California Water Service Group — Q3 2012 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2012. The company provides regulated water and related services in California, Washington, New Mexico and Hawaii, alongside non-regulated services. Results are seasonal, with water use and revenue generally higher in warm, dry months.
Key financial metrics
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $178.1 | $169.3 | $438.4 | $398.8 |
| Net operating income | $36.4 | $30.1 | $62.6 | $59.6 |
| Net income | $29.8 | $20.9 | $43.8 | $35.8 |
| Diluted EPS | $0.71 | $0.50 | $1.05 | $0.86 |
| Net operating income margin | 20.4% | 17.8% | 14.3% | 14.9% |
| Net income margin | 16.7% | 12.4% | 10.0% | 9.0% |
For the nine months, operating cash flow was $99.4 million versus $97.7 million; utility plant expenditures were $99.6 million versus $89.5 million. Cash and equivalents fell to $17.0 million from $27.2 million at year-end 2011. At September 30, total current assets were $150.1 million and current liabilities $190.2 million.
Long-term debt, including current maturities, was $486.1 million; short-term borrowings were $60.7 million, up from $47.1 million at December 31, 2011. The company reported $60.1 million of availability on its $100 million parent revolver and $300 million available on Cal Water’s $300 million facility. It was in compliance with credit covenants. Nine-month dividends paid were $19.8 million; the declared quarterly dividend was $0.1575 per share.
Material changes versus the prior comparable period
- Q3 revenue increased 5%; nine-month revenue increased 10%. Management attributed growth principally to rate increases and higher usage, including regulatory balancing-account adjustments.
- Nine-month water production costs rose $19.8 million, or 14%, primarily from higher purchased-water prices and pump taxes; production volume increased 5%. Administrative and general plus other operating expenses rose 16%, reflecting employee benefit and wage costs and conservation spending.
- Nine-month net income increased $8.0 million. Net interest expense declined $1.8 million, while other income improved partly because benefit-plan insurance investments recorded a $2.2 million unrealized gain, versus a $2.8 million loss in the prior-year period.
- Capital expenditures increased to $99.6 million. Short-term borrowings increased, while cash declined.
Outlook, management commentary, risks and unusual items
- Management expected a 2012 effective tax rate of 31%–35%. A nonrecurring tax benefit related to 2011 and prior years reduced tax expense by $6.2 million in Q3 and contributed about $0.15 to diluted EPS. Tax deductions for repairs and maintenance were expected to reduce 2012 cash tax payments by approximately $29 million and support capital spending.
- A CPUC decision shortened amortization periods for certain undercollected WRAM and MCBA balances. For the first nine months, recognition of $11.4 million of deferred revenue and $9.3 million of associated costs increased pretax income by $2.1 million. The undercollected balance was $52.0 million at September 30; recovery timing and regulatory decisions remain important to cash flow.
- The 2012 California general rate case requested increases of $92.7 million for 2014, $17.2 million for 2015 and $16.9 million for 2016. These are company requests, not approved rates. A separate cost-of-capital decision lowered authorized returns and produced a $3.8 million annual rate decrease effective January 1, 2013.
- Company-funded capital spending for 2012 was described as approximately $120–$125 million in one section; another passage gave a broader $100–$125 million budget. Management expected future capital needs to require a mix of long-term debt and equity.
- Management said water supplies should be adequate for 2012 and beyond; California snowpack and rainfall were reported at 83% of normal as of October 1, 2012. Results remain exposed to weather, conservation and usage patterns, water and power costs, regulatory timing and rate recovery, access to capital, pension costs, and litigation or environmental obligations.
- The company reported no material changes to its stated risk factors, no material changes to contractual obligations outside the ordinary course, and no expected material effect from ordinary-course litigation after considering reserves. A California tax authority audit of 2008 and 2009 returns was ongoing; management did not expect a material adverse impact.
Important facts for investors to verify
- Whether requested rate increases are approved, and the timing and amount of recovery of WRAM/MCBA and other regulatory balances.
- Whether the tax benefit and benefit-plan investment gains are nonrecurring, and how tax deductions affect future cash taxes and deferred taxes.
- The final 2012 capital-spending budget, funding mix, and implications of higher short-term borrowing and lower cash.
- Actual water supply, usage and purchased-water costs, and whether these trends support reported revenue and earnings.
- The detailed filing’s treatment of pension funding, regulatory contingencies and the disclosed difference between capital-budget estimates.