Tuesday, December 3, 2019

A Current AIM Small Cap Equity Holding: California Water Service Group (CWT, $50.25): “Is This Water Utility Drought-Proof?”

California Water Service Group (CWT, $50.25): “Is This Water Utility Drought-Proof?”
By: Tyler Bomba, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


California Water Service Group (NYSE: CWT) operates as a pure play water distribution company. Providing water service to over 2 million customers, CWT operates in California (94.1% of FY18 Revenues), New Mexico (0.7%), Washington (1.7%), and Hawaii (3.5%). The company was founded in 1926 and is headquartered in San Jose, California. 

• Operating revenues are $537.7M YTD, up 1.3% from 2018. Operating expenses were also up, YTD $458.6M, compared to $446.8M YTD 2018. Net income YTD 2019 is $51.8M, an increase of 3.1% from YTD 2018.

• On October 8, 2019 California Water and the California Public Utilities Commission (CPUC) Public Advocates Office filed a settlement in the 2018 General Rate Case (GRC), agreeing on $609 million of new capital authorizations.

• Capital spending is down 8.5% at $194.9 million YTD, compared to 2018. Estimates are higher for capital spending in 202O and 2021 due to the anticipated full GRC settlement.

• CWT’s subsidiary, Washington Water Service Company, has agreed to acquire Rainier View Water Company.

Key points: 

With the last quarter of 2019 remaining, net income and earnings per share are slightly up compared to 2018. This is primarily attributable to rate increases, offset in part by increases in operation expenses. Capital investments are down for the year, with the hope of increasing spending with the adoption of the new GRC.

General Rate Cases (GRCs) give utility companies the opportunity to address the costs of operating and maintaining the utility system. On July 2, 2018, CWT filed its 2018 GRC requesting $828.5 million in new capital investments over the period 2019-2021. As of October 8, 2019, $609 million of new capital authorizations and approximately $200 million authorized improvements initiated in 2018 and prior were settled on. There are still issues outstanding regarding the continuation of the Water Revenue Adjustment Mechanism and Sales Reconciliation Mechanism, balancing accounts for pensions and medical costs, depreciation rates, working capital, Allowance for Funds Used During Construction, and advanced metering. There is a decision scheduled to be made on the remaining disputed issues by the end of 2019, with new rates to go into effect January 2020.

Washington Water Service agreed to acquire Rainier View Water on November 6, 2019. Rainier View Water owns and operates 27 water systems that provides water to 35,000 people. This almost doubles CWT’s customer base in Washington to 81,500 people. This acquisition is subject to certain closing conditions, including appropriate due diligence and approval by Washington Utilities and Transportation Commission. No details about price have been disclosed as of November 15, 2019.

What has the stock done lately?

Since the settlement of the 2018 GRC on October 8, 2019 the stock is down about 4.5%. This is due in part to the outstanding issues within the GRC not being accepted as of October 8. Since the announcement of the acquisition of Rainier View Water Company, the stock is down almost 6%. Without any more information that what was discussed above, the market is left to guess what the impact of the acquisition will be.

Past Year Performance: 

CWT’s price has increased 10.7% over the past year. The stock hit its 52 week high on September 3rd of $57.48 and has since dropped to $50.25. With a contract awarded to CWT to provide water to Travis Air Force Base for the next 60 years and an agreement of $550 million in unsecured revolving credit facilities, CWT has seen an overall increase in the share price. Volatility in the price is due to the uncertainty with the adoption of the 2018 GRC, which was mostly approved on October 8.

Source: FactSet
My Takeaway

California Water Service Group has positioned themselves well to remain relevant for the foreseeable future. With the partial adoption of the General Rate Case and the acquisition of Rainier View Water Company, CWT will see increases in top and bottom line numbers. The 2018 GRC will allow for the needed capital investment in the California Water infrastructure. However, due to the heavily regulated nature of the utility industry,  if there was any potential issues with the remaining parts of the GRC or adopting a new GRC in the future, CWT could face hardship. I rate this company a hold, with the potential of growth from the GRC and acquisition.

Source: FactSet