California Water Service Group — Q2 2022 Form 10-Q
Business context and reporting period. The unaudited filing covers the three and six months ended June 30, 2022. The company provides regulated water and related services in California, Washington, New Mexico, Hawaii and Texas, as well as non-regulated services. It reports one operating segment. Results are seasonal, with water usage and revenue generally higher in warmer, drier months.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $206.2m | $213.1m | $379.2m | $360.9m |
| Operating expenses | $178.9m | $170.9m | $342.8m | $315.7m |
| Net operating income | $27.3m | $42.2m | $36.4m | $45.2m |
| Net income attributable to Group | $19.5m | $38.2m | $20.6m | $35.2m |
| Diluted EPS | $0.36 | $0.75 | $0.38 | $0.69 |
| Net cash from operating activities | Not presented quarterly | $89.9m | $67.7m |
Operating margin was approximately 13.2% in Q2 2022 versus 19.8% a year earlier, and 9.6% for the first half versus 12.5%. These are calculated as net operating income divided by operating revenue.
At June 30, 2022, cash and cash equivalents were $61.7m; current assets were $276.7m and current liabilities $286.1m. Long-term debt, net, was $1,054.2m, with $5.8m of current maturities and $70.0m of short-term borrowings. The company reported $480m of undrawn revolving credit availability and compliance with credit covenants. Total equity was $1,207.3m. Utility plant expenditures were $144.6m in the first half.
Changes versus comparable periods
- Q2 operating revenue fell 3.3%; first-half revenue increased 5.1%. Q2 and first-half attributable net income declined by $18.7m and $14.6m, respectively.
- Management attributed much of the earnings decline to lower accrued unbilled revenue, driven mainly by meter-reading timing and lower customer consumption. Unbilled revenue added $3.8m in Q2 2022 versus $19.0m in Q2 2021; for the first half it added $6.1m versus $18.9m. Management expects the year-over-year difference in annual accrued unbilled revenue to be less than $2m.
- Rate increases contributed $6.9m in Q2 and $12.1m in the first half. Higher revenue from changes in deferred revenue also partially offset higher expenses.
- Other operations expense increased $8.7m in Q2 and $16.7m in the first half, including costs associated with reduced deferred revenue, credit losses, and treatment and conservation costs. Depreciation, maintenance and, for the first half, administrative expenses also increased.
- Net other income declined, principally because unrealized gains on non-qualified benefit plan investments were lower than in 2021. A company-owned life insurance gain of $2.3m in Q2 ($2.7m for the first half) partly offset the decline.
Cash, funding and capital
First-half operating cash flow rose to $89.9m, primarily due to $20.8m received through California’s Water Arrearages Payment Program. Investing activities used $150.9m, including utility plant expenditures and a $6.3m asset acquisition. Financing activities provided $44.6m; the company issued $30.2m net through its at-the-market (ATM) equity program during Q2 and borrowed a net $35.0m on revolving facilities during the first half.
On April 29, 2022, the company established an ATM program permitting up to $350m of gross common-stock sales over three years. It expects to fund future utility investment through a relatively balanced mix of long-term debt and equity. The company proposed $1.0bn of water infrastructure investment for 2022–2024, subject to regulatory review; its capital program may change with the pending California rate case. The quarterly dividend was $0.25 per share in the first half, and the board declared the same amount for Q3 2022.
Outlook, regulatory matters and risks
- Cal Water’s 2021 California general rate case remained pending after hearings in Q2. Management anticipated partial interim rate increases effective January 1, 2023; timing and final outcomes were uncertain.
- The CPUC cost-of-capital proceeding was submitted at the end of Q2, with a decision expected in the latter half of 2022. If specified requested components were adopted retroactively, management estimated that the lower cost of debt could reduce 2022 annual revenue by $11m. The company had not recorded a reserve because retroactive approval was not considered probable.
- Cal Water activated Stage 2 water-use restrictions across its service areas amid California drought conditions. Management said supply from groundwater and wholesale sources should be adequate to meet customer demand, notwithstanding low Sierra snowpack.
- The filing identifies regulatory decisions and rate recovery, drought and water availability, climate and natural disasters, water quality and environmental requirements, inflation and higher interest rates, operating costs, customer usage and conservation, cybersecurity, and acquisition execution among relevant risks. Management reported no significant COVID-19 business impact through July 28, 2022; customer shutoff procedures for nonpayment had resumed.
- Known legal-matter liabilities were $6.3m at June 30, 2022, compared with $3.5m at year-end 2021. Management did not expect the ultimate resolution of existing disputes, after reserves, to materially affect financial position, results or cash flows. No material changes in contractual obligations or risk factors were reported.
Important facts for investors to verify
- Progress and final outcomes of the 2021 California general rate case and cost-of-capital proceeding, including effective dates and any revenue effects.
- Whether unbilled-revenue timing differences reverse as management expects, and how customer usage and drought restrictions affect sales.
- Credit-loss trends, collection of regulatory balancing-account receivables, and the sustainability of operating cash flow excluding the arrearage-program receipt.
- Capital spending, funding needs and share dilution under the $350m ATM program, alongside debt levels, borrowing costs and dividend coverage.
- Water-supply adequacy, regulatory recovery of costs, and developments in legal contingencies and groundwater contamination matters.