California Water Service Group — Q1 2011 Form 10-Q
Business and period: The company provides regulated water utility and related nonregulated services in California, Washington, New Mexico, and Hawaii. This unaudited filing covers the three months ended March 31, 2011, compared with Q1 2010. Water sales and earnings are seasonal; winter-quarter results are not indicative of full-year performance.
Financial results
Amounts below are in millions of dollars, except per-share data and percentages. Balance-sheet comparisons are to December 31, 2010.
| Metric | Q1 2011 / March 31, 2011 | Comparable period / prior date |
|---|---|---|
| Operating revenue | $98.1 | $90.3; up 8.7% |
| Operating expenses | $88.2 | $82.5; up 6.9% |
| Net operating income | $9.9; 10.1% of operating revenue | $7.8; 8.6% |
| Net income | $2.7; net margin 2.8% | $2.0; net margin 2.2%; up 34.7% |
| Diluted EPS | $0.13 | $0.10 |
| Net cash from operations | $24.6 | $22.1 |
| Utility plant expenditures | $24.5 | $26.1 |
| Cash and cash equivalents | $40.9 | $42.3 |
| Short-term borrowings | $28.9 | $23.8 |
| Long-term debt, including current maturities | $481.3 | $481.6 |
| Current assets / current liabilities | $129.1 / $117.5 | $126.2 / $107.3 |
| Dividend declared per share | $0.3075 | $0.2975 |
Material changes and drivers
- Revenue increased $7.9 million, primarily from rate increases ($7.1 million). Lower usage was offset by revenue recognized through California’s WRAM and MCBA mechanisms.
- Operating expenses rose $5.7 million. Water production costs increased 5%, mainly due to higher purchased-water prices; administrative and general and other operations costs increased amid higher employee benefits, wages, staffing, and conservation expenses. Depreciation also rose, largely reflecting rate changes and capital additions.
- Net income benefited from a nonrecurring $1.6 million income-tax adjustment following California approval of a change in state tax depreciation accounting. The company also cited rate increases and $0.8 million lower costs to evaluate potential acquisitions.
- Net interest expense increased $2.1 million to $7.8 million, reflecting the November 2010 issuance of $100 million of first mortgage bonds, greater short-term borrowing, and less capitalized interest.
- Operating cash flow exceeded utility plant expenditures by approximately $0.1 million. Cash declined $1.4 million during the quarter. Dividends paid were $6.4 million.
Outlook, liquidity, and risks
- Management expects a 2011 effective tax rate of 37%–40%, and budgeted company-funded capital expenditures of approximately $120–$140 million. Construction work in progress was $107.2 million at quarter-end.
- The 2009 California general rate case authorized a $25.4 million annual revenue increase effective January 1, 2011, with potential increases of $9.6 million in 2012 and $9.0 million in 2013, subject to inflation adjustments and an earnings test. These are rate-case authorizations, not earnings guidance.
- The company requested recovery of $18.2 million of 2008–2010 WRAM/MCBA balances for 17 districts; the requested recovery period was 12–36 months from approval. Approval and timing were not certain in the filing.
- Management reported $271.1 million of availability under the revolving credit facilities and compliance with all covenants. It expects to fund future capital needs through a relatively balanced mix of long-term debt and equity; internally generated cash after dividends is not expected to cover planned capital requirements.
- Management estimated 2011 contributions of $25.9 million to pension plans and $6.3 million to other postretirement benefit plans; no contributions were made in Q1.
- Risks include regulatory decisions and rate-relief timing, weather and conservation-driven water demand, purchased-water and power costs, interest rates and capital-market access, water-quality and environmental requirements, and health-care cost changes. California snowpack and rainfall accumulation for the 2010–2011 water year was reported at 147% of normal as of April 1; management believed supply would be adequate.
- MTBE, TCP, and PCE groundwater-contamination litigation remains unresolved. The company said it could not predict the eventual treatment of MTBE settlement proceeds; it did not expect other disclosed litigation, considering existing reserves, to materially affect results or cash flows. The California Franchise Tax Board was auditing the 2008 and 2009 state returns; management did not expect a material adverse impact.
- The company reported no material changes in contractual obligations outside the ordinary course, effective disclosure controls, and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and earnings improvement persist after the one-time tax benefit and through higher-cost periods; assess underlying regulated margins and the contribution from WRAM/MCBA adjustments.
- Regulatory approval, timing, and customer impacts for the requested $18.2 million WRAM/MCBA recovery, and the future disposition of MTBE proceeds and remediation costs.
- Actual capital spending versus the $120–$140 million company-funded budget, and the amount and terms of long-term debt or equity needed to finance investment.
- Future pension and postretirement contributions, health-care cost effects, and the outcome of the state tax audit.
- Water supply, usage, and purchased-water costs as weather and conservation affect demand and operating cash flow.