California Water Service Group — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2021. California Water Service Group provides regulated water and related services across five states, alongside non-regulated services. The water business is seasonal, with generally higher usage and revenue in warmer months.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $256.7m | $304.1m | $617.6m | $605.2m |
| Operating income | $71.2m | $106.1m | $116.3m | $111.6m |
| Net income attributable to Group | $62.4m | $96.4m | $97.6m | $81.3m |
| Diluted EPS | $1.20 | $1.94 | $1.91 | $1.66 |
| Operating margin | 27.7% | 34.9% | 18.8% | 18.4% |
Cash flow: Operating cash flow for the first nine months was $179.2m, versus $96.7m in 2020. Utility-plant expenditures were $207.7m, compared with $221.3m; investing cash outflow totaled $215.5m. Financing provided $132.6m, versus $237.1m. Cash, cash equivalents and restricted cash ended the period at $141.4m.
Debt and liquidity: At September 30, 2021, long-term debt, net, was $1,059.7m, current maturities were $5.2m, and short-term borrowings were $120.0m. Short-term borrowings were $370.0m at year-end 2020. Current assets were $393.4m and current liabilities $360.9m. The company reported $430m of revolving-credit repayments and issued $280m of First Mortgage Bonds during the nine-month period. It said it complied with credit-facility covenants and could access the undrawn facilities.
Capital and dividends: At-the-market stock sales raised $127.0m net in the first nine months, increasing shares outstanding to 52.608m from 50.334m at December 2020. Quarterly dividends were $0.23 per share. Management’s long-term target is a 60% dividend payout ratio, subject to future earnings growth.
Material changes and drivers
- Third-quarter revenue fell $47.4m, or 15.6%, and Group-attributable net income declined $34.0m. The primary reason was that Q3 2020 included a large catch-up for delayed 2018 California general rate case (GRC) relief and regulatory balancing-account revenue; Q3 2021 did not include a comparable catch-up.
- For the first nine months, revenue rose 2.1% and Group-attributable net income increased $16.3m. Management cited rate relief, an $8.7m increase in accrued unbilled revenue and improved benefit-plan investment results, partly offset by higher depreciation and property taxes.
- Quarterly total operating expenses declined 6.4%, including lower bad-debt and deferred-WRAM-related costs, while depreciation rose 10.3%. Nine-month expenses increased 1.6%, including a 10.6% increase in depreciation and higher water production costs.
- Nine-month net other income improved to $13.1m from $0.5m, primarily reflecting lower pension and other benefit costs and a higher unrealized gain on non-qualified benefit-plan investments. The nine-month effective tax rate before discrete items was 4.3%, versus 11.6% in 2020; management cited refunds of excess 2017 deferred federal income taxes, partly offset by lower state repair-related tax benefits.
Outlook, regulatory matters and risks
- Management estimated 2021 utility-plant expenditures of $270m–$300m; $207.7m had been spent in the first nine months. Construction work in progress was $234.5m.
- In its 2021 California GRC filing, Cal Water requested $1.0bn of infrastructure investment for 2022–2024 and proposed revenue increases of $80.5m in 2023, $43.6m in 2024 and $43.2m in 2025. These are requests, not approved increases; a decision was expected after an approximately 18-month review, with rates potentially effective in 2023. The company estimated the proposal, if approved as filed, would add less than $5 monthly for an average residential customer.
- The company also sought a 10.35% return on equity and a 53.4% equity capital structure in its cost-of-capital application; a CPUC decision was expected in early 2022. Other state rate applications and acquisitions were pending or subject to regulatory approval.
- Management said COVID-19 had not significantly affected operations through October 28, 2021, but customer payment capacity, safety costs and potential staffing or facility disruptions remained uncertain. Customer disconnections for nonpayment had been suspended, and the company anticipated the suspension would continue until further notice.
- Water supply, drought, climate and wildfire-related risks remain relevant. Despite very low reported California Sierra snowpack at August 31, management believed supply would be adequate for customer demand. The company established a drought memorandum account to track specified conservation and drought-related costs.
- Other key risks include regulatory decisions and cost recovery, water quality and environmental requirements, purchased water and power costs, customer conservation and usage patterns, groundwater sustainability rules, financing access and interest costs, cybersecurity, acquisitions, and litigation. Management said no material risk-factor changes had occurred since the 2020 Form 10-K and did not expect existing legal matters, net of reserves, to materially affect the company.
Most important facts for investors to verify
- Whether the 2021 California GRC investment and rate requests receive approval, and the resulting timing and customer-rate impact.
- How much of the strong year-to-date operating cash flow reflects timing and collection of delayed rate relief, and whether receivables and regulatory balances convert to cash as expected.
- Whether the planned $270m–$300m of 2021 plant spending is achieved and how future capital needs are funded through debt, equity and customer/developer contributions.
- Future water availability, drought-related costs and conservation effects, including developments under groundwater sustainability requirements.
- Ongoing dilution from equity issuance, dividend coverage, and the effects of regulatory and tax items on reported earnings.