California Water Service Group — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; financial statements are unaudited. The company provides regulated and non-regulated water and related utility services in California, Washington, New Mexico, and Hawaii. Results are seasonal, with revenue and earnings generally higher in warm, dry months.
Financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Operating revenue | $110.5 million | $111.4 million |
| Operating expenses | $109.4 million | $105.7 million |
| Net operating income | $1.2 million | $5.8 million |
| Net loss | $5.5 million | $1.1 million |
| Diluted loss per share | $0.11 | $0.03 |
| Operating cash flow | $10.5 million | $19.5 million |
| Utility plant expenditures | $24.6 million | $32.1 million |
Operating margin was approximately 1.0% versus 5.2% a year earlier; net margin was approximately negative 5.0% versus negative 1.0%. Dividends declared were $0.1625 per share, compared with $0.16.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $21.7 million, total current assets $130.1 million, and current liabilities $192.2 million; the current ratio was approximately 0.68.
- Long-term debt, including current maturities, was $433.6 million. Short-term borrowings were $64.0 million, up from $46.8 million at year-end 2013. The company said the March borrowings were repaid in full during April.
- Revolving credit facilities total $400 million. The company reported $336 million of availability at March 31 and compliance with its credit covenants.
- Cash from operations declined by $9.1 million year over year. Cash used for investing was $25.9 million; financing provided $9.6 million. Ending cash was $21.7 million.
Changes versus prior year and management commentary
- Revenue decreased 1%, while operating expenses increased 3%; net loss widened by $4.4 million. Management attributed the larger loss mainly to operating-cost increases and a $2.6 million pre-tax reduction from revised unbilled-revenue estimates, reflecting lower consumption near quarter-end and not included in the WRAM.
- Water production costs rose $3.7 million, or 9%, mainly because of higher purchased-water prices and 6% higher production volume. Maintenance expense rose 21%, and depreciation and amortization increased 10%, largely reflecting capital additions placed in service during 2013.
- Net interest expense fell 11% to $6.7 million, mainly following the maturity of $40 million of first-mortgage bonds in Q4 2013 and lower short-term borrowings, partly offset by less capitalized interest.
- Management cited a 2014 effective tax-rate expectation of 38%–42% and a company-funded capital expenditure budget of approximately $110–$130 million. It expects capital needs to be funded through a relatively balanced mix of long-term debt and equity.
- Management reported California precipitation below normal and snowpack and rainfall at 61% of normal as of April 17, 2014. It nevertheless believed available groundwater and purchased supplies would meet demand in 2014 and beyond.
Regulatory matters, risks, and contingencies
- Cal Water’s California general rate case remained pending. A settlement proposed approximately $45 million of 2014 annual rate increases, followed by $10 million in each of 2015 and 2016, subject to CPUC approval. Existing rates continued as interim rates from January 1, 2014, with differences tracked in a memorandum account for later recovery. As of May 1, the CPUC had not issued a decision.
- In March 2014, Cal Water filed advice letters to recover $34.9 million of WRAM/MCBA undercollections through customer surcharges over 12, 18, or 20-plus months. Total net WRAM/MCBA receivables were $45.3 million at quarter-end; management said shortened amortization periods were expected to improve 2014 cash flow.
- Hawaii Water’s Pukalani wastewater rate case was approved, providing $0.59 million of annual revenue increases phased across 2014–2016. Separate Waikoloa rate-case settlements remained subject to regulatory adoption and timing.
- Significant risks include regulatory rate decisions and recovery timing, customer water use and conservation, weather and drought, purchased water and power costs, access to capital and interest rates, water-quality and environmental requirements, and litigation. Management reported no material change to the risk factors in its 2013 Form 10-K.
- Known legal matters were accrued at $1.2 million. Management did not expect the ultimate resolution of known disputes to materially affect financial position, results, or cash flows. State tax and sales/use tax audits were ongoing; management did not expect a material impact.
Important facts for investors to verify
- Whether and when the CPUC approves the California GRC settlement, and the resulting timing and amount of rate recovery.
- Collection timing for the $45.3 million net WRAM/MCBA receivable and the related effect on cash flow and financing needs.
- Execution of the $110–$130 million 2014 capital program and the company’s planned debt/equity funding mix.
- Water supply and usage conditions, including drought-related conservation and the cost and availability of purchased water.
- Whether cost increases, unbilled-revenue estimates, and pension and postretirement contributions affect results or liquidity beyond this seasonally weak quarter.