Business context and reporting period
California Water Service Group (NYSE: CWT) filed this Form 10-K for the fiscal year ended December 31, 2020. The holding company provides regulated water and wastewater services, primarily in California, and operates non-regulated water-related businesses. It reported one operating segment and approximately 543,000 customer connections at year-end, serving about two million people.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Operating revenue | $794.3 million | $714.6 million | +11.2% |
| Net operating income | $136.7 million | $99.4 million | +37.5% |
| Net income | $96.8 million | $63.1 million | +53.4% |
| Diluted EPS | $1.97 | $1.31 | +50.4% |
| Cash from operations | $117.9 million | $168.8 million | −30.1% |
| Capital expenditures | $298.7 million | $273.8 million | +9.1% |
Operating margin was approximately 17.2%, versus 13.9% in 2019; net margin was approximately 12.2%, versus 8.8%. Operating revenue growth included regulatory balancing-account revenue, rate changes, and revenue associated with acquired customers. The company attributed higher earnings principally to implementation of its 2018 California general rate case (GRC), other rate increases, and tax benefits from repair deductions. These gains were partly offset by higher depreciation, employee costs, bad-debt expense, and other operating costs.
Cash used for capital expenditures and acquisitions exceeded operating cash flow; the resulting simple cash-flow deficit was approximately $221 million, compared with approximately $105 million in 2019. Year-end cash and cash equivalents were $44.6 million. Short-term borrowings rose to $370.0 million from $175.1 million; long-term debt, including current maturities, was approximately $786.2 million. Total debt on that basis was about $1.16 billion. Common equity was $921.3 million, and the company reported a 54% equity/46% long-term-debt capitalization mix. It had $550 million of revolving credit facilities, with $370 million drawn, and reported compliance with its financial covenants.
Material changes versus the prior year
- Revenue increased $79.7 million, while net income rose $33.7 million. California’s 2018 GRC decision was approved in December 2020 after a delay; a $53.2 million regulatory asset and corresponding revenue were recorded for the difference between interim and final rates for 2020. Final rates were implemented in February 2021.
- Operating cash flow declined by $50.9 million, primarily reflecting the GRC-related receivable and increased pension and postretirement funding. Capital spending increased, and the company spent $40.5 million on acquisitions.
- The company issued $83.6 million of common stock through its at-the-market and employee stock purchase plans. Common shares outstanding increased to approximately 50.3 million from 48.5 million.
- Acquisitions included Rainier View Water in Washington and Kalaeloa Water in Hawaii. The Rainier View transaction added approximately 18,500 customer connections and recorded $28.5 million of goodwill.
Outlook, commentary, risks, and unusual items
- Investment and rates: Management estimated 2021 capital expenditures of $270–$300 million and expects annual infrastructure spending to increase over the next five years. Cal Water was authorized to invest $828 million in California districts through 2021; the company received $700 million of additional debt and equity financing authority. Its next California GRC application was planned for July 2021.
- Regulatory uncertainty: A 2020 CPUC decision bars proposals for full decoupling water-revenue adjustment mechanisms in Cal Water’s next GRC. Management expects greater revenue volatility beginning in 2023 and plans to pursue appeal options.
- Water supply and costs: Management considered supplies adequate for 2021 and beyond despite California snowpack at 54% of long-term averages as of December 30, 2020. Purchased-water expense increased 8.3% to $230.1 million; the company noted future wholesale-price increases and potential supply constraints.
- COVID-19 and collections: Management said the pandemic did not significantly affect 2020 results, but shutoffs for nonpayment and agency collection activities were suspended. The credit-loss provision increased to $5.7 million from $1.7 million, and the company warned that prolonged customer payment difficulties could affect liquidity and results.
- Project and environmental exposure: The Palos Verdes reliability project was completed, but estimated costs significantly exceeded the $96.1 million rate-recovery cap; final costs were still being validated, with recovery of the excess expected to be sought in a future GRC. PFAS-related memorandum-account approval covers certain incremental expenses, not capital costs. Other risks include regulatory recovery delays, water quality and contamination claims, drought and climate events, cyber and infrastructure disruption, and California inverse-condemnation exposure.
- Dividend: The 2020 dividend was $0.85 per share. In January 2021, the board raised the quarterly dividend to $0.23 per share, an indicated annual rate of $0.92, subject to future board decisions and other constraints.
Important facts for investors to verify
- Whether and when the $53.2 million GRC-related regulatory asset and other balancing-account receivables are collected, and whether regulators permit expected cost recovery.
- The final Palos Verdes project cost, the amount above the $96.1 million cap, and the prospects and timing of recovery in a future rate case.
- The impact of the CPUC’s decoupling decision on revenues, conservation incentives, and earnings from 2023 onward.
- Customer payment trends, credit-loss exposure, and borrowing needs while pandemic-related collection measures remain in place.
- Capital spending, financing and share issuance needs, covenant headroom, and integration and returns from recent acquisitions.