California Water Service Group — 2014 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2014. The company provides regulated water and wastewater services and non-regulated utility-related services across California, Hawaii, New Mexico, and Washington. California represented approximately 94% of customers and consolidated operating revenue. Year-end customer count rose to 506,100 from 502,900.
Financial and operating results
- Revenue: Operating revenue was $597.5 million, up 2.3% from $584.1 million in 2013.
- Profit: Net income was $56.7 million, up 20.1% from $47.3 million. Diluted EPS increased 16.7% to $1.19 from $1.02.
- Margins: Net operating income was $81.8 million, equivalent to a 13.7% operating margin, versus $74.0 million and 12.7% in 2013. Net margin was approximately 9.5%, versus 8.1%.
- Cash flow and investment: Operating cash flow was $128.1 million, compared with $124.2 million. Utility plant expenditures were $132.0 million, leaving operating cash flow less plant expenditures of negative $3.9 million. Cash and equivalents ended the year at $19.6 million, down from $27.5 million.
- Debt and capitalization: Long-term debt, including current maturities, was $425.8 million; short-term borrowings were $79.1 million, up from $46.8 million. Common equity was 59.5% of capitalization and long-term debt 40.5%. The company reported compliance with its credit covenants.
- Liquidity: Current assets were $154.1 million and current liabilities $217.7 million; the current ratio was approximately 0.71. A $400 million aggregate revolving-credit facility was available, subject to its terms and covenants.
- Other metrics: Dividends paid were $0.65 per share, up from $0.64; the payout ratio was 55%. Return on average common equity was 9.3%, versus 8.8%. Water production declined 6.4% to 118,282 million gallons.
Material changes versus the prior comparable period
- Net income improved by $9.5 million, with management citing incremental revenue following California’s 2012 general rate case decision and lower administrative, other operating, net interest, and property-tax expenses. Higher income taxes, wages, maintenance, and depreciation partly offset those gains.
- Operating revenue rose $13.4 million, while operating expenses increased $5.6 million. Purchased-water expense declined $5.2 million as purchased volumes fell, though blended wholesale rates increased; pump taxes rose $2.1 million.
- Regulatory assets increased to $390.3 million from $251.7 million, chiefly reflecting pension and retiree-health balances. Pension funded status worsened to a $196.2 million deficit from $117.0 million, following changes in actuarial assumptions, including lower discount rates and updated mortality assumptions.
- Capital expenditures increased to $132.0 million from $123.0 million. Short-term borrowings increased, while long-term debt declined modestly.
- Fourth-quarter revenue was $137.4 million versus $133.7 million a year earlier; net income was $11.4 million versus $5.7 million, and diluted EPS was $0.24 versus $0.12.
Outlook, commentary, risks, and unusual items
- Management budgeted 2015 capital expenditures of $125 million to $145 million and expects annual capital spending to increase over the next five years. Long-term capital needs are expected to be funded through debt, equity, and operating cash flow.
- Management expected available groundwater and purchased supplies to meet demand in 2015 and beyond, while warning that rationing could be required. California precipitation was below normal in 2014; reported snowpack water content for the 2014–15 water year was 25% of normal as of January 31, 2015.
- California’s 2014 general rate case decision authorized annual rate increases of $45.3 million for 2014, $10.1 million for 2015, and $10.0 million for 2016, and approved $449.4 million of infrastructure investment over 2013–2015. Cal Water filed to recover a $30.6 million interim-rate balance through surcharges; the year-end interim-rate receivable was $26.9 million.
- Key exposures include commission decisions and timing of rate recovery, drought and water availability, wholesale water and power costs, water-quality and environmental requirements, pension funding, financing access and interest rates, litigation, and the company’s concentration in California.
- A new chromium-6 standard affected two districts where not all wells complied; the company expected supply constraints and increased capital and operating costs. A memorandum account was authorized to track compliance costs, but recovery through rates is not assured.
- The company recorded $3.2 million for known legal matters, mainly related to main and service leaks; reasonably possible losses above accruals were estimated at $1.5 million. An asbestos-litigation memorandum-account request was pending. The filing reports groundwater-contamination litigation and potential insurance limitations.
- There were no significant non-utility property sales or acquisitions in 2014. The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether authorized rate increases and interim-rate surcharges are collected on schedule, and how they affect cash flow and regulatory balances.
- Actual drought, snowpack, groundwater, and wholesale-supply conditions, including any rationing or related cost increases.
- Progress and cost of chromium-6 compliance, and the extent to which regulators permit recovery of those costs.
- Capital spending, financing needs, revolving-credit availability, and covenant compliance as the credit facilities approach their June 2016 expiration.
- Pension and postretirement obligations, required contributions, and the assumptions underlying the sharp increase in reported benefit liabilities.
- Developments in asbestos, groundwater-contamination, and other legal matters, including possible losses not covered by insurance or recoverable in rates.