UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
o
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, CA.
 
95112
(Address of principal executive offices)
 
(Zip Code)
408-367-8200
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated Filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act)  Yes o  No ý
 
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, 2016 — 47,968,212
 



TABLE OF CONTENTS
 
 
Page


2


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,
2016
 
December 31,
2015
ASSETS
 

 
 

Utility plant:
 

 
 

Utility plant
$
2,667,635

 
$
2,506,946

Less accumulated depreciation and amortization
(849,884
)
 
(805,178
)
Net utility plant
1,817,751

 
1,701,768

Current assets:
 

 
 

Cash and cash equivalents
21,351

 
8,837

Receivables:
 

 
 

Customers
45,376

 
31,512

Regulatory balancing accounts
19,811

 
35,052

Other
14,199

 
14,760

Unbilled revenue
33,727

 
23,181

Materials and supplies at weighted average cost
6,256

 
6,339

Taxes, prepaid expenses, and other assets
10,407

 
7,897

Total current assets
151,127

 
127,578

Other assets:
 

 
 

Regulatory assets
363,597

 
361,893

Goodwill
2,615

 
2,615

Other assets
50,953

 
47,399

Total other assets
417,165

 
411,907

TOTAL ASSETS
$
2,386,043

 
$
2,241,253

CAPITALIZATION AND LIABILITIES
 

 
 

Capitalization:
 

 
 

Common stock, $0.01 par value; 68,000 shares authorized, 47,968 and 47,875 outstanding in 2016 and 2015, respectively
$
480

 
$
479

Additional paid-in capital
334,213

 
333,135

Retained earnings
317,319

 
308,541

Total common stockholders’ equity
652,012

 
642,155

Long-term debt, less current maturities
555,536

 
508,002

Total capitalization
1,207,548

 
1,150,157

Current liabilities:
 

 
 

Current maturities of long-term debt
6,130

 
6,043

Short-term borrowings
57,100

 
33,615

Accounts payable
84,052

 
66,380

Regulatory balancing accounts
2,837

 
2,227

Accrued interest
12,733

 
5,088

Accrued expenses and other liabilities
41,129

 
34,545

Total current liabilities
203,981

 
147,898

Unamortized investment tax credits
1,872

 
1,872

Deferred income taxes
282,973

 
264,897

Pension and postretirement benefits other than pensions
237,341

 
236,266

Regulatory liabilities and other
90,714

 
82,414

Advances for construction
182,001

 
180,172

Contributions in aid of construction
179,613

 
177,577

Commitments and contingencies (Note 10)
—

 
—

TOTAL CAPITALIZATION AND LIABILITIES
$
2,386,043

 
$
2,241,253

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

3


CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited (In thousands, except per share data)
For the three months ended
 
September 30,
2016
 
September 30,
2015
Operating revenue
 
$
184,268

 
$
183,543

Operating expenses:
 
 

 
 

Operations:
 
 

 
 

Water production costs
 
70,175

 
60,437

Administrative and general
 
23,844

 
30,737

Other operations
 
19,561

 
17,872

Maintenance
 
5,545

 
5,952

Depreciation and amortization
 
15,884

 
15,342

Income taxes
 
13,247

 
15,293

Property and other taxes
 
5,957

 
5,709

Total operating expenses
 
154,213

 
151,342

Net operating income
 
30,055

 
32,201

Other income and expenses:
 
 

 
 

Non-regulated revenue
 
3,397

 
3,814

Non-regulated expenses
 
(2,517
)
 
(4,454
)
Income tax (expense) benefit on other income and expenses
 
(349
)
 
262

Net other income (loss)
 
531

 
(378
)
Interest expense:
 
 

 
 

Interest expense
 
8,485

 
7,201

Less: capitalized interest
 
(774
)
 
(498
)
Net interest expense
 
7,711

 
6,703

Net income
 
$
22,875

 
$
25,120

Earnings per share:
 
 

 
 

Basic
 
$
0.48

 
$
0.52

Diluted
 
0.48

 
0.52

Weighted average shares outstanding:
 
 

 
 

Basic
 
47,969

 
47,878

Diluted
 
47,969

 
47,887

Dividends declared per share of common stock
 
$
0.1725

 
$
0.1675

 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements


4


CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited (In thousands, except per share data)
For the nine months ended
 
September 30,
2016
 
September 30,
2015
Operating revenue
 
$
458,440

 
$
449,942

Operating expenses:
 
 

 
 

Operations:
 
 

 
 

Water production costs
 
168,833

 
158,661

Administrative and general
 
75,037

 
85,069

Other operations
 
57,766

 
51,227

Maintenance
 
17,542

 
15,735

Depreciation and amortization
 
47,772

 
46,015

Income taxes
 
19,192

 
21,008

Property and other taxes
 
17,439

 
16,036

Total operating expenses
 
403,581

 
393,751

Net operating income
 
54,859

 
56,191

Other income and expenses:
 
 

 
 

Non-regulated revenue
 
10,589

 
10,540

Non-regulated expenses
 
(8,306
)
 
(10,201
)
Income tax expense on other income and expenses
 
(914
)
 
(131
)
Net other income
 
1,369

 
208

Interest expense:
 
 

 
 

Interest expense
 
24,984

 
21,331

Less: capitalized interest
 
(2,341
)
 
(1,472
)
Net interest expense
 
22,643

 
19,859

Net income
 
$
33,585

 
$
36,540

Earnings per share:
 
 

 
 

Basic
 
$
0.70

 
$
0.76

Diluted
 
0.70

 
0.76

Weighted average shares outstanding:
 
 

 
 

Basic
 
47,949

 
47,861

Diluted
 
47,952

 
47,877

Dividends declared per share of common stock
 
$
0.5175

 
$
0.5025

 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements


5


CALIFORNIA WATER SER VICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (In thousands)
For the nine months ended:
 
September 30,
2016
 
September 30,
2015
Operating activities:
 
 

 
 

Net income
 
$
33,585

 
$
36,540

Adjustments to reconcile net income to net cash:
 
 

 
 

Depreciation and amortization
 
48,946

 
47,406

Change in value of life insurance contracts
 
(915
)
 
758

Changes in operating assets and liabilities:
 
 

 
 

Receivables and unbilled revenue
 
(13,352
)
 
(18,412
)
Accounts payable
 
8,940

 
7,245

Other current assets
 
(1,743
)
 
(2,428
)
Other current liabilities
 
13,982

 
11,939

Other changes in noncurrent assets and liabilities
 
33,749

 
33,476

Net cash provided by operating activities
 
123,192

 
116,524

Investing activities:
 
 

 
 

Utility plant expenditures
 
(166,406
)
 
(118,309
)
Life insurance proceeds
 
495

 
—

Purchase of life insurance contracts
 
(2,710
)
 
(1,855
)
Change in restricted cash
 
(685
)
 
(241
)
Net cash used in investing activities
 
(169,306
)
 
(120,405
)
Financing activities:
 
 

 
 

Short-term borrowings
 
105,100

 
82,500

Repayment of short-term borrowings
 
(81,615
)
 
(25,000
)
Proceeds from long-term debt, net of issuance costs of $177 for 2016, $0 for 2015
 
49,823

 
50

Short-term borrowings issuance costs
 
—

 
(1,197
)
Repayment of long-term debt
 
(2,865
)
 
(2,878
)
Advances and contributions in aid of construction
 
18,186

 
10,741

Refunds of advances for construction
 
(5,194
)
 
(5,050
)
Dividends paid
 
(24,807
)
 
(24,047
)
Net cash provided by financing activities
 
58,628

 
35,119

Change in cash and cash equivalents
 
12,514

 
31,238

Cash and cash equivalents at beginning of period
 
8,837

 
19,587

Cash and cash equivalents at end of period
 
$
21,351

 
$
50,825

Supplemental information:
 
 

 
 

Cash paid for interest (net of amounts capitalized)
 
$
13,889

 
$
13,618

Supplemental disclosure of non-cash activities:
 
 

 
 

Accrued payables for investments in utility plant
 
$
26,767

 
$
24,856

Utility plant contribution by developers
 
12,104

 
5,573

 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements


6


CALIFORNIA WATER SERVICE GROUP
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2016
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 one 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 for the year ended December 31, 2015, included in its annual report on Form 10-K as filed with the SEC on February 25, 2016.
 
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, 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. The results for interim periods are not necessarily indicative of the results for any future period.
 
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
 
Revenue
 
Revenue generally includes monthly cycle customer billings for regulated water and wastewater services at rates authorized by regulatory commissions (plus an estimate for water used between the customer's last meter reading and the end of the accounting period) and billings to certain non-regulated customers at rates authorized by contract with government agencies.
 
The Company’s regulated water and wastewater revenue requirements are authorized by the Commissions in the states in which they operate. The revenue requirements are intended to provide the Company a reasonable opportunity to recover its operating costs and earn a return on investments.
 
For metered customers, Cal Water recognizes revenue from rates which are designed and authorized by the California Public Utilities Commission (CPUC). Under the Water Revenue Adjustment Mechanism (WRAM), Cal Water records the adopted level of volumetric revenues, which would include recovery of cost of service and a return on investments, as

7


established by the CPUC for metered accounts (adopted volumetric revenues). In addition to volumetric-based revenues, the revenue requirements approved by the CPUC include service charges, flat rate charges, and other items not subject to the WRAM. The adopted volumetric revenue considers the seasonality of consumption of water based upon historical averages. The variance between adopted volumetric revenues and actual billed volumetric revenues for metered accounts is recorded as a component of revenue with an offsetting entry to a regulatory asset or liability balancing account (tracked individually for each Cal Water district) subject to certain criteria under the accounting for regulated operations being met. The variance amount may be positive or negative and represents amounts that will be recovered from or refunded to customers in the future.

Cost-recovery rates are designed to permit full recovery of certain costs allowed to be recovered by the Commissions. Cost-recovery rates such as the Modified Cost Balancing Account (MCBA) provide for recovery of adopted expense levels for purchased water, purchased power and pump taxes, as established by the CPUC. In addition, cost-recovery rates include recovery of costs related to water conservation programs and certain other operating expenses adopted by the CPUC. Variances (which include the effects of changes in both rates and volumes for the MCBA) between adopted and actual costs are recorded as a component of revenue, as the amount of such variances will be recovered from or refunded to customers in the future. Cost-recovery expenses are generally recognized when expenses are incurred with no markup for return on investments or profit.

The balances in the WRAM and MCBA asset and liability accounts will fluctuate on a monthly basis depending upon the variance between adopted and actual results. The recovery or refund of WRAM is netted against the recovery or refund of MCBA for the corresponding district. The recovery or refund of net WRAM and MCBA balances are interest bearing at the current 90 day commercial paper rate. At the end of any calendar year, Cal Water files with the CPUC to refund or collect the balance in the accounts. Undercollected net WRAM and MCBA receivable balances are collected over 12, 18, or 20+ months. Cal Water defers net WRAM and MCBA operating revenues and associated costs whenever the net receivable balances are estimated to be collected more than 24 months after the respective reporting periods in which they were recognized. The deferred net WRAM and MCBA revenues and associated costs were determined using forecasts of customer consumption trends in future reporting periods and the timing of when the CPUC will authorize Cal Water’s filings to recover the undercollected balances. Deferred net WRAM and MCBA revenues and associated costs will be recognized as revenues and costs in future periods when the net receivable balances are estimated to be collected within 24 months of the respective reporting period.

Customer meter reads occur on various business days throughout the month. As a result, there is unmetered or unbilled customer usage each month. The estimated unbilled revenue for monthly unmetered customer usage is recorded using the number of unbilled days for that month and average daily customer billing rate for the previous month. The average daily customer billing rate for the previous month fluctuates depending on customer usage. Estimated unbilled revenue is not included in the WRAM until it is billed.
 
Flat rate customers are billed in advance at the beginning of the service period. The revenue is prorated so that the portion of revenue applicable to the current period is included in that period’s revenue, with the balance recorded as unearned revenue on the balance sheet and recognized as revenue when earned in the subsequent accounting period. The unearned revenue liability was $0.9 million and $1.3 million as of September 30, 2016 and December 31, 2015, respectively. This liability is included in “accrued expenses and other liabilities” on the condensed consolidated balance sheets.
 
Cash and Cash Equivalents
 
Cash equivalents include highly liquid investments with maturities of three months or less.  Cash and cash equivalents was $21.4 million and $8.8 million as of September 30, 2016 and December 31, 2015, respectively.  Restricted cash was presented on the condensed consolidated balance sheet in “taxes, prepaid expenses and other assets” and was $1.2 million and $0.5 million as of September 30, 2016 and December 31, 2015, respectively.
 
Adoption of New Accounting Standards
 
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which amends the existing guidance relating to the presentation of debt issuance costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company adopted this guidance effective January 1, 2016 and applied the requirements retrospectively for all periods presented. The adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements. The long term debt unamortized

8


debt issuance costs were $4.6 million as of September 30, 2016 and $4.8 million as December 31, 2015. The following table shows the effect of the accounting change to the condensed consolidated balance sheet as of December 31, 2015:

 
December 31, 2015
Balance Sheet Classification
As Reported on Form 10-K
 
Adjusted Balance on Form 10-Q
 
Decrease from Retrospective Adoption
Other Assets
$
52,241

 
$
47,399

 
$
4,842

Long-term debt, less current maturities
512,287

 
508,002

 
4,285

Current maturities of long-term debt
6,600

 
6,043

 
557


In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which amends the existing revenue recognition guidance.  In August 2015, the FASB deferred the effective date of this amendment for public companies by one year to January 1, 2018, with early adoption permitted as of the original effective date of January 1, 2017.  (See ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.)  The Company expects to adopt the new revenue standard using the modified retrospective method and is currently evaluating the impact of adopting the new revenue standard on its consolidated financial statements and related disclosures.
 
In February 2016, the FASB issued ASU 2016-02, Leases. This update changes the accounting treatment of operating leases for lessees and related disclosure requirements. ASU 2016-2 is effective for annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the impact of adopting the new lease standard on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in ASU 2016-09 involve multiple aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the Statement of Cash Flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and early adoption is permitted. The Company is currently evaluating the impact on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. This update adds and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017 and early adoption is permitted. The Company is currently evaluating the impact on its consolidated financial statements and related disclosures.

Note 3. Stock-based Compensation
 
Equity Incentive Plan
 
During the nine months ended September 30, 2016 and 2015, the Company granted annual Restricted Stock Awards (RSAs) of 72,317 and 60,997, respectively, to officers and directors of the Company. During those same periods, 13,319 and 15,780 RSAs were canceled, respectively. During the three months ended September 30, 2016 and 2015, no RSAs were granted and 2,719 and 2,560 RSAs were canceled, respectively.  Employee RSAs granted in 2016 and 2015 vest over 36 months.  Director RSAs generally vest at the end of 12 months. During the first nine months of 2016 and 2015, the RSAs granted were valued at $25.17 and $24.29 per share, respectively, based upon the fair market value of the Company’s common stock on the date of grant.

During the nine months ended September 30, 2016 and 2015, the Company granted 43,659 and 38,983 performance-based Restricted Stock Unit Awards (RSUs), respectively, to officers.  During those same periods, the Company issued 28,424 and 0 RSUs, respectively, and no RSUs were canceled. During the three months ended September 30, 2016 and 2015, the Company did not grant, issue or cancel any RSUs.  Each RSU award reflects a target number of shares that may be issued to the award recipient.  The 2016 and 2015 awards may be earned upon the completion of the three year performance period ending on March 1, 2019 and March 3, 2018, respectively. The 2016 and 2015 RSUs are recognized as expense ratably over the 3 year performance period using a fair market value of $25.17 per share and $24.28 per share, respectively, and an estimate of RSUs earned during the performance period. The Company has recorded compensation costs for the RSAs and RSUs in administrative and general operating expenses in the amount of $2.1 million and $2.0 million for the nine months ended September 30, 2016 and September 30, 2015 respectively.

9


 
Note 4. Equity
 
The Company’s changes in total common stockholders’ equity for the nine months ended September 30, 2016 were as follows:
 
 
Total Common
Stockholders’ Equity
Balance at December 31, 2015
$
642,155

Common stock issued
1

Share-based compensation expense
1,078

Common stock dividends declared
(24,807
)
Net income
33,585

Balance at September 30, 2016
$
652,012

 
Note 5. Earnings Per Share
 
The computations of basic and diluted earnings per share are noted below. Basic earnings per share is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts were exercised or converted into common stock. 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 Compensation & Organization Committee of the Board of Directors.
 
There were no shares of Stock Appreciation Rights (SARs) outstanding as of September 30, 2016, and a total of 65,436 shares of SARs were vested and outstanding as of September 30, 2015. All the SARs were dilutive when they were outstanding during the period, as shown in the tables below.
 
 
Three Months Ended September 30
 
2016
 
2015
 
(In thousands, except per share data)
Net income available to common stockholders
$
22,875

 
$
25,120

Weighted average common shares outstanding, basic
47,969

 
47,878

Dilutive SARs (treasury method)


 
9

Weighted average common shares outstanding, dilutive
47,969

 
47,887

Earnings per share - basic
$
0.48

 
$
0.52

Earnings per share - diluted
$
0.48

 
$
0.52

 
 
Nine Months Ended September 30
 
2016
 
2015
 
(In thousands, except per share data)
Net income available to common stockholders
$
33,585

 
$
36,540

Weighted average common shares outstanding, basic
47,949

 
47,861

Dilutive SARs (treasury method)
3

 
16

Weighted average common shares outstanding, dilutive
47,952

 
47,877

Earnings per share - basic
$
0.70

 
$
0.76

Earnings per share - diluted
$
0.70

 
$
0.76






10


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 by the Company related to pension plans were $20.6 million and $22.7 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. Cash contributions by the Company related to other postretirement benefit plans were $6.7 million and $7.5 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. The 2016 estimated cash contribution to the pension plans is $28.3 million and to the other postretirement benefit plans is $9.6 million.
 
The following table lists 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
 
2016
 
2015
 
2016
 
2015
Service cost
$
5,594

 
$
4,715

 
$
1,045

 
$
3,043

Interest cost
5,764

 
5,072

 
625

 
2,101

Expected return on plan assets
(5,462
)
 
(4,770
)
 
(1,005
)
 
(908
)
Amortization of prior service cost
1,555

 
1,502

 
10

 
12

Recognized net actuarial loss
1,743

 
2,308

 
(482
)
 
2,182

Net periodic benefit cost
$
9,194

 
$
8,827

 
$
193

 
$
6,430

 

 
Nine Months Ended September 30
 
Pension Plan
 
Other Benefits
 
2016
 
2015
 
2016
 
2015
Service cost
$
15,728

 
$
15,980

 
$
5,653

 
$
8,044

Interest cost
16,670

 
15,078

 
4,225

 
5,328

Expected return on plan assets
(16,370
)
 
(14,354
)
 
(3,097
)
 
(2,660
)
Amortization of prior service cost
4,664

 
4,506

 
32

 
34

Recognized net actuarial loss
4,329

 
7,108

 
2,041

 
5,099

Net periodic benefit cost
$
25,021

 
$
28,318

 
$
8,854

 
$
15,845


The actuarially determined decrease in other benefits costs in the third quarter of 2016 as compared to the prior year was $6.2 million and for the nine months ended September 30, 2016 as compared to the prior year was $7.0 million. The cost decrease was mostly due to a reduction in retiree medical claim costs in 2015.

11


Note 7. Short-term and Long-term Borrowings
 
On October 13, 2015, Cal Water agreed to sell $150.0 million in aggregate principal amount of First Mortgage Bonds in a private placement. Pursuant to the agreement, Cal Water issued $100.0 million of First Mortgage Bonds on October 13, 2015, consisting of $50.0 million of 3.33% series QQQ maturing October 15, 2025 and $50.0 million of 4.31% series RRR maturing October 16, 2045.

In March 2016, Cal Water issued the remaining $50.0 million of First Mortgage Bonds, consisting of $40.0 million of 4.41% series SSS maturing April 16, 2046 and $10.0 million of 4.61% series TTT maturing April 14, 2056. Cash proceeds of approximately $49.7 million, net of $0.3 million debt issuance costs, were received. Cal Water used a portion of the net proceeds from the offering to repay outstanding borrowings on the Company and Cal Water lines of credit of $48.6 million.

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’ consolidated total capitalization ratio and interest coverage ratio.
 
The outstanding borrowings on the Company lines of credit were $57.1 million and $33.6 million as of September 30, 2016 and December 31, 2015, respectively. There were no borrowings on the Cal Water lines of credit as September 30, 2016 and December 31, 2015.  The average borrowing rate for borrowings on the Company and Cal Water lines of credit during the nine months ended September 30, 2016 was 1.30% compared to 1.05% for the same period last year.

Note 8. Income Taxes
 
As of September 30, 2016 and December 31, 2015, the Company had unrecognized tax benefits of approximately $10.4 million and $10.3 million, respectively.  Included in the balance of unrecognized tax benefits as of September 30, 2016 and December 31, 2015 is approximately $2.3 million and $2.1 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.
 
The Company’s fiscal year 2016 effective tax rate is estimated to be 38%.
 

12



Note 9. Regulatory Assets and Liabilities
 
Regulatory assets and liabilities were comprised of the following as of September 30, 2016 and December 31, 2015:
 
 
September 30, 2016
 
December 31, 2015
Regulatory Assets
 

 
 

Pension and retiree group health
$
205,120

 
$
205,614

Property-related temporary differences (tax benefits flowed through to customers)
81,522

 
81,522

Other accrued benefits
28,917

 
27,327

Net WRAM and MCBA long-term accounts receivable
16,626

 
15,410

Asset retirement obligations, net
15,660

 
14,682

Interim rates long-term accounts receivable
4,640

 
5,238

Tank coating
8,594

 
6,829

Health care balancing account
776

 
3,503

Other regulatory assets
1,742

 
1,768

Total Regulatory Assets
$
363,597

 
$
361,893

 
 
 
 
Regulatory Liabilities
 

 
 

Future tax benefits due to customers
$
29,505

 
$
29,505

Conservation program
3,574

 
2,317

Pension balancing account
2,986

 
792

Net WRAM and MCBA long-term payable
2,260

 
488

Other regulatory liabilities
3,581

 
2,162

Total Regulatory Liabilities
$
41,906

 
$
35,264

 
Short-term regulatory assets and liabilities are excluded from the above table. The short-term regulatory assets were $19.8 million as of September 30, 2016 and $35.1 million as of December 31, 2015. The short-term regulatory assets were primarily interim rate memorandum account receivable and net WRAM and MCBA accounts receivable as of September 30, 2016 and December 31, 2015. The short-term portions of regulatory liabilities were $2.8 million as of September 30, 2016 and $2.2 million as of December 31, 2015. The short-term regulatory liabilities were primarily short term net WRAM payables as of September 30, 2016. The short-term regulatory liabilities were primarily short term net WRAM payables and net refund balances to rate payers for the water conservation program from the 2009 General Rate Case (GRC) as of December 31, 2015.

Note 10. Commitment and Contingencies
 
Commitments
 
The Company has significant commitments to lease certain office spaces and water systems and to purchase water from water wholesalers. These commitments are described in Form 10-K for the year ended December 31, 2015.  As of September 30, 2016, there were no significant changes from December 31, 2015.

13



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 ratepayers 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 to request recovery of these costs in future filings and uses of proceeds to comply with CPUC’s general policy.
 
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 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, 2016 and December 31, 2015, the Company recognized a liability of $4.1 million and $3.5 million, respectively, for known legal matters. The cost of litigation is expensed as incurred and any settlement is first offset against such costs. Any settlement in excess of the cost to litigate is accounted for on a case by case basis, dependent on the nature of the settlement.

On July 21, 2016, the San Francisco Bay Area Regional Water Quality Control Board (the Water Control Board) approved a settlement between Cal Water and the Water Control Board and California Department of Fish and Wildlife (Fish and Wildlife) to resolve purported complaints from the Water Control Board and Fish and Wildlife alleging Cal Water discharged approximately 8,207,560 gallons of drinking water into Polhemus Creek that was caused by an undetected crack in a large water main located 10 feet below ground in a remote area. The water was disinfected as required to meet all federal and state water quality standards and make it safe for human consumption. Drinking water, however, can be harmful to fish and the environment.

As part of the settlement, Cal Water will replace 2,000 feet of 18-inch cast iron water main with new ductile iron main along Polhemus Road and Polhemus Creek in San Mateo. Cal Water will also conduct a streambed restoration project in San Mateo Creek to improve conditions in the creek for native fish. This work will be performed in coordination with the California Department of Fish and Wildlife. In addition to investing in these improvement projects and as required by the settlement Cal Water paid $0.5 million to the Water Control Board and $0.02 million to Fish and Wildlife during the third quarter of 2016.

Under the terms of the settlement, Cal Water will be released from all claims unless it fails to complete the projects. The agreement contains no admission of wrongdoing.
 
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 Plan has the ability to access.
 
Level 2 - Inputs to the valuation methodology include:

14


•
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, if available, or the discounted cash flow analysis, based on the current rates available using a risk-free rate (a U.S. Treasury securities yield curve) plus a risk premium of 1.70%.
 
Advances for construction fair values were estimated using broker quotes from companies that frequently purchase these investments.
 
 
September 30, 2016
 
 
 
Fair Value
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Total
Long-term debt, including current maturities
$
561,666

 
—

 
$
679,712

 
—

 
$
679,712

Advances for construction
182,001

 
—

 
74,440

 
—

 
74,440

Total
$
743,667

 
$
—

 
$
754,152

 
$
—

 
$
754,152

 
 
December 31, 2015
 
 
 
Fair Value
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Total
Long-term debt, including current maturities
$
514,045

 
$
—

 
$
600,440

 
$
—

 
$
600,440

Advances for construction
180,172

 
—

 
72,866

 
—

 
72,866

Total
$
694,217

 
—

 
$
673,306

 
$
—

 
$
673,306

 
Note 12. Condensed Consolidating Financial Statements
 
On April 17, 2009, Cal Water issued $100.0 million aggregate principal amount of 5.875% First Mortgage Bonds due 2019, and on November 17, 2010, Cal Water issued $100.0 million aggregate principal amount of 5.500% First Mortgage Bonds due 2040, all of which are fully and unconditionally guaranteed by the Company.  As a result of these guarantee arrangements, 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, 2016 and December 31, 2015, the condensed consolidating statements of income for the three months ended September 30, 2016 and 2015, condensed consolidating statements of income for the nine months ended September 30, 2016 and 2015, and the condensed consolidating statements of cash flows for the nine months ended September 30, 2016 and 2015 of (i) California Water Service Group, the guarantor of the First Mortgage Bonds and the parent company; (ii) California Water Service Company, the issuer of the First Mortgage Bonds and a 100% owned consolidated subsidiary of California Water Service Group; and (iii) the other 100% owned non-guarantor consolidated subsidiaries of California Water Service Group. No other subsidiary of the Company guarantees the securities. The condensed consolidating balance sheet as of December 31, 2015 reflects the retrospective adoption of ASU 2015-03 (refer to Note 2. Summary of Significant Accounting Policies for more details).

15


CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 2016
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS
 

 
 

 
 

 
 

 
 

Utility plant:
 

 
 

 
 

 
 

 
 

Utility plant
$
1,317

 
$
2,471,314

 
$
202,200

 
$
(7,196
)
 
$
2,667,635

Less accumulated depreciation and amortization
(776
)
 
(799,057
)
 
(51,946
)
 
1,895

 
(849,884
)
Net utility plant
541

 
1,672,257

 
150,254

 
(5,301
)
 
1,817,751

Current assets:
 
 
 
 
 

 
 
 
 
Cash and cash equivalents
1,987

 
13,928

 
5,436

 
—

 
21,351

Receivables and unbilled revenue
—

 
107,535

 
5,578

 
—

 
113,113

Receivables from affiliates
23,313

 
300

 
246

 
(23,859
)
 
—

Other current assets
179

 
15,449

 
1,035

 
—

 
16,663

Total current assets
25,479

 
137,212

 
12,295

 
(23,859
)
 
151,127

Other assets:
 
 
 
 
 

 
 
 
 
Regulatory assets
—

 
359,926

 
3,671

 
—

 
363,597

Investments in affiliates
659,828

 
—

 
—

 
(659,828
)
 
—

Long-term affiliate notes receivable
24,206

 
—

 
—

 
(24,206
)
 
—

Other assets
1,103

 
49,482

 
3,188

 
(205
)
 
53,568

Total other assets
685,137

 
409,408

 
6,859

 
(684,239
)
 
417,165

TOTAL ASSETS
$
711,157

 
$
2,218,877

 
$
169,408

 
$
(713,399
)
 
$
2,386,043

CAPITALIZATION AND LIABILITIES
 

 
 

 
 

 
 

 
 

Capitalization:
 

 
 

 
 

 
 

 
 

Common stockholders’ equity
$
652,012

 
$
588,183

 
$
76,970

 
$
(665,153
)
 
$
652,012

Affiliate long-term debt
—

 
—

 
24,206

 
(24,206
)
 
—

Long-term debt, less current maturities
—

 
554,748

 
788

 
—

 
555,536

Total capitalization
652,012

 
1,142,931

 
101,964

 
(689,359
)
 
1,207,548

Current liabilities:
 

 
 

 
 

 
 

 
 

Current maturities of long-term debt
—

 
5,661

 
469

 
—

 
6,130

Short-term borrowings
57,100

 
—

 
—

 
—

 
57,100

Payables to affiliates
—

 
2,034

 
21,825

 
(23,859
)
 
—

Accounts payable
—

 
81,161

 
2,891

 
—

 
84,052

Accrued expenses and other liabilities
2,045

 
58,141

 
(3,540
)
 
53

 
56,699

Total current liabilities
59,145

 
146,997

 
21,645

 
(23,806
)
 
203,981

Unamortized investment tax credits
—

 
1,872

 
—

 
—

 
1,872

Deferred income taxes
—

 
275,596

 
7,613

 
(236
)
 
282,973

Pension and postretirement benefits other than pensions
—

 
237,341

 
—

 
—

 
237,341

Regulatory liabilities and other
—

 
87,633

 
3,081

 
—

 
90,714

Advances for construction
—

 
181,454

 
547

 
—

 
182,001

Contributions in aid of construction
—

 
145,053

 
34,560

 
—

 
179,613

TOTAL CAPITALIZATION AND LIABILITIES
$
711,157

 
$
2,218,877

 
$
169,410

 
$
(713,401
)
 
$
2,386,043


16


CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2015
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS
 

 
 

 
 

 
 

 
 

Utility plant:
 

 
 

 
 

 
 

 
 

Utility plant
$
1,318

 
$
2,313,704

 
$
199,121

 
$
(7,197
)
 
$
2,506,946

Less accumulated depreciation and amortization
(605
)
 
(758,362
)
 
(48,034
)
 
1,823

 
(805,178
)
Net utility plant
713

 
1,555,342

 
151,087

 
(5,374
)
 
1,701,768

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
582

 
4,270

 
3,985

 
—

 
8,837

Receivables and unbilled revenue
—

 
100,777

 
3,728

 
—

 
104,505

Receivables from affiliates
19,677

 
26,219

 
—

 
(45,896
)
 
—

Other current assets
79

 
13,077

 
1,080

 
—

 
14,236

Total current assets
20,338

 
144,343

 
8,793

 
(45,896
)
 
127,578

Other assets:
 

 
 

 
 

 
 

 
 

Regulatory assets
—

 
358,254

 
3,639

 
—

 
361,893

Investments in affiliates
651,449

 
—

 
—

 
(651,449
)
 
—

Long-term affiliate notes receivable
25,099

 
—

 
—

 
(25,099
)
 
—

Other assets
758

 
45,544

 
4,616

 
(904
)
 
50,014

Total other assets
677,306

 
403,798

 
8,255

 
(677,452
)
 
411,907

TOTAL ASSETS
$
698,357

 
$
2,103,483

 
$
168,135

 
$
(728,722
)
 
$
2,241,253

CAPITALIZATION AND LIABILITIES
 

 
 

 
 

 
 

 
 

Capitalization:
 

 
 

 
 

 
 

 
 

Common stockholders’ equity
$
642,155

 
$
581,792

 
75,024

 
$
(656,816
)
 
$
642,155

Affiliate long-term debt
—

 
—

 
25,099

 
(25,099
)
 
—

Long-term debt, less current maturities
—

 
507,034

 
968

 
—

 
508,002

Total capitalization
642,155

 
1,088,826

 
101,091

 
(681,915
)
 
1,150,157

Current liabilities:
 

 
 

 
 

 
 

 
 

Current maturities of long-term debt
—

 
5,654

 
389

 
—

 
6,043

Short-term borrowings
33,615

 
—

 
—

 
—

 
33,615

Payables to affiliates
21,500

 
667

 
23,729

 
(45,896
)
 
—

Accounts payable
—

 
63,814

 
2,566

 
—

 
66,380

Accrued expenses and other liabilities
102

 
40,173

 
1,585

 
—

 
41,860

Total current liabilities
55,217

 
110,308

 
28,269

 
(45,896
)
 
147,898

Unamortized investment tax credits
—

 
1,872

 
—

 
—

 
1,872

Deferred income taxes
985

 
264,823

 
—

 
(911
)
 
264,897

Pension and postretirement benefits other than pensions
—

 
236,266

 
—

 
—

 
236,266

Regulatory and other liabilities
—

 
79,477

 
2,937

 
—

 
82,414

Advances for construction
—

 
179,630

 
542

 
—

 
180,172

Contributions in aid of construction
—

 
142,281

 
35,296

 
—

 
177,577

TOTAL CAPITALIZATION AND LIABILITIES
$
698,357

 
$
2,103,483

 
$
168,135

 
$
(728,722
)
 
$
2,241,253



17


CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended September 30, 2016
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Operating revenue
$
—

 
$
173,223

 
$
11,045

 
$
—

 
$
184,268

Operating expenses:
 

 
 

 
 

 
 

 
 

Operations:
 

 
 

 
 

 
 

 
 

Water production costs
—

 
68,045

 
2,130

 
—

 
70,175

Administrative and general
—

 
21,679

 
2,165

 
—

 
23,844

Other operations
—

 
18,037

 
1,692

 
(168
)
 
19,561

Maintenance
—

 
5,322

 
223

 
—

 
5,545

Depreciation and amortization
57

 
14,777

 
1,074

 
(24
)
 
15,884

Income tax (benefit) expense
(105
)
 
12,165

 
920

 
267

 
13,247

Property and other taxes
—

 
5,182

 
775

 
—

 
5,957

Total operating (income) expenses
(48
)
 
145,207

 
8,979

 
75

 
154,213

Net operating income
48

 
28,016

 
2,066

 
(75
)
 
30,055

Other income and expenses:
 

 
 

 
 

 
 

 
 

Non-regulated revenue
464

 
3,024

 
541

 
(632
)
 
3,397

Non-regulated expenses
—

 
(2,170
)
 
(347
)
 
—

 
(2,517
)
Income tax expense on other income and expenses
(189
)
 
(345
)
 
(73
)
 
258

 
(349
)
Total other income
275

 
509

 
121

 
(374
)
 
531

Interest:
 

 
 

 
 

 
 

 
 

Interest expense
201

 
8,259

 
488

 
(463
)
 
8,485

Less: capitalized interest
—

 
(759
)
 
(15
)
 
—

 
(774
)
Net interest expense
201

 
7,500

 
473

 
(463
)
 
7,711

Equity earnings of subsidiaries
22,753

 
—

 
—

 
(22,753
)
 
—

Net income
$
22,875

 
$
21,025

 
$
1,714

 
$
(22,739
)
 
$
22,875


18


CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended September 30, 2015
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Operating revenue
$
—

 
$
172,425

 
$
11,118

 
$
—

 
$
183,543

Operating expenses:
 

 
 

 
 

 
 

 
 

Operations:
 

 
 

 
 

 
 

 
 

Water production costs
—

 
58,173

 
2,264

 
—

 
60,437

Administrative and general
—

 
27,620

 
3,117

 
—

 
30,737

Other operations
—

 
16,329

 
1,668

 
(125
)
 
17,872

Maintenance
—

 
5,722

 
230

 
—

 
5,952

Depreciation and amortization
57

 
14,231

 
1,079

 
(25
)
 
15,342

Income tax (benefit) expense
(107
)
 
14,638

 
508

 
254

 
15,293

Property and other taxes
—

 
4,910

 
799

 
—

 
5,709

Total operating (income) expenses
(50
)
 
141,623

 
9,665

 
104

 
151,342

Net operating income
50

 
30,802

 
1,453

 
(104
)
 
32,201

Other income and expenses:
 

 
 

 
 

 
 

 
 

Non-regulated revenue
444

 
3,489

 
451

 
(570
)
 
3,814

Non-regulated expenses, net
—

 
(4,058
)
 
(396
)
 
—

 
(4,454
)
Income tax (expense) benefit on other income and expenses
(181
)
 
232

 
(33
)
 
244

 
262

Total other income (loss)
263

 
(337
)
 
22

 
(326
)
 
(378
)
Interest:
 

 
 

 
 

 
 

 
 

Interest expense
205

 
6,969

 
472

 
(445
)
 
7,201

Less: capitalized interest
—

 
(488
)
 
(10
)
 
—

 
(498
)
Net interest expense
205

 
6,481

 
462

 
(445
)
 
6,703

Equity earnings of subsidiaries
25,012

 
—

 
—

 
(25,012
)
 
—

Net income
$
25,120

 
$
23,984

 
$
1,013

 
$
(24,997
)
 
$
25,120



19


CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the nine months ended September 30, 2016
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Operating revenue
$
—

 
$
428,592

 
$
29,848

 
$
—

 
$
458,440

Operating expenses:
 

 
 

 
 

 
 

 
 

Operations:
 

 
 

 
 

 
 

 
 

Water production costs
—

 
162,933

 
5,900

 
—

 
168,833

Administrative and general
—

 
67,289

 
7,748

 
—

 
75,037

Other operations
—

 
53,128

 
5,016

 
(378
)
 
57,766

Maintenance
—

 
16,854

 
688

 
—

 
17,542

Depreciation and amortization
171

 
44,427

 
3,246

 
(72
)
 
47,772

Income tax (benefit) expense
(292
)
 
17,356

 
1,366

 
762

 
19,192

Property and other taxes
—

 
15,241

 
2,198

 
—

 
17,439

Total operating (income) expenses
(121
)
 
377,228

 
26,162

 
312

 
403,581

Net operating income
121

 
51,364

 
3,686

 
(312
)
 
54,859

Other income and expenses:
 

 
 

 
 

 
 

 
 

Non-regulated revenue
1,390

 
9,659

 
1,338

 
(1,798
)
 
10,589

Non-regulated expenses
—

 
(7,422
)
 
(884
)
 
—

 
(8,306
)
Income tax expense on other income and expenses
(566
)
 
(909
)
 
(172
)
 
733

 
(914
)
Net other income
824

 
1,328

 
282

 
(1,065
)
 
1,369

Interest:
 

 
 

 
 

 
 

 
 

Interest expense
547

 
24,421

 
1,435

 
(1,419
)
 
24,984

Less: capitalized interest
—

 
(2,293
)
 
(48
)
 
—

 
(2,341
)
Net interest expense
547

 
22,128

 
1,387

 
(1,419
)
 
22,643

Equity earnings of subsidiaries
33,187

 
—

 
—

 
(33,187
)
 
—

Net income
$
33,585

 
$
30,564

 
$
2,581

 
$
(33,145
)
 
$
33,585


20


CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the nine months ended September 30, 2015
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Operating revenue
$
—

 
$
422,372

 
$
27,570

 
$
—

 
$
449,942

Operating expenses:
 

 
 

 
 

 
 

 
 

Operations:
 

 
 

 
 

 
 

 
 

Water production costs
—

 
152,593

 
6,068

 
—

 
158,661

Administrative and general
—

 
76,271

 
8,798

 
—

 
85,069

Other operations
—

 
46,632

 
4,973

 
(378
)
 
51,227

Maintenance
—

 
15,148

 
587

 
—

 
15,735

Depreciation and amortization
171

 
42,659

 
3,261

 
(76
)
 
46,015

Income tax (benefit) expense
(294
)
 
20,454

 
92

 
756

 
21,008

Property and other taxes
—

 
13,964

 
2,072

 
—

 
16,036

Total operating (income) expenses
(123
)
 
367,721

 
25,851

 
302

 
393,751

Net operating income
123

 
54,651

 
1,719

 
(302
)