UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|
| | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20192020
or
|
| | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-13883
CALIFORNIA WATER SERVICE GROUP
(Exact name of registrant as specified in its charter)
|
| | | | | | | |
Delaware | | 77-0448994 |
(State or other jurisdiction | | (I.R.S. Employer identification No.) |
of incorporation or organization) | | |
1720 North First Street
San Jose,, California95112
(Address of principal executive offices)
408-367-8200408-367-8200
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | | | | | | | | | | |
Title of Each Class: | | Trading Symbol(s) | | Name of Each Exchange on Which Registered: |
Common Stock, $0.01 par value per share | | CWT | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large“large accelerated filer,,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | | | | | | | |
Large accelerated Filer filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act) Yes ☐ No x☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common shares outstanding as of September 30, 20192020 — 48,145,000
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
The condensed consolidated financial statements presented in this filing on Form 10-Q have been prepared by management and are unaudited.
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited (In thousands, except per share data)
| | | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
ASSETS | |
| | |
| ASSETS | | | |
Utility plant: | |
| | |
| Utility plant: | |
Utility plant | $ | 3,411,219 |
| | $ | 3,229,446 |
| Utility plant | $ | 3,835,194 | | | $ | 3,550,485 | |
Less accumulated depreciation and amortization | (1,067,965 | ) | | (996,723 | ) | Less accumulated depreciation and amortization | (1,238,880) | | | (1,144,115) | |
Net utility plant | 2,343,254 |
| | 2,232,723 |
| Net utility plant | 2,596,314 | | | 2,406,370 | |
Current assets: | |
| | |
| Current assets: | | | |
Cash and cash equivalents | 51,257 |
| | 47,176 |
| Cash and cash equivalents | 113,312 | | | 42,653 | |
Receivables: | |
| | |
| Receivables: | |
Customers | 45,624 |
| | 30,037 |
| |
Customers, net | | Customers, net | 53,397 | | | 32,058 | |
Regulatory balancing accounts | 33,437 |
| | 42,394 |
| Regulatory balancing accounts | 54,415 | | | 38,225 | |
Other | 16,977 |
| | 17,101 |
| |
Unbilled revenue | 42,562 |
| | 33,427 |
| |
Other, net | | Other, net | 15,056 | | | 14,187 | |
Unbilled revenue, net | | Unbilled revenue, net | 46,247 | | | 34,879 | |
Materials and supplies at weighted average cost | 7,804 |
| | 6,586 |
| Materials and supplies at weighted average cost | 8,611 | | | 7,745 | |
Taxes, prepaid expenses, and other assets | 14,395 |
| | 11,981 |
| Taxes, prepaid expenses, and other assets | 14,726 | | | 14,965 | |
Total current assets | 212,056 |
| | 188,702 |
| Total current assets | 305,764 | | | 184,712 | |
Other assets: | |
| | |
| Other assets: | | | |
Regulatory assets | 382,484 |
| | 353,569 |
| Regulatory assets | 484,435 | | | 433,322 | |
Goodwill | 2,615 |
| | 2,615 |
| Goodwill | 30,349 | | | 2,615 | |
Other assets | 82,845 |
| | 60,095 |
| Other assets | 89,572 | | | 84,289 | |
Total other assets | 467,944 |
| | 416,279 |
| Total other assets | 604,356 | | | 520,226 | |
TOTAL ASSETS | $ | 3,023,254 |
| | $ | 2,837,704 |
| TOTAL ASSETS | $ | 3,506,434 | | | $ | 3,111,308 | |
CAPITALIZATION AND LIABILITIES | |
| | |
| CAPITALIZATION AND LIABILITIES | | | |
Capitalization: | |
| | |
| Capitalization: | |
Common stock, $0.01 par value; 68,000 shares authorized, 48,145 and 48,065 outstanding in 2019 and 2018, respectively | $ | 481 |
| | $ | 481 |
| |
Common stock, $0.01 par value; 68,000 shares authorized, 49,840 and 48,532 outstanding in 2020 and 2019, respectively | | Common stock, $0.01 par value; 68,000 shares authorized, 49,840 and 48,532 outstanding in 2020 and 2019, respectively | $ | 498 | | | $ | 485 | |
Additional paid-in capital | 341,988 |
| | 337,623 |
| Additional paid-in capital | 422,391 | | | 362,275 | |
Retained earnings | 415,326 |
| | 392,053 |
| Retained earnings | 467,303 | | | 417,146 | |
Total common stockholders’ equity | 757,795 |
| | 730,157 |
| Total common stockholders’ equity | 890,192 | | | 779,906 | |
Long-term debt, net | 807,478 |
| | 710,027 |
| Long-term debt, net | 785,055 | | | 786,754 | |
Total capitalization | 1,565,273 |
| | 1,440,184 |
| Total capitalization | 1,675,247 | | | 1,566,660 | |
Current liabilities: | |
| | |
| Current liabilities: | | | |
Current maturities of long-term debt, net | 5,280 |
| | 104,911 |
| Current maturities of long-term debt, net | 21,883 | | | 21,868 | |
Short-term borrowings | 155,100 |
| | 65,100 |
| Short-term borrowings | 375,100 | | | 175,100 | |
Accounts payable | 108,593 |
| | 95,580 |
| Accounts payable | 127,158 | | | 108,463 | |
Regulatory balancing accounts | 6,887 |
| | 12,213 |
| Regulatory balancing accounts | 11,003 | | | 4,462 | |
Accrued interest | 14,410 |
| | 5,674 |
| Accrued interest | 14,233 | | | 5,810 | |
Accrued expenses and other liabilities | 43,674 |
| | 37,688 |
| Accrued expenses and other liabilities | 54,446 | | | 43,018 | |
Total current liabilities | 333,944 |
| | 321,166 |
| Total current liabilities | 603,823 | | | 358,721 | |
Unamortized investment tax credits | 1,649 |
| | 1,649 |
| |
Deferred income taxes | 229,237 |
| | 213,033 |
| Deferred income taxes | 245,456 | | | 222,590 | |
Pension and postretirement benefits other than pensions | 203,557 |
| | 193,538 |
| Pension and postretirement benefits other than pensions | 261,081 | | | 258,907 | |
Regulatory liabilities and other | 260,812 |
| | 256,522 |
| Regulatory liabilities and other | 257,054 | | | 271,831 | |
Advances for construction | 190,272 |
| | 186,342 |
| Advances for construction | 196,853 | | | 191,062 | |
Contributions in aid of construction | 238,510 |
| | 225,270 |
| Contributions in aid of construction | 266,920 | | | 241,537 | |
Commitments and contingencies (Note 10) |
|
| |
|
| Commitments and contingencies (Note 10) | |
TOTAL CAPITALIZATION AND LIABILITIES | $ | 3,023,254 |
| | $ | 2,837,704 |
| TOTAL CAPITALIZATION AND LIABILITIES | $ | 3,506,434 | | | $ | 3,111,308 | |
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited (In thousands, except per share data)
| | For the three months ended | | September 30, 2019 | | September 30, 2018 | For the three months ended | | September 30, 2020 | | September 30, 2019 |
Operating revenue | | $ | 232,537 |
| | $ | 221,288 |
| Operating revenue | | $ | 304,108 | | | $ | 232,537 | |
Operating expenses: | | |
| | |
| Operating expenses: | | | | |
Operations: | | |
| | |
| Operations: | | | | |
Water production costs | | 80,568 |
| | 78,818 |
| Water production costs | | 85,344 | | | 80,568 | |
Administrative and general | | 26,779 |
| | 26,493 |
| Administrative and general | | 29,208 | | | 26,779 | |
Other operations | | 24,550 |
| | 21,943 |
| Other operations | | 29,746 | | | 24,550 | |
Maintenance | | 7,065 |
| | 6,768 |
| Maintenance | | 7,129 | | | 7,065 | |
Depreciation and amortization | | 22,273 |
| | 21,009 |
| Depreciation and amortization | | 24,699 | | | 22,273 | |
Income taxes | | 12,194 |
| | 11,786 |
| Income taxes | | 13,804 | | | 12,194 | |
Property and other taxes | | 7,541 |
| | 7,142 |
| Property and other taxes | | 8,116 | | | 7,541 | |
Total operating expenses | | 180,970 |
| | 173,959 |
| Total operating expenses | | 198,046 | | | 180,970 | |
Net operating income | | 51,567 |
| | 47,329 |
| Net operating income | | 106,062 | | | 51,567 | |
Other income and expenses: | | |
| | |
| Other income and expenses: | | | | |
Non-regulated revenue | | 4,118 |
| | 4,703 |
| Non-regulated revenue | | 3,934 | | | 4,118 | |
Non-regulated expenses | | (4,351 | ) | | (4,897 | ) | Non-regulated expenses | | (2,865) | | | (4,351) | |
Other components of net periodic benefit cost | | (1,857 | ) | | (1,975 | ) | Other components of net periodic benefit cost | | (1,008) | | | (1,857) | |
Allowance for equity funds used during construction | | 1,868 |
| | 1,023 |
| Allowance for equity funds used during construction | | 973 | | | 1,868 | |
Income tax benefit on other income and expenses | | 330 |
| | 305 |
| |
Net other income (loss) | | 108 |
| | (841 | ) | |
Income tax (expense) benefit on other income and expenses | | Income tax (expense) benefit on other income and expenses | | (245) | | | 330 | |
Net other income | | Net other income | | 789 | | | 108 | |
Interest expense: | | |
| | |
| Interest expense: | | | | |
Interest expense | | 10,279 |
| | 10,875 |
| Interest expense | | 11,162 | | | 10,279 | |
Allowance for borrowed funds used during construction | | (1,028 | ) | | (560 | ) | Allowance for borrowed funds used during construction | | (671) | | | (1,028) | |
Net interest expense | | 9,251 |
| | 10,315 |
| Net interest expense | | 10,491 | | | 9,251 | |
Net income | | $ | 42,424 |
| | $ | 36,173 |
| Net income | | $ | 96,360 | | | $ | 42,424 | |
Earnings per share: | | 0 |
| | — |
| Earnings per share: | | | | |
Basic | | $ | 0.88 |
| | $ | 0.75 |
| Basic | | $ | 1.94 | | | $ | 0.88 | |
Diluted | | 0.88 |
| | 0.75 |
| Diluted | | 1.94 | | | 0.88 | |
Weighted average shares outstanding: | | |
| | |
| Weighted average shares outstanding: | | | | |
Basic | | 48,141 |
| | 48,070 |
| Basic | | 49,576 | | | 48,141 | |
Diluted | | 48,141 |
| | 48,070 |
| Diluted | | 49,576 | | | 48,141 | |
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited (In thousands, except per share data)
| | For the nine months ended | | September 30, 2019 | | September 30, 2018 | For the nine months ended | | September 30, 2020 | | September 30, 2019 |
Operating revenue | | $ | 537,679 |
| | $ | 530,779 |
| Operating revenue | | $ | 605,155 | | | $ | 537,679 | |
Operating expenses: | | |
| | |
| Operating expenses: | | | | |
Operations: | | |
| | |
| Operations: | | | | |
Water production costs | | 190,795 |
| | 191,797 |
| Water production costs | | 210,462 | | | 190,795 | |
Administrative and general | | 81,310 |
| | 77,195 |
| Administrative and general | | 85,827 | | | 81,310 | |
Other operations | | 64,913 |
| | 60,307 |
| Other operations | | 69,618 | | | 64,913 | |
Maintenance | | 19,212 |
| | 17,596 |
| Maintenance | | 20,924 | | | 19,212 | |
Depreciation and amortization | | 66,967 |
| | 62,677 |
| Depreciation and amortization | | 73,733 | | | 66,967 | |
Income taxes | | 13,524 |
| | 16,950 |
| Income taxes | | 10,489 | | | 13,524 | |
Property and other taxes | | 21,902 |
| | 20,253 |
| Property and other taxes | | 22,470 | | | 21,902 | |
Total operating expenses | | 458,623 |
| | 446,775 |
| Total operating expenses | | 493,523 | | | 458,623 | |
Net operating income | | 79,056 |
| | 84,004 |
| Net operating income | | 111,632 | | | 79,056 | |
Other income and expenses: | | |
| | |
| Other income and expenses: | | | | |
Non-regulated revenue | | 14,149 |
| | 13,967 |
| Non-regulated revenue | | 11,969 | | | 14,149 | |
Non-regulated expenses | | (10,470 | ) | | (16,449 | ) | Non-regulated expenses | | (11,811) | | | (10,470) | |
Other components of net periodic benefit cost | | (4,308 | ) | | (6,984 | ) | Other components of net periodic benefit cost | | (3,770) | | | (4,308) | |
Allowance for equity funds used during construction | | 5,087 |
| | 2,644 |
| Allowance for equity funds used during construction | | 4,292 | | | 5,087 | |
Income tax (expense) benefit on other income and expenses | | (985 | ) | | 1,882 |
| |
Net other income (loss) | | 3,473 |
| | (4,940 | ) | |
Income taxes on other income and expenses | | Income taxes on other income and expenses | | (152) | | | (985) | |
Net other income | | Net other income | | 528 | | | 3,473 | |
Interest expense: | | |
| | |
| Interest expense: | | | | |
Interest expense | | 33,532 |
| | 30,207 |
| Interest expense | | 33,573 | | | 33,532 | |
Allowance for borrowed funds used during construction | | (2,783 | ) | | (1,359 | ) | Allowance for borrowed funds used during construction | | (2,747) | | | (2,783) | |
Net interest expense | | 30,749 |
| | 28,848 |
| Net interest expense | | 30,826 | | | 30,749 | |
Net income | | $ | 51,780 |
| | $ | 50,216 |
| Net income | | $ | 81,334 | | | $ | 51,780 | |
Earnings per share: | | |
| | |
| Earnings per share: | | | | |
Basic | | $ | 1.08 |
| | $ | 1.04 |
| Basic | | $ | 1.66 | | | $ | 1.08 | |
Diluted | | 1.08 |
| | 1.04 |
| Diluted | | 1.66 | | | 1.08 | |
Weighted average shares outstanding: | | |
| | |
| Weighted average shares outstanding: | | | | |
Basic | | 48,121 |
| | 48,058 |
| Basic | | 49,034 | | | 48,121 | |
Diluted | | 48,121 |
| | 48,058 |
| Diluted | | 49,034 | | | 48,121 | |
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (In thousands)
| | For the nine months ended: | | September 30, 2019 | | September 30, 2018 | |
For the nine months ended | | For the nine months ended | | September 30, 2020 | | September 30, 2019 |
Operating activities: | | |
| | |
| Operating activities: | | | | |
Net income | | $ | 51,780 |
| | $ | 50,216 |
| Net income | | $ | 81,334 | | | $ | 51,780 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 68,522 |
| | 64,131 |
| Depreciation and amortization | | 75,550 | | | 68,522 | |
Change in value of life insurance contracts | | (3,433 | ) | | 124 |
| Change in value of life insurance contracts | | (621) | | | (3,433) | |
Allowance for equity funds used during construction | | (5,087 | ) | | (2,644 | ) | Allowance for equity funds used during construction | | (4,292) | | | (5,087) | |
Changes in operating assets and liabilities: | | |
| | |
| Changes in operating assets and liabilities: | | | | |
Receivables and unbilled revenue | | (29,436 | ) | | (18,471 | ) | Receivables and unbilled revenue | | (41,374) | | | (29,436) | |
Accounts payable | | 16,735 |
| | 18,133 |
| Accounts payable | | 7,199 | | | 16,735 | |
Other current assets | | (3,937 | ) | | (1,392 | ) | Other current assets | | (536) | | | (3,937) | |
Other current liabilities | | 11,597 |
| | 8,762 |
| Other current liabilities | | 16,304 | | | 11,597 | |
Other changes in noncurrent assets and liabilities | | 21,602 |
| | 644 |
| Other changes in noncurrent assets and liabilities | | (36,900) | | | 21,602 | |
Net cash provided by operating activities | | 128,343 |
| | 119,503 |
| Net cash provided by operating activities | | 96,664 | | | 128,343 | |
Investing activities: | | |
| | |
| Investing activities: | | | | |
Utility plant expenditures | | (194,942 | ) | | (212,856 | ) | Utility plant expenditures | | (221,261) | | | (194,942) | |
Life insurance proceeds | | — |
| | 3,491 |
| |
Purchase of life insurance contracts | | (2,216 | ) | | (4,925 | ) | Purchase of life insurance contracts | | (2,335) | | | (2,216) | |
Business acquisition, net of cash acquired | | Business acquisition, net of cash acquired | | (39,544) | | | 0 | |
Net cash used in investing activities | | (197,158 | ) | | (214,290 | ) | Net cash used in investing activities | | (263,140) | | | (197,158) | |
Financing activities: | | |
| | |
| Financing activities: | | | | |
Short-term borrowings | | 210,000 |
| | 141,000 |
| Short-term borrowings | | 270,000 | | | 210,000 | |
Repayment of short-term borrowings | | (120,000 | ) | | (341,000 | ) | Repayment of short-term borrowings | | (70,000) | | | (120,000) | |
Issuance of long-term debt, net of expenses of $1,569 for 2019 and $617 for 2018 | | 398,431 |
| | 299,383 |
| |
Issuance of long-term debt, net of expenses of $1,569 for 2019 | | Issuance of long-term debt, net of expenses of $1,569 for 2019 | | 0 | | | 398,431 | |
Repayment of long-term debt | | (401,630 | ) | | (12,499 | ) | Repayment of long-term debt | | (1,535) | | | (401,630) | |
Advances and contributions in aid of construction | | 21,266 |
| | 13,630 |
| Advances and contributions in aid of construction | | 19,862 | | | 21,266 | |
Refunds of advances for construction | | (5,560 | ) | | (5,462 | ) | Refunds of advances for construction | | (7,017) | | | (5,560) | |
Repurchase of common stock | | (2,355 | ) | | (1,496 | ) | Repurchase of common stock | | (1,578) | | | (2,355) | |
Issuance of common stock | | 1,278 |
| | — |
| Issuance of common stock | | 58,573 | | | 1,278 | |
Dividends paid | | (28,507 | ) | | (27,029 | ) | Dividends paid | | (31,177) | | | (28,507) | |
Net cash provided by financing activities | | 72,923 |
| | 66,527 |
| Net cash provided by financing activities | | 237,128 | | | 72,923 | |
Change in cash, cash equivalents, and restricted cash | | 4,108 |
| | (28,260 | ) | Change in cash, cash equivalents, and restricted cash | | 70,652 | | | 4,108 | |
Cash, cash equivalents, and restricted cash at beginning of period | | 47,715 |
| | 95,352 |
| Cash, cash equivalents, and restricted cash at beginning of period | | 43,298 | | | 47,715 | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 51,823 |
| | $ | 67,092 |
| Cash, cash equivalents, and restricted cash at end of period | | $ | 113,950 | | | $ | 51,823 | |
Supplemental information: | | |
| | |
| Supplemental information: | | | | |
Cash paid for interest (net of amounts capitalized) | | $ | 22,060 |
| | $ | 19,956 |
| Cash paid for interest (net of amounts capitalized) | | $ | 21,862 | | | $ | 22,060 | |
Supplemental disclosure of non-cash activities: | | |
| | |
| Supplemental disclosure of non-cash activities: | | | | |
Accrued payables for investments in utility plant | | $ | 31,676 |
| | $ | 32,328 |
| Accrued payables for investments in utility plant | | $ | 47,015 | | | $ | 31,676 | |
Utility plant contribution by developers | | $ | 23,955 |
| | $ | 14,807 |
| Utility plant contribution by developers | | $ | 22,762 | | | $ | 23,955 | |
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
CALIFORNIA WATER SERVICE GROUP
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 20192020
Dollar amounts in thousands unless otherwise stated
Note 1. Organization and Operations and Basis of Presentation
California Water Service Group (the Company) is a holding company that provides water utility and other related services in California, Washington, New Mexico and Hawaii through its wholly-owned subsidiaries. California Water Service Company (Cal Water), Washington Water Service Company (Washington Water), New Mexico Water Service Company (New Mexico Water), and Hawaii Water Service Company, Inc. (Hawaii Water) provide regulated utility services under the rules and regulations of their respective state’s regulatory commissions (jointly referred to herein as the Commissions). CWS Utility Services and HWS Utility Services LLC provide non-regulated water utility and utility-related services.
The Company operates in 1 reportable segment, providing water and related utility services.
Basis of Presentation
The unaudited condensed consolidated interim financial information has been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (SEC) and therefore do not contain all of the information and footnotes required by GAAP and the SEC for annual financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 20182019 as filed with the SEC on February 28, 2019.27, 2020.
The preparation of the Company’s unaudited condensed consolidated interim financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses for the periods presented. These include, but are not limited to, estimates and assumptions used in determining the Company’s regulatory asset and liability balances based upon probability assessments of regulatory recovery, revenues earned but not yet billed, asset retirement obligations, allowance for doubtful accounts,credit losses, pension and other employee benefit plan liabilities, and income tax-related assets and liabilities. Actual results could differ from these estimates.
In the opinion of management, the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of normal recurring transactions that are necessary to provide a fair presentation of the results for the periods covered.
Due to the seasonal nature of the water business, the results for interim periods are not indicative of the results for a 12-month period. Revenue and income are generally higher in the warm, dry summer months when water usage and sales are greater. Revenue and income are generally lower in the winter months when cooler temperatures and rainfall curtail water usage and sales.
Note 2. Summary of Significant Accounting Policies
Operating revenue
The following tables disaggregate the Company’s operating revenue by source for the three and nine months ended September 30, 20192020 and 2018:2019:
| | | | | | | | | | | |
| Three Months Ended September 30 |
| 2020 | | 2019 |
Revenue from contracts with customers | $ | 222,474 | | | $ | 214,963 | |
Regulatory balancing account revenue (a) | 81,634 | | | 17,574 | |
Total operating revenue | $ | 304,108 | | | $ | 232,537 | |
| | | Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2019 | | 2018 | | 2020 | | 2019 |
Revenue from contracts with customers | $ | 214,963 |
| | $ | 209,541 |
| Revenue from contracts with customers | $ | 529,804 | | | $ | 499,840 | |
Regulatory balancing account revenue | 17,574 |
| | 11,747 |
| |
Regulatory balancing account revenue (a) | | Regulatory balancing account revenue (a) | 75,351 | | | 37,839 | |
Total operating revenue | $ | 232,537 |
| | $ | 221,288 |
| Total operating revenue | $ | 605,155 | | | $ | 537,679 | |
|
| | | | | | | |
| Nine Months Ended September 30 |
| 2019 | | 2018 |
Revenue from contracts with customers | $ | 499,840 |
| | $ | 515,567 |
|
Regulatory balancing account revenue | 37,839 |
| | 15,212 |
|
Total operating revenue | $ | 537,679 |
| | $ | 530,779 |
|
(a) The adjustments for the Company’s Water Revenue Adjustment Mechanism (WRAM), Modified Cost Balancing Account (MCBA), Pension Cost Balancing Account (PCBA), and Health Cost Balancing Account (HCBA) for the first six months ended June 30, 2020 were recorded in the three months ended September 30, 2020 as the Company received a proposed decision for its 2018 General Rate Case for Cal Water (2018 GRC) in October of 2020. The Company also recorded an adjustment for its interim rate memorandum account (IRMA) where it was authorized to track the effect of the delay in the resolution of the 2018 GRC on customer billings.Revenue from contracts with customers
The Company principally generates operating revenue from contracts with customers by providing regulated water and wastewater services at tariff-rates authorized by the Commissions in the states in which they operate and non-regulated water and wastewater services at rates authorized by contracts with government agencies. Revenue from contracts with customers reflects amounts billed for the volume of consumption at authorized per unit rates, for a service charge, and for other authorized charges.
The Company satisfies its performance obligation to provide water and wastewater services over time as services are rendered. The Company applies the invoice practical expedient and recognizes revenue from contracts with customers in the amount for which the Company has a right to invoice. The Company has a right to invoice for the volume of consumption, for the service charge, and for other authorized charges.
The measurement of sales to customers is generally based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, the Company estimates consumption since the date of the last meter reading and a corresponding unbilled revenue is recognized. The estimate is based upon the number of unbilled days that month and the average daily customer billing rate from the previous month (which fluctuates based upon customer usage).
Contract terms are generally short-term and at will by customers and, as a result, no separate financing component is recognized for the Company's collections from customers, which generally require payment within 30 days of billing. The Company applies judgment, based principally on historical payment experience, in estimating its customers’ ability to pay.
Certain customers are not billed for volumetric consumption, but are instead billed a flat rate at the beginning of each monthly service period. The amount billed is initially deferred and subsequently recognized over the monthly service period, as the performance obligation is satisfied. The deferred revenue balance or contract liability, which is included in "accrued expenses and other liabilities" on the condensed consolidated balance sheets, is inconsequential.
In the following tables, revenue from contracts with customers is disaggregated by class of customers for the three and nine months ended September 30, 20192020 and 2018:2019:
| | | | | | | | | | | |
| Three Months Ended September 30 |
| 2020 | | 2019 |
Residential | $ | 151,938 | | | $ | 139,137 | |
Business | 36,951 | | | 38,247 | |
Industrial | 7,496 | | | 9,077 | |
Public authorities | 12,862 | | | 12,482 | |
Other (a) | 13,227 | | | 16,020 | |
Total revenue from contracts with customers | $ | 222,474 | | | $ | 214,963 | |
|
| | | | | | | |
| Three Months Ended September 30 |
| 2019 | | 2018 |
Residential | $ | 139,137 |
| | $ | 138,939 |
|
Business | 38,247 |
| | 38,538 |
|
Industrial | 9,077 |
| | 8,987 |
|
Public authorities | 12,482 |
| | 12,180 |
|
Other (a) | 16,020 |
| | 10,897 |
|
Total revenue from contracts with customers | $ | 214,963 |
| | $ | 209,541 |
|
|
| | | | | | | |
| Nine Months Ended September 30 |
| 2019 | | 2018 |
Residential | $ | 330,745 |
| | $ | 340,107 |
|
Business | 95,433 |
| | 97,720 |
|
Industrial | 23,866 |
| | 24,507 |
|
Public authorities | 24,566 |
| | 25,875 |
|
Other (a) | 25,230 |
| | 27,358 |
|
Total revenue from contracts with customers | $ | 499,840 |
| | $ | 515,567 |
|
| | | | | | | | | | | |
| Nine Months Ended September 30 |
| 2020 | | 2019 |
Residential | $ | 360,935 | | | $ | 330,745 | |
Business | 93,175 | | | 95,433 | |
Industrial | 21,996 | | | 23,866 | |
Public authorities | 26,470 | | | 24,566 | |
Other (a) | 27,228 | | | 25,230 | |
Total revenue from contracts with customers | $ | 529,804 | | | $ | 499,840 | |
(a) Other includes the accrued unbilled revenue.
Regulatory balancing account revenue
The Company’s ability to recover revenue requirements authorized by the California Public Utilities Commission (CPUC) in its triennial General Rate Casegeneral rate case (GRC), is decoupled from the volume of the sales. Regulatory balancing account revenue is revenue related to rate mechanisms authorized in California by the CPUC, which allow the Company to recover the authorized revenue and are not considered contracts with customers. These mechanisms include the following:
The Water Revenue Adjustment Mechanism (WRAM)WRAM allows the Company to recognize the adopted level of volumetric revenues. The variance between adopted volumetric revenues and actual billed volumetric revenues for metered accounts is recorded as regulatory balancing accountrevenue.
Cost-recovery rates, such as the Modified CostMCBA, Conservation Expense Balancing Account (MCBA)(CEBA), PCBA, and HCBA, generally provide for recovery of the adopted levels of expenses for purchased water, purchased power, pump taxes, water conservation program costs, pension, and health care. Variances between adopted and actual costs are recorded as regulatory balancing account revenue.
Due to the delay in the resolution of the 2018 GRC, the CPUC authorized Cal Water to track the effect of the delay on customer billings in IRMA effective January 1, 2020. Variances between actual customer billings and those that would have been billed assuming the GRC had been effective January 1, 2020 are recorded as regulatory balancing account revenue. In the third quarter of 2020, Cal Water determined that the IRMA met regulatory asset recognition criteria under accounting standards for regulated utilities.
Each district's WRAM and MCBA regulatory assets and liabilities are allowed to be netted against one another. The Company recognizes regulatory balancing account revenues that have been authorized for rate recovery, are objectively determinable and probable of recovery, and are expected to be collected within 24 months. To the extent that regulatory balancing account revenue is estimated to be collectible beyond 24 months, recognition is deferred.
Non-regulated Revenue
The following tables disaggregate the Company’s non-regulated revenue by source for the three and nine months ended September 30, 20192020 and 2018:2019:
| | | | | | | | | | | |
| Three Months Ended September 30 |
| 2020 | | 2019 |
Operating and maintenance revenue | $ | 2,680 | | | $ | 2,929 | |
Other non-regulated revenue | 625 | | | 626 | |
Non-regulated revenue from contracts with customers | $ | 3,305 | | | $ | 3,555 | |
Lease revenue | $ | 629 | | | $ | 563 | |
Total non-regulated revenue | $ | 3,934 | | | $ | 4,118 | |
|
| | | | | | | |
| Three Months Ended September 30 |
| 2019 | | 2018 |
Operating and maintenance revenue | $ | 2,929 |
| | $ | 2,816 |
|
Other non-regulated revenue | 626 |
| | 1,328 |
|
Non-regulated revenue from contracts with customers | $ | 3,555 |
| | $ | 4,144 |
|
Lease revenue | $ | 563 |
| | $ | 559 |
|
Total non-regulated revenue | $ | 4,118 |
| | $ | 4,703 |
|
|
| | | | | | | |
| Nine Months Ended September 30 |
| 2019 | | 2018 |
Operating and maintenance revenue | $ | 9,248 |
| | $ | 8,278 |
|
Other non-regulated revenue | 3,189 |
| | 4,053 |
|
Non-regulated revenue from contracts with customers | $ | 12,437 |
| | $ | 12,331 |
|
Lease revenue | $ | 1,712 |
| | $ | 1,636 |
|
Total non-regulated revenue | $ | 14,149 |
| | $ | 13,967 |
|
| | | | | | | | | | | |
| Nine Months Ended September 30 |
| 2020 | | 2019 |
Operating and maintenance revenue | $ | 7,969 | | | $ | 9,248 | |
Other non-regulated revenue | 2,223 | | | 3,189 | |
Non-regulated revenue from contracts with customers | $ | 10,192 | | | $ | 12,437 | |
Lease revenue | $ | 1,777 | | | $ | 1,712 | |
Total non-regulated revenue | $ | 11,969 | | | $ | 14,149 | |
Operating and maintenance services are provided for non-regulated water and wastewater systems owned by private companies and municipalities. The Company negotiates formal agreements with the customers, under which they provide operating, maintenance and customer billing services related to the customers’ water system. The formal agreements outline the fee schedule for the services provided. The agreements typically call for a fee-per-service or a flat-rate amount per month. The Company satisfies its performance obligation of providing operating and maintenance services over time as services are rendered; as a result, the Company employs the invoice practical expedient and recognizes revenue in the amount that it has the right to invoice. Contract terms are generally short-term and, as a result, no separate financing component is recognized for its collections from customers, which generally require payment within 30 days of billing.
Other non-regulated revenue primarily relates to services for the design and installation of water mains and other water infrastructure for customers outside the regulated service areas and insurance program administration.
Lease revenue is not considered revenue from contracts with customers and is recognized following operating lease standards. The Company is the lessor in operating lease agreements with telecommunications companies under which cellular phone antennas are placed on the Company's property. The company provides the lessee the right to ingress and egress across lessor property to access the antennas. The minimum rents are recognized on a straight-line basis over the terms of the leases, which may span multiple years. The excess rents are recognized over amounts contractually due pursuant to the underlying leases and is included in a deferred receivable account in the accompanying balance sheet. The
leases generally have terms of5 to 10 years, with lessee options to extend the leaseAllowance for up to15 years. The exercise of lease renewal options is at the lessee’s sole discretion. Most of the Company’s lease agreements contain mutual termination options that require prior written notice by either lessee or lessor. A subset of the Company’s leases contains variable lease payments that depend on changes in the consumer price index (CPI).credit losses
The Company determines ifmeasures expected credit losses for Customer Receivables, Other Receivables, and Unbilled Revenue on an arrangementaggregated level. These receivables are generally trade receivables due in one year or less or expected to be billed and collected in one year or less. The expected credit losses for Other Receivables and Unbilled Revenue are inconsequential. Customer receivables include receivables for water and wastewater services provided to residential customers, business, industrial, public authorities, and other customers. The overall risks related to the Company’s receivables are low as water and wastewater services are seen as essential services. The estimate for the allowance for credit losses is based on a lease at inception. Generally,historical loss ratio, in conjunction with a lease agreement existsqualitative assessment of elements that impact the collectability of receivables to determine if the Company determinesallowance for credit losses should be further adjusted in accordance with the accounting guidance for credit losses. Management contemplates available current information such as changes in economic factors, regulatory matters, industry trends, payment options and programs available to customers, and the methods that the arrangement givesCompany is able to utilize to ensure payment.
During the lessee control overthird quarter of 2020, the useCompany reviewed its allowance for credit losses utilizing a quantitative assessment, which included trend analysis of an identified assetcustomer billing and obtains substantially allcollection, aging by customer class, and unemployment rates since the outbreak of COVID-19 in the first quarter of 2020. The Company also utilized a qualitative assessment, which considered the future collectability on customer outstanding balances, management's estimate of the benefits fromcash recovery, and a general assessment of the identified asset.economic conditions of the locations the Company serves due to the outbreak of COVID-19. The Company is complying with the CPUC requirements to suspend customer disconnections for non-payment and ceased agency collection activities, and anticipates this situation will continue until April 1, 2021. Based on the above assessments, the Company expects an increase in customer receivable write-offs as compared to historical experiences and adjusted its allowance for credit losses, accordingly.
Maturities of lease payments to be received are as follows:The following table presents the activity in the allowance for credit losses for the period ended September 30, 2020:
|
| | | |
Year Ending December 31, | Operating Leases |
2019 | $ | 3,153 |
|
2020 | 2,587 |
|
2021 | 1,880 |
|
2022 | 1,078 |
|
2023 | 584 |
|
Thereafter | 871 |
|
| | | | | |
Allowance for credit losses | As of September 30, 2020 |
Beginning balance | 771 | |
Provision for credit loss expense | 2,895 | |
Write-offs | (1,317) | |
Recoveries | 396 | |
Total ending allowance balance | $ | 2,745 | |
Cash, Cash Equivalents, and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown on the Condensed Consolidated Statements of Cash Flows:
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Cash and cash equivalents | 51,257 |
| | 47,176 |
|
Restricted cash (included in "taxes, prepaid expenses and other assets") | 566 |
| | 539 |
|
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows | $ | 51,823 |
| | $ | 47,715 |
|
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
Cash and cash equivalents | 113,312 | | | 42,653 | |
Restricted cash (included in "taxes, prepaid expenses and other assets") | 638 | | | 645 | |
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows | $ | 113,950 | | | $ | 43,298 | |
Adoption of New Accounting Standards
In FebruaryJune of 2016, the FASB issued ASU 2016-13, Financial Accounting Standards Board (FASB) issued guidanceInstruments - Credit Losses (Topic 326): Measurement of Credit Losses on leases,Financial Instruments, which changed the impairment model for certain financial assets that have a contractual right to receive cash, including trade and loan receivables. The new model required recognition based upon an estimation of expected credit losses rather than recognition of losses when it is probable that they have been incurred. ASU 2016-13 was effective for annual reporting periods beginning after December 15, 2019, with amendments in 2018. The guidance requires lessees to recognize an asset and liability on the balance sheet for all of their lease obligations. Operating leases were previously not recognized on the balance sheet.
early adoption permitted. The Company adopted the standard usingutilizing the modified retrospective method for its existing leasestrade receivables and did not restate its comparative periods inunbilled revenue on January 1, 2020. Based on the periodcomposition of adoption. The Company completed its review of its lease portfolio including significant leasesthe Company’s trade receivables and the Company designedunbilled revenue, and implemented new controls as part ofexpected future losses, the adoption of ASU 2016-13 did not have a material impact on its consolidated financial statements.
In January of 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminated the second step of the goodwill impairment test that required a hypothetical purchase price allocation to measure goodwill impairment. Under the new standard. The implementation increased lease assets and lease liabilitiesguidance, a goodwill impairment loss will be measured at the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 was effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted for any impairment test performed on the Consolidated Balance Sheets by $13.8 million as oftesting dates after January 1, 2019.
2017. The Company elected certain practical expedientsadopted the standard on January 1, 2020 and carried forward historical conclusions related to (1) contracts that contain leases, (2) existing lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. The Company also applied the practical expedient that allows the Company to elect, as an accounting policy, by asset class, to include both lease and non-lease components as a single component and account for it as a lease. The Company applied the short-term lease exception which allowed the Company to not have to apply the recognition requirementsadoption of the new leasing guidance for short-term leases and to recognize lease payments in net income on a straight-line basis over the lease term. Otherwise, the new standard did not have a material impact on the remainingits consolidated financial statements.
In August of 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure for Fair Value Measurement, which modified the disclosure requirements on fair value measurements. The modifications in this update eliminated, amended, and added disclosure requirements for fair value measurements. ASU 2018-13 was effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company adopted the standard in part prospectively and in part retrospectively, in accordance with the requirements of ASU 2018-13, on January 1, 2020. Since the Company does not have level 3 fair value measurements or transfers between level 1 and level 2 fair value measurements, the adoption of the standard did not have a material impact on its footnote disclosures.
Note 3. Stock-based Compensation
Equity Incentive Plan
The following table lists the number of annual Restricted Stock Awards (RSAs) granted and canceled during the three and nine months ended September 30, 20192020 and 2018:2019:
| | | Three Months Ended September 30 | | Nine Months Ended September 30 | | Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
RSAs granted | — |
| | 1,138 |
| | 36,183 |
| | 47,273 |
| RSAs granted | 0 | | | 0 | | | 39,915 | | | 36,183 | |
RSAs canceled | 2,739 |
| | 3,214 |
| | 14,394 |
| | 16,520 |
| RSAs canceled | 2,153 | | | 2,739 | | | 9,338 | | | 14,394 | |
During the first nine months of 20192020 and 2018,2019, the RSAs granted were valued at $52.83$51.41 and $35.40$52.83 per share, respectively, based upon the fair value of the Company’s common stock on the date of grant. RSAs granted to officers vest over 36 months with the first year cliff vesting. RSAs granted to directors generally cliff vest at the end of 12 months.
The following table lists the number of performance-based Restricted Stock Unit Awards (RSUs) granted, issued, and canceled during the three and nine months ended September 30, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2020 | | 2019 | | 2020 | | 2019 |
RSUs granted | 0 | | | 0 | | | 32,720 | | | 26,473 | |
RSUs issued | 0 | | | 0 | | | 41,731 | | | 62,726 | |
RSUs canceled | 0 | | | 0 | | | 22,936 | | | 31,177 | |
|
| | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
RSUs granted | — |
| | — |
| | 26,473 |
| | 28,594 |
|
RSUs issued | — |
| | — |
| | 62,726 |
| | 48,753 |
|
RSUs canceled | — |
| | — |
| | 31,177 |
| | 24,009 |
|
The 2019 and 2018 awardsEach RSU award reflects a target number of shares that may be earnedissued to the award recipient. The 2020 and 2019 RSUs granted may be issued upon completion of the three-year performance period and are recognized as expense ratably over the period using a fair value of $52.83$51.41 per share and $35.40$52.83 per share, respectively, and an estimate of RSUs earned during the period.
The Company has recorded compensation costs for the RSAs and RSUs in administrative and general operating expenses in the amount of $5.3$1.8 million and $2.3$1.4 million for the three months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 20192020 and 2018, respectively. For the three months ended September 30, 2019, and 2018, the Company has recorded compensation costs for the RSAs and RSUs in the amount of $1.4$3.1 million and $0.8$5.3 million, respectively.
Note 4. Equity
On October 31, 2019,The Company sold 432,420 shares of common stock through its at-the-market equity program and raised proceeds of $20.1 million net of $0.2 million in commissions paid under the Company entered into an equity distribution agreement with Morgan Stanley & Co., LLC, Robert W. Baird & Co. Incorporated, Blaylock Van, LLC and Wells Fargo Securities, LLC to sellduring the three months ended September 30, 2020. During the nine months ended September 30, 2020, the Company sold 1,225,572 shares of its common stock having an aggregate gross sales price of up to $300.0 million from time to time depending on market conditions through anits at-the-market equity program overand raised proceeds of $57.3 million net of $0.6 million in commissions paid under the next three years. The Company intends 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 redemptionsequity distribution agreement.
The Company’s changes in total common stockholders’ equity for the nine months ended September 30, 20192020 and 20182019 were as follows:
|
| | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2019 |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Total Stockholders' Equity |
| Shares | | Amount | | | |
| (In thousands) |
Balance at January 1, 2019 | 48,065 |
| | $ | 481 |
| | $ | 337,623 |
| | $ | 392,053 |
| | $ | 730,157 |
|
Net loss | | | | | | | (7,640 | ) | | (7,640 | ) |
Issuance of common stock | 109 |
| | — |
| | 3,179 |
| | — |
| | 3,179 |
|
Repurchase of common stock | (40 | ) | | — |
| | (2,074 | ) | | — |
| | (2,074 | ) |
Dividends paid on common stock ($0.1975 per share) | | | | | | | (9,493 | ) | | (9,493 | ) |
Balance at March 31, 2019 | 48,134 |
| | 481 |
| | 338,728 |
| | 374,920 |
| | 714,129 |
|
Net income | | | | | | | 16,996 |
| | 16,996 |
|
Issuance of common stock | 8 |
| | — |
| | 1,675 |
| | — |
| | 1,675 |
|
Repurchase of common stock | (2 | ) | | — |
| | (129 | ) | | — |
| | (129 | ) |
Dividends paid on common stock ($0.1975 per share) | | | | | | | (9,507 | ) | | (9,507 | ) |
Balance at June 30, 2019 | 48,140 |
| | 481 |
| | 340,274 |
| | 382,409 |
| | 723,164 |
|
Net income | | | | | | | 42,424 |
| | 42,424 |
|
Issuance of common stock | 9 |
| | — |
| | 1,866 |
| | — |
| | 1,866 |
|
Repurchase of common stock | (4 | ) | | — |
| | (152 | ) | | — |
| | (152 | ) |
Dividends paid on common stock ($0.1975 per share) | | | | | | | (9,507 | ) | | (9,507 | ) |
Balance at September 30, 2019 | 48,145 |
| | 481 |
| | 341,988 |
| | 415,326 |
| | 757,795 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2020 |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Total Stockholders' Equity |
| Shares | | Amount | | | |
| (In thousands) |
Balance at January 1, 2020 | 48,532 | | | $ | 485 | | | $ | 362,275 | | | $ | 417,146 | | | $ | 779,906 | |
Net loss | | | | | | | (20,307) | | | (20,307) | |
Issuance of common stock | 210 | | | 2 | | | 7,227 | | | | | 7,229 | |
Repurchase of common stock | (28) | | | — | | | (1,373) | | | | | (1,373) | |
Dividends paid on common stock ($0.2125 per share) | | | | | | | (10,315) | | | (10,315) | |
Balance at March 31, 2020 | 48,714 | | | 487 | | | 368,129 | | | 386,524 | | | 755,140 | |
Net income | | | | | | | 5,281 | | | 5,281 | |
Issuance of common stock | 686 | | | 7 | | | 32,056 | | | | | 32,063 | |
Repurchase of common stock | (2) | | | — | | | (105) | | | | | (105) | |
Dividends paid on common stock ($0.2125 per share) | | | | | | | (10,356) | | | (10,356) | |
Balance at June 30, 2020 | 49,398 | | | 494 | | | 400,080 | | | 381,449 | | | 782,023 | |
Net income | | | | | | | 96,360 | | | 96,360 | |
Issuance of common stock | 444 | | | 4 | | | 22,410 | | | | | 22,414 | |
Repurchase of common stock | (2) | | | — | | | (99) | | | | | (99) | |
Dividends paid on common stock ($0.2125 per share) | | | | | | | (10,506) | | | (10,506) | |
Balance at September 30, 2020 | 49,840 | | | 498 | | | 422,391 | | | 467,303 | | | 890,192 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2019 |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Total Stockholders' Equity |
| Shares | | Amount | | | |
| (In thousands) |
Balance at January 1, 2019 | 48,065 | | | $ | 481 | | | $ | 337,623 | | | $ | 392,053 | | | $ | 730,157 | |
Net loss | | | | | | | (7,640) | | | (7,640) | |
Issuance of common stock | 109 | | | — | | | 3,179 | | | | | 3,179 | |
Repurchase of common stock | (40) | | | — | | | (2,074) | | | | | (2,074) | |
Dividends paid on common stock ($0.1975 per share) | | | | | | | (9,493) | | | (9,493) | |
Balance at March 31, 2019 | 48,134 | | | 481 | | | 338,728 | | | 374,920 | | | 714,129 | |
Net income | | | | | | | 16,996 | | | 16,996 | |
Issuance of common stock | 8 | | | — | | | 1,675 | | | | | 1,675 | |
Repurchase of common stock | (2) | | | — | | | (129) | | | | | (129) | |
Dividends paid on common stock ($0.1975 per share) | | | | | | | (9,507) | | | (9,507) | |
Balance at June 30, 2019 | 48,140 | | | 481 | | | 340,274 | | | 382,409 | | | 723,164 | |
Net income | | | | | | | 42,424 | | | 42,424 | |
Issuance of common stock | 9 | | | — | | | 1,866 | | | — | | | 1,866 | |
Repurchase of common stock | (4) | | | — | | | (152) | | | — | | | (152) | |
Dividends paid on common stock ($0.1975 per share) | | | | | | | (9,507) | | | (9,507) | |
Balance at September 30, 2019 | 48,145 | | | 481 | | | 341,988 | | | 415,326 | | | 757,795 | |
|
| | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2018 |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Total Stockholders' Equity |
| Shares | | Amount | | | |
| (In thousands) |
Balance at January 1, 2018 | 48,012 |
| | $ | 480 |
| | $ | 336,229 |
| | $ | 362,512 |
| | $ | 699,221 |
|
Net loss | | | | | | | (762 | ) | | (762 | ) |
Issuance of common stock | 95 |
| | 1 |
| | 635 |
| | — |
| | 636 |
|
Repurchase of common stock | (33 | ) | | — |
| | (1,239 | ) | | — |
| | (1,239 | ) |
Dividends paid on common stock ($0.1875 per share) | | | | | | | (9,003 | ) | | (9,003 | ) |
Balance at March 31, 2018 | 48,074 |
|
| 481 |
| | 335,625 |
| | 352,747 |
| | 688,853 |
|
Net income | | | | | | | 14,805 |
| | 14,805 |
|
Issuance of common stock | — |
| | — |
| | 737 |
| | — |
| | 737 |
|
Repurchase of common stock | (4 | ) | | — |
| | (124 | ) | | — |
| | (124 | ) |
Dividends paid on common stock ($0.1875 per share) | | | | | | | (9,014 | ) | | (9,014 | ) |
Balance at June 30, 2018 | 48,070 |
| | 481 |
| | 336,238 |
| | 358,538 |
| | 695,257 |
|
Net income | | | | | | | 36,173 |
| | 36,173 |
|
Issuance of common stock | 1 |
| | — |
| | 853 |
| | — |
| | 853 |
|
Repurchase of common stock | (3 | ) | | — |
| | (131 | ) | | — |
| | (131 | ) |
Dividends paid on common stock ($0.1875 per share) | | | | | | | (9,012 | ) | | (9,012 | ) |
Balance at September 30, 2018 | 48,068 |
| | 481 |
| | 336,960 |
| | 385,699 |
| | 723,140 |
|
13
Note 5. Earnings Per Share
The computations of basic and diluted earnings per share are noted in the table below. Basic earnings per share are computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding during the period. RSAs are included in the weighted average common shares outstanding because the shares have all the same voting and dividend rights as issued and unrestricted common stock. RSUs are not included in diluted shares for financial reporting until authorized by the Organization & Compensation Committee of the Board of Directors.
| | | | | | | | | | | |
| Three Months Ended September 30 |
| 2020 | | 2019 |
| (In thousands, except per share data) |
Net income available to common stockholders | $ | 96,360 | | | $ | 42,424 | |
Weighted average common shares outstanding, basic | 49,576 | | | 48,141 | |
Weighted average common shares outstanding, dilutive | 49,576 | | | 48,141 | |
Earnings per share - basic | $ | 1.94 | | | $ | 0.88 | |
Earnings per share - diluted | $ | 1.94 | | | $ | 0.88 | |
| | | | | | | | | | | |
| Nine Months Ended September 30 |
| 2020 | | 2019 |
| (In thousands, except per share data) |
Net income available to common stockholders | $ | 81,334 | | | $ | 51,780 | |
Weighted average common shares outstanding, basic | 49,034 | | | 48,121 | |
Weighted average common shares outstanding, dilutive | 49,034 | | | 48,121 | |
Earnings per share - basic | $ | 1.66 | | | $ | 1.08 | |
Earnings per share - diluted | $ | 1.66 | | | $ | 1.08 | |
| | | |
|
| | | | | | | |
| Three Months Ended September 30 |
| 2019 | | 2018 |
| (In thousands, except per share data) |
Net income available to common stockholders | $ | 42,424 |
| | $ | 36,173 |
|
Weighted average common shares outstanding, basic | 48,141 |
| | 48,070 |
|
Weighted average common shares outstanding, dilutive | 48,141 |
| | 48,070 |
|
Earnings per share - basic | $ | 0.88 |
| | $ | 0.75 |
|
Earnings per share - diluted | $ | 0.88 |
| | $ | 0.75 |
|
|
| | | | | | | |
| Nine Months Ended September 30 |
| 2019 | | 2018 |
| (In thousands, except per share data) |
Net income available to common stockholders | $ | 51,780 |
| | $ | 50,216 |
|
Weighted average common shares outstanding, basic | 48,121 |
| | 48,058 |
|
Weighted average common shares outstanding, dilutive | 48,121 |
| | 48,058 |
|
Earnings per share - basic | $ | 1.08 |
| | $ | 1.04 |
|
Earnings per share - diluted | $ | 1.08 |
| | $ | 1.04 |
|
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.
Cash contributions made by the Company related to the pension plans were $12.5$25.8 million and $42.3$12.5 million for the nine months ended September 30, 20192020 and 2018,2019, respectively. Cash contributions made by the Company related to the other postretirement benefit plans were $5.6$5.7 million and $8.0$5.6 million for the nine months ended September 30, 20192020 and 2018,2019, respectively. The total 20192020 estimated cash contribution to the pension plans is $18.8and other postretirement benefits plans are expected to be approximately $38.0 million and to the other postretirement benefit plans is $7.9 million.$7.5 million, respectively.
The following tables list components of net periodic benefit costs for the pension plans and other postretirement benefits. The data listed under “pension plan” includes the qualified pension plan and the non-qualified supplemental executive retirement plan. The data listed under “other benefits” is for all other postretirement benefits.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30 |
| Pension Plan | | Other Benefits |
| 2020 | | 2019 | | 2020 | | 2019 |
Service cost | $ | 9,378 | | | $ | 6,910 | | | $ | 1,746 | | | $ | 2,082 | |
Interest cost | 6,440 | | | 6,941 | | | 808 | | | 1,407 | |
Expected return on plan assets | (8,284) | | | (7,581) | | | (1,804) | | | (1,475) | |
Amortization of prior service cost | 1,058 | | | 1,262 | | | 50 | | | 49 | |
Recognized net actuarial loss | 3,208 | | | 1,821 | | | (27) | | | 214 | |
Net periodic benefit cost | $ | 11,800 | | | $ | 9,353 | | | $ | 773 | | | $ | 2,277 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30 |
| Pension Plan | | Other Benefits |
| 2019 | | 2018 | | 2019 | | 2018 |
Service cost | $ | 6,910 |
| | $ | 6,966 |
| | $ | 2,082 |
| | $ | 1,966 |
|
Interest cost | 6,941 |
| | 6,007 |
| | 1,407 |
| | 1,183 |
|
Expected return on plan assets | (7,581 | ) | | (7,052 | ) | | (1,475 | ) | | (1,397 | ) |
Amortization of prior service cost | 1,262 |
| | 1,263 |
| | 49 |
| | 11 |
|
Recognized net actuarial loss | 1,821 |
| | 2,791 |
| | 214 |
| | 242 |
|
Net periodic benefit cost | $ | 9,353 |
| | $ | 9,975 |
| | $ | 2,277 |
| | $ | 2,005 |
|
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30 |
| Pension Plan | | Other Benefits |
| 2019 | | 2018 | | 2019 | | 2018 |
Service cost | $ | 20,039 |
| | $ | 21,770 |
| | $ | 5,606 |
| | $ | 7,066 |
|
Interest cost | 20,225 |
| | 17,996 |
| | 4,081 |
| | 4,152 |
|
Expected return on plan assets | (22,714 | ) | | (20,777 | ) | | (4,346 | ) | | (4,229 | ) |
Amortization of prior service cost | 3,786 |
| | 3,789 |
| | 148 |
| | 32 |
|
Recognized net actuarial loss | 4,445 |
| | 8,386 |
| | 421 |
| | 1,789 |
|
Net periodic benefit cost | $ | 25,781 |
| | $ | 31,164 |
| | $ | 5,910 |
| | $ | 8,810 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30 |
| Pension Plan | | Other Benefits |
| 2020 | | 2019 | | 2020 | | 2019 |
Service cost | $ | 27,002 | | | $ | 20,039 | | | $ | 5,959 | | | $ | 5,606 | |
Interest cost | 19,306 | | | 20,225 | | | 3,229 | | | 4,081 | |
Expected return on plan assets | (24,815) | | | (22,714) | | | (5,427) | | | (4,346) | |
Amortization of prior service cost | 3,172 | | | 3,786 | | | 148 | | | 148 | |
Recognized net actuarial loss | 9,599 | | | 4,445 | | | 0 | | | 421 | |
Net periodic benefit cost | $ | 34,264 | | | $ | 25,781 | | | $ | 3,909 | | | $ | 5,910 | |
Service cost portion of the pension plan and other postretirement benefits is recognized in "administrative and general" expenses within the Condensed Consolidated Statements of Income. Other components of net periodic benefit costs include interest costs, expected return on plan assets, amortization of prior service costs, and recognized net actuarial loss and are reported together as "other components of net periodic benefit cost" within the Condensed Consolidated Statements of Income.
Note 7. Short-term and Long-term Borrowings
On June 11, 2019, Cal Water completed the sale and issuance of $400.0 million in aggregate principal amount of First Mortgage Bonds (the bonds) in a private placement. The bonds consist of $100.0 million of 3.40% bonds, series VVV, maturing June 11, 2029; $100.0 million of 4.07% bonds, series WWW, maturing June 11, 2049; and $200.0 million of 4.17% bonds, series YYY, maturing June 11, 2059. Interest on the bonds will accrue semi-annually and be payable in arrears. The bonds will rank equally with all of Cal Water’s other First Mortgage Bonds and will be secured by liens on Cal Water’s properties, subject to certain exceptions and permitted liens. Cal Water used the net proceeds from the sale of the bonds to pay down outstanding short-term borrowings and to redeem $300.0 million of bond series UUU. The bonds were not registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
On March 29, 2019, the Company and Cal Water entered into certain syndicated credit agreements, which provide for unsecured revolving credit facilities of up to an initial aggregate amount of $550.0 million for a term of five years. The revolving credit facilities amend, expand, and replace the Company’s and its subsidiaries’ prior credit facilities originally entered into on May 10, 2015. The new credit facilities extended the terms until March 29, 2024, and increased Cal Water’s unsecured revolving line of credit. 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 $400.0 million under its revolving credit facility. All borrowings must be repaid within 24 months unless a different period is required or authorized by the CPUC. Additionally, the credit facilities may be increased by up to an incremental $150.0 million under the Cal Water facility and $50.0 million under the Company facility, subject in each case to certain conditions.
The proceeds from the revolving credit facilities may be used for working capital purposes, including the short-term financing of capital projects. Borrowings under the credit facilities typically have maturities varying between one and six months and will bear interest annually at a rate equal to (i) the base rate or (ii) the Eurodollar rate, plus an applicable margin of 0.650% to 0.875%, depending on the Company and its subsidiaries’ consolidated total capitalization ratio.
Both short-term unsecured 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’subsidiaries' consolidated total capitalization ratio and interest coverage ratio.
The outstanding borrowings on the Company line of credit were $105.1 million and $55.1 million as of September 30, 20192020 and December 31, 2018.2019, respectively. There were $100.0$270.0 million and $10.0$120.0 million of borrowings on the Cal Water line of credit as of September 30, 20192020 and December 31, 2018,2019, respectively. The average borrowing rate for borrowings on the Company and Cal Water lines of credit during the nine months ended September 30, 20192020 was 3.38%1.74% compared to 2.88%3.38% for the same period last year.
Note 8. Income Taxes
The Company adjusts its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company also records the tax effect of unusual or infrequently occurring discrete items.
The provision for income taxes is shown in the tables below:
| | | | | | | | | | | |
| Three Months Ended September 30 |
| 2020 | | 2019 |
Income tax expense | $ | 14,049 | | | $ | 11,864 | |
|
| | | | | | | |
| Three Months Ended September 30 |
| 2019 | | 2018 |
Income tax expense | $ | 11,864 |
| | $ | 11,481 |
|
|
| | | | | | | |
| Nine Months Ended September 30 |
| 2019 | | 2018 |
Income tax expense | $ | 14,509 |
| | $ | 15,068 |
|
| | | | | | | | | | | |
| Nine Months Ended September 30 |
| 2020 | | 2019 |
Income tax expense | $ | 10,641 | | | $ | 14,509 | |
The income tax expense increased $0.4$2.1 million to $14.0 million for the three months ended September 30, 2020 as compared to $11.9 million for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018.2019. The increase iswas mainly due to an increase in pre-tax netoperating income, partially offset by tax repair benefit and amortization of $6.6 million forexcess deferred income tax as a result of the three months ended September 30, 2019 as compared toTax Cuts and Jobs Acts (TCJA) in the three months ended September 30, 2018.2018 GRC proposed decision.
The income tax expense decreased $0.6$3.9 million to $10.6 million for the nine months ended September 30, 2020 as compared to income tax expense of $14.5 million for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018.2019. The decrease iswas mainly due to highertax repair benefit and amortization of excess deferred income tax benefitas a result of TCJA in the 2018 GRC proposed decision.
The Company’s effective tax rate was 11.6% and 21.9% for the nine months ended September 30, 2020, and 2019, as compared torespectively. The lower effective rate for the nine months ended September 30, 2018.2020, was primarily due to the amortization of the excess deferred taxes as a result of the TCJA in the proposed decision for the 2018 GRC.
The Company's 2019 effectiveUS federal income tax rate before discrete items, is estimatedwas lowered by TCJA to be 22%.
21% in 2018 from 35% in 2017. For the year ended December 31, 2018, the Company recorded a re-measurement of its deferred tax balances (related mostly to timing differences for plant-related items).balances. The final impact of the Tax Cuts and Jobs Act (TCJA) may differ from the recorded amounts, possibly materially, due to regulatory decisions that could differ from the Company’s determination of how the impactimpacts of the TCJA are allocated between customers and shareholders. In addition, changes in interpretations, guidance on legislative intent, and any changes in accounting standards for income taxes in response to the TCJA could also impact the recorded amounts.
The Company is continuing to work with state regulators to finalize the customer net refund of $107.0 millionexcess deferred tax to ensure compliance with federal normalization rules and will record any adjustments based on state regulator's decisions.
The Company had unrecognized tax benefits of approximately $10.6$12.9 million and $9.7$10.6 million as of September 30, 20192020 and 2018,2019, respectively. Included in the balance of unrecognized tax benefits, as of September 30, 2019 and 2018 areis approximately $3.1$3.5 million and $2.9$3.1 million, respectively, of tax benefits that, if recognized, would result in an adjustment to the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly within the next 12 months.
During the nine months ended September 30, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, deferral of certain payroll taxes, technical corrections to tax depreciation methods for qualified improvement property, net operating loss carryback periods, alternative minimum tax credit refunds and modifications to the net interest deduction limitations which are not expected to have a material impact to the Company’s consolidated financial statements. The Company evaluated the provisions of the CARES Act and determined that it did not have a material effect on the Company's consolidated financial statements as of September 30, 2020. Note 9. Regulatory Assets and Liabilities
The CPUC follows a rate case plan which requires Cal Water to file a GRC for each of its regulated operating districts every three years. In a GRC proceeding, the CPUC not only considers the utility's rate setting requests, but may also consider other issues that affect the utility's rates and operations. The CPUC is generally required to issue its GRC decision prior to the first day of the test year or authorize interim rates. In accordance with the rate case plan, Cal Water filed its 2018 GRC application in July of 2018 requesting rate changes effective January 1, 2020. On October 8, 2019, Cal Water jointly filed a formal settlement agreement for its 2018 GRC with the Public Advocates Office of the CPUC covering the
majority of open matters in the case. The key matters not included in the settlement, and which were litigated, were continuation of the WRAM, MCBA, PCBA, and HCBA. On October 14, 2020, an Administrative Law Judge (ALJ) with the CPUC issued a proposed decision that is subject to adoption by the CPUC no earlier than the CPUC’s November 19, 2020 meeting. If adopted as proposed, the decision would approve the settlement reached in October of 2019 by Cal Water and the CPUC’s Public Advocates Office, allow Cal Water to continue its decoupling balancing accounts through 2022, and allow Cal Water to retain its PCBA and HCBA. Under this proposed decision, Cal Water would be authorized to invest $828.0 million in its districts throughout California through 2021. This includes $148 million of water system infrastructure upgrades that would be recovered via the CPUC’s advice letter procedure once those projects are completed. The proposed decision also authorizes total revenue of up to $698.7 million for 2020.
The Company determined that the proposed decision provides additional evidence about conditions that existed as of September 30, 2020. As of November 6, 2020, the Company believes it is probable the proposed decision will be adopted by the CPUC without any material variation and accordingly, the Company recorded regulatory assets and associated revenues resulting from the regulatory mechanisms approved in the proposed decision as of September 30, 2020. In the unlikely event that the CPUC does not approve the proposed decision as issued, the Company will need to adjust regulatory asset balances and revenues in the fourth quarter of 2020.
Regulatory assets and liabilities were comprised of the following as of September 30, 20192020 and December 31, 2018:2019:
|
| | | | | | | | | |
| Recovery Period | | September 30, 2019 | | December 31, 2018 |
Regulatory Assets | | | |
| | |
|
Pension and retiree group health | Indefinitely | | $ | 156,453 |
| | $ | 156,947 |
|
Property-related temporary differences (tax benefits flowed through to customers) | Indefinitely | | 100,943 |
| | 99,376 |
|
Other accrued benefits | Indefinitely | | 21,183 |
| | 20,588 |
|
Net WRAM and MCBA long-term accounts receivable | 1-2 years | | 30,454 |
| | 17,134 |
|
Asset retirement obligations, net | Indefinitely | | 19,619 |
| | 18,197 |
|
Interim rates long-term accounts receivable | 1 year | | 4,642 |
| | 4,642 |
|
Tank coating | 10 years | | 13,745 |
| | 11,196 |
|
Recoverable property losses | 10 years | | 5,539 |
| | 1,275 |
|
Pension balancing account | 1 year | | 20,158 |
| | 16,494 |
|
Other components of net periodic benefit cost | Indefinitely | | 4,641 |
| | 3,221 |
|
Other regulatory assets | Various | | 5,107 |
| | 4,499 |
|
Total Regulatory Assets | | | $ | 382,484 |
| | $ | 353,569 |
|
| | | | | |
Regulatory Liabilities | | | |
| | |
|
Future tax benefits due to customers | | | $ | 180,207 |
| | $ | 180,205 |
|
Health care balancing account | | | 4,315 |
| | 3,516 |
|
Conservation program | | | 5,659 |
| | 6,880 |
|
Net WRAM and MCBA long-term payable | | | 67 |
| | 222 |
|
Tax accounting memorandum account | | | 785 |
| | 5,039 |
|
Cost of capital memorandum account | | | 148 |
| | 2,834 |
|
1,2,3 trichloropropane settlement proceeds | | | 9,204 |
| | 12,142 |
|
Other regulatory liabilities | | | 272 |
| | 437 |
|
Total Regulatory Liabilities | | | $ | 200,657 |
| | $ | 211,275 |
|
| | | | | | | | | | | | | | | | | |
| Recovery Period | | September 30, 2020 | | December 31, 2019 |
Regulatory Assets | | | | | |
Pension and retiree group health | Indefinitely | | $ | 207,828 | | | $ | 208,321 | |
Property-related temporary differences (tax benefits flowed through to customers) | Indefinitely | | 107,962 | | | 104,931 | |
Other accrued benefits | Indefinitely | | 21,434 | | | 20,030 | |
Net WRAM and MCBA long-term accounts receivable | 1 - 2 years | | 40,036 | | | 25,465 | |
Asset retirement obligations, net | Indefinitely | | 21,018 | | | 19,567 | |
Interim rates long-term accounts receivable | 1 year | | 21,672 | | | 4,642 | |
Tank coating | 10 years | | 14,209 | | | 13,535 | |
Recoverable property losses | 10 years | | 4,775 | | | 5,000 | |
PCBA | 1 year | | 32,819 | | | 21,465 | |
Other components of net periodic benefit cost | Indefinitely | | 6,316 | | | 5,145 | |
Other regulatory assets | Various | | 6,366 | | | 5,221 | |
Total Regulatory Assets | | | $ | 484,435 | | | $ | 433,322 | |
| | | | | |
Regulatory Liabilities | | | | | |
Future tax benefits due to customers | | | $ | 173,048 | | | $ | 194,501 | |
HCBA | | | 7,407 | | | 4,271 | |
CEBA | | | 2,926 | | | 2,742 | |
Net WRAM and MCBA long-term payable | | | 374 | | | 211 | |
Tax accounting memorandum account | | | 711 | | | 806 | |
Cost of capital memorandum account | | | 15 | | | 151 | |
1,2,3 trichloropropane (TCP) settlement proceeds | | | 9,084 | | | 8,426 | |
Other regulatory liabilities | | | 374 | | | 305 | |
Total Regulatory Liabilities | | | $ | 193,939 | | | $ | 211,413 | |
Short-term regulatory assets and liabilities are excluded from the above table.
The short-term regulatory assets were $33.4$54.4 million as of September 30, 20192020 and $42.4$38.2 million as of December 31, 2018.2019. As of September 30, 20192020, the short-term regulatory assets primarily consist of net WRAM and MCBA receivables and IRMA receivables. As of December 31, 2018,2019, the short-term regulatory assets primarily consist of net WRAM and MCBA receivables.
The short-term portions of regulatory liabilities were $6.9$11.0 million as of September 30, 20192020 and $12.2$4.5 million as of December 31, 2018.2019. The short-term regulatory liabilities as of September 30, 2019,2020, primarily consist of 1,2,3 trichloropropane (TCP)2015 GRC CEBA refunds and TCJA customer refunds. As of December 31, 2019, the short-term regulatory liabilities primarily consist of TCP settlement proceeds, tax accounting memorandum account refunds, and cost of capital memorandum account refunds. As of December 31, 2018, the short-term regulatory liabilities primarily consist of TCP settlement proceeds and net WRAM and MCBA liability balances.
Note 10. Commitments and Contingencies
Commitments
The Company has significant commitments 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, 2018.2019.
Leases
The Company has operating and finance leases for water systems, offices, land easements, licenses, equipment, and other facilities. The leases generally have remaining lease terms of 1 year to 50 years, some of which include options to extend the lease for up to 25 years. The exercise of lease renewal options is at the Company’s sole discretion. Most of the Company’s lease agreements contain mutual termination options that require prior written notice by either lessee or lessor. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Certain leases include options to purchase the leased property. The depreciable life of the assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option that is reasonably certain of exercise. Leases with an initial term of 12 months or less are not recorded on the balance sheet as the Company applied the short-term lease exception allowed by the FASB guidance. Lease expense for these leases is recognized on a straight-line basis over the lease term. A subset of the Company’s leases contains variable lease payments that depend on changes in the CPI.
The Company determines if an arrangement is a lease at contract inception. Generally, a lease agreement exists if the Company determines that the arrangement gives the Company control over the use of an identified asset and obtains substantially all of the benefits from the identified asset.
The right-of-use (ROU) assets that are recorded represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s operating leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The ROU asset and lease liability may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Variable lease payments that are based on changes in CPI are included in the measurement of ROU asset and lease liability on the basis of the rate at lease commencement. Subsequent changes to the payments as a result of changes to the CPI rate are recognized in the period in which the obligation of these payments is incurred.
Supplemental balance sheet information related to leases was as follows:
|
| | | |
| As of September 30, 2019 |
Operating leases | |
Other assets | $ | 14,349 |
|
| |
Accrued expenses and other liabilities | $ | 1,421 |
|
Regulatory liabilities and other | 12,885 |
|
Total operating lease liabilities | $ | 14,306 |
|
| |
Finance leases | |
Utility plant | $ | 18,207 |
|
Accumulated depreciation and amortization | (9,352 | ) |
Net utility plant | $ | 8,855 |
|
| |
Current maturities of long-term debt, net | $ | 670 |
|
Long-term debt, net | 5,378 |
|
Total finance lease liabilities | $ | 6,048 |
|
| |
Weighted average remaining lease term | |
Operating leases | 155 months |
|
Finance leases | 80 months |
|
| |
Weighted average discount rate | |
Operating leases | 3.7 | % |
Finance leases | 5.5 | % |
The components of lease expense were as follows:
|
| | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2019 | | |
Operating lease cost | $ | 490 |
| | $ | 1,368 |
|
| | | |
Finance lease cost: | | | |
Amortization of right-of-use assets | $ | 292 |
| | $ | 918 |
|
Interest on lease liabilities | 85 |
| | 264 |
|
Total finance lease cost | $ | 377 |
| | $ | 1,182 |
|
| | | |
Short-term lease cost | $ | 543 |
| | $ | 716 |
|
Variable lease cost | 66 |
| | 198 |
|
Total lease cost | $ | 1,476 |
| | $ | 3,464 |
|
Supplemental cash flow information related to leases was as follows:
|
| | | |
| Nine Months Ended September 30 |
| 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 1,322 |
|
Operating cash flows from finance leases | 264 |
|
Financing cash flows from finance leases | 508 |
|
Non-cash activities: right-of-use assets obtained in exchange for lease obligations: | |
Operating leases | 1,697 |
|
Finance leases | 672 |
|
Maturities of lease liabilities asAs of September 30, 2019 are as follows:
|
| | | | | | | |
Year Ending December 31, | Operating Leases | | Finance Leases |
2019 (a) | $ | 451 |
| | $ | 245 |
|
2020 | 1,892 |
| | 986 |
|
2021 | 1,673 |
| | 987 |
|
2022 | 1,516 |
| | 987 |
|
2023 | 1,396 |
| | 1,506 |
|
2024 | 1,253 |
| | 940 |
|
Thereafter | 10,067 |
| | 1,645 |
|
Total lease payments | $ | 18,248 |
| | $ | 7,296 |
|
| | | |
Less imputed interest | $ | (3,942 | ) | | $ | (1,248 | ) |
Total | $ | 14,306 |
| | $ | 6,048 |
|
(a) Excludes payments made for the first nine months of 2019.
As previously disclosed2020, there were no significant changes in the Company's Annual Report on Form 10-K for the year endedthese commitments from December 31, 2018 and under the previous lease accounting standard, minimum lease payments, as of December 31, 2018, under non-cancelable operating leases by period were expected to be as follows:
|
| | | |
2019 | $ | 1,771 |
|
2020 | 1,709 |
|
2021 | 1,485 |
|
2022 | 1,355 |
|
2023 | 1,261 |
|
Thereafter | 10,538 |
|
Total | $ | 18,119 |
|
2019.
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 customers 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.
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 September 30, 20192020 and December 31, 2018,2019, the Company recognized a liability of $2.6$2.4 million and $2.3$2.5 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:
Accounts receivable 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 1.83%.
Advances for construction fair values were estimated using broker quotes from companies that frequently purchase these investments.
| | | September 30, 2019 | | September 30, 2020 |
| | | Fair Value | | | | Fair Value |
| Cost | | Level 1 | | Level 2 | | Level 3 | | Total | | Cost | | Level 1 | | Level 2 | | Level 3 | | Total |
Long-term debt, including current maturities, net | $ | 812,758 |
| | — |
| | $ | 912,402 |
| | — |
| | $ | 912,402 |
| Long-term debt, including current maturities, net | $ | 806,938 | | | 0 | | | $ | 991,973 | | | 0 | | | $ | 991,973 | |
Advances for construction | 190,272 |
| | — |
| | 79,818 |
| | — |
| | 79,818 |
| Advances for construction | 196,853 | | | 0 | | | 82,150 | | | 0 | | | 82,150 | |
Total | $ | 1,003,030 |
| | $ | — |
| | $ | 992,220 |
| | $ | — |
| | $ | 992,220 |
| Total | $ | 1,003,791 | | | $ | 0 | | | $ | 1,074,123 | | | $ | 0 | | | $ | 1,074,123 | |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| | | Fair Value |
| Cost | | Level 1 | | Level 2 | | Level 3 | | Total |
Long-term debt, including current maturities, net | $ | 814,938 |
| | $ | — |
| | $ | 849,551 |
| | $ | — |
| | $ | 849,551 |
|
Advances for construction | 186,342 |
| | — |
| | 77,204 |
| | — |
| | 77,204 |
|
Total | $ | 1,001,280 |
| | — |
| | $ | 926,755 |
| | $ | — |
| | $ | 926,755 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| | | Fair Value |
| Cost | | Level 1 | | Level 2 | | Level 3 | | Total |
Long-term debt, including current maturities, net | $ | 808,622 | | | $ | 0 | | | $ | 873,454 | | | $ | 0 | | | $ | 873,454 | |
Advances for construction | 191,062 | | | 0 | | | 79,550 | | | 0 | | | 79,550 | |
Total | $ | 999,684 | | | 0 | | | $ | 953,004 | | | $ | 0 | | | $ | 953,004 | |
Note 12. Condensed Consolidating Financial Statements
On November 17, 2010, Cal Water issued $100.0 million aggregate principal amount of 5.500%5.50% First Mortgage Bonds due 2040, all of which is fully and unconditionally guaranteed by the Company. As a result of this guarantee arrangement, the Company is required to present the following condensed consolidating financial information. The investments in affiliates are accounted for and presented using the “equity method” of accounting.
The following tables present the Condensed Consolidating Balance Sheets as of September 30, 20192020 and December 31, 2018,2019, the Condensed Consolidating Statements of Income for the three and nine months ended September 30, 20192020 and 2018,2019, and the Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 20192020 and 20182019 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.
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 20192020
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
ASSETS | | | | | | | | | |
Utility plant: | | | | | | | | | |
Utility plant | $ | 1,318 | | | $ | 3,559,329 | | | $ | 281,744 | | | $ | (7,197) | | | $ | 3,835,194 | |
Less accumulated depreciation and amortization | (1,177) | | | (1,151,266) | | | (88,676) | | | 2,239 | | | (1,238,880) | |
Net utility plant | 141 | | | 2,408,063 | | | 193,068 | | | (4,958) | | | 2,596,314 | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | 16,679 | | | 85,877 | | | 10,756 | | | 0 | | | 113,312 | |
Receivables and unbilled revenue, net | 0 | | | 160,479 | | | 8,636 | | | 0 | | | 169,115 | |
Receivables from affiliates | 26,962 | | | 942 | | | 261 | | | (28,165) | | | 0 | |
Other current assets | 272 | | | 20,933 | | | 2,132 | | | 0 | | | 23,337 | |
Total current assets | 43,913 | | | 268,231 | | | 21,785 | | | (28,165) | | | 305,764 | |
Other assets: | | | | | | | | | |
Regulatory assets | 0 | | | 479,613 | | | 4,822 | | | 0 | | | 484,435 | |
Investments in affiliates | 917,901 | | | 0 | | | 0 | | | (917,901) | | | 0 | |
Long-term affiliate notes receivable | 32,659 | | | 0 | | | 0 | | | (32,659) | | | 0 | |
Other assets | 2,349 | | | 84,154 | | | 33,636 | | | (218) | | | 119,921 | |
Total other assets | 952,909 | | | 563,767 | | | 38,458 | | | (950,778) | | | 604,356 | |
TOTAL ASSETS | $ | 996,963 | | | $ | 3,240,061 | | | $ | 253,311 | | | $ | (983,901) | | | $ | 3,506,434 | |
CAPITALIZATION AND LIABILITIES | | | | | | | | | |
Capitalization: | | | | | | | | | |
Common stockholders’ equity | $ | 890,192 | | | $ | 805,444 | | | $ | 117,633 | | | $ | (923,077) | | | $ | 890,192 | |
Affiliate long-term debt | 0 | | | 0 | | | 32,659 | | | (32,659) | | | 0 | |
Long-term debt, net | 0 | | | 784,715 | | | 340 | | | 0 | | | 785,055 | |
Total capitalization | 890,192 | | | 1,590,159 | | | 150,632 | | | (955,736) | | | 1,675,247 | |
Current liabilities: | | | | | | | | | |
Current maturities of long-term debt, net | 0 | | | 21,763 | | | 120 | | | 0 | | | 21,883 | |
Short-term borrowings | 105,100 | | | 270,000 | | | 0 | | | 0 | | | 375,100 | |
Payables to affiliates | 0 | | | 2,940 | | | 25,225 | | | (28,165) | | | 0 | |
Accounts payable | 0 | | | 123,129 | | | 4,029 | | | 0 | | | 127,158 | |
Accrued expenses and other liabilities | 31 | | | 73,913 | | | 5,738 | | | 0 | | | 79,682 | |
Total current liabilities | 105,131 | | | 491,745 | | | 35,112 | | | (28,165) | | | 603,823 | |
Deferred income taxes | 1,640 | | | 235,791 | | | 8,025 | | | 0 | | | 245,456 | |
Pension and postretirement benefits other than pensions | 0 | | | 261,081 | | | 0 | | | 0 | | | 261,081 | |
Regulatory liabilities and other | 0 | | | 251,230 | | | 5,824 | | | 0 | | | 257,054 | |
Advances for construction | 0 | | | 196,324 | | | 529 | | | 0 | | | 196,853 | |
Contributions in aid of construction | 0 | | | 213,731 | | | 53,189 | | | 0 | | | 266,920 | |
TOTAL CAPITALIZATION AND LIABILITIES | $ | 996,963 | | | $ | 3,240,061 | | | $ | 253,311 | | | $ | (983,901) | | | $ | 3,506,434 | |
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
ASSETS | |
| | |
| | |
| | |
| | |
|
Utility plant: | |
| | |
| | |
| | |
| | |
|
Utility plant | $ | 1,318 |
| | $ | 3,194,372 |
| | $ | 222,726 |
| | $ | (7,197 | ) | | $ | 3,411,219 |
|
Less accumulated depreciation and amortization | (1,083 | ) | | (1,004,387 | ) | | (64,654 | ) | | 2,159 |
| | (1,067,965 | ) |
Net utility plant | 235 |
| | 2,189,985 |
| | 158,072 |
| | (5,038 | ) | | 2,343,254 |
|
Current assets: | | | | | |
| | | | |
Cash and cash equivalents | 2,408 |
| | 39,187 |
| | 9,662 |
| | — |
| | 51,257 |
|
Receivables and unbilled revenue | — |
| | 133,281 |
| | 5,319 |
| | — |
| | 138,600 |
|
Receivables from affiliates | 28,896 |
| | 540 |
| | 214 |
| | (29,650 | ) | | — |
|
Other current assets | 235 |
| | 19,435 |
| | 2,529 |
| | — |
| | 22,199 |
|
Total current assets | 31,539 |
| | 192,443 |
| | 17,724 |
| | (29,650 | ) | | 212,056 |
|
Other assets: | | | | | |
| | | | |
Regulatory assets | — |
| | 377,962 |
| | 4,522 |
| | — |
| | 382,484 |
|
Investments in affiliates | 756,177 |
| | — |
| | — |
| | (756,177 | ) | | — |
|
Long-term affiliate notes receivable | 26,288 |
| | — |
| | — |
| | (26,288 | ) | | — |
|
Other assets | 460 |
| | 80,480 |
| | 4,692 |
| | (214 | ) | | 85,460 |
|
Total other assets | 782,925 |
| | 458,442 |
| | 9,214 |
| | (782,679 | ) | | 467,944 |
|
TOTAL ASSETS | $ | 814,699 |
| | $ | 2,840,870 |
| | $ | 185,010 |
| | $ | (817,367 | ) | | $ | 3,023,254 |
|
CAPITALIZATION AND LIABILITIES | |
| | |
| | |
| | |
| | |
|
Capitalization: | |
| | |
| | |
| | |
| | |
|
Common stockholders’ equity | $ | 757,795 |
| | $ | 679,037 |
| | $ | 82,366 |
| | $ | (761,403 | ) | | $ | 757,795 |
|
Affiliate long-term debt | — |
| | — |
| | 26,288 |
| | (26,288 | ) | | — |
|
Long-term debt, net | — |
| | 807,019 |
| | 459 |
| | — |
| | 807,478 |
|
Total capitalization | 757,795 |
| | 1,486,056 |
| | 109,113 |
| | (787,691 | ) | | 1,565,273 |
|
Current liabilities: | |
| | |
| | |
| | |
| | |
|
Current maturities of long-term debt, net | — |
| | 5,122 |
| | 158 |
| | — |
| | 5,280 |
|
Short-term borrowings | 55,100 |
| | 100,000 |
| | — |
| | — |
| | 155,100 |
|
Payables to affiliates | — |
| | 4,906 |
| | 24,744 |
| | (29,650 | ) | | — |
|
Accounts payable | — |
| | 103,748 |
| | 4,845 |
| | — |
| | 108,593 |
|
Accrued expenses and other liabilities | 329 |
| | 60,621 |
| | 4,021 |
| | — |
| | 64,971 |
|
Total current liabilities | 55,429 |
| | 274,397 |
| | 33,768 |
| | (29,650 | ) | | 333,944 |
|
Unamortized investment tax credits | — |
| | 1,649 |
| | — |
| | — |
| | 1,649 |
|
Deferred income taxes | 1,475 |
| | 224,549 |
| | 3,213 |
| | — |
| | 229,237 |
|
Pension and postretirement benefits other than pensions | — |
| | 203,557 |
| | — |
| | (26 | ) | | 203,557 |
|
Regulatory liabilities and other | — |
| | 253,843 |
| | 6,953 |
| | — |
| | 260,812 |
|
Advances for construction | — |
| | 189,781 |
| | 491 |
| | — |
| | 190,272 |
|
Contributions in aid of construction | — |
| | 207,038 |
| | 31,472 |
| | — |
| | 238,510 |
|
TOTAL CAPITALIZATION AND LIABILITIES | $ | 814,699 |
| | $ | 2,840,870 |
| | $ | 185,010 |
| | $ | (817,367 | ) | | $ | 3,023,254 |
|
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 20182019
(In thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
ASSETS | |
| | |
| | |
| | |
| | |
|
Utility plant: | |
| | |
| | |
| | |
| | |
|
Utility plant | $ | 1,318 |
| | $ | 3,021,437 |
| | $ | 213,888 |
| | $ | (7,197 | ) | | $ | 3,229,446 |
|
Less accumulated depreciation and amortization | (1,013 | ) | | (938,072 | ) | | (59,735 | ) | | 2,097 |
| | (996,723 | ) |
Net utility plant | 305 |
| | 2,083,365 |
| | 154,153 |
| | (5,100 | ) | | 2,232,723 |
|
Current assets: | |
| | |
| | |
| | |
| | |
|
Cash and cash equivalents | 3,779 |
| | 33,763 |
| | 9,634 |
| | — |
| | 47,176 |
|
Receivables and unbilled revenue | 126 |
| | 118,632 |
| | 4,201 |
| | — |
| | 122,959 |
|
Receivables from affiliates | 21,318 |
| | 4,074 |
| | 61 |
| | (25,453 | ) | | — |
|
Other current assets | 80 |
| | 16,907 |
| | 1,580 |
| | — |
| | 18,567 |
|
Total current assets | 25,303 |
| | 173,376 |
| | 15,476 |
| | (25,453 | ) | | 188,702 |
|
Other assets: | |
| | |
| | |
| | |
| | |
|
Regulatory assets | — |
| | 349,414 |
| | 4,155 |
| | — |
| | 353,569 |
|
Investments in affiliates | 733,156 |
| | — |
| | — |
| | (733,156 | ) | | — |
|
Long-term affiliate notes receivable | 27,829 |
| | — |
| | — |
| | (27,829 | ) | | — |
|
Other assets | 133 |
| | 58,959 |
| | 3,821 |
| | (203 | ) | | 62,710 |
|
Total other assets | 761,118 |
| | 408,373 |
| | 7,976 |
| | (761,188 | ) | | 416,279 |
|
TOTAL ASSETS | $ | 786,726 |
| | $ | 2,665,114 |
| | $ | 177,605 |
| | $ | (791,741 | ) | | $ | 2,837,704 |
|
CAPITALIZATION AND LIABILITIES | |
| | |
| | |
| | |
| | |
|
Capitalization: | |
| | |
| | |
| | |
| | |
|
Common stockholders’ equity | $ | 730,157 |
| | $ | 659,340 |
| | 79,093 |
| | $ | (738,433 | ) | | $ | 730,157 |
|
Affiliate long-term debt | — |
| | — |
| | 27,828 |
| | (27,828 | ) | | — |
|
Long-term debt, net | — |
| | 709,444 |
| | 583 |
| | — |
| | 710,027 |
|
Total capitalization | 730,157 |
| | 1,368,784 |
| | 107,504 |
| | (766,261 | ) | | 1,440,184 |
|
Current liabilities: | |
| | |
| | |
| | |
| | |
|
Current maturities of long-term debt, net | — |
| | 104,664 |
| | 247 |
| | — |
| | 104,911 |
|
Short-term borrowings | 55,100 |
| | 10,000 |
| | — |
| | — |
| | 65,100 |
|
Payables to affiliates | 17 |
| | 488 |
| | 24,948 |
| | (25,453 | ) | | — |
|
Accounts payable | — |
| | 92,310 |
| | 3,270 |
| | — |
| | 95,580 |
|
Accrued expenses and other liabilities | 107 |
| | 53,655 |
| | 1,813 |
| | — |
| | 55,575 |
|
Total current liabilities | 55,224 |
| | 261,117 |
| | 30,278 |
| | (25,453 | ) | | 321,166 |
|
Unamortized investment tax credits | — |
| | 1,649 |
| | — |
| | — |
| | 1,649 |
|
Deferred income taxes | 1,376 |
| | 210,052 |
| | 1,648 |
| | (43 | ) | | 213,033 |
|
Pension and postretirement benefits other than pensions | — |
| | 193,538 |
| | — |
| | — |
| | 193,538 |
|
Regulatory and other liabilities | (31 | ) | | 250,720 |
| | 5,817 |
| | 16 |
| | 256,522 |
|
Advances for construction | — |
| | 185,843 |
| | 499 |
| | — |
| | 186,342 |
|
Contributions in aid of construction | — |
| | 193,411 |
| | 31,859 |
| | — |
| | 225,270 |
|
TOTAL CAPITALIZATION AND LIABILITIES | $ | 786,726 |
| | $ | 2,665,114 |
| | $ | 177,605 |
| | $ | (791,741 | ) | | $ | 2,837,704 |
|
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended September 30, 2019
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
ASSETS | | | | | | | | | |
Utility plant: | | | | | | | | | |
Utility plant | $ | 1,318 | | | $ | 3,332,331 | | | $ | 224,033 | | | $ | (7,197) | | | $ | 3,550,485 | |
Less accumulated depreciation and amortization | (1,107) | | | (1,079,627) | | | (65,561) | | | 2,180 | | | (1,144,115) | |
Net utility plant | 211 | | | 2,252,704 | | | 158,472 | | | (5,017) | | | 2,406,370 | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | 3,096 | | | 29,098 | | | 10,459 | | | 0 | | | 42,653 | |
Receivables and unbilled revenue, net | 0 | | | 114,999 | | | 4,350 | | | 0 | | | 119,349 | |
Receivables from affiliates | 25,803 | | | 3,621 | | | 209 | | | (29,633) | | | 0 | |
Other current assets | 90 | | | 20,615 | | | 2,005 | | | 0 | | | 22,710 | |
Total current assets | 28,989 | | | 168,333 | | | 17,023 | | | (29,633) | | | 184,712 | |
Other assets: | | | | | | | | | |
Regulatory assets | 0 | | | 428,639 | | | 4,683 | | | 0 | | | 433,322 | |
Investments in affiliates | 777,170 | | | 0 | | | 0 | | | (777,170) | | | 0 | |
Long-term affiliate notes receivable | 30,060 | | | 0 | | | 0 | | | (30,060) | | | 0 | |
Other assets | 409 | | | 81,591 | | | 5,125 | | | (221) | | | 86,904 | |
Total other assets | 807,639 | | | 510,230 | | | 9,808 | | | (807,451) | | | 520,226 | |
TOTAL ASSETS | $ | 836,839 | | | $ | 2,931,267 | | | $ | 185,303 | | | $ | (842,101) | | | $ | 3,111,308 | |
CAPITALIZATION AND LIABILITIES | | | | | | | | | |
Capitalization: | | | | | | | | | |
Common stockholders’ equity | $ | 779,906 | | | $ | 700,784 | | | 81,604 | | | $ | (782,388) | | | $ | 779,906 | |
Affiliate long-term debt | 0 | | | 0 | | | 30,060 | | | (30,060) | | | 0 | |
Long-term debt, net | 0 | | | 786,310 | | | 444 | | | 0 | | | 786,754 | |
Total capitalization | 779,906 | | | 1,487,094 | | | 112,108 | | | (812,448) | | | 1,566,660 | |
Current liabilities: | | | | | | | | | |
Current maturities of long-term debt, net | 0 | | | 21,732 | | | 136 | | | 0 | | | 21,868 | |
Short-term borrowings | 55,100 | | | 120,000 | | | 0 | | | 0 | | | 175,100 | |
Payables to affiliates | 0 | | | 6,115 | | | 23,518 | | | (29,633) | | | 0 | |
Accounts payable | 0 | | | 104,419 | | | 4,044 | | | 0 | | | 108,463 | |
Accrued expenses and other liabilities | 313 | | | 50,569 | | | 2,408 | | | 0 | | | 53,290 | |
Total current liabilities | 55,413 | | | 302,835 | | | 30,106 | | | (29,633) | | | 358,721 | |
Deferred income taxes | 1,520 | | | 217,847 | | | 3,243 | | | (20) | | | 222,590 | |
Pension and postretirement benefits other than pensions | 0 | | | 258,907 | | | 0 | | | 0 | | | 258,907 | |
Regulatory and other liabilities | 0 | | | 264,434 | | | 7,397 | | | 0 | | | 271,831 | |
Advances for construction | 0 | | | 190,568 | | | 494 | | | 0 | | | 191,062 | |
Contributions in aid of construction | 0 | | | 209,582 | | | 31,955 | | | 0 | | | 241,537 | |
TOTAL CAPITALIZATION AND LIABILITIES | $ | 836,839 | | | $ | 2,931,267 | | | $ | 185,303 | | | $ | (842,101) | | | $ | 3,111,308 | |
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating revenue | $ | — |
| | $ | 219,261 |
| | $ | 13,276 |
| | $ | — |
| | $ | 232,537 |
|
Operating expenses: | |
| | |
| | |
| | |
| | |
|
Operations: | |
| | |
| | |
| | |
| | |
|
Water production costs | — |
| | 78,048 |
| | 2,520 |
| | — |
| | 80,568 |
|
Administrative and general | — |
| | 24,498 |
| | 2,281 |
| | — |
| | 26,779 |
|
Other operations | — |
| | 22,872 |
| | 1,825 |
| | (147 | ) | | 24,550 |
|
Maintenance | — |
| | 6,823 |
| | 242 |
| | — |
| | 7,065 |
|
Depreciation and amortization | 23 |
| | 20,770 |
| | 1,501 |
| | (21 | ) | | 22,273 |
|
Income tax (benefit) expense | (132 | ) | | 11,332 |
| | 779 |
| | 215 |
| | 12,194 |
|
Property and other taxes | — |
| | 6,620 |
| | 921 |
| | — |
| | 7,541 |
|
Total operating (income) expenses | (109 | ) | | 170,963 |
| | 10,069 |
| | 47 |
| | 180,970 |
|
Net operating income | 109 |
| | 48,298 |
| | 3,207 |
| | (47 | ) | | 51,567 |
|
Other income and expenses: | |
| | |
| | |
| | |
| | |
|
Non-regulated revenue | 599 |
| | 3,865 |
| | 399 |
| | (745 | ) | | 4,118 |
|
Non-regulated expenses | — |
| | (3,907 | ) | | (444 | ) | | — |
| | (4,351 | ) |
Other components of net periodic benefit cost | — |
| | (1,784 | ) | | (73 | ) | | — |
| | (1,857 | ) |
Allowance for equity funds used during construction | — |
| | 1,868 |
| | — |
| | — |
| | 1,868 |
|
Income tax (expense) benefit on other income and expenses | (168 | ) | | 268 |
| | 22 |
| | 208 |
| | 330 |
|
Net other income (loss) | 431 |
| | 310 |
| | (96 | ) | | (537 | ) | | 108 |
|
Interest: | |
| | |
| | |
| | |
| | |
|
Interest expense | 450 |
| | 9,820 |
| | 608 |
| | (599 | ) | | 10,279 |
|
Allowance for borrowed funds used during construction | — |
| | (954 | ) | | (74 | ) | | — |
| | (1,028 | ) |
Net interest expense | 450 |
| | 8,866 |
| | 534 |
| | (599 | ) | | 9,251 |
|
Equity earnings of subsidiaries | 42,334 |
| | — |
| | — |
| | (42,334 | ) | | — |
|
Net income | $ | 42,424 |
| | $ | 39,742 |
| | $ | 2,577 |
| | $ | (42,319 | ) | | $ | 42,424 |
|
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended September 30, 20182020
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating revenue | $ | 0 | | | $ | 287,820 | | | $ | 16,288 | | | $ | 0 | | | $ | 304,108 | |
Operating expenses: | | | | | | | | | |
Operations: | | | | | | | | | |
Water production costs | 0 | | | 82,829 | | | 2,515 | | | 0 | | | 85,344 | |
Administrative and general | 0 | | | 25,802 | | | 3,406 | | | 0 | | | 29,208 | |
Other operations | 0 | | | 27,312 | | | 2,579 | | | (145) | | | 29,746 | |
Maintenance | 0 | | | 6,872 | | | 257 | | | 0 | | | 7,129 | |
Depreciation and amortization | 23 | | | 22,984 | | | 1,712 | | | (20) | | | 24,699 | |
Income tax (benefit) expense | (113) | | | 12,787 | | | 930 | | | 200 | | | 13,804 | |
Property and other taxes | 0 | | | 6,948 | | | 1,168 | | | 0 | | | 8,116 | |
Total operating (income) expenses | (90) | | | 185,534 | | | 12,567 | | | 35 | | | 198,046 | |
Net operating income | 90 | | | 102,286 | | | 3,721 | | | (35) | | | 106,062 | |
Other income and expenses: | | | | | | | | | |
Non-regulated revenue | 549 | | | 3,588 | | | 492 | | | (695) | | | 3,934 | |
Non-regulated expenses | 0 | | | (2,321) | | | (544) | | | 0 | | | (2,865) | |
Other components of net periodic benefit cost | 0 | | | (1,016) | | | 8 | | | 0 | | | (1,008) | |
Allowance for equity funds used during construction | 0 | | | 973 | | | 0 | | | 0 | | | 973 | |
Income tax (expense) benefit on other income and expenses | (152) | | | (289) | | | 2 | | | 194 | | | (245) | |
Net other income (loss) | 397 | | | 935 | | | (42) | | | (501) | | | 789 | |
Interest: | | | | | | | | | |
Interest expense | 393 | | | 10,762 | | | 556 | | | (549) | | | 11,162 | |
Allowance for borrowed funds used during construction | 0 | | | (631) | | | (40) | | | 0 | | | (671) | |
Net interest expense | 393 | | | 10,131 | | | 516 | | | (549) | | | 10,491 | |
Equity earnings of subsidiaries | 96,266 | | | 0 | | | 0 | | | (96,266) | | | 0 | |
Net income | $ | 96,360 | | | $ | 93,090 | | | $ | 3,163 | | | $ | (96,253) | | | $ | 96,360 | |
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating revenue | $ | — |
| | $ | 208,695 |
| | $ | 12,593 |
| | $ | — |
| | $ | 221,288 |
|
Operating expenses: | |
| | |
| | |
| | |
| | |
|
Operations: | |
| | |
| | |
| | |
| | |
|
Water production costs | — |
| | 76,317 |
| | 2,501 |
| | — |
| | 78,818 |
|
Administrative and general | — |
| | 23,878 |
| | 2,615 |
| | — |
| | 26,493 |
|
Other operations | — |
| | 20,271 |
| | 1,816 |
| | (144 | ) | | 21,943 |
|
Maintenance | — |
| | 6,538 |
| | 230 |
| | — |
| | 6,768 |
|
Depreciation and amortization | 23 |
| | 19,632 |
| | 1,376 |
| | (22 | ) | | 21,009 |
|
Income tax (benefit) expense | (142 | ) | | 10,435 |
| | 1,271 |
| | 222 |
| | 11,786 |
|
Property and other taxes | — |
| | 6,205 |
| | 937 |
| | — |
| | 7,142 |
|
Total operating (income) expenses | (119 | ) | | 163,276 |
| | 10,746 |
| | 56 |
| | 173,959 |
|
Net operating income | 119 |
| | 45,419 |
| | 1,847 |
| | (56 | ) | | 47,329 |
|
Other income and expenses: | |
| | |
| | |
| | |
| | |
|
Non-regulated revenue | 628 |
| | 4,589 |
| | 259 |
| | (773 | ) | | 4,703 |
|
Non-regulated expenses | — |
| | (4,675 | ) | | (222 | ) | | — |
| | (4,897 | ) |
Other components of net periodic benefit cost | — |
| | (1,834 | ) | | (141 | ) | | — |
| | (1,975 | ) |
Allowance for equity funds used during construction | — |
| | 1,023 |
| | — |
| | — |
| | 1,023 |
|
Income tax (expense) benefit on other income and expenses | (176 | ) | | 252 |
| | 13 |
| | 216 |
| | 305 |
|
Net other income (loss) | 452 |
| | (645 | ) | | (91 | ) | | (557 | ) | | (841 | ) |
Interest: | |
| | |
| | |
| | |
| | |
|
Interest expense | 486 |
| | 10,443 |
| | 574 |
| | (628 | ) | | 10,875 |
|
Allowance for borrowed funds used during construction | — |
| | (522 | ) | | (38 | ) | | — |
| | (560 | ) |
Net interest expense | 486 |
| | 9,921 |
| | 536 |
| | (628 | ) | | 10,315 |
|
Equity earnings of subsidiaries | 36,088 |
| | — |
| | — |
| | (36,088 | ) | | — |
|
Net income | $ | 36,173 |
| | $ | 34,853 |
| | $ | 1,220 |
| | $ | (36,073 | ) | | $ | 36,173 |
|
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the ninethree months ended September 30, 2019
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating revenue | $ | 0 | | | $ | 219,261 | | | $ | 13,276 | | | $ | 0 | | | $ | 232,537 | |
Operating expenses: | | | | | | | | | |
Operations: | | | | | | | | | |
Water production costs | 0 | | | 78,048 | | | 2,520 | | | 0 | | | 80,568 | |
Administrative and general | 0 | | | 24,498 | | | 2,281 | | | 0 | | | 26,779 | |
Other operations | 0 | | | 22,872 | | | 1,825 | | | (147) | | | 24,550 | |
Maintenance | 0 | | | 6,823 | | | 242 | | | 0 | | | 7,065 | |
Depreciation and amortization | 23 | | | 20,770 | | | 1,501 | | | (21) | | | 22,273 | |
Income tax (benefit) expense | (132) | | | 11,332 | | | 779 | | | 215 | | | 12,194 | |
Property and other taxes | 0 | | | 6,620 | | | 921 | | | 0 | | | 7,541 | |
Total operating (income) expenses | (109) | | | 170,963 | | | 10,069 | | | 47 | | | 180,970 | |
Net operating income | 109 | | | 48,298 | | | 3,207 | | | (47) | | | 51,567 | |
Other income and expenses: | | | | | | | | | |
Non-regulated revenue | 599 | | | 3,865 | | | 399 | | | (745) | | | 4,118 | |
Non-regulated expenses | 0 | | | (3,907) | | | (444) | | | 0 | | | (4,351) | |
Other components of net periodic benefit cost | 0 | | | (1,784) | | | (73) | | | 0 | | | (1,857) | |
Allowance for equity funds used during construction | 0 | | | 1,868 | | | 0 | | | 0 | | | 1,868 | |
Income tax (expense) benefit on other income and expenses | (168) | | | 268 | | | 22 | | | 208 | | | 330 | |
Net other income (loss) | 431 | | | 310 | | | (96) | | | (537) | | | 108 | |
Interest: | | | | | | | | | |
Interest expense | 450 | | | 9,820 | | | 608 | | | (599) | | | 10,279 | |
Allowance for borrowed funds used during construction | 0 | | | (954) | | | (74) | | | 0 | | | (1,028) | |
Net interest expense | 450 | | | 8,866 | | | 534 | | | (599) | | | 9,251 | |
Equity earnings of subsidiaries | 42,334 | | | 0 | | | 0 | | | (42,334) | | | 0 | |
Net income | $ | 42,424 | | | $ | 39,742 | | | $ | 2,577 | | | $ | (42,319) | | | $ | 42,424 | |
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating revenue | $ | — |
| | $ | 502,785 |
| | $ | 34,894 |
| | $ | — |
| | $ | 537,679 |
|
Operating expenses: | |
| | |
| | |
| | |
| | |
|
Operations: | |
| | |
| | |
| | |
| | |
|
Water production costs | — |
| | 183,617 |
| | 7,178 |
| | — |
| | 190,795 |
|
Administrative and general | 23 |
| | 73,908 |
| | 7,379 |
| | — |
| | 81,310 |
|
Other operations | — |
| | 59,851 |
| | 5,499 |
| | (437 | ) | | 64,913 |
|
Maintenance | — |
| | 18,469 |
| | 743 |
| | — |
| | 19,212 |
|
Depreciation and amortization | 70 |
| | 62,471 |
| | 4,488 |
| | (62 | ) | | 66,967 |
|
Income tax (benefit) expense | (411 | ) | | 12,019 |
| | 1,265 |
| | 651 |
| | 13,524 |
|
Property and other taxes | — |
| | 19,431 |
| | 2,471 |
| | — |
| | 21,902 |
|
Total operating (income) expenses | (318 | ) | | 429,766 |
| | 29,023 |
| | 152 |
| | 458,623 |
|
Net operating income | 318 |
| | 73,019 |
| | 5,871 |
| | (152 | ) | | 79,056 |
|
Other income and expenses: | |
| | |
| | |
| | |
| | |
|
Non-regulated revenue | 1,826 |
| | 13,374 |
| | 1,212 |
| | (2,263 | ) | | 14,149 |
|
Non-regulated expenses | — |
| | (9,610 | ) | | (860 | ) | | — |
| | (10,470 | ) |
Other components of net periodic benefit cost | — |
| | (4,177 | ) | | (131 | ) | | — |
| | (4,308 | ) |
Allowance for equity funds used during construction | — |
| | 5,087 |
| | — |
| | — |
| | 5,087 |
|
Income tax expense on other income and expenses | (511 | ) | | (1,028 | ) | | (79 | ) | | 633 |
| | (985 | ) |
Net other income | 1,315 |
| | 3,646 |
| | 142 |
| | (1,630 | ) | | 3,473 |
|
Interest: | |
| | |
| | |
| | |
| | |
|
Interest expense | 1,376 |
| | 32,141 |
| | 1,841 |
| | (1,826 | ) | | 33,532 |
|
Allowance for borrowed funds used during construction | — |
| | (2,592 | ) | | (191 | ) | | — |
| | (2,783 | ) |
Net interest expense | 1,376 |
| | 29,549 |
| | 1,650 |
| | (1,826 | ) | | 30,749 |
|
Equity earnings of subsidiaries | 51,523 |
| | — |
| | — |
| | (51,523 | ) | | — |
|
Net income | $ | 51,780 |
| | $ | 47,116 |
| | $ | 4,363 |
| | $ | (51,479 | ) | | $ | 51,780 |
|
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the nine months ended September 30, 20182020
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating revenue | $ | 0 | | | $ | 567,494 | | | $ | 37,661 | | | $ | 0 | | | $ | 605,155 | |
Operating expenses: | | | | | | | | | |
Operations: | | | | | | | | | |
Water production costs | 0 | | | 203,485 | | | 6,977 | | | 0 | | | 210,462 | |
Administrative and general | 0 | | | 77,025 | | | 8,802 | | | 0 | | | 85,827 | |
Other operations | 0 | | | 63,427 | | | 6,628 | | | (437) | | | 69,618 | |
Maintenance | 0 | | | 19,980 | | | 944 | | | 0 | | | 20,924 | |
Depreciation and amortization | 70 | | | 68,886 | | | 4,836 | | | (59) | | | 73,733 | |
Income tax (benefit) expense | (341) | | | 9,054 | | | 1,176 | | | 600 | | | 10,489 | |
Property and other taxes | 0 | | | 19,618 | | | 2,852 | | | 0 | | | 22,470 | |
Total operating (income) expenses | (271) | | | 461,475 | | | 32,215 | | | 104 | | | 493,523 | |
Net operating income | 271 | | | 106,019 | | | 5,446 | | | (104) | | | 111,632 | |
Other income and expenses: | | | | | | | | | |
Non-regulated revenue | 1,648 | | | 11,102 | | | 1,304 | | | (2,085) | | | 11,969 | |
Non-regulated expenses | 0 | | | (10,864) | | | (947) | | | 0 | | | (11,811) | |
Other components of net periodic benefit cost | 0 | | | (3,717) | | | (53) | | | 0 | | | (3,770) | |
Allowance for equity funds used during construction | 0 | | | 4,292 | | | 0 | | | 0 | | | 4,292 | |
Income tax expense on other income and expenses | (460) | | | (179) | | | (96) | | | 583 | | | (152) | |
Net other income | 1,188 | | | 634 | | | 208 | | | (1,502) | | | 528 | |
Interest: | | | | | | | | | |
Interest expense | 1,161 | | | 32,402 | | | 1,658 | | | (1,648) | | | 33,573 | |
Allowance for borrowed funds used during construction | 0 | | | (2,604) | | | (143) | | | 0 | | | (2,747) | |
Net interest expense | 1,161 | | | 29,798 | | | 1,515 | | | (1,648) | | | 30,826 | |
Equity earnings of subsidiaries | 81,036 | | | 0 | | | 0 | | | (81,036) | | | 0 | |
Net income | $ | 81,334 | | | $ | 76,855 | | | $ | 4,139 | | | $ | (80,994) | | | $ | 81,334 | |
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating revenue | $ | — |
| | $ | 499,173 |
| | $ | 31,606 |
| | $ | — |
| | $ | 530,779 |
|
Operating expenses: | |
| | |
| | |
| | |
| | |
|
Operations: | |
| | |
| | |
| | |
| | |
|
Water production costs | — |
| | 185,149 |
| | 6,648 |
| | — |
| | 191,797 |
|
Administrative and general | — |
| | 69,531 |
| | 7,664 |
| | — |
| | 77,195 |
|
Other operations | — |
| | 55,626 |
| | 5,117 |
| | (436 | ) | | 60,307 |
|
Maintenance | — |
| | 16,974 |
| | 622 |
| | — |
| | 17,596 |
|
Depreciation and amortization | 70 |
| | 58,909 |
| | 3,763 |
| | (65 | ) | | 62,677 |
|
Income tax (benefit) expense | (342 | ) | | 15,081 |
| | 1,591 |
| | 620 |
| | 16,950 |
|
Property and other taxes | — |
| | 17,894 |
| | 2,359 |
| | — |
| | 20,253 |
|
Total operating (income) expenses | (272 | ) | | 419,164 |
| | 27,764 |
| | 119 |
| | 446,775 |
|
Net operating income | 272 |
| | 80,009 |
| | 3,842 |
| | (119 | ) | | 84,004 |
|
Other income and expenses: | |
| | |
| | |
| | |
| | |
|
Non-regulated revenue | 1,716 |
| | 13,572 |
| | 831 |
| | (2,152 | ) | | 13,967 |
|
Non-regulated expenses | — |
| | (15,943 | ) | | (506 | ) | | — |
| | (16,449 | ) |
Other components of net periodic benefit cost | — |
| | (6,618 | ) | | (366 | ) | | — |
| | (6,984 | ) |
Allowance for equity funds used during construction | — |
| | 2,644 |
| | — |
| | — |
| | 2,644 |
|
Income tax (expense) benefit on other income and expenses | (480 | ) | | 1,776 |
| | (16 | ) | | 602 |
| | 1,882 |
|
Net other income (loss) | 1,236 |
| | (4,569 | ) | | (57 | ) | | (1,550 | ) | | (4,940 | ) |
Interest: | |
| | |
| | |
| | |
| | |
|
Interest expense | 1,155 |
| | 29,095 |
| | 1,673 |
| | (1,716 | ) | | 30,207 |
|
Allowance for borrowed funds used during construction | — |
| | (1,250 | ) | | (109 | ) | | — |
| | (1,359 | ) |
Net interest expense | 1,155 |
| | 27,845 |
| | 1,564 |
| | (1,716 | ) | | 28,848 |
|
Equity earnings of subsidiaries | 49,863 |
| | — |
| | — |
| | (49,863 | ) | | — |
|
Net income | $ | 50,216 |
| | $ | 47,595 |
| | $ | 2,221 |
| | $ | (49,816 | ) | | $ | 50,216 |
|
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSINCOME
For the nine months ended September 30, 2019
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating revenue | $ | 0 | | | $ | 502,785 | | | $ | 34,894 | | | $ | 0 | | | $ | 537,679 | |
Operating expenses: | | | | | | | | | |
Operations: | | | | | | | | | |
Water production costs | 0 | | | 183,617 | | | 7,178 | | | 0 | | | 190,795 | |
Administrative and general | 23 | | | 73,908 | | | 7,379 | | | 0 | | | 81,310 | |
Other operations | 0 | | | 59,851 | | | 5,499 | | | (437) | | | 64,913 | |
Maintenance | 0 | | | 18,469 | | | 743 | | | 0 | | | 19,212 | |
Depreciation and amortization | 70 | | | 62,471 | | | 4,488 | | | (62) | | | 66,967 | |
Income tax (benefit) expense | (411) | | | 12,019 | | | 1,265 | | | 651 | | | 13,524 | |
Property and other taxes | 0 | | | 19,431 | | | 2,471 | | | 0 | | | 21,902 | |
Total operating (income) expenses | (318) | | | 429,766 | | | 29,023 | | | 152 | | | 458,623 | |
Net operating income | 318 | | | 73,019 | | | 5,871 | | | (152) | | | 79,056 | |
Other income and expenses: | | | | | | | | | |
Non-regulated revenue | 1,826 | | | 13,374 | | | 1,212 | | | (2,263) | | | 14,149 | |
Non-regulated expenses | 0 | | | (9,610) | | | (860) | | | 0 | | | (10,470) | |
Other components of net periodic benefit cost | 0 | | | (4,177) | | | (131) | | | 0 | | | (4,308) | |
Allowance for equity funds used during construction | 0 | | | 5,087 | | | 0 | | | 0 | | | 5,087 | |
Income tax expense on other income and expenses | (511) | | | (1,028) | | | (79) | | | 633 | | | (985) | |
Net other income | 1,315 | | | 3,646 | | | 142 | | | (1,630) | | | 3,473 | |
Interest: | | | | | | | | | |
Interest expense | 1,376 | | | 32,141 | | | 1,841 | | | (1,826) | | | 33,532 | |
Allowance for borrowed funds used during construction | 0 | | | (2,592) | | | (191) | | | 0 | | | (2,783) | |
Net interest expense | 1,376 | | | 29,549 | | | 1,650 | | | (1,826) | | | 30,749 | |
Equity earnings of subsidiaries | 51,523 | | | 0 | | | 0 | | | (51,523) | | | 0 | |
Net income | $ | 51,780 | | | $ | 47,116 | | | $ | 4,363 | | | $ | (51,479) | | | $ | 51,780 | |
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating activities: | |
| | |
| | |
| | |
| | |
|
Net income | $ | 51,780 |
| | $ | 47,116 |
| | $ | 4,363 |
| | $ | (51,479 | ) | | $ | 51,780 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
| | |
| | |
|
Equity earnings of subsidiaries | (51,523 | ) | | — |
| | — |
| | 51,523 |
| | — |
|
Dividends received from affiliates | 28,507 |
| | — |
| | — |
| | (28,507 | ) | | — |
|
Depreciation and amortization | 70 |
| | 63,975 |
| | 4,539 |
| | (62 | ) | | 68,522 |
|
Changes in value of life insurance contracts | — |
| | (3,433 | ) | | — |
| | — |
| | (3,433 | ) |
Allowance for equity funds used during construction | — |
| | (5,087 | ) | | — |
| | — |
| | (5,087 | ) |
Changes in operating assets and liabilities | 194 |
| | (6,744 | ) | | 1,509 |
| | — |
| | (5,041 | ) |
Other changes in noncurrent assets and liabilities | 5,239 |
| | 14,560 |
| | 1,785 |
| | 18 |
| | 21,602 |
|
Net cash provided by operating activities | 34,267 |
| | 110,387 |
| | 12,196 |
| | (28,507 | ) | | 128,343 |
|
Investing activities: | | | | | |
| | | | |
Utility plant expenditures | — |
| | (185,883 | ) | | (9,059 | ) | | — |
| | (194,942 | ) |
Changes in affiliate advances | (3,199 | ) | | 3,534 |
| | (320 | ) | | (15 | ) | | — |
|
Issuance of affiliate short-term borrowings | (4,300 | ) | | — |
| | — |
| | 4,300 |
| | — |
|
Reduction of affiliates long-term debt | 1,462 |
| | — |
| | — |
| | (1,462 | ) | | — |
|
Purchase of life insurance contracts | — |
| | (2,216 | ) | | — |
| | — |
| | (2,216 | ) |
Net cash used in investing activities | (6,037 | ) | | (184,565 | ) | | (9,379 | ) | | 2,823 |
| | (197,158 | ) |
Financing Activities: | |
| | |
| | |
| | |
| | |
|
Short-term borrowings | — |
| | 210,000 |
| | — |
| | — |
| | 210,000 |
|
Repayment of short-term borrowings | — |
| | (120,000 | ) | | — |
| | — |
| | (120,000 | ) |
Changes in affiliate advances | (17 | ) | | 4,419 |
| | (4,417 | ) | | 15 |
| | — |
|
Proceeds from affiliate short-term borrowings | — |
| | — |
| | 4,300 |
| | (4,300 | ) | | — |
|
Repayment of affiliates long-term borrowings | — |
| | — |
| | (1,462 | ) | | 1,462 |
| | — |
|
Issuance of long term debt, net of expenses | — |
| | 398,431 |
| | — |
| | — |
| | 398,431 |
|
Repayment of long-term debt | — |
| | (401,417 | ) | | (213 | ) | | — |
| | (401,630 | ) |
Advances and contributions in aid of construction | — |
| | 21,176 |
| | 90 |
| | — |
| | 21,266 |
|
Refunds of advances for construction | — |
| | (5,560 | ) | | — |
| | — |
| | (5,560 | ) |
Repurchase of common stock | (2,355 | ) | | — |
| | — |
| | — |
| | (2,355 | ) |
Issuance of common stock | 1,278 |
| | — |
| | — |
| | — |
| | 1,278 |
|
Dividends paid to non-affiliates | (28,507 | ) | | — |
| | — |
| | — |
| | (28,507 | ) |
Dividends paid to affiliates | — |
| | (27,419 | ) | | (1,088 | ) | | 28,507 |
| | — |
|
Net cash (used in) provided by financing activities | (29,601 | ) | | 79,630 |
| | (2,790 | ) | | 25,684 |
| | 72,923 |
|
Change in cash, cash equivalents, and restricted cash | (1,371 | ) | | 5,452 |
| | 27 |
| | — |
| | 4,108 |
|
Cash, cash equivalents, and restricted cash at beginning of period | 3,779 |
| | 34,238 |
| | 9,698 |
| | — |
| | 47,715 |
|
Cash, cash equivalents, and restricted cash at end of period | $ | 2,408 |
| | $ | 39,690 |
| | $ | 9,725 |
| | — |
| | $ | 51,823 |
|
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 20182020
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating activities: | | | | | | | | | |
Net income | $ | 81,334 | | | $ | 76,855 | | | $ | 4,139 | | | $ | (80,994) | | | $ | 81,334 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
Equity earnings of subsidiaries | (81,036) | | | 0 | | | 0 | | | 81,036 | | | 0 | |
Dividends received from affiliates | 31,177 | | | 0 | | | 0 | | | (31,177) | | | 0 | |
Depreciation and amortization | 70 | | | 70,604 | | | 4,935 | | | (59) | | | 75,550 | |
Changes in value of life insurance contracts | 0 | | | (621) | | | 0 | | | 0 | | | (621) | |
Allowance for equity funds used during construction | 0 | | | (4,292) | | | 0 | | | 0 | | | (4,292) | |
Changes in operating assets and liabilities | (463) | | | (17,633) | | | (311) | | | 0 | | | (18,407) | |
Other changes in noncurrent assets and liabilities | 3,262 | | | (42,184) | | | 2,005 | | | 17 | | | (36,900) | |
Net cash provided by operating activities | 34,344 | | | 82,729 | | | 10,768 | | | (31,177) | | | 96,664 | |
Investing activities: | | | | | | | | | |
Utility plant expenditures | 0 | | | (212,288) | | | (8,973) | | | 0 | | | (221,261) | |
Business acquisition, net of cash acquired | (1,950) | | | 0 | | | (37,594) | | | 0 | | | (39,544) | |
Investment in affiliates | (90,871) | | | 0 | | | 0 | | | 90,871 | | | 0 | |
Changes in affiliate advances | 2,238 | | | 2,679 | | | (145) | | | (4,772) | | | 0 | |
Issuance of affiliate short-term borrowings | (3,500) | | | 0 | | | 0 | | | 3,500 | | | 0 | |
Issuance of affiliate long-term borrowings | (4,076) | | | 0 | | | 0 | | | 4,076 | | | 0 | |
Reduction of affiliates long-term debt | 1,580 | | | 0 | | | 0 | | | (1,580) | | | 0 | |
Purchase of life insurance contracts | 0 | | | (2,335) | | | 0 | | | 0 | | | (2,335) | |
Net cash used in investing activities | (96,579) | | | (211,944) | | | (46,712) | | | 92,095 | | | (263,140) | |
Financing Activities: | | | | | | | | | |
Short-term borrowings | 50,000 | | | 220,000 | | | 0 | | | 0 | | | 270,000 | |
Repayment of short-term borrowings | 0 | | | (70,000) | | | 0 | | | 0 | | | (70,000) | |
Investment from affiliates | 0 | | | 57,266 | | | 33,605 | | | (90,871) | | | 0 | |
Changes in affiliate advances | 0 | | | (3,175) | | | (1,597) | | | 4,772 | | | 0 | |
Proceeds from affiliate short-term borrowings | 0 | | | 0 | | | 3,500 | | | (3,500) | | | 0 | |
Proceeds from affiliate long-term borrowings | 0 | | | 0 | | | 4,076 | | | (4,076) | | | 0 | |
Repayment of affiliates long-term borrowings | 0 | | | 0 | | | (1,580) | | | 1,580 | | | 0 | |
Repayment of long-term debt | 0 | | | (1,415) | | | (120) | | | 0 | | | (1,535) | |
Advances and contributions in aid of construction | 0 | | | 19,735 | | | 127 | | | 0 | | | 19,862 | |
Refunds of advances for construction | 0 | | | (7,015) | | | (2) | | | 0 | | | (7,017) | |
Repurchase of common stock | (1,578) | | | 0 | | | 0 | | | 0 | | | (1,578) | |
Issuance of common stock | 58,573 | | | 0 | | | 0 | | | 0 | | | 58,573 | |
Dividends paid to non-affiliates | (31,177) | | | 0 | | | 0 | | | 0 | | | (31,177) | |
Dividends paid to affiliates | 0 | | | (29,461) | | | (1,716) | | | 31,177 | | | 0 | |
Net cash provided by financing activities | 75,818 | | | 185,935 | | | 36,293 | | | (60,918) | | | 237,128 | |
Change in cash, cash equivalents, and restricted cash | 13,583 | | | 56,720 | | | 349 | | | 0 | | | 70,652 | |
Cash, cash equivalents, and restricted cash at beginning of period | 3,096 | | | 29,679 | | | 10,523 | | | 0 | | | 43,298 | |
Cash, cash equivalents, and restricted cash at end of period | $ | 16,679 | | | $ | 86,399 | | | $ | 10,872 | | | 0 | | | $ | 113,950 | |
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating activities: | |
| | |
| | |
| | |
| | |
|
Net income | $ | 50,216 |
| | $ | 47,595 |
| | $ | 2,221 |
| | $ | (49,816 | ) | | $ | 50,216 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
| | |
| | |
|
Equity earnings of subsidiaries | (49,863 | ) | | — |
| | — |
| | 49,863 |
| | — |
|
Dividends received from affiliates | 27,029 |
| | — |
| | — |
| | (27,029 | ) | | — |
|
Depreciation and amortization | 70 |
| | 60,298 |
| | 3,828 |
| | (65 | ) | | 64,131 |
|
Changes in value of life insurance contracts | — |
| | 124 |
| | — |
| | — |
| | 124 |
|
Allowance for equity funds used during construction | — |
| | (2,644 | ) | | — |
| | — |
| | (2,644 | ) |
Changes in operating assets and liabilities | (281 | ) | | 6,135 |
| | 1,178 |
| | — |
| | 7,032 |
|
Other changes in noncurrent assets and liabilities | 2,518 |
| | (3,881 | ) | | 1,989 |
| | 18 |
| | 644 |
|
Net cash provided by operating activities | 29,689 |
| | 107,627 |
| | 9,216 |
| | (27,029 | ) | | 119,503 |
|
Investing activities: | |
| | |
| | |
| | |
| | |
|
Utility plant expenditures | 4 |
| | (205,218 | ) | | (7,642 | ) | | — |
| | (212,856 | ) |
Changes in affiliate advances | (975 | ) | | 3,198 |
| | (269 | ) | | (1,954 | ) | | — |
|
Issuance of affiliate short-term borrowings | (23,700 | ) | | — |
| | — |
| | 23,700 |
| | — |
|
Reduction of affiliates long-term debt | 1,224 |
| | — |
| | — |
| | (1,224 | ) | | — |
|
Life insurance proceeds | — |
| | 3,491 |
| | — |
| | — |
| | 3,491 |
|
Purchase of life insurance contracts | — |
| | (4,925 | ) | | — |
| | — |
| | (4,925 | ) |
Net cash used in investing activities | (23,447 | ) | | (203,454 | ) | | (7,911 | ) | | 20,522 |
| | (214,290 | ) |
Financing Activities: | |
| | |
| | |
| | |
| | |
|
Short-term borrowings | 20,000 |
| | 121,000 |
| | — |
| | — |
| | 141,000 |
|
Repayment of short-term borrowings | — |
| | (341,000 | ) | | — |
| | — |
| | (341,000 | ) |
Changes in affiliate advances | — |
| | 1,129 |
| | (3,083 | ) | | 1,954 |
| | — |
|
Proceeds from affiliate short-term borrowings | — |
| | 20,000 |
| | 3,700 |
| | (23,700 | ) | | — |
|
Repayment of affiliates long-term borrowings | — |
| | — |
| | (1,224 | ) | | 1,224 |
| | — |
|
Issuance of long-term debt, net of expenses | — |
| | 299,383 |
| | — |
| | — |
| | 299,383 |
|
Repayment of long-term debt | — |
| | (12,299 | ) | | (200 | ) | | — |
| | (12,499 | ) |
Advances and contributions in aid for construction | — |
| | 13,288 |
| | 342 |
| | — |
| | 13,630 |
|
Refunds of advances for construction | — |
| | (5,452 | ) | | (10 | ) | | — |
| | (5,462 | ) |
Repurchase of common stock | (1,496 | ) | | — |
| | — |
| | — |
| | (1,496 | ) |
Dividends paid to non-affiliates | (27,029 | ) | | — |
| | — |
| | — |
| | (27,029 | ) |
Dividends paid to affiliates | — |
| | (25,959 | ) | | (1,070 | ) | | 27,029 |
| | — |
|
Net cash (used in) provided by financing activities | (8,525 | ) | | 70,090 |
| | (1,545 | ) | | 6,507 |
| | 66,527 |
|
Change in cash, cash equivalents, and restricted cash | (2,283 | ) | | (25,737 | ) | | (240 | ) | | — |
| | (28,260 | ) |
Cash, cash equivalents, and restricted cash at beginning of period | 4,728 |
| | 81,453 |
| | 9,171 |
| | — |
| | 95,352 |
|
Cash, cash equivalents, and restricted cash at end of period | $ | 2,445 |
| | $ | 55,716 |
| | $ | 8,931 |
| | — |
| | $ | 67,092 |
|
26
Subsequent to the issuance of the Company's Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2018, the Company identified an immaterial computational error related to the amount of authorized revenue recorded pursuant to the Company's pension and health care cost recovery balancing accounts. In accordance with the 2015 GRC, the Company adjusts the revenue and corresponding balancing accounts quarterly to reflect actual pension and health care costs, subject to certain limitations prescribed by the 2015 GRC. The error does not impact the billings to customers or the cash collected from customers in this GRC period, which ends on December 31, 2019. As provided for in the 2015 GRC, the amounts included in the balancing account will be recovered from or refunded to customers during the next GRC period.
The Company corrected the error in the accompanying Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2018. The Company believes the correction of the error is immaterial to the previously issued Condensed Consolidated Financial Statements.
The corrections to the Company's Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 were as follows:
Condensed Consolidated Statements of Income
|
| | | | | | | | | | | |
| For the three months ended September 30, 2018 |
| As Previously Reported | | Corrections | | As Corrected |
| (In thousands, except per share data) |
Operating revenue | $ | 218,983 |
| | $ | 2,305 |
| | $ | 221,288 |
|
Operating expenses: | |
| | |
| | |
|
Income taxes | 11,262 |
| | 524 |
| | 11,786 |
|
Total operating expenses | 173,435 |
| | 524 |
| | 173,959 |
|
Net operating income | 45,548 |
| | 1,781 |
| | 47,329 |
|
Net income | $ | 34,392 |
| | $ | 1,781 |
| | $ | 36,173 |
|
Earnings per share: | |
| | |
| | |
|
Basic | $ | 0.72 |
| | $ | 0.03 |
| | $ | 0.75 |
|
Diluted | $ | 0.72 |
| | $ | 0.03 |
| | $ | 0.75 |
|
CALIFORNIA WATER SERVICE GROUPCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
| | | | | | | | | | | |
| For the nine months ended September 30, 2018 |
| As Previously Reported | | Corrections | | As Corrected |
| (In thousands, except per share data) |
Operating revenue | $ | 523,862 |
| | $ | 6,917 |
| | $ | 530,779 |
|
Operating expenses: | |
| | |
| | |
|
Income taxes | 15,380 |
| | 1,570 |
| | 16,950 |
|
Total operating expenses | 445,205 |
| | 1,570 |
| | 446,775 |
|
Net operating income | 78,657 |
| | 5,347 |
| | 84,004 |
|
Net income | $ | 44,869 |
| | $ | 5,347 |
| | $ | 50,216 |
|
Earnings per share: | |
| | |
| | |
Basic | $ | 0.93 |
| | $ | 0.11 |
| | $ | 1.04 |
|
Diluted | $ | 0.93 |
| | $ | 0.11 |
| | $ | 1.04 |
|
The corrections to the Company's retained earnings and total stockholders’ equity as of January 1, 2018, March 31, 2018, June 30, 2018, and September 30, 2018 were as follows:
|
| | | | | | | | | | | |
| January 1, 2018 |
| As Previously Reported | | Corrections | | As Corrected |
| (In thousands) |
Retained earnings | $ | 356,753 |
| | $ | 5,759 |
| | $ | 362,512 |
|
Total common stockholders' equity | 693,462 |
| | 5,759 |
| | 699,221 |
|
|
| | | | | | | | | | | |
| March 31, 2018 |
| As Previously Reported | | Corrections | | As Corrected |
| (In thousands) |
Retained earnings | $ | 345,205 |
| | $ | 7,542 |
| | $ | 352,747 |
|
Total common stockholders' equity | 681,311 |
| | 7,542 |
| | 688,853 |
|
|
| | | | | | | | | | | |
| June 30, 2018 |
| As Previously Reported | | Corrections | | As Corrected |
| (In thousands) |
Retained earnings | $ | 349,213 |
| | $ | 9,325 |
| | $ | 358,538 |
|
Total common stockholders' equity | 685,932 |
| | 9,325 |
| | 695,257 |
|
|
| | | | | | | | | | | |
| September 30, 2018 |
| As Previously Reported | | Corrections | | As Corrected |
| (In thousands) |
Retained earnings | $ | 374,593 |
| | $ | 11,106 |
| | $ | 385,699 |
|
Total common stockholders' equity | 712,034 |
| | 11,106 |
| | 723,140 |
|
The corrections to the Company's Condensed Consolidated Statement of Cash Flows forFor the nine months ended September 30, 20182019
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Parent Company | | Cal Water | | All Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
Operating activities: | | | | | | | | | |
Net income | $ | 51,780 | | | $ | 47,116 | | | $ | 4,363 | | | $ | (51,479) | | | $ | 51,780 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
Equity earnings of subsidiaries | (51,523) | | | 0 | | | 0 | | | 51,523 | | | 0 | |
Dividends received from affiliates | 28,507 | | | 0 | | | 0 | | | (28,507) | | | 0 | |
Depreciation and amortization | 70 | | | 63,975 | | | 4,539 | | | (62) | | | 68,522 | |
Changes in value of life insurance contracts | 0 | | | (3,433) | | | 0 | | | 0 | | | (3,433) | |
Allowance for equity funds used during construction | 0 | | | (5,087) | | | 0 | | | 0 | | | (5,087) | |
Changes in operating assets and liabilities | 194 | | | (6,744) | | | 1,509 | | | 0 | | | (5,041) | |
Other changes in noncurrent assets and liabilities | 5,239 | | | 14,560 | | | 1,785 | | | 18 | | | 21,602 | |
Net cash provided by operating activities | 34,267 | | | 110,387 | | | 12,196 | | | (28,507) | | | 128,343 | |
Investing activities: | | | | | | | | | |
Utility plant expenditures | 0 | | | (185,883) | | | (9,059) | | | 0 | | | (194,942) | |
Changes in affiliate advances | (3,199) | | | 3,534 | | | (320) | | | (15) | | | 0 | |
Issuance of affiliate short-term borrowings | (4,300) | | | 0 | | | 0 | | | 4,300 | | | 0 | |
Reduction of affiliates long-term debt | 1,462 | | | 0 | | | 0 | | | (1,462) | | | 0 | |
Purchase of life insurance contracts | 0 | | | (2,216) | | | 0 | | | 0 | | | (2,216) | |
Net cash used in investing activities | (6,037) | | | (184,565) | | | (9,379) | | | 2,823 | | | (197,158) | |
Financing Activities: | | | | | | | | | |
Short-term borrowings | 0 | | | 210,000 | | | 0 | | | 0 | | | 210,000 | |
Repayment of short-term borrowings | 0 | | | (120,000) | | | 0 | | | 0 | | | (120,000) | |
Changes in affiliate advances | (17) | | | 4,419 | | | (4,417) | | | 15 | | | 0 | |
Proceeds from affiliate short-term borrowings | 0 | | | 0 | | | 4,300 | | | (4,300) | | | 0 | |
Repayment of affiliates long-term borrowings | 0 | | | 0 | | | (1,462) | | | 1,462 | | | 0 | |
Issuance of long-term debt, net of expenses | 0 | | | 398,431 | | | 0 | | | 0 | | | 398,431 | |
Repayment of long-term debt | 0 | | | (401,417) | | | (213) | | | 0 | | | (401,630) | |
Advances and contributions in aid for construction | 0 | | | 21,176 | | | 90 | | | 0 | | | 21,266 | |
Refunds of advances for construction | 0 | | | (5,560) | | | 0 | | | 0 | | | (5,560) | |
Repurchase of common stock | (2,355) | | | 0 | | | 0 | | | 0 | | | (2,355) | |
Issuance of common stock | 1,278 | | | 0 | | | 0 | | | 0 | | | 1,278 | |
Dividends paid to non-affiliates | (28,507) | | | 0 | | | 0 | | | 0 | | | (28,507) | |
Dividends paid to affiliates | 0 | | | (27,419) | | | (1,088) | | | 28,507 | | | 0 | |
Net cash (used in) provided by financing activities | (29,601) | | | 79,630 | | | (2,790) | | | 25,684 | | | 72,923 | |
Change in cash, cash equivalents, and restricted cash | (1,371) | | | 5,452 | | | 27 | | | 0 | | | 4,108 | |
Cash, cash equivalents, and restricted cash at beginning of period | 3,779 | | | 34,238 | | | 9,698 | | | 0 | | | 47,715 | |
Cash, cash equivalents, and restricted cash at end of period | $ | 2,408 | | | $ | 39,690 | | | $ | 9,725 | | | 0 | | | $ | 51,823 | |
Note 13. Acquisition
On March 27, 2020, the Company’s wholly owned subsidiary, Washington Water, received regulatory approval from the Washington Utilities and Transportation Commission (WUTC) for Washington Water's application for the sale and transfer of assets of Rainier View Water Company. Washington Water paid $37.6 million in cash to take control of the water system on June 1, 2020. The acquisition of Rainier View Water doubles the size of Washington Water’s operations and solidifies the Company’s position as the largest investor-owned water company in the state of Washington, regulated by the WUTC. Rainier View Water serves approximately 35,000 people in parts of Graham, Spanaway, Puyallup, Gig Harbor, and other nearby areas through approximately 18,500 customer connections in 27 water systems.
Assets acquired were as follows:$32.7 million, including utility plant of $31.1 million, and liabilities of $22.9 million were assumed, including $21.3 million of contributions in aid of construction. Goodwill of $27.7 million was recorded and consists largely of the synergies expected from combining the operations of Rainier View Water Company and Washington Water. In the third quarter of 2020, the Company finalized identifying the acquired assets and liabilities. The Company is still in the process of finalizing the valuation of certain intangible assets; therefore, the goodwill recorded is subject to further refinement upon completion.
The Company expects all the goodwill from the acquisition to be deductible for tax purposes.
Condensed Consolidated Statementbalance sheets and pro forma results of Cash Flows
|
| | | | | | | | | | | |
| For the nine months ended September 30, 2018 |
| As Previously Reported | | Corrections | | As Corrected |
| (In thousands) |
Operating activities: | |
| | | | |
|
Net income | $ | 44,869 |
| | $ | 5,347 |
| | $ | 50,216 |
|
Other changes in noncurrent assets and liabilities | 5,991 |
| | (5,347 | ) | | 644 |
|
Net cash provided by operating activities | $ | 119,503 |
| | $ | — |
| | $ | 119,503 |
|
Note 14. Subsequent Event
California GRC filing
Subsequent tooperations for this acquisition have not been presented since the issuanceimpact of the Company's Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2018, Cal Water jointly filed a formal settlement agreement in its 2018 GRC with the Public Advocates Office of the CPUC covering the majority of open matters in the case on October 8, 2019. The largest component of the GRC is Cal Water’s Infrastructure Improvement Plan for 2019-2021. The settlement details investment plans that Cal Water and the Public Advocates Office agree should be made to Cal Water’s water infrastructure to continue providing safe, reliable water service to Cal Water customers and communities. The CPUC will consider, but isacquisition was not required to adopt, the settlement agreement. If the CPUC approves the settlement agreement, Cal Water would be authorized to include in rates $609.0 million to $628.0 million of new projects throughout the state in 2019 to 2021, along with approximately $200.0 million for completion of additional projects begun in 2018 and prior periods. Included in these figures are $148.0 million of advice letter authorizations, which would not be included in rates until related projects are completed. Cal Water anticipates that if the settlement were adopted, it would plan to make capital investments of approximately $809.0 million to $828.0 million in the 2019-2021 period. The settlement proposes, in part, an average water main replacement rate of 0.76% annually company-wide by 2021, with higher replacement rates in some areas. A final decision on the case is expected in late 2019, with new rates going into effect in January of 2020. Cal Water previously filed a request for interim rates beginning January 1, 2020 in the event a final decision is unexpectedly delayed.material.
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Dollar amounts in thousands unless otherwise stated
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. 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 “expects,” “intends,” “plans,” “believes,” “may,” “estimates,” “assumes,” “anticipates,” “projects,” “predicts,” “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 outcome of the CPUC's decision on the proposed decision issued by an ALJ with respect to the litigated balancing accounts for Cal Water's 2018 GRC filing. Failure of the CPUC to accept the proposed decision could have a material effect on our results of operations. If the CPUC were to change the ALJ's proposed decision and discontinue the litigated balancing accounts effective December 31, 2019, the impact to the Company would be a material decrease in the Company's 2020, 2021, and 2022 operating revenue and net operating income;
•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 relating to our water systems;
•changes in regulatory commissions’commissions' policies and procedures;
•the outcome and timeliness of regulatory commissions’commissions' actions concerning rate relief and other actions;
•increased risk of inverse condemnation losses as a result of climate conditions;
•our ability to renew leases to operate 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, especially as a result of Public Safety Power Shutoff (PSPS) programs for the 2019 fire season as we further develop approaches to manage that risk;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;
•the adequacy of our efforts to mitigate physical and cyber security riskrisks and threats;
•the ability of our enterprise risk management processes to identify or address risks adequately;
•labor relations matters as we negotiate with the unions;
•changes in customer water use patterns and the effects of conservation;
•our ability to complete, successfully integrate and achieve anticipated benefits from announced acquisitions;
•the impact of weather, climate, natural disasters, and diseasesactual or threatened public health emergencies, including disease outbreaks, on our operations, water quality, water availability, water sales and operating results and the adequacy of our emergency preparedness; and
•the risks set forth in “Risk Factors” included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.2019.
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
We maintain our accounting records in accordance with 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 Company's Annual Report on Form 10-K for the year ended December 31, 2018.2019. They include:
•revenue recognition;
•regulated utility accounting;
•income taxes;
•pension and postretirement health care benefits;
For the nine months ended September 30, 2019,2020, 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.
CAL WATER'S 2018 GRC
On October 14, 2020, an ALJ with the CPUC issued a proposed decision for Cal Water's 2018 GRC filing. The proposed decision is subject to adoption by the CPUC no earlier than the CPUC’s November 19, 2020 meeting. Both Cal Water and the CPUC's Public Advocates Office have an opportunity to provide their feedback on the proposed decision. If adopted as proposed, the decision would approve the settlement reached in October of 2019 by Cal Water and the CPUC’s Public Advocates Office, allow Cal Water to continue its decoupling balancing accounts through 2022, and allow Cal Water to retain its PCBA and HCBA.
We determined that the proposed decision provides additional evidence about conditions that existed as of September 30, 2020. As of November 6, 2020, we also believe that it is probable that the proposed decision will be adopted by the CPUC without any material variation and accordingly, we recorded regulatory assets and associated revenues resulting from the regulatory mechanisms approved in the proposed decision as of September 30, 2020. In the unlikely event that the CPUC does not approve the proposed decision as issued, we will need to adjust regulatory asset balances and revenues in the fourth quarter of 2020. Any such adjustment could result in a material decrease to our operating revenue and net operating income for full-year 2020.
COVID-19
At the end of 2019, a COVID-19 outbreak was reported to have surfaced in Wuhan, China, and has since spread to a large number of other countries, including the United States. In March of 2020, the World Health Organization characterized the outbreak as a pandemic. During the month of March, all of the states in which we operate enacted shelter-in-place and social distancing ordinances that resulted in temporary closures of non-essential businesses and self-quarantining of non-essential workers. Although such measures have been partially rescinded in certain areas, public health restrictions remain in place in all of the states in which we operate. As an “essential business” during times of emergencies pursuant to the U.S. Critical Infrastructures Protection Act of 2001, we are working to continue to provide high quality water and wastewater services to our two million customers. For the nine months ended September 30, 2020 and through November 6, 2020, the COVID-19 pandemic has not had a significant impact on our business or operations. We have, however, increased our allowance for credit losses as we have ceased all shutoffs for non-payment during the pandemic and anticipate this situation will continue until April 1, 2021. We are expecting segments of our customer base to continue to experience employment layoffs and business closures that negatively impact their ability to pay utility bills. We have also incurred costs to promote the health and safety of our employees and facilities.
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. 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 THIRD QUARTER 20192020 OPERATIONS
COMPARED TO THIRD QUARTER 20182019 OPERATIONS
Dollar amounts in thousands unless otherwise stated
Overview
As discussed further in Note 13, the Company corrected an immaterial computational error that understated revenue for the three months ended September 30, 2018.Net Income
Net income for the three months ended September 30, 20192020 was $42.4$96.4 million or $0.88$1.94 earnings per diluted common share, compared to net income of $36.2$42.4 million or $0.75$0.88 earnings per diluted common share for the three months ended September 30, 2018.
2019.
The $6.2$54.0 million increase in net income was primarily due to generalour determination that the October 14, 2020 proposed decision in the 2018 GRC was sufficient evidence to record regulatory assets and associated revenues for interim rate recovery as well as benefits balancing accounts and the decoupling mechanisms. In the third quarter of 2020, we recorded revenues of $37.6 million related to interim rate recovery regulatory assets, balancing account net revenue increases of $6.1$37.0 million, a $5.5and customer refunds for 2017 excess deferred federal income taxes (TCJA) of $7.1 million increasefor the nine months ended September 30, 2020. Included in unbilledthe amounts above, there were $18.9 million of interim rate recovery, $11.5 million of balancing account net revenue accrual, a reductionincreases, and $3.0 million of $1.3 million in business development expenses, and $0.8 million increase in allowancecustomer refunds for equity funds used during construction.TCJA for the three months ended September 30, 2020. These factorsincreases were partially offset by increases in operating expenses of $1.3 million for depreciation and amortization $1.0of $2.4 million, in employee wages $0.8costs of $2.2 million, inincome taxes of $1.6 million, bad debt expenses of $0.9 million, and outside service costs attributable to electric utilities’ PSPS programs and wildfire management, and $0.4 million in property taxes.of $0.7 million.
Unbilled revenue accrual is
Additionally, certain factors outside the Company’sCompany's immediate control. The quarter’s increasecontrol decreased net income, including a $2.6 million reduction in accrued unbilled revenue, mirrored the accrual reduction from the first two quarters of 2019. Also outside the Company’s control this quarterwhich was partially offset by a $0.4$1.2 million decreaseincrease in unrealized gain on certain benefit plan investments. The change in the Company’s unbilled revenue accrual was relatively consistent with the previous year.
Operating Revenue
Operating revenue increased $11.2$71.6 million, or 5.1%30.8%, to $232.5$304.1 million in the third quarter of 20192020 as compared to the third quarter of 2018. The factors that impacted the operating revenue for the third quarter of 2019, as comparedwith such change attributed to the third quarter of 2018 are as follows:following:
|
| | | |
Net change due to rate changes, usage, and other (1) | $ | 12,874 |
|
MCBA Revenue (2) | (395 | ) |
Other balancing account revenue (3) | 1,454 |
|
Deferral of revenue (4) | (2,684 | ) |
Net operating revenue increase | $ | 11,249 |
|
| | | | | |
1. | The netNet change due to rate changes, usage, and other in the above table was mainly driven by rate increases and a $5.5 million(1) | $ | 1,724 | |
WRAM Revenue (2) | (3,215) | |
MCBA Revenue (3) | 24,484 | |
IRMA Revenue (4) | 37,623 | |
Other balancing account revenue (5) | 4,459 | |
Deferral of revenue (6) | 6,496 | |
Net operating revenue increase in accrued unbilled revenue. The components of the rate increases are as follows: | $ | 71,571 | |
|
| | | |
General rate case | 761 |
|
Escalation rate increases | 5,218 |
|
Purchased water and pump tax offsets | 1,743 |
|
Rate base offsets | 162 |
|
Total increase in rates | $ | 7,884 |
|
1.The net change due to rate changes, usage, and other in the above table was mainly driven by a $3.3 million increase in volumetric revenue due to a 6.0% increase in customer usage and rate increases, the components of which are set forth in the table below, partially offset by a $2.6 million decrease in accrued unbilled revenue.
| | | | | |
2.General rate case | The MCBA revenue decrease resulted from a decrease in actual water production costs relative to adopted water production costs in the third quarter of 2019 as compared to the third quarter of 2018. The actual water production costs relative to adopted decreased as a result of a decrease in customer consumption in the third quarter of 2019 as compared to the third quarter of 2018. As required by the MCBA mechanism, the decrease in actual water production costs relative to adopted water production costs in California also decreased operating revenue for the same amount. |
185 | |
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 conservation expenses relative to adopted in the third quarter of 2019 as compared to the third quarter of 2018, which was partially offset by a decrease in actual pension and health care expenses relative to adopted in the third quarter of 2019 as compared to the third quarter of 2018. |
1,208 | |
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 period883 | |
Total increase in which these revenues were recorded. The deferral increased in the third quarter of 2019 as compared to the third quarter of 2018 due to a decline in actual customer usage relative to adopted customer usage in the third quarter of 2019 as compared to the third quarter of 2018.rates | $ | 2,276 | |
2.WRAM revenue is the variance between adopted volumetric revenues and actual billed volumetric revenues for metered accounts. In October of 2020, Cal Water received a proposed decision that authorizes the continuation of WRAM effective January 1, 2020; as a result, in the third quarter of 2020, we recorded an increase to revenue for the WRAM for the three and nine months ended September 30, 2020 of $8.4 million and $17.0 million, respectively. For the nine months ended September 30, 2020, actual billed volumetric revenue was lower than adopted volumetric revenue. In the third quarter of 2019, we recognized $20.2 million of WRAM revenue as actual billed volumetric revenue was lower than adopted volumetric revenue.
3.MCBA revenue is the variance between adopted water production costs and actual water production costs. In October of 2020, Cal Water received a proposed decision that authorizes the continuation of MCBA effective January 1, 2020; as a result, in the third quarter of 2020, we recorded an increase to revenue for the MCBA for the three and nine months ended September 30, 2020 of $1.1 million and $11.8 million, respectively. For the nine months ended September 30, 2020, actual water production costs were higher than adopted water production costs. In the third quarter of 2019, we recognized a $12.7 million decrease to revenue as actual water production costs were lower than adopted water production costs. As required by the MCBA mechanism, the difference in actual water production costs and adopted water production costs in California is recorded to operating revenue.
4.Due to the delay in the resolution of the 2018 GRC, the CPUC authorized Cal Water to track the effect of the delay on customer billings in an IRMA effective January 1, 2020. Variances between actual customer billings and those that would have been billed assuming the GRC had been effective January 1, 2020 are recorded as regulatory balancing account revenue. In October of 2020, Cal Water received a proposed decision on its 2018 GRC and was able to determine if the 2018 GRC had been resolved effective January 1, 2020, we would have billed customers an additional $18.9 million and $37.6 million for the three and nine months ended September 30, 2020.
5.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. In October of 2020, Cal Water received a proposed decision that authorizes the continuation of PCBA and HCBA effective January 1, 2020. We recorded an increase to revenue of $3.8 million and $11.4 million for the three and nine months ended September 30, 2020, respectively, for the PCBA and a decrease to revenue of $1.8 million and $3.1 million for the three and nine months ended September 30, 2020, respectively, for the HCBA in the third quarter of 2020. For the first nine months of 2020, actual pension costs were higher than adopted pension costs,
while actual health care costs were lower than adopted health care costs. In the third quarter of 2019, actual pension costs were above the adopted pension costs, while actual health care costs were below the adopted health care costs. A net increase to revenue of $1.5 million was recognized for the differences. In addition, there was a decrease in actual conservation expenses relative to adopted costs in the third quarter of 2020 as compared to the third quarter 2019 of $2.3 million.
6.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 third quarter of 2020 as compared to the third quarter of 2019 due to a decrease in the balancing account revenue expected to be collected beyond 24 months.
Total Operating Expenses
Total operating expenses increased $7.0$17.0 million, or 4.0%9.4%, to $198.0 million in the third quarter of 2020, as compared to $181.0 million in the third quarter of 2019, as compared to $174.0 million in the third quarter of 2018.2019.
Water production costs consists of purchased water, purchased power, and pump taxes. It represents the largest component of total operating expenses, accounting for approximately 43.1% of total operating expenses in the third quarter of 2020, as compared to 44.5% of total operating expenses in the third quarter of 2019, as compared to 45.3% of total operating expenses2019. Water production costs increased 5.8% in the third quarter of 2018. Water production costs increased 2.2% in the third quarter of 20192020 as compared to the same period last year mainly due to increased rates from our purchased water wholesalers.wholesalers, changes in water production mix in certain of our service territories, and an increase in customer usage.
Sources of water as a percent of total water production are listed in the following table:
| | | Three Months Ended September 30 | | Three Months Ended September 30 |
| 2019 | | 2018 | | 2020 | | 2019 |
Well production | 44 | % | | 47 | % | Well production | 47 | % | | 44 | % |
Purchased | 51 | % | | 49 | % | Purchased | 48 | % | | 51 | % |
Surface | 5 | % | | 4 | % | Surface | 5 | % | | 5 | % |
Total | 100 | % | | 100 | % | Total | 100 | % | | 100 | % |
The components of water production costs are shown in the table below:
|
| | | | | | | | | | | |
| Three Months Ended September 30 |
| 2019 | | 2018 | | Change |
Purchased water | $ | 66,483 |
| | $ | 64,578 |
| | $ | 1,905 |
|
Purchased power | 10,633 |
| | 10,488 |
| | 145 |
|
Pump taxes | 3,452 |
| | 3,752 |
| | (300 | ) |
Total | $ | 80,568 |
| | $ | 78,818 |
| | $ | 1,750 |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30 |
| 2020 | | 2019 | | Change |
Purchased water | $ | 70,398 | | | $ | 66,483 | | | $ | 3,915 | |
Purchased power | 11,983 | | | 10,633 | | | 1,350 | |
Pump taxes | 2,963 | | | 3,452 | | | (489) | |
Total | $ | 85,344 | | | $ | 80,568 | | | $ | 4,776 | |
Administrative and general and other operations expenses increased $2.9$7.7 million to $51.3$59.0 million in the third quarter of 2019,2020, primarily due to increasesa $5.4 million increase of costs associated with deferred WRAM revenue, a $2.2 million in conservation program costs, $0.9 million of outside services, $0.7 million of GRC settlement and asset impairment costs, $0.6 millionincrease in employee wages, and $0.5a $1.3 million ofincrease in employee pension retirement benefit costs, attributable to electric utilities’ PSPS programs and wildfire management,a $0.9 million increase in bad debt expense, $0.7 million increase in outside service costs which were partially offset by a $2.2decreases of $2.0 million deferral of costs associated with deferred revenues, and a $1.0 million decrease in health carewater conservation program costs. Changes in employee pension benefits and water conservation program costs for regulated California operations generally do not affect earnings, as the Company is allowed by the CPUC to record these costs in balancing accounts for future recovery, creating a corresponding change to revenue. Employee and retiree medical expenses are recovered in rates through a balancing account authorized in the 2015 GRC, such that revenues are recovered up to 85% of the variance between adopted and recorded expenses. At September 30, 2019,2020, there were 1,1981,224 employees and at September 30, 2018,2019, there were 1,1761,194 employees.
Maintenance expense did not change in the third quarter of 2020 as compared to the third quarter of 2019.
Depreciation and amortization expense increased $0.3$2.4 million, or 4.4%10.9%, to $7.1$24.7 million in the third quarter of 2019,2020, as compared to $6.8 million in the third quarter of 2018, mostly due to increased costs of $0.3 million for wildfire management.
Depreciation and amortization expense increased $1.3 million, or 6.0%, to $22.3 million in the third quarter of 2019, as compareddue mostly to $21.0capital additions in 2019.
Income taxes increased $1.6 million, or 13.2%, to $13.8 million in the third quarter of 2018, primarily due to capital additions.
Income taxes increased $0.4 million, or 3.5%,2020, as compared to $12.2 million in the third quarter of 2019,2019. The increase was due to an increase in operating income in the third quarter of 2020, partially offset by amortization of the excess deferred taxes as compareda result of the TCJA in the proposed decision of the 2018 GRC.
Property and other taxes increased $0.6 million to $11.8$8.1 million in the third quarter of 2018, due to an increase in operating income. The Company’s estimated combined effective income tax rate for 2019 is 22%.
Property and other taxes increased $0.4 million, or 5.6%,2020, as compared to $7.5 million in the third quarter of 2019, as compared to $7.1 million in the third quarter of 2018, mostly due to an increase in assessed property values.
Other Income and Expenses
Net other income increased $0.9$0.7 million in the third quarter of 2019,2020, mostly due to a $1.3$1.2 million increase in unrealized gain on certain benefit plan investments and $0.8 million decrease in business development expenses andother components of net periodic benefit costs which was partially offset by a $0.8$0.9 million increasedecrease in allowance for equity funds used during construction which was partially offset by the non-recurrence of a $0.5 million benefit from Company-owned life insurance which occurred in 2018 and a $0.4 million decrease in unrealized gain on certain benefit plan investments.
construction.
Interest Expense
Net interest expense decreased $1.0increased $1.2 million, or 10.3%13.4%, to $10.5 million in the third quarter of 2020, as compared to $9.3 million in the third quarter of 2019, as compared2019. The increase was due primarily to $10.3 millionincreased average short term borrowing and decreased interest capitalized in the third quarter of 2018. The decrease was due primarily2020 as compared to an increase in capitalized interest and reduced interest rates resulting from the refinancingthird quarter of $300.0 million of first mortgage bonds in 2019.
RESULTS OF THE NINE MONTHS ENDED SEPTEMBER 30, 20192020 OPERATIONS
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 20182019 OPERATIONS
Dollar amounts in thousands unless otherwise stated
Overview
As discussed further in Note 13, the Company corrected an immaterial computational error that understated revenue for the nine months ended September 30, 2018.Net Income
Net income for the nine months ended September 30, 20192020 was $51.8$81.3 million or $1.08 earnings$1.66 income per diluted common share, compared to net income of $50.2$51.8 million or $1.04$1.08 earnings per diluted common share for the nine months ended September 30, 2018.2019.
The $1.6$29.5 million increase in net income was driven primarilydue to our determination that the October 14, 2020 proposed decision in the 2018 GRC was sufficient evidence to record regulatory assets and associated revenues for interim rate recovery. In the third quarter of 2020, we recorded revenues of $37.6 million related to interim rate recovery regulatory assets and customer refunds for TCJA of $7.1 million. These increases were partially offset by $15.2increases in depreciation and amortization of $6.8 million, employee wages costs of general rate increases,$1.8 million, maintenance expense of $1.7 million, bad debt expenses of $1.6 million, and outside service costs of $1.1 million.
Additionally, certain factors outside the Company's immediate control decreased net income, including a $5.0$2.8 million reduction in business development expenses, a $3.6 million increasedecrease in unrealized income fromgain on certain benefit plan investments, due to market conditions, andwhich was partially offset by a $2.4$2.2 million increase in allowance for equity funds used during construction. These were partially offset by increased operating expenses of $11.8 million, increased net interest expenses of $1.9 million, $1.6 million decrease in benefit from Company owned life insurance, and a $1.4 million reduction inaccrued unbilled revenue accrual.
Operating expense changes included increases of $4.3 million in depreciation and amortization, $4.2 million in employee wages, $2.7 million in outside services, $1.6 million in property taxes, and $1.1 million of costs attributable to electric utilities’ PSPS programs and wildfire management.revenue.
Operating Revenue
Operating revenue increased $6.9$67.5 million, or 1.3%12.5%, to $537.7$605.2 million in the first nine months of 20192020 as compared to the first nine months of 2018. The factors that impacted2019, with such change attributed to the operating revenue for the first nine months of 2019 as compared to 2018 are as follows:following:
|
| | | |
Net change due to rate changes, usage, and other (1) | $ | 17,388 |
|
MCBA Revenue (2) | (7,313 | ) |
Other balancing account revenue (3) | 1,369 |
|
Deferral of revenue (4) | (4,544 | ) |
Net operating revenue increase | $ | 6,900 |
|
| | | | | |
1. | The netNet change due to rate changes, usage, and other in the above table was mainly driven by rate increases, which was partially offset by a $1.4 million decrease in accrued unbilled revenue. The components(1) | $ | 31,154 | |
WRAM Revenue (2) | (52,362) | |
MCBA Revenue (3) | 47,146 | |
IRMA Revenue (4) | 37,623 | |
Other balancing account revenue (5) | 1,077 | |
Deferral of the rate increases are as follows: revenue (6) | 2,838 | |
Net operating revenue increase | $ | 67,476 | |
1.The net change due to rate changes, usage, and other in the above table was mainly driven by a $26.5 million increase in volumetric revenue due to a 6.0% increase in customer usage and rate increases, the components of which are set forth in the table below. In addition, there was a $2.2 million increase in accrued unbilled revenue.
|
| | | |
General rate case | $ | 1,837 |
|
Escalation rate increases | 12,251 |
|
Purchased water and pump tax offsets | 4,302 |
|
Rate base offsets | 1,141 |
|
Total increase in rates | $ | 19,531 |
|
| | | | | |
2.General rate case | The MCBA revenue decrease resulted from a decrease in actual water production costs relative to adopted water production costs in the first nine months of 2019 as compared to the first nine months of 2018. The actual water production costs decreased as a result of a decrease in customer consumption in the first nine months of 2019 as compared to the first nine months of 2018. As required by the MCBA mechanism, the decrease in actual water production costs relative to adopted water production costs in California also decreased operating revenue for the same amount.$ |
470 | |
3.Escalation rate increases | 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 an increase in actual conservation expenses relative to adopted in the first nine months of 2019 as compared to the first nine months of 2018, which was partially offset by a decrease in actual pension expenses relative to adopted in the first nine months of 2019 as compared to the first nine months of 2018. |
518 | |
4.Purchased water and pump tax 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 period3,847 | |
Rate base offsets | 2,023 | |
Total increase in which these revenues were recorded. The deferral increased in the first nine months of 2019 as compared to the first nine months of 2018 due to a decline in actual customer usage relative to adopted customer usage in the first nine months of 2019 as compared to the first nine months of 2018.rates | $ | 6,858 | |
2.WRAM revenue is the variance between adopted volumetric revenues and actual billed volumetric revenues for metered accounts. For the first nine months of 2020, we recognized $17.0 million of WRAM revenue as compared to $69.4 million for the first nine months of 2019. The WRAM revenue decrease in the first nine months of 2020 as compared to the first nine months of 2019 resulted from an increase in actual billed volumetric revenue relative to adopted volumetric revenues. Actual consumption was closer to adopted consumption in the first nine months of 2020 as compared to the first nine months of 2019.
3.MCBA revenue is the variance between adopted water production costs and actual water production costs. For the first nine months of 2020, we recognized $11.8 million of MCBA revenue as compared to a decrease to revenue of $35.4 million for the first nine months of 2019. The MCBA revenue increase in the first nine months of 2020 as compared to the first nine months of 2019 resulted from an increase in actual water production costs relative to adopted water production costs. The actual water production costs increased relative to adopted water production costs in the first nine months of 2020 as compared to the first nine months of 2019 due to a shift in water production mix from well water to purchased water in certain of our service territories. 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.
4.Due to the delay in the resolution of the 2018 GRC, the CPUC authorized Cal Water to track the effect of the delay on customer billings in an IRMA effective January 1, 2020. Variances between actual customer billings and those that would have been billed assuming the GRC had been effective January 1, 2020 are recorded as regulatory balancing account revenue. In October of 2020, Cal Water received a proposed decision on its 2018 GRC and was able to determine if the 2018 GRC had been resolved effective January 1, 2020, we would have billed customers an additional $37.6 million for the nine months ended September 30, 2020.
5.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 nine months of 2020, we recognized net revenue of $5.2 million for these balancing accounts as compared to a net $4.1 million of revenue for the first nine months of 2019. The increase in revenue was mainly due to an increase in actual pension expenses relative to adopted in the first nine months of 2020 as compared to the first nine months of 2019, which was partially offset by an decrease in actual conservation and health care expenses relative to adopted in the first nine months of 2020 as compared to the first nine months of 2019.
6.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 nine months of 2020 as compared to the first nine months of 2019 due to a decrease in the balancing account revenue expected to be collected beyond 24 months.
Total Operating Expenses
Total operating expenses increased $11.8$34.9 million, or 2.7%7.6%, to $493.5 million in the first nine months of 2020, as compared to $458.6 million in the first nine months of 2019, as compared to $446.8 million in the first nine months of 2018.2019.
Water production costs consists of purchased water, purchased power, and pump taxes. It represents the largest component of total operating expenses, accounting for approximately 42.6% of total operating expenses in the first nine months of 2020, as compared to 41.6% of total operating expenses in the first nine months of 2019, as compared to 42.9% of total operating expenses2019. Water production costs increased 10.3% in the first nine months of 2018. Water production costs decreased 0.5% in the first nine months of 20192020 as compared to the same period last year mainly due to a decreasean increase in customer usage, offset by increasedchanges in water production mix in certain of our service territories, and an increase in rates from our purchased water wholesalers.
Sources of water as a percent of total water production are listed in the following table:
| | | Nine Months Ended September 30 | | Nine Months Ended September 30 |
| 2019 | | 2018 | | 2020 | | 2019 |
Well production | 45 | % | | 47 | % | Well production | 45 | % | | 45 | % |
Purchased | 50 | % | | 49 | % | Purchased | 50 | % | | 50 | % |
Surface | 5 | % | | 4 | % | Surface | 5 | % | | 5 | % |
Total | 100 | % | | 100 | % | Total | 100 | % | | 100 | % |
The components of water production costs are shown in the table below:
| | | Nine Months Ended September 30 | | Nine Months Ended September 30 |
| 2019 | | 2018 | | Change | | 2020 | | 2019 | | Change |
Purchased water | $ | 158,369 |
| | $ | 157,062 |
| | $ | 1,307 |
| Purchased water | $ | 175,485 | | | $ | 158,369 | | | $ | 17,116 | |
Purchased power | 23,734 |
| | 23,830 |
| | (96 | ) | Purchased power | 25,887 | | | 23,734 | | | 2,153 | |
Pump taxes | 8,692 |
| | 10,905 |
| | (2,213 | ) | Pump taxes | 9,090 | | | 8,692 | | | 398 | |
Total | $ | 190,795 |
| | $ | 191,797 |
| | $ | (1,002 | ) | Total | $ | 210,462 | | | $ | 190,795 | | | $ | 19,667 | |
Administrative and general and other operations expenses increased $8.7$9.2 million, or 6.3%, to $155.4 million in the first nine months of 2020, as compared to $146.2 million in the first nine months of 2019, as compared to $137.5 million in the first nine months of 2018.2019. The increase was primarily due primarily to increases of $4.4a $5.7 million increase in employee pension retirement benefit costs, $2.4 million increase in costs associated with deferred WRAM revenue, $1.8 million increase in employee wage cost, $1.6 million increase in bad debt expense, $1.1 million in conservation program costs, $3.5outside service cost, $0.6 million increase in employee wages, $2.7 million of outside services, $1.3 million of software maintenance cost, $0.5 million increase in uninsured loss costs, $0.8$0.5 million ofincrease in generator rent costs, attributable to electric utilities’ PSPS programs and wildfire management, which were partially offset by a reduction of $3.8$3.6 million ofdecrease in water conservation program costs, associated with deferred revenue and a $1.6$1.2 million decrease in employee pension benefithealthcare costs, and retiree medical$0.7 million decrease in travel costs. Changes in employee pension benefits and water conservation program costs for regulated California operations generally do not affect earnings, as the Company is allowed by the CPUC to record these costs in balancing accounts for future recovery, creating a corresponding change to revenue. Employee and retiree medical expenses are recovered in rates through a balancing account authorized in the 2015 GRC, such that revenues are recovered up to 85% of the variance between adopted and recorded expenses.
Maintenance expense increased $1.6$1.7 million, or 9.2%8.9%, to $20.9 million in the first nine months of 2020, as compared to $19.2 million in the first nine months of 2019, as comparedmostly due to $17.6repairs for services, mains, reservoirs, and tanks.
Depreciation and amortization expense increased $6.7 million, or 10.1%, to $73.7 million in the first nine months of 2018, mostly due to repair cost increases in reservoirs, tanks, and structures and $0.3 million of costs for wildfire management.
Depreciation and amortization expense increased $4.3 million, or 6.8%,2020, as compared to $67.0 million in the first nine months of 2019, as comparedmostly due to $62.7capital additions in 2019.
Income taxes decreased $3.0 million, or 22.4%, to an income tax expense of $10.5 million in the first nine months of 2018, mostly due to capital additions.
Income taxes decreased $3.5 million, or 20.22%, to $13.5 million in the first nine months of 2019,2020, as compared to $17.0income tax expense of $13.5 million in the first nine months of 2018.2019. The decrease was mainlymostly due to tax repair benefit and amortization of the excess deferred taxes as a decreaseresult of the TCJA in operating income. The Company’s estimated combined effective income tax rate for 2019 is 22.0%.the proposed decision of the 2018 GRC.
Property and other taxes increased $1.6$0.6 million or 8.1%,to $22.5 million in the nine months of 2020, as compared to $21.9 million in the first nine monthssame period of 2019, as compared to $20.3 million in the first nine months of 2018,mostly due primarily to an increase in assessed property values.
Other Income and Expenses
Net other income increased $8.4decreased $3.0 million to $0.5 million in the first nine months of 2020, as compared to a net other income of $3.5 million in the first nine months of 2019, as compared to a net other loss of $4.9 million in the first nine months of 2018, due primarily to a $5.0$2.8 million decrease of business development expenses, a $3.6 million increase infrom the unrealized gain from certain benefit plan investments due to market conditions and a $2.4$0.8 million increasedecrease in allowance for equity funds used during construction which was partially offset by a $1.6$0.5 million decrease in other components of net periodic benefit from Company-owned life insurance.costs.
Interest Expense
Net interest expense increased $1.9$0.1 million, or 6.6%0.3%, to $30.8 million in the first nine months of 2020, as compared to $30.7 million in the first nine months of 2019, as compared2019. The increase was due to $28.8 millionan increase in average short term borrowing which was offset by decreases in interest rates in the first nine months of 2018. The increase was due primarily2020 as compared to an increase in financing for capital investments and operations.the same period last year.
REGULATORY MATTERS
20192020 California Regulatory Activity
California2018 GRC filingFiling
On October 8, 2019,14, 2020, an ALJ with the CPUC issued a proposed decision for Cal Water jointly filed a formal settlement agreement for itsWater's 2018 GRC with the Public Advocates Office offiling. The proposed decision is subject to adoption by the CPUC coveringno earlier than the majorityCPUC’s November 19, 2020 meeting. If adopted as proposed, the decision would approve the settlement reached in October of open matters in the case. The largest component of the GRC is Cal Water’s Infrastructure Improvement Plan for 2019-2021. The settlement details investment plans that2019 by Cal Water and the CPUC’s Public Advocates Office, agree should be made toallow Cal Water’s water infrastructureWater to continue providing safe, reliable water service toits decoupling balancing accounts through 2022, and allow Cal Water customersto retain its PCBA and communities. The CPUC will consider, but is not required to adopt, the settlement agreement. If the CPUC approves the settlement agreement,HCBA. Under this proposed decision, Cal Water would be authorized to includeinvest $828.0 million in rates $609.0 million to $628.0its districts throughout California through 2021. This includes $148 million of new projects throughoutwater system infrastructure upgrades that would be recovered via the state in 2019 to 2021, along with approximately $200.0 million for completion of additional projects begun in 2018 and prior periods. Included in these figures are $148.0 million ofCPUC’s advice letter authorizations, which would not be included in rates until relatedprocedure once those projects are completed. Cal Water anticipates that if the settlement were adopted, it would planThe proposed decision also authorizes total revenue of up to make capital investments of approximately $809.0$698.7 million to $828.0 million in the 2019-2021 period. The settlement proposes, in part, an average water main replacement rate of 0.76% annually company-wide by 2021, with higher replacement rates in some areas. A final decision on the case is expected in late 2019, with new rates going into effect in January offor 2020. Cal Water previously filed a request for interim rates beginning January 1,
2020 in the event a final decision is unexpectedly delayed.
City of Hawthorne GRC filing
Cal Water operates the City of Hawthorne’s water system under a lease agreement that was originally entered into on August 9, 2011. As part of the agreement, Cal Water can request rate increases but requires city council approval for any rate request to take effect. Cal Water has not increased rates since 2017 and Cal Water has seen significant increases in costs since then. Cal Water requested rate increases of 11.7% in 2020, 11.6% in 2021, and 11.6% in 2022.
On August 27, 2019, the rate increases were approved via resolution 8123. The new rates will become effective on January 1, 2020 and January 1st each year thereafter.
Cost of Capital DecisionApplication
In April of 2017, Cal Water, along with three other water utilities, filed an application to adopt a new cost of capital and capital structure for 2018. On March 22, 2018,11, 2020, the CPUC adopted a revised decision in the cost of capital proceeding forgranted Cal Water and three other large water utilities for the years 2018, 2019, and 2020, establishing for Cal Water a 9.20% return on equity and a 5.51% cost of debt, with a capital structure of 46.60% long-term debt and 53.40% common equity, andcompanies an authorized return on rate base of 7.48%, compared with Cal Water’s prior return on equity of 9.43%, cost of debt of 6.24%, and authorized return on rate base of 7.94%. The adopted capital structure did not change. The adopted returns on debt and equity reduced Cal Water’s 2018 adopted revenue by approximately $6.9 million. The CPUC also authorized continuation of the waterextension to May 1, 2021 to file their cost of capital adjustment mechanism, which provides for an adjustment in the return on equity if the cost of
long-term debt as defined by an index of utility debt rates varies from the most recent index by 100 basis points or more in 2019 and 2020.
On March 30, 2018, Cal Water submitted an advice letter that established the Cost of Capital Memorandum Account (CoC MA) to track the difference between current rates and rates based upon the new cost of capital adopted by the CPUC as if the new cost of capital had been in effect beginning January 1, 2018.
In May of 2018, Cal Water submitted an advice letter to adopt the new cost of capital and capital structure for 2018 in customer rates. The annual adopted gross revenue reduction associated with the May 2018 filing was $6.9 million. The new rates became effective on July 1, 2018.
In 2018, Cal Water recorded a $3.0 million regulatory liability due to the CoC MA. The regulatory liability was for the revenue reduction that Cal Water recorded for the first six months of 2018 during which the new cost of capital and capital structure were yet to be adopted in customer rates. In April of 2019, Cal Water submitted an advice letter to refund the full balance of the cost of capital memorandum account of $3.0 million. The new rates became effective April 15, 2019.
2018 Tax Accounting Memorandum Account (TAMA)
On December 22, 2017, the CPUC sent a letter to All Class A and B Water and Sewer Utilities on the subject of “Changes in Federal Tax Rates for 2018.” The CPUC required Cal Water to establish a memo account to track the impact of the TCJA on Cal Water. The TAMA will track the revenue requirement impact of the TCJA not otherwise reflected in rates from January 1, 2018 until current rates are modified to reflect all impacts of the TCJA. The Hawaii Water, Washington Water, and New Mexico Water Commissions have similar requirements to track the impact of the changes to the federal tax law. In 2018, the Company recorded a $5.4 million regulatory liability due to the changes required by the TCJA. The regulatory liability was for the revenue reduction that the Company recorded for the first six months of 2018 during which the new federal corporate income tax rate was yet to be adopted in customer rates.
In May of 2018, Cal Water submitted an advice letter to adopt the new federal corporate income tax rate in customer rates. The annual adopted gross revenue reduction associated with the May 2018 filing was $11.1 million. The new rates became effective on July 1, 2018.
In April of 2019, Cal Water submitted an advice letter to refund $5.0 million of the tax accounting memorandum account's balance associated with the decrease in the federal corporate income tax rate for Cal Water for the first six months of 2018. The new rates became effective April 15, 2019. The memorandum account remains open to allow the Commissions to review other changes to Cal Water’s revenue requirements such as property taxes and excess deferred income taxes.
Escalation increase requests
As a part of the decision on the 2015 GRC, Cal Water was authorized to request annual escalation rate increases for 2019 for those districts that passed the earnings test. In November of 2018, Cal Water requested escalation rate increases in all of its regulated districts. The annual adopted gross revenue associated with the November 2018 filing was $16.2 million. The new rates became effective on January 1, 2019.
WRAM and MCBA filings
In April of 2019, Cal Water submitted an advice letter to true up the revenue under-collections in the 2018 annual WRAMs/MCBAs of its regulated districts. A net under-collection of $29.2 million is being recovered from customers in the form of 12, 18, and greater-than-18-month surcharges and 12 month surcredits. The new rates became effective April 15, 2019. These surcharges/surcredits are in addition to surcharges/surcredits authorized in prior years which have not yet expired.application.
Expense Offset filingsRequests
Expense offsets are dollar-for-dollar increases in revenue to match increased expenses, and therefore do not affect net operating income. In November of 2018, Cal Water submitted advice letters to request offsets for increases in purchased water costs and pump taxes in five of its regulated districts totaling $2.0 million. The new rates became effective on January 1, 2019.
In June and JulyDecember of 2019, Cal Water submitted advice letters to request offsets for increases in purchased water costs and pump taxes in fivesix of its regulated districts totaling $3.9$2.5 million. The new rates became effective on July 15, 2019.
February 1, 2020.
Rate baseBase Offset filingsRequests
For construction projects that are authorized in GRCs as advice letter projects, companies areCal Water is allowed to filerequest rate base offsets to increase revenues after the plant is placedproject goes into service. In Novemberthe fourth quarter of 2018,2019, Cal Water submitted advice letters to recover $0.2$2.5 million of annual revenue increaseincreases for rate base offsets in fourall of its regulated districts. The new rates became effective on April 15, 2019.February 1, 2020.
WRAM/MCBA Filings
In AugustMarch and April of 2020, Cal Water submitted advice letters to true up the revenue under-collections for the 2019 annual WRAMs/MCBAs of its regulated districts. A net under-collection of $27.1 million is being recovered from customers in the form of 12 and 18 month surcharges. Due to the COVID 19 pandemic, Cal Water elected to adjust the 2019 WRAM filing so that the new rates would only be implemented in districts where overall customer bills would not be increased. As a result, approximately $18.8 million of the $45.9 million of net WRAM/MCBA additions from 2019 were deferred to 2021. The new rates incorporate net WRAM/MCBA balances that were previously approved for recovery, and became effective in April of 2020.
Polyfluoroalkyl Substances Memorandum Account (PFAS MA)
Public water systems have been ordered by the State Water Resources Control Board to detect, monitor, and report perfluorooctanoic and perfluorooctanesulfonic acid in drinking water. Cal Water has begun sampling its wells for these contaminants, and anticipates incurring substantial costs in order to comply. In the first quarter of 2020, Cal Water submitted an advice letter to establish a PFAS MA that would give Cal Water the opportunity to track and recover $0.4 millionincremental costs related to compliance with the order. In the third quarter of annual revenue increase2020, the CPUC approved by resolution a modified the PFAS MA effective March 4, 2020. The approved PFAS MA allows for cost recovery of certain incremental PFAS-related expense, but not capital costs, due to the rate base offsetcurrent lack of a maximum contaminant level.
Low-Income Water Affordability Proceeding
On August 27, 2020, by a 4-1 vote, the CPUC approved a decision which applies to Cal Water, and other Class A water companies (Joint Parties). The decision precludes the Joint Parties from proposing full decoupling Water Revenue Adjustment Mechanisms in one oftheir next GRC filing. Cal Water expects it will be required to comply with the order in its regulated districts. The new2021 GRC filing, with rates are expected to become effective in the fourth quarter of 2019.
In October of 2019,2023. Beginning in 2023, Cal Water submitted an advice letterexpects it will experience more revenue volatility and that necessary changes to recover $0.3 million of annual revenue increase for the rate base offset in one of its regulated districts. The new rates are proposeddesign to become effective on January 1, 2020.
California Drought Memorandum Account
In March of 2018,mitigate this volatility may dampen conservation price signals, potentially reducing customers’ incentives to pursue water efficiency measures. Cal Water submitted an advice letterwill pursue legal and procedural appeal options to request recovery of 2016 and 2017 incremental drought expenses of $3.3 million. On January 10, 2019, the Commission approved Cal Water's request for recovery of the $3.3 million of incremental expenses; subsequently,overturn this decision, which Cal Water submittedbelieves will damage the state’s policy goals for water use efficiency based on an advice letter on January 15, incomplete and insufficient analysis.
2019 to implement a surcharge to recover the incremental expenses from customers. The new rates became effective on April 15, 2019.California Financing Authorization
Travis Air Force Base
On September 29, 2016, Cal Water entered into a 50-year agreement with the U.S. Department of Defense to acquire the water distribution assets of and distribute water to most of Travis Air Force Base (TAFB) beginning in 2018. On May 31, 2017, Cal Water submitted an application toNovember 5, 2020, the CPUC seeking approval to distribute water service to most of the base and to establish rates for its service.
On December 13, 2018, the CPUC conditionally approved Cal Water’s request to own and operate the TAFB water system as a regulated water utility district. Approval was conditioned upon modifying the contract between Cal Water and the Department of Defense to more clearly assert the CPUC’s jurisdiction over a new Travis District. In January of 2019, Cal Water fulfilled the condition by submitting a contract amendment that was approved by the CPUC. The decision enables Cal Water to acquire the water distribution assets of TAFB from the U.S. Department of Defense and provide water utility service to the base for a term of 50 years. Subject to the terms of the contract with the Department of Defense and the CPUC decision, Cal Water began serving TAFB’s more than 15,000 active and reserve personnel and civilians on July 1, 2019. The rates for TAFB are scheduled to be updated in January of 2020 with the CPUC's resolution of the 2018 GRC.
Public Safety Power Shut-off Memorandum Account (PSPS MA).
The recent wildfires in California have focused regulatory efforts to reduce the incidence and severity of these types of devastating events. The increased number of wildfire events are due to a number of factors such as extended drought, increased fuel for fires, and other extreme weather events. In addition, energized power lines can exacerbate wildfire conditions. These lines carry the potential to start or worsen an existing wildfire. Given this, the Commission has been examining issues related to wildfires and other emergencies in several proceedings. One of the proceedings, Rulemaking 18-12-005, is focused on proactively shutting off electric power in order to protect public safety through the Public Safety Power Shut-Off (PSPS) program, or de-energization. During a PSPS event, power will be cut off to electric lines that may fail in certain weather conditions in order to reduce the likelihood that electric utility infrastructure could cause or contribute to a wildfire.
The Commission’s rulemaking is divided into two phases. In Phase 1, the Commission examined and adopted PSPS guidelines, focusing primarily on notification, communication and outreach. In Phase 2, the Commission will address issues that were outside of the scope of Phase 1 and will revisit some Phase 1 issues for further refinement. In Phase 2, which has been divided into two tracks, the Commission will take a more comprehensive look at de-energization practices, including mitigation, additional coordination across agencies, further refinements to findings in Phase 1, re-energization practices, and other matters. The first track will cover issues that may need to be addressed to inform PSPS events as soon as possible. The second track will cover issues that require an in depth analysis.
Electric utilities are expected to declare PSPS events during periods of high fire danger and where there is specific risk of electrical facilities causing a fire. As a public safety partner, Cal Water will receive priority notification of such events. According to communications with Cal Water’s main electric providers, Southern California Edison and Pacific Gas and Electric, PSPS events may last up to 5 days which could significantly impact facilities within Cal Water's water systems. Additionally, power loss events can occur in major earthquakes, non-electric utility caused wildfires, tsunami, or other natural and man-made disasters. Cal Water must be ready and equipped to maintain water service to the extent possible during these events. In response, Cal Water has performed a draft risk assessment which outlines recommended
improvements necessary to prepare its water systems for power loss events. The PSPS program will require either an increase in backup power generation or the development of an alternate means of providing reliable supply within Cal Water’s water distribution systems. Depending upon the course of action, this can increase the need for generator fuel commensurate with the expected duration of power shutoffs. In most cases, Cal Water may need to lease generators for the most critical facilities to be prepared for the 2019 wildfire season, in anticipation of installing more permanent facilities in the long term. There will also be a necessary increase in generator and electrical equipment maintenance activities to improve reliability of the auxiliary power sources for a power loss event. To this end, Cal Water respectfully requested a memorandum account from the CPUC to track costs related to this effort. The memorandum account is pending approval by the CPUC. The PSPS MA will track the incremental costs associated with the preparation and installation of facilities to address public safety needs in the event of power losses. For the three and nine months ended September 30, 2019, the PSPS MA incremental costs were $0.5 million.
2019 Regulatory Activity—Other States
2019 Kona (Hawaii Water) GRC Filing
In February of 2019, Hawaii Water filed a GRC application requesting an additional $0.6$700 million in annual revenuesof authorization for debt and equity financing to fund its Kona Water and Wastewater systems with the Hawaii Public Utilities Commission. The GRC seeks recovery of capital investments in the Kona water and wastewater systems as well as increases in operational expenses since the previous rate case. If approved, the Company anticipates rates would become effective the first quarter of 2020improvement program through 2025.
2017 Waikoloa (HawaiiRegulatory Activity - Other States
Rainier View Water Company (Washington Water) GRC Filings
In DecemberOn March 27, 2020, the Washington Utilities and Transportation Commission (WUTC) approved Washington Water's application for the sale and transfer of 2017, Hawaiiassets of Rainier View Water filed GRC applications requesting an additional $3.8 million in annual revenues for its Waikoloa Village and Resort Systems withCompany. Washington Water took control of the Hawaii Public Utilities Commission. The GRCs seek recovery of capital investments in the Waikoloa Village and Waikoloa Resort Systems as well as increases in operating expenses since the previous rate case. On Januarywater system on June 1, 2019, the HPUC authorized Waikoloa Village rate increases of $0.8 million for 2019 and $0.1 million for 2020. On January 7, 2019, the HPUC authorized Waikoloa Resort rate increases of $0.8 million for 2019, $0.8 million for 2020, and $0.1 million for 2021.
Kalaeloa Water Company (Hawaii Water)
In March 2019, Hawaii Water and Hunt Kalaeloa Water LLC entered into a Membership Interest Purchase Agreement to acquire water and wastewater assets. The Kalaeloa service area is located on the Island of Oahu on the former Barbers Point Naval Air Station. On July 3, 2019, the parties submitted a change of control application toSeptember 25, 2020, the Hawaii Public Utilities Commission requesting approval(HPUC) approved Hawaii Water's application for the purchase.purchase of the Membership Interests of Kalaeloa Water Company, LLC. The transaction remains subject to customary closing conditions.
Kapalua Water Company and Kapalua Waste Treatment (Hawaii Water)
On June 4, 2020, Hawaii Water filed an application with the HPUC for approval to acquire the assets of Kapalua Water Company, LTD. and Kapalua Waste Treatment Company, LTD in connection with the December 2019 asset purchase agreement with Maui Land and Pineapple Company.
Animas Valley Land and Water Co., LLC (New Mexico Water)
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. The purchase is subject to customary closing conditions, including approvals of the San Juan County Court and the New Mexico Public Regulation Commission, as well as successful completion of AV Water’s pending rate case. If approved, Hawaii Water would be authorizedthe transaction is expected to provide water and wastewater serviceclose in the Kalaeloa service area.early 2021.
LIQUIDITY
Cash flow from Operations
Cash flow from operations for the first nine months of 20192020 was $128.3$96.7 million compared to $119.5$128.3 million for the same period in 2018.2019. 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 nine months of 2019,2020, we made contributions of $12.5$25.8 million to our employee pension plan compared to contributions of $42.3$12.5 million during the first nine months of 2018.2019. During the first nine months of 2019,2020, we made contributions of $5.6$5.7 million to the other postretirement benefit plans compared to contributions of $8.0$5.6 million during the first nine months of 2018.2019. The total 2019full-year 2020 estimated cash contribution to the pension plans is $18.8and other postretirement benefits plans are expected to be approximately $38.0 million and to the other postretirement benefit plans is $7.9 million.$7.5 million, 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. Due to the uncertainty of the effect of the COVID-19 pandemic, during the first quarter of 2020, we borrowed on our unsecured revolving credit facilities to provide substantial additional liquidity to manage our business (as described below under Financing Activities). 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.
Investing Activities
During the first nine months of 20192020 and 2018,2019, we used $194.9$221.3 million and $212.9$194.9 million, respectively, of cash for Company-funded and developer-funded utility plant expenditures. Annual expenditures fluctuate each year due to the availability of construction resources and our ability to obtain construction permits in a timely manner. For 2019,2020, we estimate utility plant expenditures to be between $250.0$260.0 million and $260.0$290.0 million. We also paid $37.6 million with higher capital spending anticipated after approvalfor the acquisition of Rainier View Water Company during the 2018 GRC settlement (see note 14).second quarter of 2020.
Financing Activities
Net cash provided by financing activities was $72.9$237.1 million during the first nine months of 20192020 compared to $66.5$72.9 million of net cash provided by financing activities for the same period in 2018.
On October 31, 2019, the2019. For 2020, this includes $270.0 million of short-term borrowings on our unsecured revolving credit facilities, issuance of $57.3 million of Company entered into an equity distribution agreement with Morgan Stanley & Co., LLC, Robert W. Baird & Co. Incorporated, Blaylock Van, LLC and Wells Fargo Securities, LLC to sell shares of its common stock having an aggregate gross sales price of up to $300.0 million from time to time depending on market conditions through anour at-the-market equity program, over the next three years. The Company intends 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.$1.3 million through our employee stock purchase plan.
During the first nine months of 20192020 and 2018, Cal Water issued $400.0 million of First Mortgage Bonds on June 11, 2019, in a private placement. Cal Water used the net proceeds from the sale of the bonds to pay down outstanding short-term borrowings and to redeem $300.0 million of First Mortgage Bond series UUU. Additionally, we borrowed $210.0$270.0 million and $141.0$210.0 million, respectively, on our unsecured revolving credit facilities. The borrowings on our unsecured revolving credit facilities duringin 2020 were to provide substantial additional liquidity to manage our business in connection with economic uncertainty and financial market volatility caused by the first nine months of 2019 and 2018. Cal Water repaid $100.0 million of First Mortgage Bonds that matured during the first nine months of 2019. Also, weCOVID-19 pandemic. We made a repayment on our unsecured revolving credit facilities borrowings of $70.0 million and $120.0 million during the first nine months of 2020 and 2019, compared to a repayment of $341.0 million for the same period in 2018.
On March 29, 2019, the Company and Cal Water entered into certain syndicated credit agreements, which provide for unsecured revolving credit facilities of up to an initial aggregate amount of $550.0 million for a term of five years. The revolving credit facilities amend, expand, and replace the Company’s and its subsidiaries’ prior credit facilities originally entered into on May 10, 2015. The new credit facilities extended the terms until March 29, 2024, and increased Cal Water’s unsecured revolving line of credit. 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 $400.0 million under its revolving credit facility. All borrowings must be repaid within 24 months unless a different period is required or authorized by the CPUC. Additionally, the credit facilities may be increased by up to an incremental $150.0 million under the Cal Water facility and $50.0 million under the Company facility, subject in each case to certain conditions. The proceeds from the revolving credit facilities may be used for working capital purposes, including the short-term financing of capital projects. Borrowings under the credit facilities typically have maturities varying between one and nine months and will bear interest annually at a rate equal to (i) the base rate or (ii) the Eurodollar rate, plus an applicable margin of 0.650% to 0.875%, depending on the Company and its subsidiaries’ consolidated total capitalization ratio.respectively.
The undercollected net WRAM and MCBA receivable balances were $62.6$72.7 million and $60.0$62.6 million as of September 30, 20192020 and 2018,2019, respectively. The undercollected balances were primarily financed by Cal Water using short-term and long-term financing arrangements to meet operational cash requirements. Interest on the undercollected balances, which represents the interest recoverable from 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-termShort-Term and Long-Term Financing
During the first nine months of 2019,2020, we utilized cash generated from operations, issuance of First Mortgage Bonds, 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 2019 and 2018. We issued $1.3 million of Company common stock for the Company's employee stock purchase plan that went into effect on January 1, 2019.
On June 11, 2019, Cal Water issued $400.0 million of First Mortgage Bonds (see Note 7) in a private placement. Cal Water used the net proceeds from the sale of the bonds to pay down outstanding short-term borrowings and to redeem $300.0 million of First Mortgage Bond series UUU. Bond principal and other long-term debt payments were $1.5 million and $401.6 million during the first nine months of 2020 and 2019, and $12.5 million during the first nine months of 2018.
respectively.
In future periods, management anticipates funding our utility plant needs through a relatively balanced approach between 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. However, the recent COVID-19 pandemic, which has caused disruption in the capital markets, could make financing more difficult and/or expensive. To mitigate this risk, we borrowed $100.0 million on our unsecured revolving credit facilities to provide substantial additional liquidity. 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 $400.0 million under its revolving credit facility; however, all borrowings must be repaid within 24 months unless a 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.
As of September 30, 20192020 and December 31, 2018,2019, there were short-term borrowings of $155.1$375.1 million and $65.1$175.1 million, respectively, outstanding on the unsecured revolving credit 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, and Hawaii 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 September 30, 2019,2020, 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.
Long-term financing, which includes 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 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.
On October 31, 2019, the Company entered into an equity distribution agreement with Morgan Stanley & Co., LLC, Robert W. Baird & Co. Incorporated, Blaylock Van, LLC and Wells Fargo Securities, LLC to sell shares
Dividends
During the first nine months of 2019,2020, our quarterly common stock dividend payments were $0.5925$0.6375 per share compared to $0.5625$0.5925 per share during the first nine months of 2018.2019. For the full year 2018,2019, the payout ratio was 55.2%60.3% 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 30, 201928, 2020 meeting, the Company's Board of Directors declared the fourth quarter dividend of $0.1975$0.2125 per share payable on November 22, 2019,20, 2020, to stockholders of record on November 11, 2019.9, 2020. This was our 299th303rd consecutive quarterly dividend.
20192020 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 $400.0 million, respectively, for short-term borrowings. As of September 30, 2019,2020, the Company’s and Cal Water’s availability on these unsecured revolving lines of credit was $94.9$44.9 million and $300.0$130.0 million, respectively. As the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our financing needs.
Book Value and Stockholders of Record
Book value per common share was $15.74$17.86 at September 30, 20192020 compared to $15.19$16.07 at December 31, 2018.2019. There were approximately 1,9251,955 stockholders of record for our common stock as of August 12, 2019.10, 2020.
Utility Plant Expenditures
During the first nine months of 2019,2020, utility plant expenditures totaled $194.9$221.3 million for Company-funded and developer-funded projects. For 2019,2020, we estimate utility plant expenditures to be between $250.0$260.0 million and $260.0 million with higher capital spending anticipated after approval of the 2018 GRC settlement (see note 14).$290.0 million. We do not control third-party-funded utility plant expenditures and therefore are unable to estimate the amount of such projects for 2019.2020.
As of September 30, 2019,2020, construction work in progress was $266.0$211.7 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's knowledge, we are meeting water quality, environmental, and other regulatory standards for all Company-owned systems.
Historically, approximately 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 6.86.4 billion gallons or 14.0%13.5% 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. Our annual groundwater extraction from managed groundwater basins approximates 29.128.1 billion gallons or 59.4%59.2% of our total annual water supply pumped from wells. Our annual groundwater extraction from unmanaged groundwater basins approximates 13.112.9 billion gallons or 26.6%27.3% 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. Well pump taxes were $3.5$3.0 million and $3.8$3.5 million for the three months ended September 30, 20192020 and 2018,2019, respectively. For the nine months ended September 30, 20192020 and 2018,2019, well pump taxes were $8.7$9.1 million and $10.9$8.7 million, respectively. In 2014, the State of California enacted the Sustainable Groundwater Management Act of 2014. The law and its implementing regulations 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'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'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 June 27, 2019,9, 2020, the State of California snowpack water content during the 2019-20202020-2021 water year for the northern Sierra region is 80%7% of long-term averages (per the California Department of Water Resources, Daily Drought Information Summary). The northern Sierra region is the most important for the state’s urban water supplies. The central and southern portions of the Sierras also have recorded 91%0% and 59%4%, respectively, of long-term averages. Management believes that supply pumped from underground aquifers and purchased from wholesale suppliers will be adequate to meet customer demand during 20192020 and beyond. 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 current treatment processes.
On May 31, 2018, California's Governor Brown 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. By June 30, 2022, the California State Water Resources Control Board, in conjunction with the California Department of Water Resources, will 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 known regulations required of utilities.applicable to Cal Water.
CONTRACTUAL OBLIGATIONS
During the nine months ended September 30, 2019,2020, 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. 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 offsettable 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 come 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.”
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(e) under the Securities Exchange 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's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and 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 Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019.2020. Based on that evaluation, and the changes made to our internal control over financial reporting in the first nine months of 2019 noted below, we concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
(b) Changes to Internal Control over Financial Reporting
To remediate the material weaknessThere was no change in our internal controlcontrols over financial reporting as of December 31, 2018 disclosed in Part I, Item 9A of our Annual Report on Form 10-K for the year-ended December 31, 2018, management made the following changesthat occurred during the first nine months of 2019:
•Management revised the design of the monthly regulatory balancing account control for the health cost balancing account (HCBA) and pension cost balancing account (PCBA). Monthly detailed calculations are prepared for these balancing accounts, which are reviewed by accounting and rates management who approve the calculations. The monthly review and approval process validates all assumptions and inputs used to determine the monthly balancing account revenue and related balance sheet account adjustments for HCBA and PCBA. This control was implemented
in the first quarter of 2019 and internal audit tested the design and operating effectiveness of the resulting control and concluded that it is operating effectively as ofended September 30, 2019.2020, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
•Management designed a new control over regulatory orders, GRC settlements or other decisions made by the Commissions impacting the Company. As required by the control, accounting and rates management review and document the financial impacts of the provisions, events, and requirements of any such regulatory orders, GRC settlements, or decisions made by the Commissions. This control was implemented in the third quarter of 2019 and internal audit tested the design and operating effectiveness of the resulting control and concluded that it is operating effectively as of September 30, 2019.
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-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 customers or other third parties. For more information refer to note 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, 20182019 filed with the SEC on February 28, 2019.
27, 2020, except for the additional risk factor set forth in Part II, Item 5.
OTHER INFORMATION
On October 31, 2019, we entered into an equity distribution agreement (the Equity Distribution Agreement) with Morgan Stanley & Co. LLC, Robert W. Baird & Co. Incorporated, Blaylock Van, LLC, and Wells Fargo Securities, LLC (the Managers). Pursuant to the terms1A of the Equity Distribution Agreement, we may, from time to time through an at-the-market equity program, sell shares of our common stock, par value $0.01 per share, having an aggregate gross sales price of up to $300.0 million (the Shares) through the Managers, acting as our agents (the ATM Offering). We will pay the Managers a commission equal to 1.0% of the gross offering proceeds from the sale of Shares pursuant to the ATM Offering. In the Equity Distribution Agreement, the Company agrees to indemnify the Managers against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the Securities Act) or to contribute payments that the Managers may be required to make because of such liabilities. We or the Managers may suspend the offering of Shares at any time and from time to time by notifying the other party.
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.
The Managers and their affiliates have, from time to time, provided, and may in the future provide, various investment banking, commercial banking and/or other financial services for us and our affiliates in the ordinary course of business, for which services they have and may in the future receive customary fees. Affiliates of certain of the Managers are lenders under certain of our and our affiliates’ credit facilities.
The Shares will be issued pursuant to our automatically effective shelf registration statementCompany’s Quarterly Report on Form S-3 that is currently on file (Registration No. 333-234389),10-Q for the base prospectus contained therein, and a prospectus supplement that wasquarter-ended March 31, 2020 filed with the SecuritiesSEC and Exchange Commissionfor the additional risk factor set forth below.
The Adopted Decision for Cal Water's 2018 GRC May be Materially Different than What was Issued on October 31, 2019.14, 2020
A copyWe are unable to guarantee that the proposed decision for Cal Water's 2018 GRC that was issued on October 14, 2020, will be adopted as issued without material variation. Both Cal Water and the CPUC's Public Advocates Office have an opportunity to provide their feedback on the proposed decision. As of November 6, 2020, the Equity Distribution Agreementproposed decision is attachedsubject to adoption by the CPUC no earlier than the CPUC’s meeting on November 19, 2020. Although historically proposed decisions affecting Cal
Water have not materially varied between the proposed decision and the adopted decision, there can be no guarantee that there will not be changes made to the proposed decision. The Company believes that is it probable that the proposed decision will be adopted as Exhibit 1.1 to this quarterly report. The foregoing descriptionissued without any material variation. As of September 30, 2020, the Equity Distribution AgreementCompany has applied accounting standards for recognized subsequent events and recorded regulatory assets and associated revenues for the regulatory mechanisms approved in the proposed decision. In the unlikely event that the CPUC does not purportapprove the proposed decision as issued, the Company will need to be completeadjust regulatory asset balances and is qualified in its entirety by reference to Exhibit 1.1.
A copy of the opinion of Gibson, Dunn & Crutcher LLP relating to the validity of the securities issuedrevenues in the ATM Offering is filed as Exhibit 5.1fourth quarter of 2020. Any such adjustment could result in a material decrease to this quarterly report.our operating revenue and net operating income for full-year 2020.
Item 6.
EXHIBITS
|
| | | | | | | |
Exhibit | | Description |
1.13.3 |
| | Equity Distribution Agreement, dated asAmended and Restated Bylaws of October 31, 2019, between California Water Service Group, and Morgan Stanley & Co. LLC, Robert W. Baird & Co. Incorporated, Blaylock Van, LLC, and Wells Fargo Securities, LLCas amended on September 30, 2020 (Exhibit 3.1 to the Current Report on Form 8-K filed October 5, 2020) |
| | |
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 Company |
| | |
4.131.1 |
| | Sixty-Second Supplemental Indenture dated as of June 11, 2019, between California Water Service Company and U.S. Bank National Association, as Trustee, covering 3.40% First Mortgage Bonds due 2029, Series VVV, 4.07% First Mortgage Bonds due 2049, Series WWW, and 4.17% First Mortgage Bonds due 2059, Series YYY (Exhibit 10.1 to the Current Report on Form 8-K filed June 18, 2019) |
| | |
5.1 |
| | |
| | |
10.1 |
| | Credit Agreement dated as of March 29, 2019 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, Bank of China, Los Angeles Branch and Wells Fargo Bank, National Association as co-documentation agents, and the other lender parties thereto (Exhibit 10.1 to the Current Report on Form 8-K filed March 29, 2019). |
|
| | |
10.2 |
| | Credit Agreement dated as of March 29, 2019 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, Bank of China, Los Angeles Branch and Wells Fargo Bank, National Association as co-documentation agents, and the other lender parties thereto (Exhibit 10.2 to the Current Report on Form 8-K filed March 29, 2019). |
| | |
23.1 |
| | Consent of Gibson, Dunn & Crutcher LLP (contained in Exhibit 5.1) |
| | |
31.1 |
| | |
|
| | |
31.2 |
| | |
|
| | |
32 |
| | |
|
| | |
101 |
| | The following materials from California Water Service Group'sthis Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of (Loss) Income, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to the Condensed Consolidated Financial Statements. |
104 |
| |
104 | | The cover page from California Water Service Group'sthis Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, 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.
|
| | | | | | | |
| CALIFORNIA WATER SERVICE GROUP |
| Registrant |
| |
October 31, 2019November 6, 2020 | By: | /s/ Thomas F. Smegal III |
| | Thomas F. Smegal III |
| | Vice President, |
| | Chief Financial Officer and Treasurer |