California Water Service Group — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited results; dollar amounts below are in millions unless noted. The company provides regulated water and related services across California, Washington, New Mexico, and Hawaii, plus nonregulated services. Results are seasonal, with revenue and income generally higher in warmer, drier months.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $184.4 | $178.1 | $450.4 | $438.4 |
| Net operating income | $35.8 | $36.4 | $62.4 | $62.6 |
| Net income | $29.2 | $29.8 | $41.6 | $43.8 |
| Diluted EPS | $0.61 | $0.71 | $0.90 | $1.05 |
| Net operating margin | 19.4% | 20.4% | 13.8% | 14.3% |
- Revenue and earnings: Revenue rose 4% in Q3 and 3% year to date, while net income declined about 2% and 5%, respectively. EPS fell more sharply, reflecting the increased share count after the March 2013 equity offering. Rate increases and WRAM/MCBA effects supported revenue; weaker Q3 consumption and deferral of revenue also affected results.
- Costs and interest: Q3 operating expenses increased 5%, including a 6% rise in water production costs, mainly from higher purchased-water prices. Nine-month net interest expense rose 5% to $21.9 million, primarily because less interest was capitalized to construction projects.
- Cash flow and investment: Nine-month operating cash flow was $101.9 million, versus $99.4 million. Utility-plant expenditures were $94.8 million, versus $99.6 million. Cash increased to $48.8 million from $38.8 million at year-end 2012; dividends paid were $22.0 million.
- Debt and liquidity: At September 30, long-term debt including current maturities was $478.2 million and short-term borrowings were $11.5 million, compared with $481.3 million and $89.5 million, respectively, at December 31, 2012. The company raised $105.6 million net through an equity offering and used part of the proceeds to repay credit-line borrowings. It reported $388.5 million of available revolving-credit capacity, compliance with covenants, and a 52.7% total capitalization ratio. A $40 million Cal Water bond maturity was due in Q4 2013.
- Capital and dividends: The 2013 capital budget was approximately $110–$130 million. The quarterly dividend was $0.16 per share; the board declared the same amount for Q4. Management’s long-term dividend payout goal is 60% of net income.
Material changes and management commentary
- Q3 net income fell $0.6 million. Management attributed the decrease mainly to a smaller income-tax benefit than in the prior-year quarter. California enterprise-zone credits and equipment repair deductions increased Q3 2013 net income by $4.1 million; prior-year mains repair deductions had increased Q3 2012 net income by $6.2 million.
- Nine-month net income declined $2.2 million. Management cited a smaller tax benefit, higher net interest expense, lower unrealized gains on benefit-plan insurance investments, and a prior-year benefit from reversal of deferred WRAM/MCBA amounts. 2013 tax credits and deductions increased nine-month net income by $4.8 million, versus $6.2 million from deductions in 2012.
- Net WRAM/MCBA undercollections were $49.0 million at September 30, up from $46.1 million at year-end. Management said lower consumption relative to adopted levels increased receivables with longer expected collection periods. Most balances are generally collected over 12–18 months, but balances expected to take more than 24 months are deferred.
- Cash contributions to pension and retiree health plans were $28.1 million in the first nine months, versus $25.5 million a year earlier. The balance-sheet liability for pension and other postretirement benefits was $247.3 million.
Outlook, regulation, risks, and contingencies
- Management expected the 2013 effective tax rate to be 32%–35% and forecast 2013 capital expenditures of approximately $110–$130 million. It said water supplies were expected to be adequate to meet demand during 2013 and beyond.
- On October 30, 2013, after quarter-end, Cal Water reached a proposed settlement in its California general rate case. If approved as proposed, it would authorize $447 million of investment over 2013–2015 and revenue increases of approximately $45 million in 2014, $10 million in 2015, $10 million in 2016, plus $19 million upon completion and approval of qualifying projects. Commission approval was uncertain.
- The company filed California purchased-water and/or pump-tax expense offsets totaling $2.8 million in annual revenue. These dollar-for-dollar offsets are intended to match higher expenses and do not affect net operating income.
- A proposed California chromium-6 drinking-water standard of 10 parts per billion was expected to be finalized in 2014. Compliance could require additional operating expense, capital investment, or constrain available supplies; recovery of those costs through rates is not assured.
- Other principal risks include regulatory decisions and timing of rate relief, water and power costs, weather and conservation-driven usage changes, access to capital and interest-rate changes, water-quality and environmental requirements, pension costs, and litigation. Management did not expect known legal matters, after reserves, to materially affect results; a $1.1 million liability was recorded for known legal matters. The filing also describes groundwater-contamination litigation and customer-related use restrictions on certain proceeds.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to contractual obligations outside the ordinary course were reported.
Important facts for investors to verify
- Whether the CPUC approved the proposed GRC settlement and the timing and amount of resulting rate changes.
- Progress in collecting the $49.0 million WRAM/MCBA undercollection, including amounts deferred beyond 24 months and financing costs not fully recoverable from customers.
- Actual 2013 capital expenditures and financing needs, including repayment or refinancing of the $40 million bond maturity.
- Final chromium-6 requirements, required compliance investments, and whether regulators permit recovery of associated costs.
- Whether the expected 32%–35% tax rate and the benefits from California tax credits and deductions are realized as anticipated.