California Water Service Group — Q1 2024 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2024. The company provides regulated water and wastewater services and related non-regulated services across California, Washington, New Mexico, Hawaii, and Texas. Results are seasonal, with water use and revenue generally higher in warmer months; Q1 is not indicative of full-year performance.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Operating revenue | $270.7 million | $131.1 million |
| Operating income (loss) | $77.9 million | $(17.5) million |
| Net income (loss) attributable to Group | $69.9 million | $(22.2) million |
| Diluted EPS | $1.21 | $(0.40) |
| Operating cash flow | $26.5 million | $21.0 million |
| Utility plant expenditures | $109.8 million | $82.0 million |
- Revenue rose $139.6 million, or 106.5%. Most of the increase reflected the March 2024 approval of the 2021 California general rate case (GRC) and related retroactive regulatory-account recognition, rather than a comparable increase in current-period customer billings.
- Q1 2024 included $80.7 million of Interim Rates Memorandum Account revenue, of which $70.3 million related to 2023, and $31.1 million of Monterey-Style Water Revenue Adjustment Mechanism revenue, of which $17.6 million related to 2023. Revenue from contracts with customers increased to $154.9 million from $145.2 million.
- Operating expenses increased 29.8% to $192.9 million. Higher costs included water production (+$9.2 million), other operations (+$10.3 million), and depreciation and amortization (+$2.9 million). Net interest expense rose to $15.0 million from $12.0 million.
- Operating margin was approximately 28.8%, compared with approximately negative 13.4% in Q1 2023; these are calculated from reported operating income and revenue. The comparison is substantially affected by the regulatory catch-up revenue.
- Operating cash flow did not cover investment spending: cash flow less utility plant expenditures was approximately negative $83.3 million. Net financing cash provided was $86.6 million, including net short-term borrowing.
Balance sheet and liquidity
- At March 31, 2024, cash and cash equivalents were $42.8 million and restricted cash was $45.4 million. Current assets were $283.1 million versus current liabilities of $507.9 million.
- Long-term debt, net, was $1.052 billion; short-term borrowings were $280.0 million, up from $180.0 million at year-end 2023. Including current maturities, reported debt was approximately $1.333 billion.
- The company had $320 million of availability under its revolving facilities: $135 million under the Company facility and $185 million under the Cal Water facility. It reported compliance with facility covenants. The Q1 average borrowing rate was 6.38%, compared with 5.49% a year earlier.
- Utility plant expenditures are estimated at $365 million for 2024; construction work in progress was $321.4 million at quarter-end. Management expects to fund future utility plant needs through a relatively balanced mix of long-term debt and equity.
Material changes, outlook, and notable items
- California GRC: The CPUC approved the 2021 GRC on March 7, 2024, with corrections approved April 23. The decision increased adopted 2023 revenues by approximately $41.5 million retroactive to January 1, 2023, and may increase revenues by up to approximately $30.0 million in 2024 and $30.6 million in 2025, subject to an earnings test and inflation adjustments. It authorized approximately $1.2 billion of infrastructure investment for 2021–2024.
- Final GRC rates had not been implemented at quarter-end. Cal Water requested a $42.5 million annual revenue increase effective May 1, 2024; if approved, the company expected new rates to take effect May 31. The filing does not provide a confirmed approval or implementation outcome for that request.
- Customer arrearage program: Cal Water received $82.0 million for eligible customer arrearages and $1.0 million for administrative costs in April 2024, after quarter-end. It intends to apply the funds to eligible past-due balances in Q2 2024.
- Unusual accounting item: Because the GRC did not approve recovery of Cal Water SERP costs for 2023–2025, the company reclassified $13.7 million of SERP-related regulatory asset amounts to accumulated other comprehensive loss.
- Water-quality regulation: The EPA finalized drinking-water limits for six PFAS in April 2024. The company estimates approximately $215 million of capital investment will be required for compliance. California also adopted a Chromium-6 limit in April; affected systems must comply within two to four years. Recovery of PFAS-related capital investments remains subject to regulatory approval; the CPUC dismissed one application without precluding other recovery routes.
- Management believes water supplies will be adequate to meet demand in 2024 and thereafter. It cited California snowpack at 127% of long-term averages as of April 9, 2024. Major risks include regulatory timing and cost recovery, water availability and weather, changing consumption, water-quality requirements, interest rates and financing needs, and litigation. The company reported no material changes to the risk factors in its 2023 Form 10-K.
- The quarterly dividend was $0.28 per share, versus $0.26 a year earlier; the board declared another $0.28 dividend for Q2. The 2023 payout ratio was 113.8% of net income, compared with a stated long-term goal of 60%.
Important facts for investors to verify
- Whether the requested GRC rate increase was approved and implemented, and how actual rates compare with the decision’s authorized revenue levels.
- Timing and collectability of the substantial regulatory-account balances, including amounts recorded for periods before Q1 2024 and balances whose recovery is expected beyond 24 months.
- How the $83 million arrearage-program payment is applied and whether it affects customer receivables, credit-loss provisions, or regulatory-account recovery as expected.
- Whether PFAS and Chromium-6 compliance costs can be recovered from customers, and the timing and funding of the estimated PFAS investment.
- How planned capital spending will be funded, given negative cash flow after utility plant expenditures, increased short-term borrowing, and the company’s dividend commitments.