California Water Service Group — 2011 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2011; the filing also reports unaudited fourth-quarter results. The company provides regulated water and wastewater service and related non-regulated services in California, Hawaii, Washington, and New Mexico. California accounted for approximately 94% of customers and consolidated operating revenue. Year-end customers totaled approximately 499,500, up from 497,900 in 2010.
Financial performance
Amounts below are consolidated; dollars are millions except per-share data.
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Operating revenue | $501.8 | $460.4 | +9.0% |
| Operating expenses | $434.6 | $398.6 | +9.1% |
| Net operating income | $67.2 | $61.8 | +$5.4 |
| Net income | $37.7 | $37.7 | Essentially unchanged |
| Diluted EPS | $0.90 | $0.90 | Unchanged |
| Cash from operations | $111.3 | $75.5 | +$35.8 |
| Utility plant expenditures | $118.5 | $123.9 | -$5.4 |
- Net operating margin was approximately 13.4% in both years; net margin declined to approximately 7.5% from 8.2%.
- Purchased water costs rose $16.7 million (13.3%); total water production expenses rose $17.7 million (10.8%). Water production was 120.4 billion gallons, down 1.3%.
- Administrative and general expenses increased $10.5 million (13.9%); depreciation and amortization rose $7.6 million, and net interest expense increased $3.3 million.
- Year-end cash was $27.2 million, compared with $42.3 million. Current assets were $113.9 million and current liabilities $151.9 million. Short-term borrowings were $47.1 million, versus $23.8 million.
- Long-term debt, including current maturities, was $488.2 million; common equity was $449.8 million. Total assets were $1.855 billion, including net utility plant of $1.381 billion.
- Operating cash flow exceeded capital expenditures by $-7.3 million before financing and developer-related funding. The 2011 dividend was $0.615 per share, with a 68% payout ratio.
- Fourth-quarter revenue was $103.0 million, net income $1.9 million, and diluted EPS $0.04, versus $105.5 million, $4.9 million, and $0.11, respectively, in fourth-quarter 2010.
Material changes versus the prior period
- Revenue rose primarily due to $53.2 million of rate increases, partly offset by lower usage and other factors. The 2009 California general rate case (GRC) rates took effect January 1, 2011.
- Net income remained flat despite higher revenue and net operating income. Higher water, labor and benefit, depreciation, and interest costs, along with lower net other income, offset much of the benefit.
- Cash from operations improved, principally due to higher billing rates, tax refunds and timing of payments, partly offset by growth in WRAM/MCBA receivables.
- Net WRAM/MCBA receivables increased to $49.6 million from $31.6 million. Total regulatory assets rose to $319.9 million from $229.6 million; pension and retiree-health regulatory assets were $213.8 million.
- The pension benefit obligation increased materially as discount-rate assumptions changed. Pension and postretirement liabilities on the balance sheet totaled $232.1 million, compared with $155.2 million.
Outlook, commentary, risks, and unusual items
- Management expects water supplies to be adequate in 2012 and beyond, but reported California snowpack and precipitation at 54% of normal as of February 1, 2012; rationing may be required if declared by authorities.
- Management budgeted 2012 capital expenditures of $100 million to $125 million and expects annual capital spending to remain broadly similar over the next five years. Long-term capital needs are expected to be funded through debt, equity, and operating cash flow.
- The next California GRC was expected to be filed July 2, 2012, with any resulting rate changes anticipated to take effect in 2014. Authorized 2012 and 2013 step increases are subject to adjustment and a weather-normalized earnings test.
- A proposed California cost-of-capital settlement, pending at year-end, would set a 9.99% return on equity and 53.4% equity capital structure for 2012–2014. The filing anticipated a decision in the first or second quarter of 2012.
- Due to uncertainty about CPUC recovery timing, the company excluded $12.9 million of WRAM/MCBA revenue and $10.5 million of related costs, or $2.4 million of pre-tax net operating income, from 2011. Recognition depends on collection being expected within 24 months and on regulatory decisions.
- In October 2011, Cal Water entered a 15-year Hawthorne system lease, including an $8.1 million upfront lease deposit, annual payments of at least $0.9 million, and responsibility for operations and capital improvements.
- A proposed $2.1 million ratepayer refund related to the former service-line protection program reduced 2011 revenue and was recorded as a regulatory liability; CPUC approval was pending. A separate $1.5 million 2011 revenue-sharing charge related to non-tariffed products and services.
- Key risks include dependence on regulatory rate recovery and decisions, California concentration, wholesale water price and availability, drought and weather, water contamination and litigation, pension funding, seasonal liquidity needs, capital-market access, and environmental compliance costs. The company disclosed ongoing groundwater-contamination litigation; management did not believe other ordinary-course disputes would materially affect results, taking existing reserves into account.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The filing disclosed a correction to prior-year condensed consolidating cash-flow presentation, with no effect on consolidated cash flows.
Investor verification priorities
- Track CPUC decisions on WRAM/MCBA amortization and whether deferred 2011 revenue and related costs are ultimately recognized or refunded.
- Confirm approval and implementation of the proposed $2.1 million service-line settlement and the pending cost-of-capital settlement.
- Monitor purchased-water cost recovery, 2012–2013 step-rate increases, and the timing and outcome of the planned California GRC.
- Assess pension funding needs and assumptions, including the planned 2012 pension and postretirement contributions of approximately $36.5 million and $8.8 million.
- Review liquidity and financing against the capital program, rising WRAM/MCBA receivables, seasonal borrowing needs, and the $400 million aggregate revolving facilities.
- Monitor water supply and quality conditions, contamination litigation and remediation, and any rate-recovery exposure arising from regulatory or environmental requirements.