California Water Service Group (NYSE: CWT) — FY 2013 Form 10-K
Business context and reporting period. Fiscal year ended December 31, 2013; the filing also reports fourth-quarter results. The group provides regulated water and wastewater services and non-regulated utility-related services through subsidiaries in California, Hawaii, Washington, and New Mexico. California accounted for approximately 94% of customers and consolidated operating revenue. Year-end customers totaled 502,900, up from 500,700.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Operating revenue | $584.1 | $560.0 | +4.3% |
| Operating expenses | $510.1 | $486.1 | +4.9% |
| Net operating income | $74.0 | $73.8 | +0.2% |
| Net income | $47.3 | $48.8 | -3.2% |
| Diluted EPS | $1.02 | $1.17 | -12.8% |
| Net cash from operations | $124.2 | $131.9 | -$7.7 |
| Capital expenditures | $123.0 | $127.7 | -$4.7 |
- Net operating income margin was approximately 12.7% versus 13.2%; net margin was approximately 8.1% versus 8.7%.
- Water production expenses rose 11.5% to $226.1 million, led by purchased water costs, which increased 13.5% to $183.0 million. Purchased water represented 49.2% of supply; wells supplied 46.3% and surface sources 4.5%.
- Cash and cash equivalents were $27.5 million at year-end, down from $38.8 million. Current assets were $139.5 million and current liabilities $166.6 million.
- Long-term debt, including current maturities, was $434.1 million; short-term borrowings were $46.8 million. Common equity was $598.8 million, and capitalization was 58% equity / 42% long-term debt. The 2013 total capitalization ratio under the credit agreement was 55.0%; the company reported compliance with covenants.
- Operating cash flow covered reported capital expenditures by approximately $1.2 million before dividends and other investing uses. Dividends paid were $29.6 million; the 2013 dividend was $0.64 per share. The board subsequently declared a quarterly dividend of $0.1625 per share.
- Fourth quarter: revenue was $133.7 million versus $121.5 million; net income was $5.7 million versus $5.0 million; diluted EPS was $0.12 in both periods.
Material changes versus the prior comparable period
- Revenue increased $24.1 million, principally from rate increases ($13.6 million), changes in actual versus adopted results and usage ($8.4 million), and new customers ($1.5 million).
- Net income declined $1.5 million. Management attributed the reduction to higher wages and benefits, water production costs, depreciation and property taxes, and the absence of certain 2012 benefits. Diluted weighted-average shares increased to 46.4 million from 41.9 million, primarily following a March 2013 offering of 5.75 million shares.
- 2012 results included a $12.9 million reversal of previously deferred WRAM revenue and $10.5 million of associated costs, plus a $6.2 million state tax benefit. 2013 included a $4.9 million one-time tax benefit from state enterprise-zone credits and repairs deductions.
- Operating cash flow declined mainly because 2013 included $7.7 million of income-tax payments, compared with a $5.3 million refund in 2012. A $105.6 million net equity offering helped repay $93.3 million of company and subsidiary credit-line borrowings; year-end short-term borrowings fell from $89.5 million to $46.8 million.
- Long-term debt repayments were $47.2 million, including repayment of $40 million of bonds due in 2013. The equity offering increased year-end common shares outstanding from 41.9 million to 47.7 million.
Outlook, commentary, risks, and unusual items
- Management expected water supplies to be adequate for 2014 and beyond, while noting California precipitation was below average and snowpack and rainfall accumulation were 19% of normal as of January 1, 2014. Drought-related rationing remained possible.
- A California rate-case settlement proposed approximately $45 million of annual revenue increases in 2014, $10 million in 2015, and $10 million in 2016, plus $19 million upon completion and approval of specified projects. The settlement remained subject to CPUC approval; interim rates and a memorandum account applied from January 1, 2014. The settlement contemplated $447 million of California infrastructure investment over 2013–2015.
- Management estimated 2014 capital expenditures of $110 million to $130 million and expected annual spending to remain broadly similar over the next five years. The company expects to fund long-term needs through operating cash flow, debt, and equity issuance.
- Key exposures include regulatory timing and cost recovery, purchased-water and power prices, drought and weather variability, water quality requirements, pension funding, interest rates, seasonal liquidity needs, and California concentration. A proposed chromium-6 standard could restrict supply and require significant capital and operating spending in two districts; recovery of related costs through rates was not assured.
- Contractual commitments totaled approximately $1.73 billion, including $617.1 million for water supply contracts, $424.7 million of long-term debt, $339.2 million of interest payments, and $147.2 million for pension and postretirement benefits. Certain water contracts require minimum or fixed payments regardless of actual use or supply received.
- The company reported a $1.3 million liability for known legal matters and said it did not expect their resolution to materially affect financial position, results, or cash flows. Groundwater contamination litigation and the possibility of uninsured claims remain relevant contingencies.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether and when the CPUC approved the California GRC settlement, and the rates and capital-project recovery ultimately authorized.
- Whether drought conditions, supply availability, wholesale water prices, or chromium-6 requirements changed costs, service levels, or capital needs after the filing date.
- The collectability and timing of the $46.3 million net WRAM/MCBA receivable and the effects of associated customer surcharges on cash flow.
- Whether the 2014 capital program and dividend remain supportable alongside pension contributions, debt maturities, and planned financing needs.
- How much 2013 earnings reflected one-time tax benefits and other nonrecurring items, and the ongoing effect of share dilution and higher operating costs.