California Water Service Group — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated results. The company provides regulated water and related services in California, Washington, New Mexico, and Hawaii; it reports one operating segment.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $183.5 million | $191.2 million | $449.9 million | $460.1 million |
| Net operating income | $32.2 million | $40.8 million | $56.2 million | $65.3 million |
| Net income | $25.1 million | $33.7 million | $36.5 million | $45.3 million |
| Diluted EPS | $0.52 | $0.70 | $0.76 | $0.95 |
| Operating margin | 17.5% | 21.4% | 12.5% | 14.2% |
| Net margin | 13.7% | 17.6% | 8.1% | 9.9% |
Margins are calculated from reported revenue and income. Q3 operating expenses were $151.3 million, versus $150.4 million a year earlier; nine-month operating expenses were $393.8 million, versus $394.8 million.
- Cash flow: Nine-month operating cash flow was $116.5 million, compared with $100.2 million in 2014. Utility-plant expenditures were $118.3 million, versus $86.3 million; cash dividends paid were $24.0 million. Cash ended at $50.8 million, up from $19.6 million at year-end 2014.
- Debt and liquidity: September 30 short-term borrowings were $136.6 million, up from $79.1 million at December 31, 2014. Long-term debt, including current maturities, was $423.0 million. The company had $313.4 million of unused revolving-credit capacity, was in compliance with its credit covenants, and had a $450 million aggregate revolving facility. Current assets were $191.1 million and current liabilities $300.8 million.
- Capital and dividends: Utility plant was $2.46 billion; stockholders’ equity was $640.9 million. The declared dividend was $0.1675 per share quarterly, up from $0.1625 a year earlier.
Changes versus the prior comparable period
- Q3 revenue declined 4% and net income fell $8.5 million. A major comparison factor was $10.3 million of retroactive 2014 revenue recognized in Q3 2014 following the California 2012 general rate case decision, along with a $2.3 million tax benefit in that prior-year quarter.
- Nine-month revenue declined 2.2% and net income fell $8.8 million. Management attributed the earnings decline mainly to a prior-year $4.8 million tax benefit, lower estimated unbilled revenue in 2015, drought-program expenses, and higher maintenance costs.
- Water-production costs fell 10% in Q3 and 9% for the first nine months, as lower production more than offset higher wholesale water prices. Management reported production was down 19% in Q3 and 17% for the nine-month period.
- Administrative and general plus other operations expenses increased $9.1 million in Q3 and $15.5 million for the first nine months, mainly reflecting higher pension and postretirement costs, drought and conservation program costs, and wages. Maintenance expense also rose.
Outlook, regulation, risks, and unusual items
- Drought and usage: California’s 2015 executive order required a statewide 25% reduction in urban water use through February 2016, compared with 2013. Conservation reduced customer usage and unbilled revenue. Q3 drought surcharges were $23.6 million; these are recorded to offset under-collected revenues. The company says available groundwater and purchased supplies should meet demand, while noting below-normal California precipitation.
- Rates and investment: Cal Water’s July 2015 general rate case seeks rate increases of $94.8 million for 2017, $23.0 million for 2018, and $22.6 million for 2019, and proposes $693 million of investment over 2016–2018. These are requested amounts, not approved guidance. The 2015 capital-expenditure budget was $125–$145 million; nine-month expenditures were $118.3 million.
- Financing after quarter-end: On October 13, 2015, Cal Water issued $100 million of first-mortgage bonds at 3.33% and 4.31%, receiving approximately $99.4 million net, and used part of the proceeds to repay its $72.4 million credit-line borrowing. A further $50 million issuance was scheduled for March 2016, subject to customary conditions.
- Management estimates: Management estimated a 38% full-year 2015 effective tax rate and forecast 2015 pension contributions of $31.2 million and other postretirement-benefit contributions of $15.0 million. The filing gives no earnings or EPS guidance.
- Regulatory and other exposures: Recovery of balancing-account costs and drought-related expenses depends on regulatory processes and timing. Regulatory assets totaled $398.5 million, including $244.5 million for pension and retiree health costs. Known legal-matter liabilities were $4.1 million; management did not expect ordinary-course litigation to materially affect results. No accrual was recorded for asbestos matters because management did not consider a loss probable.
- Key stated risks include regulatory decisions and rate-relief timing, drought and conservation effects, water and power costs, access to capital, interest rates, litigation, and cyber-security risks. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Progress and timing of the 2015 California general rate case, including whether requested rates and planned investment are approved.
- Actual water-use reductions, drought conditions, surcharge collections, and the recovery of drought and balancing-account costs.
- Capital spending versus the $125–$145 million budget and the funding mix of future debt and equity needs.
- Execution of the planned remaining $50 million bond issuance and effects of borrowing levels on interest expense and liquidity.
- Whether pension, postretirement, and legal costs or regulatory recovery estimates change materially.