California Water Service Group — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. The filing also reports fourth-quarter results. The company is a regulated water utility holding company operating in California, Hawaii, New Mexico, and Washington, with California providing about 94% of customers and consolidated operating revenue.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Operating revenue | $588.4 million | $597.5 million |
| Net operating income | $71.2 million | $81.8 million |
| Net income | $45.0 million | $56.7 million |
| Diluted EPS | $0.94 | $1.19 |
| Cash from operations | $144.6 million | $128.1 million |
| Capital expenditures | $176.8 million | $132.0 million |
| Cash and cash equivalents at year-end | $8.8 million | $19.6 million |
| Long-term debt, including current portion | $518.9 million | $425.8 million |
| Short-term borrowings | $33.6 million | $79.1 million |
| Common dividend per share | $0.67 | $0.65 |
Net operating margin was approximately 12.1% in 2015 versus 13.7% in 2014; net margin was approximately 7.7% versus 9.5%. These percentages are calculated from reported operating revenue. Fourth-quarter 2015 revenue was $138.4 million and net income was $8.5 million, compared with $137.4 million and $11.4 million, respectively, in fourth-quarter 2014.
Current assets were $127.6 million against current liabilities of $148.5 million at year-end. The company reported a 49.1% consolidated total debt ratio under its credit-facility covenant calculation and stated it was in compliance with covenants. Operating cash flow was below capital spending by $32.2 million; the company relied on financing and other sources to fund investment. Net utility plant was $1.70 billion, and total assets were $2.25 billion.
Changes versus the prior comparable period
- Revenue fell 1.5%, net operating income declined 13.1%, net income declined 20.7%, and diluted EPS fell 21.0% year over year.
- Management attributed lower earnings mainly to reduced estimated unbilled revenue associated with drought-related conservation, the nonrecurrence of a $4.8 million tax benefit recorded in 2014, and higher drought-related costs. Lower water-treatment and uninsured-loss expenses partly offset the decline.
- California water production fell 16.4% to 98.9 billion gallons. Purchased-water expense declined 5.3% to $168.6 million, while blended wholesale water rates increased 13.1%; lower purchased volumes drove the expense reduction. Total water-production expense fell 7.1%.
- Administrative and general expense increased 16.2%, chiefly from higher pension and postretirement costs, wages, and drought-related expense. Cash from operations rose 12.9%, while capital expenditures increased 34.0%.
- Long-term debt increased following issuance of $100 million of first mortgage bonds in October 2015. Equity was $642.2 million, and the reported capitalization mix shifted to 55.3% common equity and 44.7% long-term debt, versus 59.5% and 40.5% in 2014.
Outlook, risks, and unusual items
- Rates and investment: Cal Water’s 2015 California general rate case requested annual rate increases of $94.8 million for 2017, $23.0 million for 2018, and $22.6 million for 2019, and approval to invest $693 million over 2016–2018. These were requests, not approved outcomes. Management estimated 2016 capital expenditures of $180–$210 million and expects infrastructure investment to rise over the next five years.
- Water supply and drought: Management expected supplies to be adequate for 2016 and beyond, while noting that water budgets and restrictions could continue and rationing might be required if authorities direct it. California’s 2015 emergency order targeted a statewide 25% reduction in urban potable-water use. In 2015, customer drought surcharges were $36.9 million; incremental drought-program costs tracked since inception were $5.8 million.
- Regulatory and cost recovery: Earnings and cash flow depend on commission rate decisions and timely recovery of costs through rates and balancing accounts. At year-end, undercollected net WRAM/MCBA balances were $42.0 million. Recovery timing can pressure cash flow even where costs are expected to be recoverable.
- Capital and financing: The company’s $450 million of revolving facilities mature in 2020, subject to their terms. A further $50 million first-mortgage-bond sale was scheduled for March 2016. Capital requirements, variable-rate short-term borrowing, credit access, and debt covenants remain relevant risks.
- Other exposures: The filing identifies water-quality and environmental compliance risks, including chromium-6 standard compliance in two California districts; wholesale water price and availability risk; pension funding exposure; and concentration of operations in California. The pension plan’s reported funded status was a deficit of $173.2 million, before regulatory accounting effects.
- Contingencies and events: A California water-control-board complaint concerning a discharge that allegedly killed more than 270 fish was under settlement discussions; management expected a $0.5–$1.0 million civil payment plus infrastructure replacement. The company recorded $3.5 million of liabilities for known legal matters, mostly related to leaks. The City of Visalia, which had considered appraising the local water system, stated in January 2016 that it would not pursue an acquisition at that time.
- Shareholder returns: The board raised the quarterly dividend to $0.1725 per share in January 2016, equivalent to $0.69 annually. The 2015 payout ratio was 71%, above the company’s stated long-term target of 60%.
Most important facts for investors to verify
- Progress and final commission decisions on the 2015 California rate case, including authorized revenue increases and capital plans.
- Whether drought restrictions, conservation-driven volume changes, water supply conditions, and wholesale water costs affect cash flow and the timing of balancing-account recovery.
- Funding of the $180–$210 million 2016 capital program, subsequent debt issuance, liquidity, and compliance with credit covenants.
- Trends in pension and postretirement obligations, expense, and required contributions, as well as the extent of regulatory recovery.
- Outcome and financial impact of the fish-kill matter and other legal, water-quality, and environmental exposures.
- Dividend sustainability given the 71% payout ratio, earnings decline, and capital spending above operating cash flow.
The filing reports an unqualified audit opinion on the consolidated financial statements and effective internal control over financial reporting as of December 31, 2015.