California Water Service Group — FY2022 Form 10-K
Reporting period: Year ended December 31, 2022. California Water Service Group is a holding company providing regulated water and wastewater services, primarily in California, and related services in several other states. It served approximately 553,000 customer connections and about two million people. California operations generated 91.6% of consolidated operating revenue.
Financial performance and condition
| Metric | FY2022 | FY2021 |
|---|---|---|
| Operating revenue | $846.4 million | $790.9 million |
| Net income attributable to Group | $96.0 million | $101.1 million |
| Diluted EPS | $1.77 | $1.96 |
| Net operating income | $127.7 million | $126.8 million |
| Cash from operations | $243.8 million | $231.7 million |
| Utility-plant expenditures | $327.8 million | $293.2 million |
- Revenue rose 7.0%, while net income attributable to the Group fell 5.1% and diluted EPS declined 9.7%. Operating margin was approximately 15.1%, compared with 16.0% in 2021; net margin was approximately 11.3%, versus 12.8%.
- Revenue growth reflected $34.5 million of rate increases and a $16.5 million change in deferred revenue, among other items. Operating expenses increased $54.6 million, including higher other operating costs, purchased power, depreciation, and administrative expenses.
- Net income was affected by an $11.0 million decline in unrealized gains on non-qualified benefit-plan investments and $1.1 million of higher financing costs; a $2.7 million gain on company-owned life insurance partly offset these items.
- Cash and cash equivalents were $62.1 million, with $22.9 million of restricted cash, at year-end. Short-term borrowings were $70.0 million; long-term debt, net, was $1,052.5 million, with $3.3 million of current maturities. The disclosed long-term capitalization mix was 55.6% equity and 44.4% debt. The company reported compliance with credit covenants, a 52.4% consolidated capitalization ratio, and interest coverage above five.
- Operating cash flow exceeded capital expenditures by $84.0 million, but capital spending continued to exceed internally generated funds after dividends. The company issued $106.7 million of common stock during 2022 and established a new at-the-market program permitting up to $350 million of gross sales over three years.
- The annual common dividend increased to $1.00 per share in 2022; the board subsequently declared a quarterly dividend of $0.26 per share, an indicated annual rate of $1.04.
Material changes versus the prior year
- Customer connections increased to approximately 553,000 from 547,600, including the Morningstar system acquisition in New Mexico and continued growth in Texas.
- California purchased-water volume fell 5.9%, while the blended wholesale rate increased 6.0%; purchased-power expense increased 20.2% to $44.6 million. The net under-collected WRAM/MCBA receivable balance rose to $104.7 million from $72.8 million, mainly due to customer usage below adopted levels.
- Operating cash flow increased by $12.1 million, supported in part by $17.2 million net received through California’s Water Arrearages Payment Program. Capital expenditures increased by $34.6 million.
- The company sold 1.8 million shares through its at-the-market program in 2022, compared with 3.3 million shares in 2021; outstanding shares increased to approximately 55.6 million.
Outlook, regulatory matters, risks, and unusual items
- Management expects water supplies to be adequate for customer demand in 2023 and thereafter, while acknowledging that rationing could be required in future periods. California snowpack was reported at 165% of the long-term average as of February 10, 2023.
- Management expects annual capital expenditures to increase over the next five years to maintain and replace infrastructure. Cal Water requested $1.0 billion of infrastructure investment for 2022–2024 in its pending California rate case. Its proposed revenue increases were $80.5 million for 2023, $43.6 million for 2024, and $43.2 million for 2025; these were requests, not approved guidance.
- The California 2021 General Rate Case decision was delayed. The CPUC extended its decision deadline to July 3, 2023; interim rates and a memorandum account were in place, with a later inflationary increase authorized for implementation in April 2023. The outcome and timing could affect revenue and earnings.
- A pending California cost-of-capital proceeding could reduce annual revenue by approximately $11 million if specified lower debt costs were adopted retroactively; the company had not reserved for that outcome. The California Supreme Court was also reviewing the CPUC’s decision to end full-decoupling WRAMs; replacement MWRAM and ICBA mechanisms were expected to apply from 2023.
- Key risks include regulatory delays or inadequate cost recovery, drought and water-supply constraints, rising wholesale water and power costs, climate and natural-disaster impacts, aging infrastructure, cybersecurity and operational disruption, inverse-condemnation claims, and dependence on California for most revenue. Water supply contracts, pension and benefit obligations, and substantial long-term capital needs are also relevant.
- The financial statements received an unmodified audit opinion, but management and the auditor concluded internal control over financial reporting was ineffective at year-end because of a material weakness in controls over identifying regulatory filings and assessing their accounting effects. Management planned remediation during the first quarter of 2023.
- The company corrected an immaterial prior-period error involving a 2019 customer-refund regulatory liability and related revenue and deferred taxes through opening retained earnings. The filing says the correction did not affect customer billings or cash refunded.
Important facts for investors to verify
- Progress and effectiveness of the internal-control remediation, and whether any later filings identify further accounting corrections.
- Final CPUC decisions on the California general rate case, interim-rate recovery, cost of capital, and the associated revenue and earnings effects.
- Collection timing and financing cost of the $104.7 million under-collected regulatory balance, and the operation of the MWRAM and ICBA mechanisms.
- Actual capital spending, funding mix, share dilution under the $350 million equity program, and the effect on debt, liquidity, and dividend coverage.
- Water-supply availability and wholesale-cost changes, particularly under long-term purchase commitments and drought restrictions.