Throughout 2015, water utility California Water Services Group (NYSE:CWT) has dealt with the impact of the severe drought in its home territory. Lacking the exposure to other areas that peers such as SJW Corp. (NYSE:SJW) have, California Water has felt the full effect of the drought, and coming into Wednesday's fourth-quarter financial report, California Water investors were prepared for decreases in earnings and sales related to conservation efforts. However, the declines in the bottom line were more severe than expected, and that made some investors impatient about how well the utility will be able to weather the crisis. Let's take a closer look at the latest from California Water Services Group and try to figure out whether some relief might be in sight for the utility.
Thirsty for profits
California Water's fourth-quarter results were quite mixed from investors' viewpoint. Revenue actually managed to post a 1% rise to $138.4 million, defying calls for a 14% plunge. On the bottom line, though, net income fell by a fourth to $8.5 million, and that produced earnings of $0.18 per share. That was $0.02 per share less than the consensus forecast among investors, and represented a 25% decline from year-ago levels.
Looking more closely at the results, California Water said that higher revenue came largely from rate increases and changes to various types of special balancing accounts designed to help deal with extraordinary situations like this. Operating expenses climbed 2%, with higher overhead from wages and pension costs outweighing savings from falling healthcare benefits costs and lower water-related expenses due to reduced consumption. Drought-related costs contributed to the shortfall in net income, as did uninsured loss expenses and maintenance costs.
Some favorable trends also reversed themselves this quarter. For instance, in past quarters, California Water has seen increases in unbilled revenue that promised future cash inflows. This quarter, though, unbilled revenues decreased slightly from year-ago levels, which indicates less available future cash on those figures get billed and collected. An $18 million drop in regulatory balancing accounts also contributed to lower asset totals on the balance sheet.
CEO Martin Kropelnicki again pointed to the central goal of the utility over the past year. "Responding to California's historic drought and helping our customers achieve the required 25% water-use reduction was our primary focus in 2015," Kropelnicki said, and "our customers did an excellent job conserving water." The CEO pointed to California Water's customer-first mentality as being essential to its long-term success.
What's next for California Water?
In addition, California Water set the stage for a future rebound. Kropelnicki said that the company did "two things that will benefit the Company in the longer term: filing our 2015 General Rate Case in California, and continuing to invest in capital improvements needed to provide a safe and reliable water supply to our customers."
The rate case should be useful in helping California Water rebound. Last July's application requested measures that would boost revenue by nearly $95 million in 2017, with about $23 million in additional sales for each of the 2018 and 2019 years. The application also requests approval to spend almost $700 million to for improvements in districts across the state between now and 2018.
California Water's situation is similar to what SJW faces in California. The utility, which also does business in Texas, saw operating revenue drop almost 5% in 2015, and SJW said that lower customer usage was primarily responsible for offsetting revenue gains from rate increases and balancing accounts. Even though SJW no longer holds the shares of California Water that it once owned, SJW nevertheless is seeing many of the same impacts on its business in San Jose that California Water is experiencing elsewhere in the state.
Eventually, California Water will gain the favorable effects of being a regulated utility, passing through higher costs to its customers and seeing its results return to more normal levels. Nevertheless, an end to the drought would be the best thing that could happen for California Water, its investors, and its customers.