California Water Service Group — Q3 2010 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2010, compared with 2009. The group provides regulated water and related services in California, Washington, New Mexico, and Hawaii, alongside non-regulated services. Results are seasonal, typically stronger in warmer months; interim results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $146.3m | $139.2m | $354.9m | $342.4m |
| Net operating income | $25.9m | $24.1m | $49.9m | $46.3m |
| Net income | $20.4m | $19.6m | $32.8m | $34.1m |
| Diluted EPS | $0.98 | $0.94 | $1.58 | $1.64 |
| Net interest expense | $6.5m | $5.5m | $18.0m | $15.2m |
- Operating margin was approximately 17.7% in Q3 versus 17.3% a year earlier; for the first nine months it was approximately 14.1% versus 13.5%.
- Operating cash flow was $77.5m for the first nine months, essentially level with $77.2m in 2009. Utility plant expenditures were $99.3m, leaving cash flow before financing of about negative $20.6m after investing activities overall.
- At September 30, cash was $9.7m; current assets were $91.7m and current liabilities $155.5m. Long-term debt was $380.3m, current maturities $2.4m, and short-term borrowings $56.3m. Short-term borrowings were up from $12.0m at year-end 2009. The company reported compliance with credit-facility covenants.
- Net utility plant rose to $1.280bn from $1.198bn at December 31, 2009. Shareholders’ equity was $436.5m. Quarterly dividends declared were $0.2975 per share; nine-month dividends were $0.8925 per share.
Changes versus the prior comparable period
- Q3 revenue increased 5.2%, principally from rate increases; Q3 net income rose 4.1%. Management attributed improved quarterly earnings primarily to rate increases and lower administrative and general expenses.
- For the first nine months, revenue rose 3.6%, but net income fell 3.9%. Rate increases and new customers were partly offset by a $10.6m year-over-year reduction in revenue associated with actual-versus-adopted results, usage, and other WRAM/MCBA effects.
- Nine-month water production costs increased $7.5m, mainly from purchased water and power prices, while total water production volume declined 5%, which management attributed primarily to conservation and cooler weather. Administrative and general plus other operating expenses declined $1.8m; maintenance and depreciation increased.
- Nine-month net other income declined $2.1m, including lower unrealized gains on life-insurance investments associated with benefit plans and a prior-year property-sale gain. Net interest expense increased $2.8m, principally due to revolving-credit borrowings.
Outlook, regulatory matters, and risks
- Management expected a 2010 effective tax rate of 40%–40.5%. The 2010 company-funded capital expenditure budget was approximately $120m–$140m; $99.3m of company- and developer-funded plant expenditures had been recorded through September.
- On October 27, 2010, after quarter-end, the CPUC issued a proposed decision on Cal Water’s 2009 general rate case. It approved the settlement’s recommended revenue and, reflecting additional offset and other rate increases, would raise rates by a further $25.4m annually effective January 1, 2011. Estimated attrition increases were $9.6m for 2012 and $9.0m for 2013, subject to change and an earnings test. The proposed decision was not final and remained subject to comment and Commission action.
- Cal Water received CPUC authority to issue up to $350m of debt and equity for capital projects and operations. Management planned to fund future capital needs through a relatively balanced mix of long-term debt and equity. The company’s capital spending needs exceed internally generated funds after dividends, making external financing important.
- Management believed water supplies would be adequate for 2010 and beyond; California snowpack and rainfall were reported at 107% of normal as of October 1, 2010. Rationing could be required if declared by authorities. Weather, conservation, customer usage, water and power prices, regulatory decisions and rate-relief timing may affect results.
- Contingencies include MTBE, TCP, and PCE groundwater contamination litigation. The CPUC’s October 14 interim policy decision on contamination proceeds could affect their regulatory treatment; disposition of the company’s MTBE memorandum account remains unresolved. Management did not expect other litigation, after existing reserves, to materially affect financial position, results, or cash flows. The company reported no material change in contractual obligations and effective disclosure controls.
Important facts for investors to verify
- Whether and when the CPUC adopts the proposed GRC decision, and the final amount and timing of rate increases and attrition adjustments.
- How WRAM/MCBA balances, conservation-related usage changes, and delayed recovery periods affect revenue and cash collection.
- Funding needs and costs for the capital program, including the mix and timing of debt and equity issuance and continued reliance on short-term borrowings.
- Developments in contamination litigation and the CPUC’s allocation of settlement proceeds between remediation, ratepayers, and shareholders.
- Actual water supply, customer demand, and purchased water and power costs compared with management’s expectations.