Note 6. Pension Plan and Other Postretirement Benefits
The Company provides a qualified, defined-benefit, non-contributory pension plan for substantially all employees. The Company makes annual contributions to fund the amounts accrued for in the qualified pension plan. The Company also
maintains an unfunded, non-qualified, supplemental executive retirement plan. The costs of the plans are charged to expense or are capitalized in utility plant as appropriate.
The Company offers medical, dental, vision, and life insurance benefits for retirees and their spouses and dependents. Participants are required to pay a premium, which offsets a portion of the cost.
Note 7. Short-term and Long-term Borrowings
Note 8. Income Taxes
Note 9. Regulatory Assets and Liabilities
Regulatory assets and liabilities were comprised of the following as of SeptemberJune 30, 20172022 and December 31, 2016:2021:
| | | September 30, 2017 | | December 31, 2016 | | Recovery Period | | June 30, 2022 | | December 31, 2021 |
Regulatory Assets | |
| | |
| Regulatory Assets | | | | | |
Pension and retiree group health | $ | 188,386 |
| | $ | 188,880 |
| Pension and retiree group health | Indefinitely | | $ | 17,278 | | | $ | 17,607 | |
Property-related temporary differences (tax benefits flowed through to customers) | 94,144 |
| | 92,099 |
| Property-related temporary differences (tax benefits flowed through to customers) | Indefinitely | | 130,565 | | | 130,565 | |
Other accrued benefits | 26,540 |
| | 27,503 |
| Other accrued benefits | Indefinitely | | 24,656 | | | 23,280 | |
Net WRAM and MCBA long-term accounts receivable | 34,735 |
| | 16,148 |
| Net WRAM and MCBA long-term accounts receivable | 1 - 2 years | | 37,581 | | | 29,789 | |
Asset retirement obligations, net | 16,832 |
| | 15,812 |
| Asset retirement obligations, net | Indefinitely | | 24,005 | | | 22,935 | |
Interim rates long-term accounts receivable | 4,616 |
| | 4,605 |
| |
Interim rates memorandum account (IRMA) long-term accounts receivable | | Interim rates memorandum account (IRMA) long-term accounts receivable | 1 - 3 years | | 7,212 | | | 9,032 | |
Tank coating | 10,114 |
| | 8,452 |
| Tank coating | 10 years | | 14,986 | | | 13,680 | |
Health care balancing account | 412 |
| | 1,000 |
| |
Pension balancing account | 1,684 |
| | — |
| |
Recoverable property losses | | Recoverable property losses | Various | | 3,489 | | | 3,843 | |
PCBA | | PCBA | 1 year | | 20,040 | | | 21,500 | |
Other components of net periodic benefit cost | | Other components of net periodic benefit cost | Indefinitely | | 623 | | | 3,342 | |
General district balancing account receivable | | General district balancing account receivable | 1 year | | 358 | | | 568 | |
Customer assistance program (CAP) and Rate support fund (RSF) accounts receivable | | Customer assistance program (CAP) and Rate support fund (RSF) accounts receivable | 1 year | | 3,262 | | | 5,991 | |
Other regulatory assets | 2,421 |
| | 1,431 |
| Other regulatory assets | Various | | 3,570 | | | 3,560 | |
Total Regulatory Assets | $ | 379,884 |
| | $ | 355,930 |
| Total Regulatory Assets | | $ | 287,625 | | | $ | 285,692 | |
| | | | | | | |
Regulatory Liabilities | |
| | |
| Regulatory Liabilities | | | | |
Future tax benefits due to customers | $ | 33,375 |
| | $ | 33,231 |
| Future tax benefits due to customers | | $ | 134,378 | | | $ | 135,027 | |
Health care balancing account | 6,006 |
| | — |
| |
Conservation program | 2,312 |
| | 584 |
| |
Pension balancing account | 383 |
| | 695 |
| |
Retiree group health | | Retiree group health | | 27,294 | | | 27,294 | |
HCBA | | HCBA | | 12,713 | | | 9,687 | |
CEBA | | CEBA | | 7,684 | | | 7,206 | |
Net WRAM and MCBA long-term payable | 710 |
| | 611 |
| Net WRAM and MCBA long-term payable | | 479 | | | 143 | |
Other regulatory liabilities | 1,251 |
| | 3,614 |
| Other regulatory liabilities | | 1,039 | | | 1,071 | |
Total Regulatory Liabilities | $ | 44,037 |
| | $ | 38,735 |
| Total Regulatory Liabilities | | $ | 183,587 | | | $ | 180,428 | |
Short-term regulatory assets and liabilities are excluded from the above table.
The short-term regulatory assets were $31.4$56.6 million as of SeptemberJune 30, 20172022 and $30.3$78.6 million as of December 31, 2016. As of September 30, 2017, the2021. The short-term regulatory assets wereas of June 30, 2022 and December 31, 2021 primarily consist of net WRAM and MCBA, accounts receivable, 2012 General Rate Case (GRC) health cost balancing account receivable, 2014-2015 drought expense recovery,IRMA, and East Los Angeles Memorandum Account receivable. As of December 31, 2016, the short-term regulatory assets were primarily net WRAM and MCBA accounts receivable, 2012 GRC health cost balancing account receivable, 2014-2015 drought expense recovery, interim rate memorandum account receivable, and East Los Angeles Memorandum Account receivable.
PCBA receivables.
The short-term portions of regulatory liabilities were $4.5$9.6 million as of SeptemberJune 30, 20172022 and $4.8$17.5 million as of December 31, 2016. As of September 30, 2017, the2021. The short-term regulatory liabilities wereas of June 30, 2022 primarily net WRAM and MCBA liability balances, refund balance from an interim rates true up authorized prior to the 2009 GRC, and net refund balances to customers for the pension and conservation programs from the 2012 GRC.consist of TCJA liabilities. As of December 31, 2016, the2021, short-term regulatory liabilities were primarily net WRAMconsist of TCJA and MCBA liability balances and net refund balances to customers for the pension and conservation programs from the 2012 GRC.HCBA liabilities.
Note 10. Commitments and Contingencies
Commitments
The Company has significant commitments to lease certain office spaces and water systems and to purchase water from water wholesalers. The Company also has operating and finance leases for water systems, offices, land easements, licenses, equipment, and other facilities. These commitments and leases are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. 2021.
As of SeptemberJune 30, 2017,2022, there were no significant changes in these commitments from December 31, 2016.
2021.
Contingencies
Groundwater Contamination
The Company has undertaken litigation against third parties to recover past and anticipated costs related to groundwater contamination in our service areas. The cost of litigation is expensed as incurred and any settlement is first offset against such costs. The CPUC’s general policy requires all proceeds from groundwater contamination litigation to be used first to pay transactional expenses, then to make ratepayerscustomers whole for water treatment costs to comply with the CPUC’s water quality standards. The CPUC allows for a risk-based consideration of contamination proceeds which exceed the costs of the remediation described above and may result in some sharing of proceeds with the shareholder, determined on a case by case basis. The CPUC has authorized various memorandum accounts that allow the Company to track significant litigation costs and to request recovery of these costs in future filings and uses of proceeds to comply with CPUC’s general policy.
filings.
Other Legal Matters
From time to time, the Company is involved in various disputes and litigation matters that arise in the ordinary course of business. The status of each significant matter is reviewed and assessed for potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount of the range of loss can be estimated, a liability is accrued for the estimated loss in accordance with the accounting standards for contingencies. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. While the outcome of these disputes and litigation matters cannot be predicted with any certainty, management does not believe when taking into account existing reserves the ultimate resolution of these matters will materially affect the Company’s financial position, results of operations, or cash flows. As of SeptemberJune 30, 20172022 and December 31, 2016,2021, the Company recognized a liability of $6.1$6.3 million and $6.0$3.5 million, respectively, for known legal matters. The cost of litigation is expensed as incurred and any settlement is first offset against such costs. Any settlement in excess of the cost to litigate is accounted for on a case by case basis, dependent on the nature of the settlement.
Note 11. Fair Value of Financial Assets and Liabilities
The accounting guidance for fair value measurements and disclosures provides a single definition of fair value and requires certain disclosures about assets and liabilities measured at fair value. A hierarchical framework for disclosing the observability of the inputs utilized in measuring assets and liabilities at fair value is established by this guidance. The three levels in the hierarchy are as follows:
Level 1 - Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the PlanCompany has the ability to access.
Level 2 - Inputs to the valuation methodology include:
•Quoted market prices for similar assets or liabilities in active markets;
•Quoted prices for identical or similar assets or liabilities in inactive markets;
•Inputs other than quoted prices that are observable for the asset or liability; and
•Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Specific valuation methods include the following:
Cash, Accounts receivable, short-term borrowings, and accounts payable carrying amounts approximated the fair value because of the short-term maturity of the instruments.
Long-term debt fair values were estimated using the published quoted market price of similar securities, if available, or the discounted cash flow analysis, based on the current rates available using a risk-free rate (a U.S. Treasury securities yield curve) plus a risk premium of 1.70%0.60%.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| | | Fair Value |
| Cost | | Level 1 | | Level 2 | | Level 3 | | Total |
Long-term debt, including current maturities, net | $ | 1,059,953 | | | — | | | $ | 1,093,248 | | | — | | | $ | 1,093,248 | |
Advances for construction fair values were estimated using broker quotes from companies that frequently purchase these investments. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | | Fair Value |
| Cost | | Level 1 | | Level 2 | | Level 3 | | Total |
Long-term debt, including current maturities, net | $ | 1,060,986 | | | $ | — | | | $ | 1,338,831 | | | $ | — | | | $ | 1,338,831 | |
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| | | Fair Value |
| Cost | | Level 1 | | Level 2 | | Level 3 | | Total |
Long-term debt, including current maturities | $ | 555,715 |
| | — |
| | $ | 631,447 |
| | — |
| | $ | 631,447 |
|
Advances for construction | 182,820 |
| | — |
| | 75,717 |
| | — |
| | 75,717 |
|
Total | $ | 738,535 |
| | $ | — |
| | $ | 707,164 |
| | $ | — |
| | $ | 707,164 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| | | Fair Value |
| Cost | | Level 1 | | Level 2 | | Level 3 | | Total |
Long-term debt, including current maturities | $ | 557,953 |
| | $ | — |
| | $ | 630,510 |
| | $ | — |
| | $ | 630,510 |
|
Advances for construction | 182,448 |
| | — |
| | 74,460 |
| | — |
| | 74,460 |
|
Total | $ | 740,401 |
| | — |
| | $ | 704,970 |
| | $ | — |
| | $ | 704,970 |
|
Note 12. Condensed Consolidating Financial StatementsSubsequent Event
On April 17, 2009, Cal Water issued $100.0 million aggregate principal amount of 5.875% First Mortgage Bonds due 2019, and on November 17, 2010, Cal Water issued $100.0 million aggregate principal amount of 5.500% First Mortgage Bonds due 2040, all of which are fully and unconditionally guaranteedAs approved by the Company. As a resultCompany's stockholders at the 2022 Annual Meeting, effective July 26, 2022, the aggregate number of these guarantee arrangements,common shares of stock which the Company is requiredcorporation shall have authority to present the following condensed consolidating financial information. The investments in affiliates are accounted for and presented using the “equity method”issue was increased from 68.0 million common shares to 136.0 million common shares. All of accounting.
The following tables present the condensed consolidating balance sheets assaid 136.0 million common shares shall be of September 30, 2017 and December 31, 2016, the condensed consolidating statements of income for the three and nine months ended September 30, 2017 and 2016,one and the condensed consolidating statementssame series, namely common shares with par value of cash flows for the nine months ended September 30, 2017 and 2016 of (i) California Water Service Group, the guarantor of the First Mortgage Bonds and the parent company; (ii) California Water Service Company, the issuer of the First Mortgage Bonds and a 100% owned consolidated subsidiary of California Water Service Group; and (iii) the other 100% owned non-guarantor consolidated subsidiaries of California Water Service Group. No other subsidiary of the Company guarantees the securities. The condensed consolidating statement of cash flows for the nine months ended September 30, 2016 reflects the retrospective adoption of ASU 2016-09 (refer to Note 2 Summary of Significant Accounting Policies for more details).$0.01 per common share.
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 2017
(In thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
ASSETS | |
| | |
| | |
| | |
| | |
|
Utility plant: | |
| | |
| | |
| | |
| | |
|
Utility plant | $ | 1,321 |
| | $ | 2,695,106 |
| | $ | 203,435 |
| | $ | (7,196 | ) | | $ | 2,892,666 |
|
Less accumulated depreciation and amortization | (896 | ) | | (858,386 | ) | | (53,448 | ) | | 1,988 |
| | (910,742 | ) |
Net utility plant | 425 |
| | 1,836,720 |
| | 149,987 |
| | (5,208 | ) | | 1,981,924 |
|
Current assets: | | | | | |
| | | | |
Cash and cash equivalents | 2,722 |
| | 17,851 |
| | 7,768 |
| | — |
| | 28,341 |
|
Receivables and unbilled revenue | — |
| | 127,858 |
| | 5,398 |
| | — |
| | 133,256 |
|
Receivables from affiliates | 22,568 |
| | 703 |
| | 261 |
| | (23,532 | ) | | — |
|
Other current assets | 184 |
| | 17,665 |
| | 1,039 |
| | — |
| | 18,888 |
|
Total current assets | 25,474 |
| | 164,077 |
| | 14,466 |
| | (23,532 | ) | | 180,485 |
|
Other assets: | | | | | |
| | | | |
Regulatory assets | — |
| | 376,041 |
| | 3,843 |
| | — |
| | 379,884 |
|
Investments in affiliates | 693,766 |
| | — |
| | — |
| | (693,766 | ) | | — |
|
Long-term affiliate notes receivable | 24,677 |
| | — |
| | — |
| | (24,677 | ) | | — |
|
Other assets | 217 |
| | 56,886 |
| | 3,912 |
| | (204 | ) | | 60,811 |
|
Total other assets | 718,660 |
| | 432,927 |
| | 7,755 |
| | (718,647 | ) | | 440,695 |
|
TOTAL ASSETS | $ | 744,559 |
| | $ | 2,433,724 |
| | $ | 172,208 |
| | $ | (747,387 | ) | | $ | 2,603,104 |
|
CAPITALIZATION AND LIABILITIES | |
| | |
| | |
| | |
| | |
|
Capitalization: | |
| | |
| | |
| | |
| | |
|
Common stockholders’ equity | $ | 687,723 |
| | $ | 620,892 |
| | $ | 78,143 |
| | $ | (699,035 | ) | | $ | 687,723 |
|
Affiliate long-term debt | — |
| | — |
| | 24,677 |
| | (24,677 | ) | | — |
|
Long-term debt, less current maturities | — |
| | 518,802 |
| | 898 |
| | — |
| | 519,700 |
|
Total capitalization | 687,723 |
| | 1,139,694 |
| | 103,718 |
| | (723,712 | ) | | 1,207,423 |
|
Current liabilities: | |
| | |
| | |
| | |
| | |
|
Current maturities of long-term debt | — |
| | 35,606 |
| | 409 |
| | — |
| | 36,015 |
|
Short-term borrowings | 55,100 |
| | 140,000 |
| | — |
| | — |
| | 195,100 |
|
Payables to affiliates | — |
| | 1,257 |
| | 22,275 |
| | (23,532 | ) | | — |
|
Accounts payable | — |
| | 86,374 |
| | 3,020 |
| | — |
| | 89,394 |
|
Accrued expenses and other liabilities | 154 |
| | 55,607 |
| | 4,091 |
| | — |
| | 59,852 |
|
Total current liabilities | 55,254 |
| | 318,844 |
| | 29,795 |
| | (23,532 | ) | | 380,361 |
|
Unamortized investment tax credits | — |
| | 1,798 |
| | — |
| | — |
| | 1,798 |
|
Deferred income taxes | 1,582 |
| | 325,619 |
| | 2,448 |
| | (143 | ) | | 329,506 |
|
Pension and postretirement benefits other than pensions | — |
| | 227,819 |
| | — |
| | — |
| | 227,819 |
|
Regulatory liabilities and other | — |
| | 87,714 |
| | 3,292 |
| | — |
| | 91,006 |
|
Advances for construction | — |
| | 182,298 |
| | 522 |
| | — |
| | 182,820 |
|
Contributions in aid of construction | — |
| | 149,938 |
| | 32,433 |
| | — |
| | 182,371 |
|
TOTAL CAPITALIZATION AND LIABILITIES | $ | 744,559 |
| | $ | 2,433,724 |
| | $ | 172,208 |
| | $ | (747,387 | ) | | $ | 2,603,104 |
|
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2016
(In thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
ASSETS | |
| | |
| | |
| | |
| | |
|
Utility plant: | |
| | |
| | |
| | |
| | |
|
Utility plant | $ | 1,318 |
| | $ | 2,519,785 |
| | $ | 203,433 |
| | $ | (7,197 | ) | | $ | 2,717,339 |
|
Less accumulated depreciation and amortization | (826 | ) | | (805,992 | ) | | (53,163 | ) | | 1,919 |
| | (858,062 | ) |
Net utility plant | 492 |
| | 1,713,793 |
| | 150,270 |
| | (5,278 | ) | | 1,859,277 |
|
Current assets: | |
| | |
| | |
| | |
| | |
|
Cash and cash equivalents | 5,216 |
| | 13,215 |
| | 7,061 |
| | — |
| | 25,492 |
|
Receivables and unbilled revenue | — |
| | 98,850 |
| | 4,173 |
| | — |
| | 103,023 |
|
Receivables from affiliates | 19,566 |
| | 3,608 |
| | 8 |
| | (23,182 | ) | | — |
|
Other current assets | 80 |
| | 12,442 |
| | 1,032 |
| | — |
| | 13,554 |
|
Total current assets | 24,862 |
| | 128,115 |
| | 12,274 |
| | (23,182 | ) | | 142,069 |
|
Other assets: | |
| | |
| | |
| | |
| | |
|
Regulatory assets | — |
| | 352,139 |
| | 3,791 |
| | — |
| | 355,930 |
|
Investments in affiliates | 666,525 |
| | — |
| | — |
| | (666,525 | ) | | — |
|
Long-term affiliate notes receivable | 25,744 |
| | — |
| | — |
| | (25,744 | ) | | — |
|
Other assets | 376 |
| | 50,361 |
| | 3,765 |
| | (33 | ) | | 54,469 |
|
Total other assets | 692,645 |
| | 402,500 |
| | 7,556 |
| | (692,302 | ) | | 410,399 |
|
TOTAL ASSETS | $ | 717,999 |
| | $ | 2,244,408 |
| | $ | 170,100 |
| | $ | (720,762 | ) | | $ | 2,411,745 |
|
CAPITALIZATION AND LIABILITIES | |
| | |
| | |
| | |
| | |
|
Capitalization: | |
| | |
| | |
| | |
| | |
|
Common stockholders’ equity | $ | 659,471 |
| | $ | 595,003 |
| | 76,833 |
| | $ | (671,836 | ) | | $ | 659,471 |
|
Affiliate long-term debt | — |
| | — |
| | 25,744 |
| | (25,744 | ) | | — |
|
Long-term debt, less current maturities | — |
| | 530,850 |
| | 895 |
| | — |
| | 531,745 |
|
Total capitalization | 659,471 |
| | 1,125,853 |
| | 103,472 |
| | (697,580 | ) | | 1,191,216 |
|
Current liabilities: | |
| | |
| | |
| | |
| | |
|
Current maturities of long-term debt | — |
| | 25,657 |
| | 551 |
| | — |
| | 26,208 |
|
Short-term borrowings | 57,100 |
| | 40,000 |
| | — |
| | — |
| | 97,100 |
|
Payables to affiliates | — |
| | 539 |
| | 22,643 |
| | (23,182 | ) | | — |
|
Accounts payable | — |
| | 74,998 |
| | 2,815 |
| | — |
| | 77,813 |
|
Accrued expenses and other liabilities | 88 |
| | 47,232 |
| | 1,789 |
| | — |
| | 49,109 |
|
Total current liabilities | 57,188 |
| | 188,426 |
| | 27,798 |
| | (23,182 | ) | | 250,230 |
|
Unamortized investment tax credits | — |
| | 1,798 |
| | — |
| | — |
| | 1,798 |
|
Deferred income taxes | 1,340 |
| | 296,781 |
| | 803 |
| | — |
| | 298,924 |
|
Pension and postretirement benefits other than pensions | — |
| | 222,691 |
| | — |
| | — |
| | 222,691 |
|
Regulatory and other liabilities | — |
| | 80,518 |
| | 3,130 |
| | — |
| | 83,648 |
|
Advances for construction | — |
| | 181,907 |
| | 541 |
| | — |
| | 182,448 |
|
Contributions in aid of construction | — |
| | 146,434 |
| | 34,356 |
| | — |
| | 180,790 |
|
TOTAL CAPITALIZATION AND LIABILITIES | $ | 717,999 |
| | $ | 2,244,408 |
| | $ | 170,100 |
| | $ | (720,762 | ) | | $ | 2,411,745 |
|
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended September 30, 2017
(In thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating revenue | $ | — |
| | $ | 199,002 |
| | $ | 12,729 |
| | $ | — |
| | $ | 211,731 |
|
Operating expenses: | |
| | |
| | |
| | |
| | |
|
Operations: | |
| | |
| | |
| | |
| | |
|
Water production costs | — |
| | 73,061 |
| | 2,200 |
| | — |
| | 75,261 |
|
Administrative and general | — |
| | 22,362 |
| | 2,524 |
| | — |
| | 24,886 |
|
Other operations | — |
| | 18,979 |
| | 2,356 |
| | (127 | ) | | 21,208 |
|
Maintenance | — |
| | 5,729 |
| | 328 |
| | — |
| | 6,057 |
|
Depreciation and amortization | 21 |
| | 18,115 |
| | 1,117 |
| | (22 | ) | | 19,231 |
|
Income tax (benefit) expense | (136 | ) | | 16,190 |
| | 1,028 |
| | 266 |
| | 17,348 |
|
Property and other taxes | — |
| | 5,680 |
| | 864 |
| | — |
| | 6,544 |
|
Total operating (income) expenses | (115 | ) | | 160,116 |
| | 10,417 |
| | 117 |
| | 170,535 |
|
Net operating income | 115 |
| | 38,886 |
| | 2,312 |
| | (117 | ) | | 41,196 |
|
Other income and expenses: | |
| | |
| | |
| | |
| | |
|
Non-regulated revenue | 505 |
| | 3,218 |
| | 450 |
| | (631 | ) | | 3,542 |
|
Non-regulated expenses | — |
| | (2,151 | ) | | (425 | ) | | — |
| | (2,576 | ) |
Allowance for equity funds used during construction | — |
| | 1,105 |
| | — |
| | — |
| | 1,105 |
|
Income tax expense on other income and expenses | (206 | ) | | (885 | ) | | (7 | ) | | 257 |
| | (841 | ) |
Total other income | 299 |
| | 1,287 |
| | 18 |
| | (374 | ) | | 1,230 |
|
Interest: | |
| | |
| | |
| | |
| | |
|
Interest expense | 313 |
| | 8,951 |
| | 525 |
| | (505 | ) | | 9,284 |
|
Allowance for borrowed funds used during construction | — |
| | (684 | ) | | (23 | ) | | — |
| | (707 | ) |
Net interest expense | 313 |
| | 8,267 |
| | 502 |
| | (505 | ) | | 8,577 |
|
Equity earnings of subsidiaries | 33,748 |
| | — |
| | — |
| | (33,748 | ) | | — |
|
Net income | $ | 33,849 |
| | $ | 31,906 |
| | $ | 1,828 |
| | $ | (33,734 | ) | | $ | 33,849 |
|
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended September 30, 2016
(In thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating revenue | $ | — |
| | $ | 173,223 |
| | $ | 11,045 |
| | $ | — |
| | $ | 184,268 |
|
Operating expenses: | |
| | |
| | |
| | |
| | |
|
Operations: | |
| | |
| | |
| | |
| | |
|
Water production costs | — |
| | 68,045 |
| | 2,130 |
| | — |
| | 70,175 |
|
Administrative and general | — |
| | 21,679 |
| | 2,165 |
| | — |
| | 23,844 |
|
Other operations | — |
| | 18,037 |
| | 1,692 |
| | (168 | ) | | 19,561 |
|
Maintenance | — |
| | 5,322 |
| | 223 |
| | — |
| | 5,545 |
|
Depreciation and amortization | 57 |
| | 14,777 |
| | 1,074 |
| | (24 | ) | | 15,884 |
|
Income tax (benefit) expense | (105 | ) | | 12,165 |
| | 920 |
| | 267 |
| | 13,247 |
|
Property and other taxes | — |
| | 5,182 |
| | 775 |
| | — |
| | 5,957 |
|
Total operating (income) expenses | (48 | ) | | 145,207 |
| | 8,979 |
| | 75 |
| | 154,213 |
|
Net operating income | 48 |
| | 28,016 |
| | 2,066 |
| | (75 | ) | | 30,055 |
|
Other income and expenses: | |
| | |
| | |
| | |
| | |
|
Non-regulated revenue | 464 |
| | 3,024 |
| | 541 |
| | (632 | ) | | 3,397 |
|
Non-regulated expenses | — |
| | (2,170 | ) | | (347 | ) | | — |
| | (2,517 | ) |
Income tax expense on other income and expenses | (189 | ) | | (345 | ) | | (73 | ) | | 258 |
| | (349 | ) |
Total other income | 275 |
| | 509 |
| | 121 |
| | (374 | ) | | 531 |
|
Interest: | |
| | |
| | |
| | |
| | |
|
Interest expense | 201 |
| | 8,259 |
| | 488 |
| | (463 | ) | | 8,485 |
|
Less: capitalized interest | — |
| | (759 | ) | | (15 | ) | | — |
| | (774 | ) |
Net interest expense | 201 |
| | 7,500 |
| | 473 |
| | (463 | ) | | 7,711 |
|
Equity earnings of subsidiaries | 22,753 |
| | — |
| | — |
| | (22,753 | ) | | — |
|
Net income | $ | 22,875 |
| | $ | 21,025 |
| | $ | 1,714 |
| | $ | (22,739 | ) | | $ | 22,875 |
|
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the nine months ended September 30, 2017
(In thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating revenue | $ | — |
| | $ | 473,518 |
| | $ | 31,381 |
| | $ | — |
| | $ | 504,899 |
|
Operating expenses: | |
| | |
| | |
| | |
| | |
|
Operations: | |
| | |
| | |
| | |
| | |
|
Water production costs | — |
| | 175,339 |
| | 6,121 |
| | — |
| | 181,460 |
|
Administrative and general | — |
| | 65,985 |
| | 7,946 |
| | — |
| | 73,931 |
|
Other operations | — |
| | 50,108 |
| | 5,931 |
| | (379 | ) | | 55,660 |
|
Maintenance | — |
| | 16,144 |
| | 733 |
| | — |
| | 16,877 |
|
Depreciation and amortization | 70 |
| | 54,328 |
| | 3,320 |
| | (68 | ) | | 57,650 |
|
Income tax (benefit) expense | (362 | ) | | 24,344 |
| | 1,331 |
| | 786 |
| | 26,099 |
|
Property and other taxes | (4 | ) | | 16,407 |
| | 2,314 |
| | — |
| | 18,717 |
|
Total operating (income) expenses | (296 | ) | | 402,655 |
| | 27,696 |
| | 339 |
| | 430,394 |
|
Net operating income | 296 |
| | 70,863 |
| | 3,685 |
| | (339 | ) | | 74,505 |
|
Other income and expenses: | |
| | |
| | |
| | |
| | |
|
Non-regulated revenue | 1,482 |
| | 9,822 |
| | 1,300 |
| | (1,861 | ) | | 10,743 |
|
Non-regulated expenses | — |
| | (5,326 | ) | | (918 | ) | | — |
| | (6,244 | ) |
Allowance for equity funds used during construction | — |
| | 2,763 |
| | — |
| | — |
| | 2,763 |
|
Income tax expense on other income and expenses | (604 | ) | | (2,958 | ) | | (143 | ) | | 758 |
| | (2,947 | ) |
Net other income | 878 |
| | 4,301 |
| | 239 |
| | (1,103 | ) | | 4,315 |
|
Interest: | |
| | |
| | |
| | |
| | |
|
Interest expense | 823 |
| | 26,216 |
| | 1,516 |
| | (1,482 | ) | | 27,073 |
|
Allowance for borrowed funds used during construction | — |
| | (1,702 | ) | | (63 | ) | | — |
| | (1,765 | ) |
Net interest expense | 823 |
| | 24,514 |
| | 1,453 |
| | (1,482 | ) | | 25,308 |
|
Equity earnings of subsidiaries | 53,161 |
| | — |
| | — |
| | (53,161 | ) | | — |
|
Net income | $ | 53,512 |
| | $ | 50,650 |
| | $ | 2,471 |
| | $ | (53,121 | ) | | $ | 53,512 |
|
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the nine months ended September 30, 2016
(In thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating revenue | $ | — |
| | $ | 428,592 |
| | $ | 29,848 |
| | $ | — |
| | $ | 458,440 |
|
Operating expenses: | |
| | |
| | |
| | |
| | |
|
Operations: | |
| | |
| | |
| | |
| | |
|
Water production costs | — |
| | 162,933 |
| | 5,900 |
| | — |
| | 168,833 |
|
Administrative and general | — |
| | 67,289 |
| | 7,748 |
| | — |
| | 75,037 |
|
Other operations | — |
| | 53,128 |
| | 5,016 |
| | (378 | ) | | 57,766 |
|
Maintenance | — |
| | 16,854 |
| | 688 |
| | — |
| | 17,542 |
|
Depreciation and amortization | 171 |
| | 44,427 |
| | 3,246 |
| | (72 | ) | | 47,772 |
|
Income tax (benefit) expense | (292 | ) | | 17,356 |
| | 1,366 |
| | 762 |
| | 19,192 |
|
Property and other taxes | — |
| | 15,241 |
| | 2,198 |
| | — |
| | 17,439 |
|
Total operating (income) expenses | (121 | ) | | 377,228 |
| | 26,162 |
| | 312 |
| | 403,581 |
|
Net operating income | 121 |
| | 51,364 |
| | 3,686 |
| | (312 | ) | | 54,859 |
|
Other income and expenses: | |
| | |
| | |
| | |
| | |
|
Non-regulated revenue | 1,390 |
| | 9,659 |
| | 1,338 |
| | (1,798 | ) | | 10,589 |
|
Non-regulated expenses | — |
| | (7,422 | ) | | (884 | ) | | — |
| | (8,306 | ) |
Income tax expense on other income and expenses | (566 | ) | | (909 | ) | | (172 | ) | | 733 |
| | (914 | ) |
Net other income | 824 |
| | 1,328 |
| | 282 |
| | (1,065 | ) | | 1,369 |
|
Interest: | |
| | |
| | |
| | |
| | |
|
Interest expense | 547 |
| | 24,421 |
| | 1,435 |
| | (1,419 | ) | | 24,984 |
|
Less: capitalized interest | — |
| | (2,293 | ) | | (48 | ) | | — |
| | (2,341 | ) |
Net interest expense | 547 |
| | 22,128 |
| | 1,387 |
| | (1,419 | ) | | 22,643 |
|
Equity earnings of subsidiaries | 33,187 |
| | — |
| | — |
| | (33,187 | ) | | — |
|
Net income | $ | 33,585 |
| | $ | 30,564 |
| | $ | 2,581 |
| | $ | (33,145 | ) | | $ | 33,585 |
|
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2017
(In thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating activities: | |
| | |
| | |
| | |
| | |
|
Net income | $ | 53,512 |
| | $ | 50,650 |
| | $ | 2,471 |
| | $ | (53,121 | ) | | $ | 53,512 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
| | |
| | |
|
Equity earnings of subsidiaries | (53,161 | ) | | — |
| | — |
| | 53,161 |
| | — |
|
Dividends received from affiliates | 25,920 |
| | — |
| | — |
| | (25,920 | ) | | — |
|
Depreciation and amortization | 70 |
| | 55,623 |
| | 3,392 |
| | (69 | ) | | 59,016 |
|
Changes in value of life insurance contracts | — |
| | (1,871 | ) | | — |
| | — |
| | (1,871 | ) |
Allowance for equity funds used during construction | — |
| | (2,763 | ) | | — |
| | — |
| | (2,763 | ) |
Changes in operating assets and liabilities | (38 | ) | | (40,941 | ) | | 1,036 |
| | — |
| | (39,943 | ) |
Other changes in noncurrent assets and liabilities | 2,420 |
| | 37,125 |
| | 2,263 |
| | 29 |
| | 41,837 |
|
Net cash provided by operating activities | 28,723 |
| | 97,823 |
| | 9,162 |
| | (25,920 | ) | | 109,788 |
|
Investing activities: | | | | | |
| | | | |
Utility plant expenditures | (4 | ) | | (175,234 | ) | | (5,204 | ) | | — |
| | (180,442 | ) |
Changes in affiliate advances | (334 | ) | | 2,905 |
| | (287 | ) | | (2,284 | ) | | — |
|
Issuance of affiliate short-term borrowings | (2,610 | ) | | — |
| | — |
| | 2,610 |
| | — |
|
Reduction of affiliates long-term debt | 1,010 |
| | — |
| | — |
| | (1,010 | ) | | — |
|
Life insurance proceeds | — |
| | 1,558 |
| | — |
| | — |
| | 1,558 |
|
Purchase of life insurance contracts | — |
| | (3,948 | ) | | — |
| | — |
| | (3,948 | ) |
Changes in restricted cash | — |
| | (679 | ) | | — |
| | — |
| | (679 | ) |
Net cash used in investing activities | (1,938 | ) | | (175,398 | ) | | (5,491 | ) | | (684 | ) | | (183,511 | ) |
Financing Activities: | |
| | |
| | |
| | |
| | |
|
Short-term borrowings | — |
| | 185,000 |
| | — |
| | — |
| | 185,000 |
|
Repayment of short-term borrowings | (2,000 | ) | | (85,000 | ) | | — |
| | — |
| | (87,000 | ) |
Changes in affiliate advances | — |
| | 718 |
| | (3,002 | ) | | 2,284 |
| | — |
|
Proceeds from affiliate short-term borrowings | — |
| | — |
| | 2,610 |
| | (2,610 | ) | | — |
|
Repayment of affiliates long-term borrowings | — |
| | — |
| | (1,010 | ) | | 1,010 |
| | — |
|
Repayment of long-term debt | — |
| | (2,336 | ) | | (461 | ) | | — |
| | (2,797 | ) |
Advances and contributions in aid of construction | — |
| | 14,900 |
| | 64 |
| | — |
| | 14,964 |
|
Refunds of advances for construction | — |
| | (6,311 | ) | | (5 | ) | | — |
| | (6,316 | ) |
Repurchase of common stock | (1,359 | ) | | — |
| | — |
| | — |
| | (1,359 | ) |
Dividends paid to non-affiliates | (25,920 | ) | | — |
| | — |
| | — |
| | (25,920 | ) |
Dividends paid to affiliates | — |
| | (24,760 | ) | | (1,160 | ) | | 25,920 |
| | — |
|
Net cash (used in) provided by financing activities | (29,279 | ) | | 82,211 |
| | (2,964 | ) | | 26,604 |
| | 76,572 |
|
Change in cash and cash equivalents | (2,494 | ) | | 4,636 |
| | 707 |
| | — |
| | 2,849 |
|
Cash and cash equivalents at beginning of period | 5,216 |
| | 13,215 |
| | 7,061 |
| | — |
| | 25,492 |
|
Cash and cash equivalents at end of period | $ | 2,722 |
| | $ | 17,851 |
| | $ | 7,768 |
| | $ | — |
| | $ | 28,341 |
|
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2016
(In thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating activities: | |
| | |
| | |
| | |
| | |
|
Net income | $ | 33,585 |
| | $ | 30,564 |
| | $ | 2,581 |
| | $ | (33,145 | ) | | $ | 33,585 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
| | |
| | |
|
Equity earnings of subsidiaries | (33,187 | ) | | — |
| | — |
| | 33,187 |
| | — |
|
Dividends received from affiliates | 24,807 |
| | — |
| | — |
| | (24,807 | ) | | — |
|
Depreciation and amortization | 171 |
| | 45,466 |
| | 3,381 |
| | (72 | ) | | 48,946 |
|
Changes in value of life insurance contracts | — |
| | (915 | ) | | — |
| | — |
| | (915 | ) |
Changes in operating assets and liabilities | 1,844 |
| | 12,552 |
| | (6,623 | ) | | 54 |
| | 7,827 |
|
Other changes in noncurrent assets and liabilities | 387 |
| | 24,726 |
| | 9,297 |
| | (24 | ) | | 34,386 |
|
Net cash provided by operating activities | 27,607 |
| | 112,393 |
| | 8,636 |
| | (24,807 | ) | | 123,829 |
|
Investing activities: | |
| | |
| | |
| | |
| | |
|
Utility plant expenditures | — |
| | (163,179 | ) | | (3,227 | ) | | — |
| | (166,406 | ) |
Changes in affiliate advances | (957 | ) | | 4,419 |
| | (319 | ) | | (3,143 | ) | | — |
|
Reduction of affiliate short-term borrowings | 2,000 |
| | 42,100 |
| | — |
| | (44,100 | ) | | — |
|
Issuance of affiliate short-term borrowings
| (4,615 | ) | | (20,600 | ) | | — |
| | 25,215 |
| | — |
|
Reduction of affiliates long-term debt | 829 |
| | — |
| | — |
| | (829 | ) | | — |
|
Life insurance proceeds | — |
| | 495 |
| | — |
| | — |
| | 495 |
|
Purchase of life insurance contracts | — |
| | (2,710 | ) | | — |
| | — |
| | (2,710 | ) |
Changes in restricted cash | — |
| | (685 | ) | | — |
| | — |
| | (685 | ) |
Net cash used in investing activities | (2,743 | ) | | (140,160 | ) | | (3,546 | ) | | (22,857 | ) | | (169,306 | ) |
Financing Activities: | |
| | |
| | |
| | |
| | |
|
Short-term borrowings | 44,100 |
| | 61,000 |
| | — |
| | — |
| | 105,100 |
|
Repayment of short-term borrowings | (20,615 | ) | | (61,000 | ) | | — |
| | — |
| | (81,615 | ) |
Changes in affiliate advances | — |
| | 1,367 |
| | (4,510 | ) | | 3,143 |
| | — |
|
Proceeds from affiliate short-term borrowings | 20,600 |
| | — |
| | 4,615 |
| | (25,215 | ) | | — |
|
Repayment of affiliate short-term borrowings | (42,100 | ) | | — |
| | (2,000 | ) | | 44,100 |
| | — |
|
Repayment of affiliates long-term borrowings | — |
| | — |
| | (829 | ) | | 829 |
| | — |
|
Proceeds from long-term debt, net of issuance costs | — |
| | 49,823 |
| | — |
| | — |
| | 49,823 |
|
Repayment of long-term debt | — |
| | (2,516 | ) | | (349 | ) | | — |
| | (2,865 | ) |
Advances and contributions in aid for construction | — |
| | 18,096 |
| | 90 |
| | — |
| | 18,186 |
|
Refunds of advances for construction | — |
| | (5,172 | ) | | (22 | ) | | — |
| | (5,194 | ) |
Repurchase of common stock | (637 | ) | | — |
| | — |
| | — |
| | (637 | ) |
Dividends paid to non-affiliates | — |
| | (24,173 | ) | | (634 | ) | | — |
| | (24,807 | ) |
Dividends paid to affiliates | (24,807 | ) | | — |
| | — |
| | 24,807 |
| | — |
|
Net cash (used in) provided by financing activities | (23,459 | ) | | 37,425 |
| | (3,639 | ) | | 47,664 |
| | 57,991 |
|
Change in cash and cash equivalents | 1,405 |
| | 9,658 |
| | 1,451 |
| | — |
| | 12,514 |
|
Cash and cash equivalents at beginning of period | 582 |
| | 4,270 |
| | 3,985 |
| | — |
| | 8,837 |
|
Cash and cash equivalents at end of period | $ | 1,987 |
| | $ | 13,928 |
| | $ | 5,436 |
| | $ | — |
| | $ | 21,351 |
|
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Dollar amounts in thousands unless otherwise statedstated.
FORWARD LOOKING STATEMENTS
This quarterly report, including all documents incorporated by reference, contains forward-looking statements within the meaning established by the Private Securities Litigation Reform Act of 1995 (Act). The forward-looking statements are intended to qualify under provisions of the federal securities laws for "safe harbor" treatment established by the Act. Forward-looking statements in this quarterly report are based on currently available information, expectations, estimates, assumptions and projections, and our management’s beliefs, assumptions, judgments and expectations about us, the water utility industry and general economic conditions.conditions, including statements regarding the anticipated impact on our business of the ongoing COVID-19 pandemic and related public health measures. These statements are not statements of historical fact. When used in our documents, statements that are not historical in nature, including words like "will," "would," “expects,” “intends,” “plans,” “believes,” “may,” “estimates,” “assumes,” “anticipates,” “projects,” "progress," “predicts,” "hopes," "targets," “forecasts,” “should,” “seeks,” or variations of these words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not guarantees of future performance. They are based on numerous assumptions that we believe are reasonable, but they are open to a wide range of uncertainties and business risks. Consequently, actual results may vary materially from what is contained in a forward-looking statement.
Factors which may cause actual results to be different than those expected or anticipated include, but are not limited to:
•the impact of the ongoing COVID-19 pandemic and related public health measures;
•our ability to invest or apply the proceeds from the issuance of common stock in an accretive manner;
•governmental and regulatory commissions’commissions' decisions, including decisions on proper disposition of property;
•consequences of eminent domain actions relationrelating to our water systems;
•changes in regulatory commissions’commissions' policies and procedures;procedures, such as the CPUC’s decision in 2020 to preclude companies from proposing fully decoupled WRAMs in their next GRC filing (which impacted our 2021 GRC filing related to our operations commencing in 2023);
•the outcome and timeliness of regulatory commissions’commissions' actions concerning rate relief;relief and other matters, including with respect to our 2021 GRC filing and our Cost of Capital filing;
inability•increased risk of inverse condemnation losses as a result of climate change and drought;
•our ability to renew leases to operate city water systems owned by others on beneficial terms;
•changes in California State Water Resources Control Board water quality standards;
•changes in environmental compliance and water quality requirements;
•electric power interruptions;interruptions, especially as a result of Public Safety Power Shutoff (PSPS) programs;
•housing and customer growth trends;growth;
•the impact of opposition to rate increases;
•our ability to recover costs;
•availability of water supplies;
•issues with the implementation, maintenance or security of our information technology systems;
•civil disturbances or terrorist threats or acts,acts;
•the adequacy of our efforts to mitigate physical and cyber security risks and threats;
•the ability of our enterprise risk management processes to identify or apprehension about the possible future occurrences of acts of this type;address risks adequately;
•labor relations matters as we negotiate with the unions;
restrictive covenants in or changes to the credit ratings on current or future debt that could increase financing costs or affect the ability to borrow, make payments on debt, or pay dividends;
•changes in customer water use patterns and the effects of conservation;
•our ability to complete, in a timely manner or at all, successfully integrate, and achieve anticipated benefits from announced acquisitions;
•the impact of weather, climate change, natural disasters, and diseasesactual or threatened public health emergencies, including disease outbreaks, on our operations, water quality, water availability, water sales and operating results;results and the adequacy of our emergency preparedness;
•restrictive covenants in or changes to the credit ratings on our current or future debt that could increase our financing costs or affect our ability to borrow, make payments on debt or pay dividends;
•risks associated with expanding our business and operations geographically;
•stagnating or worsening business and economic conditions, including inflationary pressures, general economic slowdown or a recession, increasing interest rates, and changes in monetary policy; and
•the risks set forth in “Risk Factors” included in the Company's annual reportAnnual Report on 2016 Form 10-K.
10-K for the year ended December 31, 2021.
In light of these risks, uncertainties and assumptions, investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this quarterly report or as of the date of any document incorporated by reference in this report, as applicable. When considering forward-looking statements, investors should keep in mind the cautionary statements in this quarterly report and the documents incorporated by reference. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES
ESTIMATES
We maintain our accounting records in accordance with accounting principles generally accepted in the United States of America (GAAP)GAAP and as directed by the Commissions to which our operations are subject. The process of preparing financial statements in accordance with GAAP requires the use of estimates on the part of management. The estimates used by management are based on historic experience and an understanding of current facts and circumstances. Management believes that the following accounting policies are critical because they involve a higher degree of complexity and judgment, and can have a material impact on our results of operations, financial condition, and cash flows of the business. These policies and their key characteristics are discussed in detail in the 2016Company's Annual Report on Form 10-K.10-K for the year ended December 31, 2021. They include:
•revenue recognition;
•regulated utility accounting;
•income taxes; and
•pension and postretirement health care benefits;
benefits.
For the nine month periodsix months ended SeptemberJune 30, 2017,2022, there were no changes in the methodology for computing critical accounting estimates, no additional accounting estimates met the standards for critical accounting policies, and there were no material changes to the important assumptions underlying the critical accounting estimates.
COVID-19
During 2021 and for the six months ended June 30, 2022 and through July 28, 2022, the COVID-19 pandemic has not had a significant impact on our business or operations. We have resumed the process for shutoffs for non-payment in all of our regulated utilities. If we need to close any of our facilities due to outbreaks of COVID-19 or if a critical number of our employees become too ill to work, our business operations could be materially adversely affected in a rapid manner. Company employees have returned to the office full-time. We continue to be vigilant for employee and customer safety, we encourage and incentivize vaccination, and we follow local masking rules as applicable. The impact of the COVID-19 pandemic is fluid and continues to evolve, and therefore, we cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted.
RESULTS OF THIRDSECOND QUARTER 20172022 OPERATIONS
COMPARED TO THIRDSECOND QUARTER 20162021 OPERATIONS
Dollar amounts in thousands unless otherwise stated
Overview
Net Income Attributable to California Water Service Group
Net income attributable to California Water Service Group for the three month period ended September 30, 2017,second quarter of 2022 was $33.8$19.5 million or $0.70$0.36 earnings per diluted common share, compared to net income attributable to California Water Service Group of $22.9$38.2 million or $0.48$0.75 earnings per diluted common share for the three month period ended September 30, 2016, an increasesecond quarter of $10.9 million. 2021.
The increase$18.7 million decrease in net income was primarily the resultdue to a reduction of rate increases authorized$15.2 million in Cal Water's 2015 General Rate Case (GRC). Also increasingaccrued unbilled revenue and a $6.2 million decrease in unrealized gains on non-qualified benefit plan investments. Increases of $8.7 million in other operations expense, $1.6 million in depreciation and amortization, and $1.0 million in maintenance expense also reduced net income. The decrease in net income was anpartially offset by general rate increases of $6.9 million, increase in operating revenue from a change in deferred revenue of $5.1 million, and a gain from company owned life insurance of $2.3 million. The $5.1 million change in deferred revenue offset $4.2 million of the increase in other operations expense.
The change in accrued unbilled revenue increases resulting fromwas mostly driven by the adoptiontiming of allowance for equity funds usedwhen meter reads were completed during construction (equity AFUDC) in 2017,the month of June 2022 as compared to June 2021 and a decrease in emergency drought incremental expenses overcustomer consumption. In the second quarter of 2022, accrued unbilled revenue added $3.8 million to revenue as compared to $19.0 million for the same period last year. These factors were partially offset by increases in administrative and general, other operations, maintenance, depreciation and amortization, and interest expenses. The increaseOver the past ten years, annual changes in accrued unbilled revenue resulted from higher water usage athave typically been less than $2.0 million. We expect the end of the quarter. This increase indifference between 2022 and 2021 annual accrued unbilled revenue is not included in the WRAM until it is billed. The WRAM account records changes in billed revenue. Accrued unbilled revenue is seasonal and the patternto be less than $2.0 million. Changes to unrealized gains on benefit plan investments were caused by unfavorable market conditions.
Operating Revenue
Operating revenue increased $27.5decreased $6.9 million, or 14.9%3.3%, to $211.7$206.2 million in the thirdsecond quarter of 20172022 as compared to the thirdsecond quarter of 2016. The factors that impacted the operating revenue for the third quarter of 2017 as compared2021, with such change attributed to the third quarter of 2016 are as follows:following:
|
| | | |
Net change due to rate changes, usage, and other (1) | $ | 20,703 |
|
MCBA Revenue (2) | 865 |
|
Other balancing account revenue (3) | 2,048 |
|
Deferral of revenue (4) | 3,847 |
|
Net operating revenue increase | $ | 27,463 |
|
| | | | | |
1. | The netNet change due to WRAM, rate changes, usage, and other in the above table was mainly driven by rate increases. There also was a $3.4 million increase in accrued unbilled revenue. The components(1) | $ | (4,723) | |
MCBA Revenue (2) | (7,292) | |
Other balancing account revenue (3) | (31) | |
Deferral of the rate increases are as follows:revenue (4) | 5,117 | |
Net operating revenue decrease | $ | (6,929) | |
1.The net change due to WRAM, rate changes, usage, and other in the above table was primarily driven by a $15.2 million decrease in accrued unbilled revenue, partially offset by rate increases, the components of which are set forth in the table below, and a $1.4 million increase in operating revenue in Hawaii due to an increase in customer usage and prior year acquisitions.
|
| | | |
General rate case | $ | 10,900 |
|
Purchased water and pump tax offset increases | 2,359 |
|
Ratebase offset increases | 1,137 |
|
Total increase in rates | $ | 14,396 |
|
| | | | | |
2.Escalation rate increases | The MCBA revenue increase resulted from an increase in actual water production costs relative to adopted water production costs in the third quarter of 2017 as compared to the third quarter of 2016. The actual water production costs increased in 2017 as a result of an increase in customer consumption in the third quarter of 2017 as compared to the third quarter of 2016. As required by the MCBA mechanism, the increase in actual water production costs relative to adopted water production costs in California also increased operating revenue for the same amount. |
5,140 | |
3.Purchased water and pump tax offsets | The other balancing account revenue consists of the pension, conservation and health care balancing account revenues. Pension and conservation balancing account revenues are the differences between actual expenses and adopted rate recovery. Health care balancing account revenue is 85% of the difference between actual health care expenses and adopted rate recovery. The increase in revenue was mainly due to an increase in actual health care, pension, and conservation expenses relative to adopted in the third quarter of 2017 as compared to the third quarter of 2016. |
1,722 | |
4.Rate base offsets | The deferral of revenue consists of amounts that are expected to be collected from customers beyond 24 months following the end of the accounting period68 | |
Total increase in which these revenues were recorded. The deferral decreased in the third quarter of 2017 as compared to the third quarter of 2016 due to a decrease in the balancing account revenue expected to be collected beyond 24 months.rates | $ | 6,930 | |
2.MCBA revenue is the variance between adopted water production costs and actual water production costs. For the second quarter of 2022, we recorded a decrease to revenue of $0.3 million as compared to an increase to revenue of $7.0 million for the second quarter 2021. The MCBA revenue decrease in the second quarter of 2022 as compared to the second quarter of 2021 resulted from a decrease in actual water production costs relative to adopted water production costs in the second quarter of 2022, due to a 16.1% decrease in purchased water production.
3.The other balancing account revenue consists of the pension, conservation and health care balancing account revenues. Pension and conservation balancing account revenues are the differences between actual expenses and adopted rate recovery. Health care balancing account revenue is 85% of the difference between actual health care expenses and adopted rate recovery. For the second quarter of 2022 and 2021, we recognized a net decrease to revenue of $1.8 million for these balancing accounts primarily due to lower actual health care expenses relative to adopted.
4.The deferral of revenue consists of amounts that are expected to be collected from customers beyond 24 months following the end of the accounting period in which these revenues were recorded. The deferral decreased in the second quarter of 2022 as compared to the second quarter of 2021 due to a decrease in the balancing account revenue expected to be collected beyond 24 months.
Total Operating Expenses
Total operating expenses increased $16.3$8.0 million, or 10.6%4.7%, to $170.5$178.9 million in the thirdsecond quarter of 2017,2022, as compared to $154.2$170.9 million in the thirdsecond quarter of 2016.2021.
Water production cost consists of purchased water, purchased power, and pump taxes. It represents the largest component of total operating expenses, accounting for approximately 39.6% of total operating expenses for the second quarter of 2022, as compared to 43.8% of total operating expenses for the second quarter of 2021. Water production costs decreased 5.3% in the second quarter of 2022 as compared to the same period last year primarily due to a decrease in purchased water production.
Sources of water as a percent of total water production are listed in the following table:
| | | | | | | | | | | |
| Three Months Ended June 30 |
| 2022 | | 2021 |
Well production | 49 | % | | 47 | % |
Purchased | 48 | % | | 49 | % |
Surface | 3 | % | | 4 | % |
Total | 100 | % | | 100 | % |
The components of water production costs are shown in the table below:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30 |
| 2022 | | 2021 | | Change |
Purchased water | $ | 55,929 | | | $ | 62,139 | | | $ | (6,210) | |
Purchased power | 11,144 | | | 9,171 | | | 1,973 | |
Pump taxes | 3,834 | | | 3,601 | | | 233 | |
Total | $ | 70,907 | | | $ | 74,911 | | | $ | (4,004) | |
Administrative and general expense increased $0.9 million, or 2.9%, to $32.7 million in the second quarter of 2022, as compared to $31.8 million in the second quarter of 2021. The increase was primarily due to increases in outside legal and consulting service costs of $0.8 million. Changes in employee pension benefits and employee and retiree medical costs for regulated California operations generally do not affect net income, as the Company has been allowed by the CPUC to record these costs in balancing accounts for future recovery, creating a corresponding change to revenue.
Other operations expenses increased $8.7 million, or 42.0%, to $29.4 million in the second quarter of 2022, as compared to $20.7 million in the second quarter of 2021. The increase was primarily due to an increase in the costs associated with the reduction of deferred revenue of $4.2 million, credit losses of $1.2 million, and conservation program expenses of $0.9 million. Changes in conservation program expense for regulated California operations generally do not affect net income, as the Company has been allowed by the CPUC to record these costs in balancing accounts for future recovery, creating a corresponding change to revenue.
Maintenance expense increased $1.0 million, or 15.2%, to $7.6 million in the second quarter of 2022, as compared to $6.6 million in the second quarter of 2021, due to repairs of services and equipment.
Depreciation and amortization expense increased $1.6 million, or 5.7%, to $28.8 million in the second quarter of 2022, as compared to $27.2 million in the second quarter of 2021, mostly due to utility plant placed in service in 2021.
Income tax expense decreased $0.5 million to $1.5 million in the second quarter of 2022 mostly due to a reduction in net operating income in the second quarter of 2022 as compared to prior year.
Property and other taxes increased $0.4 million to $8.1 million in the second quarter of 2022, as compared to $7.7 million in the same period of 2021, mostly due to an increase in assessed property values for utility plant in service.
Other Income and Expenses
Net other income decreased $3.7 million to $2.9 million in the second quarter of 2022, as compared to a net other income of $6.6 million in the second quarter of 2021, due primarily to a $6.2 million decrease in unrealized gains on non-qualified benefit plan investments, which was partially offset by a $2.3 million gain on company owned life insurance and $1.1 million increase in other components of net periodic benefit credit.
Interest Expense
Net interest expense increased $0.2 million, or 2.3%, to $11.0 million in the second quarter of 2022, as compared to $10.8 million in the second quarter of 2021. The increase was due primarily to an increase in interest rates.
RESULTS OF THE SIX MONTHS ENDED JUNE 30, 2022 OPERATIONS
COMPARED THE SIX MONTHS ENDED JUNE 30, 2021 OPERATIONS
Dollar amounts in thousands unless otherwise stated
Overview
Net Income Attributable to California Water Service Group
Net income attributable to California Water Service Group for the first six months of 2022 was $20.6 million or $0.38 earnings per diluted common share, compared to net income attributable to California Water Service Group of $35.2 million or $0.69 earnings per diluted common share for the first six months of 2021.
The $14.6 million decrease in net income was primarily due to a reduction of $12.8 million in accrued unbilled revenue and a $9.4 million decrease in unrealized gains on non-qualified benefit plan investments. Increases of $16.7 million in other operations expense, $4.0 million in administrative and general expense, $3.2 million in depreciation and amortization, $1.6 million in maintenance expense, and $1.2 million in net interest expense also reduced net income. The decrease in net income was partially offset by general rate increases of $12.1 million, increase in operating revenue from a change in deferred revenue of $14.5 million, gain from company owned life insurance of $2.7 million, increase in other components of net periodic benefit credit of $2.1 million, decrease in income tax expense of $1.8 million, and increase in non-regulated revenue of $1.3 million. The $14.5 million change in deferred revenue offset $11.9 million of the increase in other operations expense.
The change in accrued unbilled revenue was mostly driven by the timing of when meter reads were completed during the month of June 2022 as compared to June 2021 and a decrease in customer consumption. In the first six months of 2022, accrued unbilled revenue added $6.1 million to revenue as compared to $18.9 million for the same period last year. We expect the difference between 2022 and 2021 annual accrued unbilled revenue to be less than $2.0 million. Changes to unrealized gains on benefit plan investments were caused by unfavorable market conditions.
Operating Revenue
Operating revenue increased $18.3 million, or 5.1%, to $379.2 million for the first six months of 2022 as compared to the first six months of 2021, with such change attributed to the following:
| | | | | |
Net change due to WRAM, rate changes, usage, and other (1) | $ | 6,771 | |
MCBA Revenue (2) | (3,057) | |
Other balancing account revenue (3) | 71 | |
Deferral of revenue (4) | 14,542 | |
Net operating revenue increase | $ | 18,327 | |
1.The net change due to WRAM, rate changes, usage, and other in the above table was primarily driven by rate increases, the components of which are set forth in the table below and a $3.4 million increase in Hawaii Water due to an increase in customer usage and prior year acquisitions. The increase was partially offset by a $12.8 million decrease in accrued unbilled revenue.
| | | | | |
Escalation rate increases | 8,993 | |
Purchased water and pump tax offsets | 3,035 | |
Rate base offsets | 95 | |
Total increase in rates | $ | 12,123 | |
2.MCBA revenue is the variance between adopted water production costs and actual water production costs. For the first six months of 2022, we recognized $8.0 million of MCBA revenue as compared to $11.0 million of MCBA revenue for the first six months of 2021. The MCBA revenue decrease in the first six months of 2022 as compared to the first six months of 2021 resulted from a decrease in actual water production costs relative to adopted water production costs due to a 6.4% decrease in purchased water production.
3.The other balancing account revenue consists of the pension, conservation and health care balancing account revenues. Pension and conservation balancing account revenues are the differences between actual expenses and adopted rate recovery. Health care balancing account revenue is 85% of the difference between actual health care expenses and adopted rate recovery. For the first six months of 2022 and 2021, we recognized a net decrease to revenue of $3.9
million for these balancing accounts. The decrease in revenue for both 2022 and 2021 was primarily due to lower actual health care expenses relative to adopted.
4.The deferral of revenue consists of amounts that are expected to be collected from customers beyond 24 months following the end of the accounting period in which these revenues were recorded. The deferral decreased in the first six months of 2022 as compared to the first six months of 2021 due to a decrease in the balancing account revenue expected to be collected beyond 24 months.
Total Operating Expenses
Total operating expenses increased $27.1 million, or 8.6%, to $342.8 million for the first six months of 2022, as compared to $315.7 million for the first six months of 2021.
Water production costs consists of purchased water, purchased power, and pump taxes. It represents the largest component of total operating expenses, accounting for approximately 44.1%38.6% of total operating expenses in the third quarterfirst six months of 2017,2022, as compared to 45.5%41.1% of total operating expenses in the third quarterfirst six months of 2016.2021. Water production costs increased 7.3%2.1% in the first six months of 2022 as compared to the same period last year mainlyprimarily due to a 5.5% increase inincreased purchased water productionpower rates and an average increase of 0.8% in wholesale supplier rates.
well production.
Sources of water as a percent of total water production are listed in the following table:
| | | Three Months Ended September 30 | | Six Months Ended June 30 |
| 2017 | | 2016 | | 2022 | | 2021 |
Well production | 48 | % | | 48 | % | Well production | 48 | % | | 47 | % |
Purchased | 48 | % | | 48 | % | Purchased | 48 | % | | 49 | % |
Surface | 4 | % | | 4 | % | Surface | 4 | % | | 4 | % |
Total | 100 | % | | 100 | % | Total | 100 | % | | 100 | % |
The components of water production costs are shown in the table below:
| | | Three Months Ended September 30 | | Six Months Ended June 30 |
| 2017 | | 2016 | | Change | | 2022 | | 2021 | | Change |
Purchased water | $ | 62,041 |
| | $ | 58,075 |
| | $ | 3,966 |
| Purchased water | $ | 104,721 | | | $ | 106,905 | | | $ | (2,184) | |
Purchased power | 9,658 |
| | 9,255 |
| | 403 |
| Purchased power | 19,543 | | | 15,674 | | | 3,869 | |
Pump taxes | 3,562 |
| | 2,845 |
| | 717 |
| Pump taxes | 8,181 | | | 7,158 | | | 1,023 | |
Total | $ | 75,261 |
| | $ | 70,175 |
| | $ | 5,086 |
| Total | $ | 132,445 | | | $ | 129,737 | | | $ | 2,708 | |
Administrative and general and other operations expenses increased $2.7$4.0 million, or 6.4%, to $46.1$66.1 million in the third quarterfirst six months of 2017,2022, as compared to $43.4$62.1 million in the third quarterfirst six months of 2016.2021. The increase was mostlyprimarily due to an increaseincreases in expensesoutside legal and consulting service costs of $3.2$1.8 million, from the reversaltraining and travel costs of prior year deferred WRAM revenue$1.3 million, and associated deferred expenses, increases inemployee health care costs of $2.0 million, $1.1 million of costs previously capitalized, and uninsured loss expense of $0.3 million which
were partially offset by the write-off of $3.2 million of capital costs in the third quarter of 2016 and a decrease in incremental drought expense of $0.9$0.8 million. Changes in employee pension and other postretirement benefit costs,benefits and employee health careand retiree medical costs for regulated California operations generally do not affect net income, becauseas the Company trackshas been allowed by the CPUC to record these costs in balancing accounts for future recovery, which createscreating a corresponding change to operating revenue. At September 30, 2017, there were 1,165 employees
Other operations expenses increased $16.7 million, or 43.1%, to $55.3 million in the first six months of 2022, as compared to $38.6 million in the first six months of 2021. The increase was primarily due to an increase in the costs associated with the reduction of deferred revenue of $11.9 million, water and at September 30, 2016, there were 1,157 employees.
wastewater treatment costs of $1.5 million, and conservation program expenses of $1.2 million. Changes in conservation program expense for regulated California operations generally do not affect net income, as the Company has been allowed by the CPUC to record these costs in balancing accounts for future recovery, creating a corresponding change to revenue.
Maintenance expense increased $0.5$1.6 million, or 9.2%11.8%, to $6.1$15.0 million in the third quarterfirst six months of 2017,2022, as compared to $5.5$13.4 million in the third quarterfirst six months of 2016,2021, mostly due to increasesan increase in transmissionrepairs of services, tanks, and distribution mains repairs.
equipment.
Depreciation and amortization expense increased $3.3$3.2 million, or 21.1%6.0%, to $19.2$57.5 million in the third quarterfirst six months of 2017,2022, as compared to $15.9$54.3 million in the third quarterfirst six months of 2016,2021, mostly due to 2016 capital additions.additions in 2021.
Income taxes increased $4.1tax expense decreased $1.8 million or 31.0%, to $17.3$0.04 million in the third quarterfirst six months of 2017,2022, as compared to $13.2$1.9 million in the third quarterfirst six months of 2016.2021. The increasedecrease was mainlyprimarily due to an increasea decrease in net operating income in the third quarterfirst six months of 20172022 as compared to the third quarter of 2016.
prior year.
Property and other taxes increased $0.6$0.7 million or 9.9%, to $6.5$16.4 million in the third quarterfirst six months of 2017,2022, as compared to $6.0$15.7 million in the third quartersame period of 2016,2021, mostly due to an increase in assessed property values in 2016 and increased local franchise taxes.
values.
Other Income and Expenses
Net other income and expenses increased $0.7decreased $5.0 million to $1.2$5.6 million in the third quarterfirst six months of 2017,2022, as compared to $0.5net other income of $10.6 million in the third quarterfirst six months of 2016, principally2021, due primarily to the implementationa $9.4 million decrease in unrealized gains on non-qualified benefit plan investments, which was partially offset by a $2.7 million gain on company owned life insurance and $2.1 million increase in other components of equity AFUDC in 2017.
net periodic benefit credit.
Interest Expense
Net interest expense increased $0.9$1.2 million, or 11.2%6%, to $8.6$21.9 million in the third quarterfirst six months of 2017,2022, as compared to $7.7$20.7 million in the third quarterfirst six months of 2016.2021. The increase was due primarily to an increase in short-term financing for capital investments as well as increased short-term interest rates.
RESULTS OF THE NINE MONTHS ENDED SEPTEMBER 30, 2017 OPERATIONS
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2016 OPERATIONS
Dollar amounts in thousands unless otherwise stated
Overview
Net income for the nine months ended September 30, 2017, was $53.5 million or $1.11 per diluted common share compared to a net income of $33.6 million or $0.70 per diluted common share for the nine months ended September 30, 2016, an increase of $19.9 million. The increase in net income was primarily the result of increased rates adopted in the recent California GRC and decreases in emergency drought incremental costs, and maintenance expenses, as well as increases resulting from the implementation of equity AFUDC in 2017 and unrealized gains on certain benefit plan investments. These factors were partially offset by increases in depreciation and amortization, interest, and employee wage expenses.
Operating Revenue
Operating revenue increased $46.5 million, or 10.1%, to $504.9 million in the first nine months of 2017 as compared to the first nine months of 2016. The factors that impacted the operating revenue for the first nine months of 2017 as compared to 2016 are as follows:
|
| | | |
Net change due to rate changes, usage, and other (1) | $ | 52,025 |
|
MCBA Revenue (2) | (4,757 | ) |
Other balancing account revenue (3) | (578 | ) |
Deferral of revenue (4) | (232 | ) |
Net operating revenue increase | $ | 46,458 |
|
| |
1. | The net change due to rate changes, usage, and other in the above table was mainly driven by rate increases. There also was a $2.7 million increase in accrued unbilled revenue. The components of the rate increases are as follows: |
|
| | | |
General rate case | $ | 31,720 |
|
Purchased water and pump tax offset increases | 10,015 |
|
Ratebase offset increases | 2,193 |
|
Total increase in rates | $ | 43,928 |
|
| |
2. | The MCBA revenue decrease resulted from an increase in adopted water production costs relative to actual water production costs in the first nine months of 2017 as compared to the first nine months of 2016. The adopted water production costs increased in 2017 as a result of Cal Water's 2015 GRC. As required by the MCBA mechanism, the increase in adopted water production costs relative to actual water production costs in California also decreased operating revenue for the same amount. |
| |
3. | The other balancing account revenue consists of the pension, conservation and health care balancing account revenues. Pension and conservation balancing account revenues are the differences between actual expenses and adopted rate recovery. Health care balancing account revenue is 85% of the difference between actual health care expenses and adopted rate recovery. The decrease in revenue was mainly due to a decrease in actual health care and conservation expenses relative to adopted in the first nine months of 2017 as compared to the first nine months of 2016. This was partially offset by an increase in actual pension expenses relative to adopted in the first nine months of 2017 as compared to the first nine months of 2016. |
| |
4. | The deferral of revenue consists of amounts that are expected to be collected from customers beyond 24 months following the end of the accounting period in which these revenues were recorded. The deferral increased in the first nine months of 2017 as compared to the first nine months of 2016 due to an increase in the balancing account revenue expected to be collected beyond 24 months. |
Total Operating Expenses
Total operating expenses increased $26.8 million, or 6.6%, to $430.4 million in the first nine months of 2017, as compared to $403.6 million in the first nine months of 2016.
Water production costs consists of purchased water, purchased power, and pump taxes. It represents the largest component of total operating expenses, accounting for approximately 42.2% of total operating expenses in the first nine months of 2017, as compared to 41.8% of total operating expenses in the first nine months of 2016. Water production costs increased 7.5% as compared to the same period last year mainly due to a blended 3.0% increase in purchased water wholesaler rates and an increase of 3.8% in purchased water production.
Sources of water as a percent of total water production are listed in the following table:
|
| | | | | |
| Nine Months Ended September 30 |
| 2017 | | 2016 |
Well production | 48 | % | | 48 | % |
Purchased | 48 | % | | 48 | % |
Surface | 4 | % | | 4 | % |
Total | 100 | % | | 100 | % |
The components of water production costs are shown in the table below:
|
| | | | | | | | | | | |
| Nine Months Ended September 30 |
| 2017 | | 2016 | | Change |
Purchased water | $ | 149,731 |
| | $ | 139,514 |
| | $ | 10,217 |
|
Purchased power | 22,168 |
| | 21,123 |
| | 1,045 |
|
Pump taxes | 9,561 |
| | 8,196 |
| | 1,365 |
|
Total | $ | 181,460 |
| | $ | 168,833 |
| | $ | 12,627 |
|
Administrative and general and other operations expenses decreased $3.2 million, or 2.4%, to $129.6 million in the first nine months of 2017, as compared to $132.8 million in the first nine months of 2016. The decrease was due primarily to a decrease in California drought program incremental costs of $3.8 million, the write-off of $3.2 million of capital costs in the third quarter of 2016, decreases in health care benefit costs of $0.6 million and conservation program expenses of $0.9 million, and $0.4 million of insurance proceeds to recover 2016 wild fire damages in our southern California District, and a deferral of $0.4 million costs associated with the deferral of operating revenue. The decreases were partially offset by employee wage cost increase of $1.7 million, pension benefit cost increase of $1.1 million, $1.1 million of costs previously capitalized, a software maintenance and licensing cost increase of $1.0 million, and additional uninsured loss expenses of $0.8 million. Changes in employee pension and other postretirement benefit costs, water conservation program costs, and health care costs for regulated California operations do not affect net income, because the Company tracks these costs in balancing accounts for future recovery, which create corresponding changes to operating revenue.
Maintenance expense decreased $0.7 million, or 3.8%, to $16.9 million in the first nine months of 2017, as compared to $17.5 million in the first nine months of 2016, mostly due to decreases in transmission and distribution mains repair costs.
Depreciation and amortization expense increased $9.9 million, or 20.7%, to $57.7 million in the first nine months of 2017, as compared to $47.8 million in the first nine months of 2016, mostly due to 2016 utility plant additions.
Income taxes increased $6.9 million, or 36.0%, to $26.1 million in the first nine months of 2017, as compared to $19.2 million in the first nine months of 2016. The increase was due primarily to an increase to operating income in the first nine months of 2017 as compared to the first nine months of 2016, which was partially offset by a $0.5 million tax benefit associated with the settlement of equity awards in 2017.
Property and other taxes increased $1.3 million, or 7.3%, to $18.7 million during the first nine months of 2017, as compared to $17.4 million in the first nine months of 2016, due primarily to an increase in assessed property values in 2016 and increased local franchise taxes.
Other Income and Expenses
Net other income increased $2.9 million to $4.3 million in the first nine months of 2017, as compared to $1.4 million in the first nine months of 2016, due primarily to the implementation of allowance for equity funds used during construction in 2017 and a $1.0 million increase in unrealized gains on certain benefit plan investments.
Interest Expense
Net interest expense increased $2.7 million, or 11.8%, to $25.3 million in the first nine months of 2017, as compared to $22.6 million in the first nine months of 2016. The increase was due primarily to an increase in short-term financing for capital investments as well as increased short-term interest rates.
REGULATORY MATTERS
20172021 California Regulatory Activity
2021 GRC Filing
California Public Advocates Office reviewed Cal Water's 2021 GRC filing
On December 15, 2016, and submitted its report in February 2022. Cal Water reviewed California Public Advocates Office recommendations, evaluated the validity of the underlying data, and composed and filed rebuttal testimony with the CPUC votedin April 2022. Settlement negotiations with the California Public Advocates Office and intervenors began in the second quarter of 2022 and evidentiary hearings were held in the second quarter of 2022. The timing of the final decision is uncertain. We anticipate partial interim rate increases will be authorized to approve Cal Water's 2015 GRC settlement agreement. The approved decision, which was proposed by the presiding Administrative Law Judge in November 2016, authorized Cal Waterbe added to increase gross revenue by approximately $45.0 million starting oncustomer billings effective January 1, 2017, up to $17.2 million in 2018, up to $16.3 million in2023.
2019, and up to $30.0 million upon completion and approval of the Company’s advice letter projects. The 2018 and 2019 revenue increases are subject to the CPUC’s earnings test protocol.
The CPUC’s decision also authorized Cal Water to invest $658.8 million in water system improvements throughout California over the three-year period of 2016-2018 in order to continue to provide safe and reliable water to its customers. This figure includes $197.3 million of water system infrastructure improvements that will be subject to the CPUC’s advice letter procedure.
2021 Cost of Capital Application
In April of 2017,On May 3, 2021, Cal Water alongfiled its required application with three other water utilities, filed an applicationthe CPUC to adopt a newreview its cost of capital for 2022 through 2024. Cal Water currently has an approved return on equity of 9.2%, a cost of debt of 5.51%, and a 53.4% equity capital structure for 2018.structure. Cal Water requested a return on equity of 10.75%10.35%, a cost of debt of 4.23%, and a 53.4% equity capital structurestructure. The California Public Advocates Office recommends a return on equity of 7.81%, a cost of debt of 4.23%, and a 49.4% equity capital structure. Evidentiary hearings were held in May 2022 and the case was submitted to the CPUC at the end of the second quarter of 2022. The CPUC will evaluate the proposal along with proposals of other parties, and in accordance with its standard process, is currently expected to issue a decision in the latter half of 2022 We have not reserved for any potential outcome of the proceeding as well as a waterwe have determined that it is not probable that the proceeding will be approved retroactively to January 1, 2022. In the event that the CPUC adopts the cost of capital adjustment mechanism similarcomponents retroactively to that lastJanuary 1, 2022, the reduced cost of debt, if adopted for the company. The California Office of Ratepayer Advocates and other parties submitted testimony and the CPUC held evidentiary hearings in September 2017. The schedule for the application anticipates a decision on the matterat our proposed equity capital structure, would reduce 2022 annual revenue by the end of 2017.
School Lead Testing Memorandum Account (SLT MA)
In March of 2017, Cal Water submitted an advice letter that established the SLT MA, which gives Cal Water the opportunity to recover costs related to lead monitoring and testing required by the State Water Resources Control Board's Division of Drinking Water. The SLT MA will track all incremental expenses associated with lead testing conducted at the request of K-12 schools within Cal Water's service territory.
$11.0 million.
California Drought Memorandum Account (DRMA)
In June 2021, Cal Water submitted advice letters to request a DRMA to track the incremental operational and administrative costs incurred to further implement updated Rule 14.1 for voluntary conservation measures and Schedule 14.1 for implementation of our Water Shortage Contingency Plan, including activities related to enhanced conservation efforts, staffing, and capital expenditures to ensure a safe, reliable supply of water. The incremental costs tracked inDRMA would also track monies paid by customers for fines, penalties, or other compliance measures associated with water use violations; and penalties paid by Cal Water to its water wholesalers. The DRMA was approved by the drought memorandum account for the nine month period ended September 30, 2017 were $0.2CPUC with an effective date of June 14, 2021. Cal Water has incurred $1.2 million of which less than $0.1 million was spent on capital. For the nine month period ended September 30, 2016, incrementalcumulative DRMA related costs, were $4.6 million, of which $0.6 million was spentincurred in the first six months of 2022.
The California State Governor has issued a drought declaration for all California counties through five State of Emergency Proclamations with the most recent on capital. During the three months ended September 30, 2017, incremental costs were less than $0.1 million. During the three months ended September 30, 2016, incremental costs were $0.8 million,October 19, 2021. Given these drought proclamations and current water usage levels in all of which less than $0.1 million was spent on capital.
On December 15, 2016, the CPUC approved a resolution to allowits service areas, Cal Water has activated Stage 2 of the “Water Use Restrictions of its Water Shortage Contingency Plan” of Schedule 14.1 in all of its service areas.
In Stage 1, irrigating ornamental landscape with potable water is prohibited during the hours of 8:00 a.m. and 6:00 p.m. For Stage 2, irrigating ornamental landscapes with potable water is limited to begin recovering $2.9 millionno more than three days per week as well as
prohibited during the hours of 8:00 a.m. and 2014 through a surcharge which became effective6:00 p.m. In addition this stage states that new connections may not install single-pass cooling systems for air conditioning or other cooling system applications unless required for health or safety reasons.
Escalation Increase Requests
As part of the decision on January 1, 2017.
In 2017,the 2018 GRC, Cal Water expects to submit an advice letterwas authorized to request recoveryannual escalation rate increases for 2022 for those districts that passed the earnings test. In November of 2016 and 2017 incremental drought expenses.
WRAM and MCBA filings
In March of 2017,2021, Cal Water submitted an advice letter to true up the revenue over- and under-collectionsrequested escalation rate increases for 2022 in the 2016 annual WRAMs/MCBAs19 of its regulated districts. A net under-collection of $25.8 million is being recovered from customersThe increase in annual adopted gross revenue associated with the form of 12, 18, and greater-than-18-month surcharges/surcredits.November 2021 filing was $21.7 million. The new rates became effective April 15, 2017. This surcharge/surcredit in some cases is in addition to surcharges/surcredits authorized in prior years which have not yet expired.
were implemented on January 1, 2022.
Expense Offset filings
Requests
Expense offsets are dollar-for-dollar increases in revenue to match increased expenses, and therefore do not affect net operating income. In OctoberDecember of 2016,2021, Cal Water submitted an advice lettersletter to offset increasedrequest offsets for increases in purchased water costs and pump taxes in seven of its regulated districts totaling $5.2 million. The new rates were implemented on January 1, 2022.
In June of 2022, Cal Water submitted an advice letter to request offsets for increases in purchased water costs and pump taxes in four of its regulated districts totaling $1.9$12.7 million. The new rates became effective on January 1, 2017.
In March of 2017, Cal Water submitted an advice letter to offset increased purchased water in one of its regulated districts, totaling $1.0 million. The new rates became effective on April 15, 2017.
In June of 2017, Cal Water submitted advice letters to offset increased purchased water and pump taxes in four of its regulated districts, totaling $2.7 million. The new rates became effective on July 1, 2017.
In July of 2017, Cal Water submitted an advice letter to offset increased purchased water and pump taxes in one of its regulated districts, totaling $0.2 million. The new rates became effectivewill be implemented on August 1, 2017.2022.
RatebaseRate Base Offset filings
Requests
For construction projects that are authorized in GRCs as advice letter projects, companies areCal Water is allowed to file ratebaserequest rate base offsets to increase revenues after the plant is placedproject goes into service. In November of 2016,2021, Cal Water submitted an advice letter to recover $2.6 million of annual revenue increase for ratebase offsets in five of its regulated districts. The new rates became effective on January 1, 2017.
In April of 2017, Cal Water submitted advice letters to recover $0.9 million of annual revenue increase for ratebase offsets in two of its regulated districts. The new rates became effective on April 15, 2017.
In May of 2017, Cal Water submitted an advice letter to recover $0.4$0.2 million of annual revenue increase for a ratebaserate base offset in one of its regulated districts. The new rates became effectivewere implemented on JulyJanuary 1, 2017.2022.
Travis Air Force Base
Cal Water has entered into a 50-year agreement with the U.S. DepartmentIn March of Defense to acquire the water distribution assets of, and to provide water utility service to, the Travis Air Force Base beginning in 2018. On May 31, 2017,2022, Cal Water submitted an applicationadvice letter to recover $0.1 million of annual revenue increase for a rate base offset in one of its regulated districts. The new rates were implemented on April 15, 2022.
WRAM/MCBA Filings
In April of 2022, Cal Water submitted an advice letter to true up the revenue under-collections for the 2021 annual WRAMs/MCBAs of its regulated districts. A net under-collection of $54.1 million is being recovered/refunded from/to customers in the form of 12, 18, and greater-than-18-month surcharges and 12 month surcredits. The new rates incorporate net WRAM/MCBA balances that were previously approved for recovery and were implemented on April 15, 2022.
Regulatory Activity - Other States
Kona Water Service Company GRC (Hawaii Water)
In May of 2021, Hawaii Water submitted a private letter ruling (PLR) to the CPUC seeking approval to provide water service to the base and to establish rates for its service.
The water system utilizes surface water treated atIRS requesting a water treatment plant and groundwater from five wells, and includes distribution piping, storage tanks, hydrants, and other appurtenances to serve about 15,280 active and reserve personnel and civiliansruling on the 6,400-acre base. If approved, Cal Water will make initial capital improvementstreatment of about $12.7 million, with an anticipated capital investment of about $52.0 million over the 50-year termdeferred taxes because of the utility service contract.
2017 Regulatory Activity—Other States
2016 Pukalani (Hawaii) GRC Filing
In December of 2016,TCJA. A favorable decision on the PLR was received on November 18, 2021. The Consumer Advocates and Hawaii water filedWater submitted a GRC for its Pukalani wastewater system requesting an additional $1.3 million in revenues on an annual basis. This revenue increase is proposedjoint stipulation to be implemented over five years. The application requested recovery for increases in operating expenses since the previous rate case. Additionally, the application requested recovery of the balance of the cost of the wastewater treatment plant that was not approved to be included in customer rates in the previous rate case among other capital investments. On September 15, 2017, the Hawaii Public Utility Commission (HPUC) incorporating the PLR into revised water rates on March 2, 2022. Hawaii Water is awaiting approval from the HPUC.
HOH Utilities Commission issuedCompany (Hawaii Water)
In June of 2021, Hawaii Water signed an agreement to acquire the assets of HOH Utilities Company, a proposed decision authorizingwastewater utility located in the growing Poipu/Koloa area of Kauai County on the island of Kauai. The acquisition is subject to satisfaction of customary closing conditions, including approval by the HPUC.
Hawaii Water is expected to own and manage the wastewater utility, which currently serves almost 1,800 residential, commercial, and resort customers in Poipu and Koloa, including three hotels, condominiums, multi-family housing, a $0.8 milliongolf course, and single-family homes.
Hawaii Water received HPUC approval for the acquisition in June of 2022.
Kalaeloa Water Company GRC (Hawaii Water)
In August of 2021, a GRC application requesting an increase inof revenues on an annual basis. Pursuant to a settlement agreement betweenfor Kalaeloa was submitted with the HPUC. In June of 2022, Hawaii Water and the Consumer Advocate submitted a full settlement agreement to the revenue increase will be phased-in over 4 years ($0.2 million per year). The first phaseHPUC for approval. A decision is expected in the third quarter of 2022.
Animas Valley Land and Water Co., LLC (New Mexico Water)
In October of 2020, New Mexico Water signed a purchase agreement with Animas Valley Land and Water Co., LLC (AV Water) and court-appointed receiver C. Randel Lewis to acquire the Morning Star Water System assets of AV Water and provide regulated water utility service to its approximately 2,000 customer connections in northwest New Mexico.
In April of 2022, New Mexico Water closed its purchase of the increase was effective on October 18, 2017.Morningstar Water system. The New Mexico Public Regulation Commission granted approval of the transaction, and the utility commenced operation of the water system as of April 14, 2022.
LIQUIDITY
Cash flow from Operations
Cash flow from operations for the first ninesix months of 20172022 was $109.8$89.9 million compared to $123.2$67.7 million for the same period in 2016.2021. The increase in the first six months of 2022 as compared to 2021 was primarily due to receipt of $20.8 million from the Water Arrearages Payment Program. Cash generated by operations varies during the year due to customer billings and timing of collections and contributions to our benefit plans.
During the first ninesix months of 2017,2022, we made contributions of $22.2$8.8 million to our employee pension plan compared to contributions of $20.6$14.1 million made during the first ninesix months of 2016.2021. During the first ninesix months of 2017,2022, we made contributions of $2.3$0.3 million to the other postretirement benefit plans compared to contributions of $6.7$1.5 million during the first ninesix months of 2016.2021. The total 2017full-year 2022 estimated cash contribution to the pension plans is $29.8and other postretirement benefits plans are expected to be approximately $16.1 million and to the other postretirement benefit plans is $9.0 million.
Cal Water customer drought surcharges were discontinued on July 29, 2016. As such there were no drought surcharge billings during the first nine months of 2017 as compared to $26.1$0.7 million, in the first nine months of 2016.
respectively.
The water business is seasonal. Billed revenue is lower in the cool, wet winter months when less water is used compared to the warm, dry summer months when water use is highest. This seasonality results in the possible need for short-term borrowings under the bank lines ofunsecured revolving credit facilities in the event cash is not available to cover operating and utility plant costs during the winter period. The increase in cash flows during the summer allows short-term borrowings to be paid down. Customer
water usage can be lower than normal in drought years and when more than normalgreater-than-normal precipitation falls in our service areas or temperatures are lower than normal, especially in the summer months. In addition, short-term borrowings are usedAged accounts receivable past due more than 60 days decreased from $26.2 million as of December 31, 2021 to finance utility plant expenditures until long-term financing is arranged.
$20.6 million as of June 30, 2022 mostly due to the application of $16.9 million of Water Arrearages Payment Program funds.
Investing Activities
During the first ninesix months of 20172022 and 2016,2021, we used $180.4$144.6 million and $166.4$138.5 million, respectively, of cash for company-fundedCompany-funded and developer-funded utility plant expenditures. The 2017 budget estimates utility plant expenditures to be between $200.0 and $220.0 million. Annual expenditures fluctuate each year due to the availability of construction resources and our ability to obtain construction permits in a timely manner.
For 2022, the Company's capital program will be dependent in part on the timing and nature of regulatory approvals in connection with Cal Water's 2021 GRC filing. The Company proposed to the CPUC spending $1.0 billion on water infrastructure investments in 2022-2024. Capital expenditures in California are evaluated in the context of the pending GRC and may change as the case moves forward.
Financing Activities
Net cash provided by financing activities was $76.6$44.6 million during the first ninesix months of 20172022 compared to $58.0$98.7 million of net cash provided by financing activities for the same period in 2016.
2021. For 2022, this includes our issuance of $30.2 million of Company common stock through our at-the-market equity program and $1.1 million through our employee stock purchase plan. For 2021, this includes our issuance of $280.0 million of First Mortgage Bonds, $61.6 million of Company common stock through our at-the-market equity program, and $1.0 million through our employee stock purchase plan.
During the first ninesix months of 20172022 and 2016,2021, we borrowed $185.0$55.0 million and $105.1$125.0 million, respectively, on our unsecured revolving credit facilities. Repayments ofWe made a repayment on our unsecured revolving credit facilities borrowingsof $20.0 million and $350.0 million during the first ninesix months of 2017 were $87.0 million2022 and $81.6 million for the same period in 2016.
2021, respectively.
The undercollected net WRAM and MCBA receivable balances were $61.6$77.4 million and $30.5$67.5 million as of SeptemberJune 30, 20172022 and September 30, 2016,2021, respectively. The undercollectedreceivable balances were primarily financed by Cal Water using short-term and long-term financing arrangements to meet operational cash requirements. Interest on the undercollectedreceivable balances, which represents the interest recoverable from ratepayers,customers, is limited to the currentthen-current 90-day commercial paper rates which istypically are significantly lower than Cal Water’s short and long-term financing rates.
Short-Term and Long-Term Financing
During the first ninesix months of 2017,2022, we utilized cash generated from operations, and borrowings on the unsecured revolving credit facilities, and cash received from the sale of Company common stock through our at-the-market equity program to fund operations and capital investments. We did not sell Company common stock during the first nine months of 2017 and 2016.
In future periods, management anticipates funding our utility plant needs through a relatively balanced approach between long term debt and equity.
Short-term liquidity is provided by our unsecured revolving credit facilities and internally generated funds. Long-term financing is accomplished through the use of both debt and equity. On September 23, 2010, the CPUC authorized Cal Water to issue $350.0 million of debt and common stock to finance utility plant projects and operations.
On March 10, 2015, the Company and Cal Water entered into Syndicated Credit Agreements, which provided for unsecured revolving credit facilities of up to an initial aggregate amount of $450.0 million for a term of five years. The Syndicated Credit Facilities amended, expanded, and replaced the Company’s and its subsidiaries’ credit facilities originally entered into on September 29, 2011. The new credit facilities extended the terms until March 10, 2020 and increased the Company’s unsecured revolving line of credit. The credit facilities may each be expanded by up to $50.0 million subject to certain conditions. The Company and subsidiaries that it designates may borrow up to $150.0 million under the Company’s revolving credit facility. Cal Water may borrow up to $300.0$400.0 million under its revolving credit facility. On May 13, 2016, the CPUC approved additional financing for Cal Water. As part of that decision, Cal Water is now allowed to use its revolving credit facilities for up tofacility; however, all borrowings must be repaid within 24 months. Previously, Cal Water had to pay down its credit facility every 12 months unless otherwisea different period is required or authorized by the CPUC. The proceeds from the unsecured revolving credit facilities may be used for working capital purposes, including the short-term financing of utility plant projects. The base loan rate may vary from LIBOR plus 72.5 basis points to LIBOR plus 95 basis points, depending on the Company’s total capitalization ratio. Likewise, the unused commitment fee may vary from 8 basis points to 12.5 basis points based on the same ratio.
purposes.
As of SeptemberJune 30, 2017,2022 and December 31, 2021, there were short-term borrowings of $195.1$70.0 million and $35.0 million, respectively, outstanding on the unsecured revolving credit facilities compared to $57.1 million as of September 30, 2016. The increase in short-term borrowings during the first nine months of 2017 was mostly to fund general operations and capital investment.
facilities.
Given our ability to access our lines of credit on a daily basis, cash balances are managed to levels required for daily cash needs and excess cash is invested in short-term or cash equivalent instruments. Minimal operating levels of cash are maintained for Washington Water, New Mexico Water, Hawaii Water and HawaiiTexas Water.
Both short-term credit agreements contain affirmative and negative covenants and events of default customary for credit facilities of this type including, among other things, limitations and prohibitions relating to additional indebtedness, liens, mergers, and asset sales. Also, these unsecured credit agreements contain financial covenants governing the Company and its subsidiaries’ consolidated total capitalization ratio not to exceed 66.7% and an interest coverage ratio of three or more. As of SeptemberJune 30, 2017,2022, we are in compliance with all of the covenant requirements and are eligible to use the full amount of the undrawn portion of our unsecured revolving credit facilities.
In March 2016, Cal Water issued $50.0 million of First Mortgage Bonds, consisting of $40.0 million of 4.41% series SSS maturing April 16, 2046 and $10.0 million of 4.61% series TTT maturing April 14, 2056. Cash proceeds of approximately $49.7 million, net of $0.3 million debt issuance costs, were received. Cal Water used a portion of the net proceeds from the offering to repay outstanding borrowings on the Company and Cal Water lines of credit of $48.6 million.
Bond principal and other long-term debt payments were $2.8 million during the first nine months of 2017 and $2.9 million during the first nine months of 2016. In addition, Cal Water has $20.0 million of First Mortgage Bonds maturing during the fourth quarter of 2017.
Long-term financing, which includes senior notes,First Mortgage Bonds, other debt securities, and common stock, has typically been used to replace short-term borrowings and fund utility plant expenditures. Internally generated funds, after making dividend payments, provide positive cash flow, but have not been at a level to meet the needs of our utility plant expenditure requirements. Management expects this trend to continue given our planned utility plant expenditures plan for the next five years. Some utility plant expenditures are funded by payments received from developers for contributions in aid of construction or advances for construction. Funds received for contributions in aid of construction are non-refundable, whereas funds classified as advances in construction are refundable.generally refundable over 40 years. Management believes long-term financing is available to meet our cash flow needs through issuances in both debt and equity instruments.
Equity Issuance
On April 29, 2022, we entered into an equity distribution agreement to sell shares of our common stock having an aggregate gross sales price of up to $350.0 million from time to time depending on market conditions through an at-the-market equity program over the next three years. We intend to use the net proceeds from these sales, after deducting commissions on such sales and offering expenses, for general corporate purposes, which may include working capital, construction and acquisition expenditures, investments and repurchases, and redemptions of securities.
Summarized Financial Information for Guarantors and the Issuer of Guaranteed Securities.
On April 17, 2009, Cal Water (Issuer) issued $100.0 million aggregate principal amount of 5.500% First Mortgage Bonds due 2040, all of which are fully and unconditionally guaranteed by the Company (Guarantor). Certain subsidiaries of the Company do not guarantee the security and are referred to as Non-guarantors. The Guarantor fully, absolutely, irrevocably and unconditionally guarantees the due and punctual payment when due, whether at stated maturity, by acceleration, by notice of prepayment or otherwise, of the principal of, premium, if any, and interest on the bonds. The bonds rank equally among Cal Water's other First Mortgage Bonds.
The following tables present summarized financial information of the Issuer subsidiary and the Guarantor. The information presented below excludes eliminations necessary to arrive at the information on a consolidated basis. In presenting the summarized financial statements, the equity method of accounting has been applied to the Guarantor interests in the Issuer. The summarized information excludes financial information of the Non-guarantors, including earnings from and investments in these entities.
| | | | | | | | | | | | | | | | | | | | | | | |
Summarized Statement of Operations | | | | | | | |
(in thousands) | Six Months Ended June 30, 2022 | | Twelve Months Ended December 31, 2021 |
| Issuer | | Guarantor | | Issuer | | Guarantor |
Net sales | $ | 347,574 | | | $ | — | | | $ | 727,149 | | | $ | — | |
Gross profit | $ | 222,967 | | | $ | — | | | $ | 462,301 | | | $ | — | |
Income from operations | $ | 37,532 | | | $ | 53 | | | $ | 121,231 | | | $ | 181 | |
Equity in earnings of guarantor | $ | — | | | $ | 19,403 | | | $ | — | | | $ | 99,912 | |
Net income | $ | 20,765 | | | $ | 20,109 | | | $ | 94,313 | | | $ | 100,979 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Summarized Balance Sheet Information | | | | | | | |
(in thousands) | As of June 30, 2022 | | As of December 31, 2021 |
| Issuer | | Guarantor | | Issuer | | Guarantor |
Current assets | $ | 239,364 | | | $ | 6,260 | | | $ | 251,573 | | | $ | 20,077 | |
Intercompany receivable from Non-guarantors | $ | 1,959 | | | $ | 39,707 | | | $ | 3,810 | | | $ | 31,449 | |
Other assets | $ | 426,322 | | | $ | 1,016,931 | | | $ | 431,137 | | | $ | 991,173 | |
Long-term intercompany receivable from Non-issuers | $ | — | | | $ | 33,391 | | | $ | — | | | $ | 34,216 | |
Net utility plant | $ | 2,696,912 | | | $ | — | | | $ | 2,625,092 | | | $ | 24 | |
Total assets | $ | 3,364,557 | | | $ | 1,096,289 | | | $ | 3,311,612 | | | $ | 1,076,939 | |
| | | | | | | |
Current liabilities | $ | 232,473 | | | $ | 40,115 | | | $ | 211,915 | | | $ | 35,019 | |
Intercompany payable to Non-guarantors and Guarantor | $ | 2,653 | | | $ | — | | | $ | 361 | | | $ | — | |
Long-term debt | $ | 1,053,612 | | | $ | — | | | $ | 1,055,538 | | | $ | — | |
Other liabilities | $ | 1,053,818 | | | $ | 2,420 | | | $ | 1,046,647 | | | $ | 2,146 | |
Total Liabilities | $ | 2,342,556 | | | $ | 42,535 | | | $ | 2,314,461 | | | $ | 37,165 | |
Dividends
During the first ninesix months of 2017,2022, our quarterly common stock dividend payments were $0.1800$0.5000 per share compared to $0.1725$0.4600 per share during the first ninesix months of 2016.2021. For the full year 2016,2021, the payout ratio was 68%46.9% of net income. On a long-term basis, our goal is to achieve a dividend payout ratio of 60% of net income accomplished through future earnings growth.
At the October 25, 2017July 27, 2022 meeting, the Company's Board of Directors declared the fourththird quarter dividend of $0.1800$0.2500 per share payable on November 17, 2017,August 19, 2022, to stockholders of record on November 6, 2017.August 8, 2022. This was our 291st310th consecutive quarterly dividend.
20172022 Financing Plan
We intend to fund our utility plant needs in future periods through a relatively balanced approach between long-term debt and equity. The Company and Cal Water have a syndicated unsecured revolving line of credit of $150.0 million and $300.0$400.0 million, respectively, for short-term borrowings. As of SeptemberJune 30, 2017,2022, the Company’s and Cal Water’s availability on these unsecured revolving lines of credit was $94.9$110.0 million and $160.0$370.0 million, respectively.
Book Value and Stockholders of Record
Book value per common share was $14.32$22.12 at SeptemberJune 30, 20172022 compared to $13.75$21.92 at December 31, 2016.2021. There were approximately 1,9281,905 stockholders of record for our common stock as of August 7, 2017.
May 9, 2022.
Utility Plant Expenditures
During the first ninesix months of 2017,2022, utility plant expenditures totaled $180.4$144.6 million for company-fundedCompany-funded and developer-funded projects. For 2022, the Company's capital program will be dependent in part on the timing and nature of regulatory approvals in connection with Cal Water's 2021 GRC filing. The 2017 budget estimates company-funded utility plantCompany proposed to the CPUC spending $1.0 billion on water infrastructure investments in 2022-2024. Capital expenditures to be between $200.0in California are evaluated in the context of the pending GRC and $220.0 million. The actual amount may vary fromchange as the budget number due to timingcase moves forward.
As of SeptemberJune 30, 2017,2022, construction work in progress was $195.3 million compared to $164.1 million as of September 30, 2016. Work$257.2 million. Construction work in progress includes projects that are under construction but not yet complete and placed in service.
WATER SUPPLY
Our source of supply varies among our operating districts. Certain districts obtain all of their supply from wells; some districts purchase all of their supply from wholesale suppliers; and other districts obtain supply from a combination of wells and wholesale suppliers. A small portion of supply comes from surface sources and is processed through Company-owned water treatment plants. To the best of management’smanagement's knowledge, we are meeting water quality, environmental, and other regulatory standards for all company-ownedCompany-owned systems.
Historically, approximately 49%half of our annual water supply is pumped from wells. State groundwater management agencies operate differently in each state. Some of our wells extract ground water from water basins under state ordinances. These are adjudicated groundwater basins, in which a court has settled the dispute between landowners, or other parties over how much annual groundwater can be extracted by each party. All of our adjudicated groundwater basins are located in the State of California. Our annual groundwater extraction from adjudicated groundwater basins approximates 6.85.4 billion gallons or 15%10.3% of our total annual water supply pumped from wells. Historically, we have extracted less than 100% of our annual adjudicated groundwater rights and have the right to carry forward up to 20% of the unused amount to the next annual period. All of our remaining wells extract ground water from managed or unmanaged water basins. There are no set limits for the ground water extracted from these water basins; however, the state or local water management agencies have the authority to regulate the groundwater extraction quantity whenever there are unforeseen large decreases to water basin levels.basins. Our annual groundwater extraction from managed groundwater basins approximates 28.132.1 billion gallons or 59%61.1% of our total annual water supply pumped from wells. Our annual groundwater extraction from unmanaged groundwater basins approximates 12.215.0 billion gallons or 26%28.6% of our total annual water supply pumped from wells. Most of the managed groundwater basins we extract water from have groundwater recharge facilities. We are required to pay well pump taxes to financially support these groundwater recharge facilities.facilities by paying well pump taxes. Our well pump taxes were $9.6$3.8 million and $8.2 million for the nine months ended September 30, 2017 and 2016, respectively. Well pump taxes were $3.6 million and $2.8 million for the three months ended SeptemberJune 30, 20172022 and 2016,2021, respectively. For the six months ended June 30, 2022 and 2021, our well pump taxes were $8.2 million and $7.2 million, respectively. In 2014, the State of California enacted the Sustainable Groundwater Management Act of 2014. The law and its implementing regulations will require most basins to select a sustainability agency by 2017, develop a sustainability plan by 2022, and show progress toward sustainability by 2027. We expect that inafter the future,act's provisions are fully implemented, substantially all the Company's California groundwater will be produced mainly from sustainably managed and adjudicated basins.
California’sCalifornia's normal weather pattern yields little precipitation between mid-spring and mid-fall. The Washington Water service areas receive precipitation in all seasons, with the heaviest amounts during the winter. New Mexico Water’sWater's rainfall is heaviest in the summer monsoon season. Hawaii Water receives precipitation throughout the year, with the largest amounts in the winter months. Water usage in all service areas is highest during the warm and dry summers and declines in the cool winter months. Rain and snow during the winter months in California replenish underground water aquifers and fill reservoirs, providing the water supply for subsequent delivery to customers. As of September 30, 2017,June 13, 2022, the State of California snowpack water content and rainfall accumulation during the 2016 - 20172022-2023 water year was 189%is 16% of normallong-term averages (per the California Department of Water Resources, Northern Sierra Precipitation Accumulation report). In JanuaryThe northern Sierra region is the most important for the state’s urban water supplies. The central and southern portions of 2014, California's Governor Brown proclaimed a drought emergency and directed State officials to take all necessary actions to make water immediately available. On April 7, 2017, the Governor declared an end to the drought emergency in 54Sierras have recorded 0% of California’s 58 counties. Two of Cal Water's districts remain under a declared drought; these were areas where groundwater was impacted by five years of drought conditions.long-term averages. Management believes that, notwithstanding lower-than-average snowpack water content, supply pumped from underground aquifers and purchased from wholesale suppliers will be adequate to meet customer demand during 20172022 and beyond.thereafter. Long-term water supply plans are developed for each of our districts to help assure an adequate water supply under various operating and supply conditions. Some districts have unique challenges in meeting water quality standards, but management believes that supplies will meet current standards using currentcurrently available treatment processes.
On May 31, 2018, California's Governor signed two bills (Assembly Bill 1668 and Senate Bill 606) into law that will establish long-term standards for water use efficiency. The bills revise and expand the existing urban water management plan requirements to include five-year drought risk assessments, water shortage contingency plans, and annual water supply/demand assessments. The California State Water Resources Control Board, in conjunction with the California Department of Water Resources, is expected to establish long-term water use standards for indoor residential use, outdoor residential use, water losses, and other uses. Cal Water will also be required to calculate and report on urban water use target by November 1, 2023 and each November 1 thereafter, that compares actual urban water use to the target. Management believes that Cal Water is well positioned to comply with all such regulations.
CONTRACTUAL OBLIGATIONS
During the ninesix months ended SeptemberJune 30, 2017,2022, there were no material changes in contractual obligations outside the normal course of business.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not hold, trade in or issue derivative financial instruments and therefore are not exposed to risks these instruments present. Our market risk to interest rate exposure is limited because the cost of long-term financing and short-term bank borrowings, including interest costs, is covered in consumer water rates as approved by the commissions.Commissions. We do not have
foreign operations; therefore, we do not have a foreign currency exchange risk. Our business is sensitive to commodity prices and is most affected by changes in purchased water and purchased power costs.
Historically, the CPUC’s balancing account or offsetableoffsettable expense procedures allowed for increases in purchased water, pump tax, and purchased power costs to be flowed through to consumers. Traditionally, a significant percentage of our net income and cash flows comescome from California regulated operations; therefore the CPUC’s actions have a significant impact on our business. See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Matters”.Matters.”
Item 4.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(c)15d-15(e) under the Securities Exchange Act)Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’sCommission's rules and forms, and that such information is accumulated and communicated to our management, including our CEOChief Executive Officer and CFO,Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management, including the Chief Executive Officer and Chief Financial Officer, recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Accordingly, our disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives.
Our management, with the participation of our CEOChief Executive Officer and our CFO,Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 2017.2022. Based on that evaluation, we concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
(b) Changes to Internal Control over Financial Reporting
There was no change in our internal controls over financial reporting that occurred during the quarter ended SeptemberJune 30, 2017,2022, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS
From time to time, the Company is involved in various disputes and litigation matters that arise in the ordinary course of business. The status of each significant matter is reviewed and assessed for potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount of the range of loss can be reasonably estimated, a liability is accrued for the estimated loss in accordance with the accounting standards for contingencies. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. While the outcome of these disputes and litigation matters cannot be predicted with any certainty, management does not believe when taking into account existing reserves the ultimate resolution of these matters will materially affect the Company’s financial position, results of operations, or cash flows. In the future, we may be involved in disputes and litigation related to a wide range of matters, including employment, construction, environmental issues and operations. Litigation can be time consumingtime-consuming and expensive and could divert management’s time and attention from our business. In addition, if we are subject to additional lawsuits or disputes, we
might incur significant legal costs and it is uncertain whether we would be able to recover the legal costs from ratepayerscustomers or other third parties. For more information refer to footnotenote 10.
Item 1A.
RISK FACTORS
There have been no material changes to the Company’s risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year-ended December 31, 20162021 filed with the SEC on February 23, 2017.24, 2022.
Item 6.
EXHIBITS
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Exhibit | | Description |
41.1 |
| Equity Distribution Agreement, dated as of April 29, 2022, between California Water Service Group and Morgan Stanley & Co. LLC, Robert W. Baird & Co. Incorporated, Blaylock Van, LLC, Wells Fargo Securities, LLC, Janney Montgomery Scott LLC and Samuel A. Ramirez & Company, Inc. (incorporated by reference to the Company’s Form 8-K filed April 29, 2022) |
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3.1 | | |
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3.2 | | |
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3.3 | | |
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3.4 | | |
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4.0 | | The Company agrees to furnish upon request to the Securities and Exchange Commission a copy of each instrument defining the rights of holders of long-term debt of the CompanyCompany. |
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10.131.1 |
| | Credit Agreement dated as of March 10, 2015 among California Water Service Group and certain of its subsidiaries from time to time party thereto, as borrowers, Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, Merrill Lynch, Pierce, Fenner & Smith incorporated, as sole lead arranger and sole bookrunner, CoBank, ACB and U.S. Bank National Association, as co-syndication agents, and Bank of China, Los Angeles Branch, as documentation agent, and the other lender parties thereto (Exhibit 10.1 to the Current Report on Form 8-K filed March 11, 2015) |
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10.2 |
| | Credit Agreement dated as of March 10, 2015 among California Water Service Company, as borrower, Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as sole lead arranger and sole bookrunner, CoBank, ACB and U.S. Bank National Association, as co-syndication agents, and Bank of China, Los Angeles Branch, as documentation agent, and the other lender parties thereto (Exhibit 10.2 to the Current Report on Form 8-K filed March 11, 2015) |
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31.1 |
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31.2 |
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32 |
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101.INS101 |
| | XBRL Instance DocumentThe following materials from this Quarterly Report on Form 10-Q formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to the Condensed Consolidated Financial Statements. |
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101.SCH104 |
| | XBRL Taxonomy Extension Schema Document |
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101.CAL |
| | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| | XBRL Taxonomy Extension Presentation Linkbase DocumentThe cover page from this Quarterly Report on Form 10-Q formatted in iXBRL (included as exhibit 101) |
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| CALIFORNIA WATER SERVICE GROUP |
| Registrant |
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October 26, 2017 | By: | /s/ Thomas F. Smegal III |
| | Thomas F. Smegal III |
| | Vice President, |
| | Chief Financial Officer and Treasurer |
Exhibit Index
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Exhibit | | DescriptionCALIFORNIA WATER SERVICE GROUP |
4 |
| | The Company agrees to furnish upon request to the Securities and Exchange Commission a copy of each instrument defining the rights of holders of long-term debt of the CompanyRegistrant |
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10.1July 28, 2022 | By: | | Credit Agreement dated as of March 10, 2015 among California Water Service Group and certain of its subsidiaries from time to time party thereto, as borrowers, Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, Merrill Lynch, Pierce, Fenner & Smith incorporated, as sole lead arranger and sole bookrunner, CoBank, ACB and U.S. Bank National Association, as co-syndication agents, and Bank of China, Los Angeles Branch, as documentation agent, and the other lender parties thereto (Exhibit 10.1 to the Current Report on Form 8-K filed March 11, 2015) /s/ Thomas F. Smegal III |
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| | Thomas F. Smegal III |
10.2 |
| | Credit Agreement dated as of March 10, 2015 among California Water Service Company, as borrower, Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as sole lead arranger and sole bookrunner, CoBank, ACB and U.S. Bank National Association, as co-syndication agents, and Bank of China, Los Angeles Branch, as documentation agent, and the other lender parties thereto (Exhibit 10.2 to the Current Report on Form 8-K filed March 11, 2015) Vice President, |
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31.1 |
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31.2 |
| | and Treasurer |
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32 |
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101.INS |
| | XBRL Instance Document |
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101.SCH |
| | XBRL Taxonomy Extension Schema Document |
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101.CAL |
| | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| | XBRL Taxonomy Extension Presentation Linkbase DocumentOfficer) |