California Water Service Group — Q2 2012 Form 10-Q
Business and period: Unaudited results for the three and six months ended June 30, 2012. The company provides regulated water and related services in California, Washington, New Mexico and Hawaii, plus non-regulated services. It reports one operating segment. Results are seasonal, generally stronger in warm, dry months.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $143.6m | $131.4m | $260.3m | $229.5m |
| Net operating income | $19.6m | $19.6m | $26.2m | $29.5m |
| Net income | $13.0m | $12.2m | $14.1m | $14.9m |
| Diluted EPS | $0.31 | $0.29 | $0.34 | $0.36 |
| Net margin | 9.0% | 9.3% | 5.4% | 6.5% |
- Q2 revenue rose 9%, while net income rose about 6%. Management attributed the earnings increase mainly to prior rate increases and lower net interest expense, partly offset by higher operating costs.
- For the six-month period, revenue increased 13%, but net income declined about 6%. The prior-year comparison included a nonrecurring $1.6m income-tax benefit in Q1 2011.
- Q2 operating expenses increased 11% to $123.9m. Water production costs rose 18% to $52.7m, primarily from higher purchased-water prices and greater pump taxes; total production volume also increased 4%. For the six months, water production costs rose 19% to $91.6m.
- Six-month net interest expense decreased 11% to $13.6m, reflecting more capitalized interest, lower credit-line rates and fees, and the end of temporary interest-rate balancing-account expense.
Cash flow, debt and liquidity
- Six-month operating cash flow was $32.1m, down from $47.7m. Capital expenditures were $62.0m, compared with $52.3m a year earlier; cash dividends paid were $13.2m. Cash at June 30 was $20.8m, versus $27.2m at year-end 2011.
- At June 30, total current and long-term debt was approximately $574.4m, including $87.8m of short-term borrowings, compared with approximately $535.3m at December 31. Short-term borrowings increased by $40.6m during the period.
- Current assets were $134.9m and current liabilities $210.7m. The company relies on revolving credit facilities for seasonal and capital needs; $312.2m of facility capacity remained available. The company reported compliance with borrowing covenants, a 58.4% capitalization ratio, and an interest coverage ratio slightly above five.
- Net WRAM/MCBA undercollections were $53.7m, up from $49.6m at year-end. The CPUC shortened amortization periods for certain undercollected balances, which management expected to improve 2012 collections.
- Shareholders’ equity was $451.4m. The declared quarterly dividend was $0.1575 per share, up from $0.15375 a year earlier.
Material changes, outlook and risks
- Rate increases contributed $8.9m to Q2 revenue growth; higher usage, actual-versus-adopted results and other items contributed a further $3.3m. For the six months, revenue growth included $9.5m of previously deferred WRAM/MCBA revenue recognized after the CPUC shortened amortization periods; associated costs were $7.7m, increasing pretax income by $1.8m.
- Management estimated a 2012 effective tax rate of 38%–42%. The mandatory federal repairs deduction was expected to reduce 2012 estimated tax payments and support operating cash flow.
- The 2012 capital budget was approximately $120m–$125m. Management expected to fund future capital needs through a relatively balanced mix of long-term debt and equity; internally generated funds after dividends were not expected to cover planned capital spending.
- Cal Water filed its 2012 California general rate case on July 5, 2012, requesting increases of $92.7m (19.4%) for 2014, $17.2m (3.0%) for 2015 and $16.9m (2.9%) for 2016. These requests were pending, with any resulting rate changes expected from January 1, 2014. The CPUC had also set a 9.99% authorized return on equity and 53.4% equity capital structure for rate-setting purposes.
- Management said water supplies should be adequate to meet demand. California snowpack and rainfall accumulation for the 2011–12 water year was 85% of normal as of July 1, and precipitation in the first half was below average.
- Key risks include regulatory timing and decisions, weather and conservation-related changes in usage, purchased-water and power costs, access to capital and interest rates, pension and health-care costs, and environmental and water-quality requirements. The company reported no significant change in contractual commitments. Management did not expect existing legal matters, taking account of reserves, to materially affect results.
- Notable matters include a pending CPUC settlement proposing a $2.1m ratepayer payment related to the non-regulated service-line business; $16.6m of remaining MTBE proceeds recorded as other long-term liabilities; and a California tax authority audit of 2008 and 2009 returns, which management did not expect to have a material adverse impact. Management reported effective disclosure controls.
Important facts for investors to verify
- Progress and final outcomes of the 2012 California rate case and other pending regulatory filings, including the proposed $2.1m service-line settlement.
- Whether WRAM/MCBA balances are collected on the expected schedule, and the resulting cash-flow and earnings effects.
- Purchased-water prices, customer usage, conservation, weather and supply conditions, which influence costs, revenue and liquidity.
- Capital spending versus budget, financing needs, short-term borrowings and continued compliance with credit covenants.
- Pension funding and benefit costs, the actual 2012 tax rate, and resolution of the California tax audit.