California Water Service Group — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. California Water Service Group provides regulated water and wastewater services and related nonregulated services across five states. Results are seasonal; revenue and income are generally higher in warmer, drier months.
Financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Operating revenue | $131.1 million | $173.0 million |
| Operating income (loss) | $(17.5) million | $9.1 million |
| Net income (loss) attributable to Group | $(22.2) million | $1.1 million |
| Diluted earnings (loss) per share | $(0.40) | $0.02 |
| Operating margin | (13.4)% | 5.3% |
| Net cash from operating activities | $21.0 million | $54.2 million |
| Utility plant expenditures | $82.0 million | $68.5 million |
Operating revenue fell 24.2%, primarily reflecting the absence of WRAM and MCBA revenue mechanisms that ended in 2022, delayed rate relief, and lower customer usage. Contract revenue was $145.2 million versus $158.9 million; regulatory balancing account revenue was negative $14.1 million versus positive $14.1 million. Customer usage declined 8.8%, which management attributes principally to higher winter precipitation in California and conservation.
Operating expenses declined 9.3% to $148.6 million, including lower water production costs and other operations expense; administrative and general, maintenance, and depreciation expenses increased. Net other income rose to $7.2 million, partly reflecting improved unrealized investment results. Net interest expense increased 9.7% to $12.0 million, reflecting higher rates and greater line-of-credit borrowings.
Financial position and liquidity
At March 31, 2023, cash and cash equivalents were $52.3 million and restricted cash was $34.2 million. Total assets were $3.89 billion. Long-term debt, net, was $1.05 billion; short-term borrowings were $130.0 million, up from $70.0 million at year-end 2022. Equity was $1.30 billion. Operating cash flow was lower year over year, substantially because Q1 2022 included a $20.8 million receipt from the Water Arrearages Payment Program; investing outflows rose to $82.1 million. Financing provided $62.5 million, including $18.2 million of net ATM stock proceeds.
On March 31, the Company and Cal Water entered into five-year unsecured revolving credit facilities totaling $600 million. At quarter-end, reported availability was $165 million under the Company facility and $305 million under the Cal Water facility. The Company reported compliance with financial covenants and access to the undrawn facilities. Management expects to fund future utility-plant needs through a relatively balanced mix of long-term debt and equity.
Regulatory matters, outlook, and risks
- California general rate case: The CPUC’s decision on the 2021 GRC remained delayed. Management estimated that the delay adversely affected Q1 operating revenue by approximately $24–$34 million. The filing says interim inflationary rate increases were expected to take effect May 5, 2023; final rates and recovery of amounts tracked in the IRMA depend on the proceeding.
- Revenue mechanisms and customer balances: Management expected MWRAM implementation in 2023, retroactive to January 1, subject to regulatory approval; no Q1 MWRAM or ICBA asset or liability was recorded. An April 2023 filing sought recovery of $76.7 million in net 2022 WRAM/MCBA under-collections through customer surcharges. A separate filing sought $6.2 million in conservation-cost refunds.
- Cost of capital case: A CPUC decision deadline was extended to August 10, 2023. If specified cost-of-capital changes are applied retroactively to January 1, 2022, management estimated an approximately $11 million annual revenue reduction under its stated assumptions; the Company had not accrued for that possibility.
- Capital and water supply: The Company proposed $1.0 billion of California infrastructure investment for 2022–2024; Q1 utility-plant expenditures were $82.0 million. Management said it expected available water supplies to meet 2023 and future demand. California snowpack was well above long-term averages as of late March, while drought response, conservation, groundwater management, weather, and water quality remain relevant factors.
- PFAS: The EPA issued proposed limits for six PFAS in March 2023. If adopted in their then-current form, management estimated approximately $200 million of capital investment to comply, with three years expected for compliance after final rules.
- Other risks: The filing cites regulatory decisions and cost recovery, usage and weather variability, inflation and interest rates, water availability and quality, natural disasters and climate change, cybersecurity, and litigation among factors that could affect results. Management reported no significant COVID-19 business impact during the quarter.
Other notable disclosures
Disclosure controls and procedures were deemed ineffective at March 31, 2023 because of a previously reported material weakness in internal control over financial reporting. Management planned to implement a remediation process involving monthly reviews of regulatory activity by rates and accounting personnel, with full implementation planned for Q2 2023. The filing also describes an immaterial prior-period correction related to a customer-refund regulatory liability; it did not affect customer billings or cash refunded.
The Board declared a Q2 dividend of $0.26 per share, consistent with Q1. Management’s long-term dividend payout-ratio goal is 60% of net income; the 2022 payout ratio was 56.5%.
Important facts for investors to verify
- Timing and outcome of the California 2021 GRC and cost-of-capital proceedings, including resulting customer rates and recoveries.
- Whether the expected MWRAM, IRMA, and WRAM/MCBA recoveries are approved, and their timing and effect on cash flow.
- Progress in remediating the material weakness and whether disclosure controls are subsequently judged effective.
- Funding needs, capital spending, ATM equity issuance, borrowings, and compliance with credit-facility covenants.
- Final PFAS requirements and resulting compliance costs, alongside water-supply, conservation, and weather conditions.