its and Cal Water’s credit lines. The company reported $306.7 million of available revolving credit capacity at quarter-end and compliance with credit covenants. The current ratio was approximately 0.90.
Q1 2013 dividends declared were $0.16 per share, versus $0.1575 in Q1 2012. Cash dividends paid were $6.7 million.
Changes versus prior period
- Revenue declined $5.3 million, or 5%, while net results shifted from income of $1.1 million to a loss of $1.1 million.
- Management attributed much of the comparison to Q1 2012’s reversal of previously deferred WRAM/MCBA amounts, which benefited that quarter, versus a net deferral in Q1 2013. The filing reports a $9.8 million unfavorable revenue comparison from these deferrals.
- Lower customer consumption reduced usage-related revenue by $3.5 million; the year-over-year decrease in accrued unbilled revenue reduced pretax income by $3.0 million.
- Water production costs rose 7% to $41.7 million, mainly because purchased-water prices increased, despite a 7% decrease in water production. Net interest expense increased 11% to $7.5 million.
- Cash from operations fell $3.4 million. Utility plant spending increased $3.4 million.
- The March 2013 offering of 5.75 million shares generated approximately $105.8 million net proceeds and materially increased equity and cash; outstanding shares were approximately 47.7 million at March 31, versus 41.9 million at year-end.
Outlook, management commentary and risks
- Capital and financing: The 2013 company-funded capital expenditure budget is approximately $120–$130 million. Management expects to fund future capital needs through a relatively balanced mix of long-term debt and equity; internally generated funds alone have not covered capital spending needs.
- Rates and regulation: Cal Water’s pending 2012 general rate case requested annual rate increases of $92.7 million for 2014, $17.2 million for 2015 and $16.9 million for 2016. These are requests, not approved outcomes; changes were expected to take effect January 1, 2014. A separate settlement proposed $5.7 million of renovation capital-cost recovery, subject to regulatory approval and incorporation into the rate case.
- Other rate items: The company filed to recover $23.6 million of WRAM/MCBA balances through surcharges and requested $4.6 million in annual purchased-water and pump-tax offsets. A $2.2 million residential customer surcredit for the service-line-insurance billing settlement will be issued over 12 months.
- Taxes and benefits: Management expected a 2013 effective tax rate of 38%–42%. Estimated 2013 cash contributions were $31.3 million to pension plans and $9.6 million to other postretirement plans; $7.5 million was contributed in Q1.
- Water supply: California snowpack and rainfall accumulation was reported at 95% of normal as of April 1, 2013. Management believed supplies would be adequate to meet demand in 2013 and beyond.
- Risks and contingencies: Results depend on regulatory decisions and timing of rate relief, water and power costs, customer usage and weather, access to capital, interest rates, water quality/environmental requirements, and litigation. The IRS was auditing the company’s 2010 and 2011 federal returns; management did not expect a material adverse effect. A $1.3 million liability was recorded for known legal matters; management did not expect existing matters, net of reserves, to materially affect financial condition, results or cash flows. No material changes to the 2012 Form 10-K risk factors were reported.
- The filing provides no specific earnings or revenue guidance. Management cautioned that quarterly results are not indicative of full-year results because of seasonality.
Important facts for investors to verify
- Progress and final approved terms of the California general rate case, including timing and recovery of requested costs.
- Collection timing and financing cost of the $48.6 million net WRAM/MCBA receivable balance at March 31.
- Whether lower water consumption and the Q1 revenue decline persist as seasonal usage patterns change.
- Execution of the $120–$130 million capital budget, financing needs, and any further debt or equity issuance.
- Actual pension and postretirement contributions, purchased-water cost trends, and resolution of the IRS audit and legal matters.