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Table of Contents

 
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 June 30, 2019
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, California 95112
(Address of principal executive offices)
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)
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 accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated 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 June 30, 2019 — 48,140,000
 


Table of Contents

TABLE OF CONTENTS
 
 
Page

2

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)
 
June 30,
2019
 
December 31,
2018
ASSETS
 

 
 

Utility plant:
 

 
 

Utility plant
$
3,346,165

 
$
3,229,446

Less accumulated depreciation and amortization
(1,043,960
)
 
(996,723
)
Net utility plant
2,302,205

 
2,232,723

Current assets:
 

 
 

Cash and cash equivalents
54,560

 
47,176

Receivables:
 

 
 

Customers
43,345

 
30,037

Regulatory balancing accounts
33,466

 
42,394

Other
17,616

 
17,101

Unbilled revenue
32,934

 
33,427

Materials and supplies at weighted average cost
6,989

 
6,586

Taxes, prepaid expenses, and other assets
17,120

 
11,981

Total current assets
206,030

 
188,702

Other assets:
 

 
 

Regulatory assets
373,619

 
353,569

Goodwill
2,615

 
2,615

Other assets
80,126

 
60,095

Total other assets
456,360

 
416,279

TOTAL ASSETS
$
2,964,595

 
$
2,837,704

CAPITALIZATION AND LIABILITIES
 

 
 

Capitalization:
 

 
 

Common stock, $0.01 par value; 68,000 shares authorized, 48,140 and 48,065 outstanding in 2019 and 2018, respectively
$
481

 
$
481

Additional paid-in capital
340,274

 
337,623

Retained earnings
382,409

 
392,053

Total common stockholders’ equity
723,164

 
730,157

Long-term debt, net
807,693

 
710,027

Total capitalization
1,530,857

 
1,440,184

Current liabilities:
 

 
 

Current maturities of long-term debt, net
5,312

 
104,911

Short-term borrowings
165,100

 
65,100

Accounts payable
97,376

 
95,580

Regulatory balancing accounts
17,855

 
12,213

Accrued interest
6,311

 
5,674

Accrued expenses and other liabilities
39,435

 
37,688

Total current liabilities
331,389

 
321,166

Unamortized investment tax credits
1,649

 
1,649

Deferred income taxes
216,880

 
213,033

Pension and postretirement benefits other than pensions
201,476

 
193,538

Regulatory liabilities and other
264,027

 
256,522

Advances for construction
189,642

 
186,342

Contributions in aid of construction
228,675

 
225,270

Commitments and contingencies (Note 10)


 


TOTAL CAPITALIZATION AND LIABILITIES
$
2,964,595

 
$
2,837,704

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

3

Table of Contents

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited (In thousands, except per share data)
For the three months ended
 
June 30,
2019
 
June 30,
2018
Operating revenue
 
$
179,031

 
$
174,938

Operating expenses:
 
 

 
 

Operations:
 
 

 
 

Water production costs
 
64,635

 
65,373

Administrative and general
 
25,434

 
24,383

Other operations
 
22,542

 
20,724

Maintenance
 
5,692

 
5,389

Depreciation and amortization
 
22,326

 
20,953

Income taxes
 
4,321

 
4,870

Property and other taxes
 
7,068

 
6,407

Total operating expenses
 
152,018

 
148,099

Net operating income
 
27,013

 
26,839

Other income and expenses:
 
 

 
 

Non-regulated revenue
 
5,130

 
4,845

Non-regulated expenses
 
(3,900
)
 
(6,115
)
Other components of net periodic benefit cost
 
(1,192
)
 
(2,463
)
Allowance for equity funds used during construction
 
1,686

 
710

Income tax (expense) benefit on other income and expenses
 
(487
)
 
819

Net other income (loss)
 
1,237

 
(2,204
)
Interest expense:
 
 

 
 

Interest expense
 
12,178

 
10,134

Allowance for borrowed funds used during construction
 
(924
)
 
(304
)
Net interest expense
 
11,254

 
9,830

Net income
 
$
16,996

 
$
14,805

Earnings per share:
 
0

 

Basic
 
$
0.35

 
$
0.31

Diluted
 
0.35

 
0.31

Weighted average shares outstanding:
 
 

 
 

Basic
 
48,136

 
48,073

Diluted
 
48,136

 
48,073

 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements


4

Table of Contents

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited (In thousands, except per share data)
For the six months ended
 
June 30,
2019
 
June 30,
2018
Operating revenue
 
$
305,142

 
$
309,491

Operating expenses:
 
 

 
 

Operations:
 
 

 
 

Water production costs
 
110,227

 
112,979

Administrative and general
 
54,531

 
50,702

Other operations
 
40,363

 
38,364

Maintenance
 
12,147

 
10,828

Depreciation and amortization
 
44,694

 
41,668

Income taxes
 
1,330

 
5,164

Property and other taxes
 
14,361

 
13,111

Total operating expenses
 
277,653

 
272,816

Net operating income
 
27,489

 
36,675

Other income and expenses:
 
 

 
 

Non-regulated revenue
 
10,031

 
9,264

Non-regulated expenses
 
(6,119
)
 
(11,552
)
Other components of net periodic benefit cost
 
(2,451
)
 
(5,009
)
Allowance for equity funds used during construction
 
3,219

 
1,621

Income tax (expense) benefit on other income and expenses
 
(1,315
)
 
1,577

Net other income (loss)
 
3,365

 
(4,099
)
Interest expense:
 
 

 
 

Interest expense
 
23,253

 
19,332

Allowance for borrowed funds used during construction
 
(1,755
)
 
(799
)
Net interest expense
 
21,498

 
18,533

Net income
 
$
9,356

 
$
14,043

Earnings per share:
 
 

 
 

Basic
 
$
0.19

 
$
0.29

Diluted
 
0.19

 
0.29

Weighted average shares outstanding:
 
 

 
 

Basic
 
48,111

 
48,051

Diluted
 
48,111

 
48,051

 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements


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CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (In thousands)
For the six months ended:
 
June 30,
2019
 
June 30,
2018
Operating activities:
 
 

 
 

Net income
 
$
9,356

 
$
14,043

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
45,744

 
42,582

Change in value of life insurance contracts
 
(3,147
)
 
817

Allowance for equity funds used during construction
 
(3,219
)
 
(1,621
)
Changes in operating assets and liabilities:
 
 

 
 

Receivables and unbilled revenue
 
(16,619
)
 
(14,431
)
Accounts payable
 
5,928

 
6,417

Other current assets
 
(5,750
)
 
(4,207
)
Other current liabilities
 
(396
)
 
(4,168
)
Other changes in noncurrent assets and liabilities
 
11,494

 
10,139

Net cash provided by operating activities
 
43,391

 
49,571

Investing activities:
 
 

 
 

Utility plant expenditures
 
(121,936
)
 
(133,900
)
Life insurance proceeds
 

 
2,054

Purchase of life insurance contracts
 

 
(2,054
)
Net cash used in investing activities
 
(121,936
)
 
(133,900
)
Financing activities:
 
 

 
 

Short-term borrowings
 
190,000

 
111,000

Repayment of short-term borrowings
 
(90,000
)
 
(61,000
)
Issuance of long-term debt, net of expenses of $1,558 for 2019 and $0 for 2018
 
398,442

 

Repayment of long-term debt
 
(401,358
)
 
(12,264
)
Advances and contributions in aid of construction
 
12,755

 
8,385

Refunds of advances for construction
 
(3,555
)
 
(3,498
)
Repurchase of common stock
 
(2,203
)
 
(1,364
)
Issuance of common stock
 
829

 

Dividends paid
 
(19,000
)
 
(18,017
)
Net cash provided by financing activities
 
85,910

 
23,242

Change in cash, cash equivalents, and restricted cash
 
7,365

 
(61,087
)
Cash, cash equivalents, and restricted cash at beginning of period
 
47,715

 
95,352

Cash, cash equivalents, and restricted cash at end of period
 
$
55,080

 
$
34,265

Supplemental information:
 
 

 
 

Cash paid for interest (net of amounts capitalized)
 
$
21,033

 
$
17,344

Supplemental disclosure of non-cash activities:
 
 

 
 

Accrued payables for investments in utility plant
 
$
31,464

 
$
30,696

Utility plant contribution by developers
 
$
11,092

 
$
8,653

 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements


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Table of Contents

CALIFORNIA WATER SERVICE GROUP
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2019
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 included in its Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on February 28, 2019.
 
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.
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 six months ended June 30, 2019 and 2018:
 
Three Months Ended June 30
 
2019
 
2018
Revenue from contracts with customers
$
167,467

 
$
171,772

Regulatory balancing account revenue
11,564

 
3,166

Total operating revenue
$
179,031

 
$
174,938


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Six Months Ended June 30
 
2019
 
2018
Revenue from contracts with customers
$
284,877

 
$
306,026

Regulatory balancing account revenue
20,265

 
3,465

Total operating revenue
$
305,142

 
$
309,491


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 consolidated balance sheets, is inconsequential.
In the following tables, revenue from contracts with customers is disaggregated by class of customers for the three and six months ended June 30, 2019 and 2018:
 
Three Months Ended June 30
 
2019
 
2018
Residential
$
107,349

 
$
109,849

Business
31,706

 
32,125

Industrial
7,524

 
7,941

Public authorities
7,613

 
8,251

Other (a)
13,275

 
13,606

Total revenue from contracts with customers
$
167,467

 
$
171,772

 
Six Months Ended June 30
 
2019
 
2018
Residential
$
191,609

 
$
201,167

Business
57,186

 
59,182

Industrial
14,788

 
15,520

Public authorities
12,084

 
13,695

Other (a)
9,210

 
16,462

Total revenue from contracts with customers
$
284,877

 
$
306,026


(a) Other includes the accrued unbilled revenue.



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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 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.
The Water Revenue Adjustment Mechanism (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 account revenue.
Cost-recovery rates, such as the Modified Cost Balancing Account (MCBA), 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.
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 six months ended June 30, 2019 and 2018:
 
Three Months Ended June 30
 
2019
 
2018
Operating and maintenance revenue
$
3,273

 
$
2,297

Other non-regulated revenue
1,267

 
1,981

Non-regulated revenue from contracts with customers
$
4,540

 
$
4,278

Lease revenue
$
590

 
$
567

Total non-regulated revenue
$
5,130

 
$
4,845

 
Six Months Ended June 30
 
2019
 
2018
Operating and maintenance revenue
$
6,319

 
$
5,462

Other non-regulated revenue
2,563

 
2,724

Non-regulated revenue from contracts with customers
$
8,882

 
$
8,186

Lease revenue
$
1,149

 
$
1,078

Total non-regulated revenue
$
10,031

 
$
9,264


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

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leases generally have terms of 5 to 10 years, with lessee options to extend the lease for up to 15 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).
The Company determines if an arrangement is a lease at inception. Generally, a lease agreement exists if the Company determines that the arrangement gives the lessee control over the use of an identified asset and obtains substantially all of the benefits from the identified asset.
Maturities of lease payments to be received are as follows:
Year Ending December 31,
Operating Leases
2019
$
3,095

2020
2,499

2021
1,827

2022
1,031

2023
554

Thereafter
872


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:
 
June 30, 2019
 
December 31, 2018
Cash and cash equivalents
54,560

 
47,176

Restricted cash (included in "taxes, prepaid expenses and other assets")
520

 
539

Total cash, cash equivalents, and restricted cash shown in the statements of cash flows
$
55,080

 
$
47,715


Adoption of New Accounting Standards
In February of 2016, the Financial Accounting Standards Board (FASB) issued guidance on leases, 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.
The Company adopted the standard using the modified retrospective method for its existing leases and did not restate its comparative periods in the period of adoption. The Company completed its review of its lease portfolio including significant leases and the Company designed and implemented new controls as part of the adoption of the new standard. The implementation increased lease assets and lease liabilities on the Consolidated Balance Sheets by $13.8 million as of January 1, 2019.

The Company elected certain practical expedients 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 nonlease 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 requirements 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 remaining consolidated financial statements.

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Table of Contents

Note 3. Stock-based Compensation
Equity Incentive Plan
During the six months ended June 30, 2019 and 2018, the Company granted annual Restricted Stock Awards (RSAs) of 36,183 and 46,135, respectively, to officers and directors of the Company. During those same periods, 10,878 RSAs and 13,306 RSAs, respectively, were canceled. During the three months ended June 30, 2019 and 2018, no RSAs were granted and 2,544 RSAs and 3,842 RSAs, respectively, were canceled. RSAs granted to officers vest over 36 months with the first year cliff vesting. RSAs granted to directors generally vest at the end of 12 months. During the first six months of 2019 and 2018, the RSAs granted were valued at $52.83 and $35.40 per share, respectively, based upon the fair value of the Company’s common stock on the date of grant.
During the six months ended June 30, 2019 and 2018, the Company granted 26,473 and 28,594 performance-based Restricted Stock Unit Awards (RSUs), respectively, to officers. During those same periods, the Company issued 62,726 RSUs and 48,753 RSUs, respectively, to officers, and canceled 31,177 RSUs and 24,009 RSUs, respectively. During the three months ended June 30, 2019 and 2018, 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 2019 and 2018 awards may be earned upon completion of the three-year performance period and are recognized as expense ratably over the period using a fair value of $52.83 per share and $35.40 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 $3.9 million and $1.5 million for the six months ended June 30, 2019 and 2018, respectively. For the three months ended June 30, 2019 and 2018, the Company has recorded compensation costs for the RSAs and RSUs in the amount of $1.2 million and $0.8 million, respectively.
Note 4. Equity
The Company’s changes in total common stockholders’ equity for the six months ended June 30, 2019 and 2018 were as follows:
 
Six months ended June 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


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Table of Contents

 
Six months ended June 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


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 June 30
 
2019
 
2018
 
(In thousands, except per share data)
Net income available to common stockholders
$
16,996

 
$
14,805

Weighted average common shares outstanding, basic
48,136

 
48,073

Weighted average common shares outstanding, dilutive
48,136

 
48,073

Earnings per share - basic
$
0.35

 
$
0.31

Earnings per share - diluted
$
0.35

 
$
0.31

 
Six Months Ended June 30
 
2019
 
2018
 
(In thousands, except per share data)
Net income available to common stockholders
$
9,356

 
$
14,043

Weighted average common shares outstanding, basic
48,111

 
48,051

Weighted average common shares outstanding, dilutive
48,111

 
48,051

Earnings per share - basic
$
0.19

 
$
0.29

Earnings per share - diluted
$
0.19

 
$
0.29



12

Table of Contents

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 $6.3 million and $16.3 million for the six months ended June 30, 2019 and 2018, respectively. Cash contributions made by the Company related to the other postretirement benefit plans were $3.4 million and $2.7 million for the six months ended June 30, 2019 and 2018, respectively. The total 2019 estimated cash contribution to the pension plans is $18.8 million and to the other postretirement benefit plans is $7.9 million.

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 June 30
 
Pension Plan
 
Other Benefits
 
2019
 
2018
 
2019
 
2018
Service cost
$
6,565

 
$
7,402

 
$
1,762

 
$
2,550

Interest cost
6,642

 
5,995

 
1,337

 
1,484

Expected return on plan assets
(7,567
)
 
(6,862
)
 
(1,435
)
 
(1,416
)
Amortization of prior service cost
1,262

 
1,263

 
49

 
11

Recognized net actuarial loss
1,312

 
2,797

 
104

 
773

Net periodic benefit cost
$
8,214

 
$
10,595

 
$
1,817

 
$
3,402


 
Six Months Ended June 30
 
Pension Plan
 
Other Benefits
 
2019
 
2018
 
2019
 
2018
Service cost
$
13,129

 
$
14,804

 
$
3,524

 
$
5,100

Interest cost
13,284

 
11,989

 
2,674

 
2,969

Expected return on plan assets
(15,133
)
 
(13,725
)
 
(2,871
)
 
(2,832
)
Amortization of prior service cost
2,524

 
2,526

 
99

 
21

Recognized net actuarial loss
2,624

 
5,595

 
207

 
1,547

Net periodic benefit cost
$
16,428

 
$
21,189

 
$
3,633

 
$
6,805


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.

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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 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 million under the Company’s revolving credit facility. Cal Water may borrow up to $400 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 million under the Cal Water facility and $50 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’ consolidated total capitalization ratio and interest coverage ratio.
The outstanding borrowings on the Company line of credit were $55.1 million as of June 30, 2019 and December 31, 2018. There were $110.0 million and $10.0 million of borrowings on the Cal Water line of credit as of June 30, 2019 and December 31, 2018, respectively. The average borrowing rate for borrowings on the Company and Cal Water lines of credit during the six months ended June 30, 2019 was 3.33% compared to 2.72% 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 June 30
 
2019
 
2018
Income tax expense
$
4,808

 
$
4,051

 
Six Months Ended June 30
 
2019
 
2018
Income tax expense
$
2,645

 
$
3,587


The income tax expense increased $0.8 million to $4.8 million for the three months ended June 30, 2019 as compared to the three months ended June 30, 2018. The increase is due to an increase in pre-tax income of $2.9 million for the three months ended June 30, 2019 as compared to the three months ended June 30, 2018.

The income tax expense decreased $0.9 million to $2.6 million for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The decrease is due to a decrease in pre-tax income of $5.6 million for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.


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The Company's 2019 effective tax rate, before discrete items, is estimated to be 22%.

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). 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 impact 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 million 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 million and $11.5 million as of June 30, 2019 and 2018, respectively. Included in the balance of unrecognized tax benefits as of June 30, 2019 and 2018 are approximately $3.1 million and $2.2 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.
Note 9. Regulatory Assets and Liabilities
Regulatory assets and liabilities were comprised of the following as of June 30, 2019 and December 31, 2018:
 
Recovery Period
 
June 30, 2019
 
December 31, 2018
Regulatory Assets
 
 
 

 
 

Pension and retiree group health
Indefinitely
 
$
156,618

 
$
156,947

Property-related temporary differences (tax benefits flowed through to customers)
Indefinitely
 
100,626

 
99,376

Other accrued benefits
Indefinitely
 
21,342

 
20,588

Net WRAM and MCBA long-term accounts receivable
1-2 years
 
30,460

 
17,134

Asset retirement obligations, net
Indefinitely
 
19,140

 
18,197

Interim rates long-term accounts receivable
1 year
 
4,642

 
4,642

Tank coating
10 years
 
12,559

 
11,196

Health care balancing account
1 year
 
442

 
442

Pension balancing account
1 year
 
18,211

 
16,494

Other components of net periodic benefit cost
Indefinitely
 
3,983

 
3,221

Other regulatory assets
Various
 
5,596

 
5,332

Total Regulatory Assets
 
 
$
373,619

 
$
353,569

 
 
 
 
 
 
Regulatory Liabilities
 
 
 

 
 

Future tax benefits due to customers
 
 
$
180,141

 
$
180,205

Health care balancing account
 
 
3,817

 
3,516

Conservation program
 
 
6,599

 
6,880

Net WRAM and MCBA long-term payable
 
 
120

 
222

Tax accounting memorandum account
 
 
765

 
5,039

Cost of capital memorandum account
 
 
147

 
2,834

1,2,3 trichloropropane settlement proceeds
 
 
10,950

 
12,142

Other regulatory liabilities
 
 
221

 
437

Total Regulatory Liabilities
 
 
$
202,760

 
$
211,275


Short-term regulatory assets and liabilities are excluded from the above table.

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The short-term regulatory assets were $33.5 million as of June 30, 2019 and $42.4 million as of December 31, 2018. As of June 30, 2019 and December 31, 2018, the short-term regulatory assets primarily consist of net WRAM and MCBA receivables.
The short-term portions of regulatory liabilities were $17.9 million as of June 30, 2019 and $12.2 million as of December 31, 2018. The short-term regulatory liabilities as of June 30, 2019, primarily consist of 1,2,3 trichloropropane (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. These commitments are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. 
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 are 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 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.










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Table of Contents

Supplemental balance sheet information related to leases was as follows:
 
As of June 30, 2019
Operating leases
 
Other assets
$
14,241

 
 
Accrued expenses and other liabilities
$
1,309

Regulatory liabilities and other
12,897

Total operating lease liabilities
$
14,206

 
 
Finance leases
 
Utility plant
$
18,207

Accumulated depreciation and amortization
(9,059
)
Net utility plant
$
9,148

 
 
Current maturities of long-term debt, net
$
660

Long-term debt, net
5,550

Total finance lease liabilities
$
6,210

 
 
Weighted average remaining lease term
 
Operating leases
160 months

Finance leases
83 months

 
 
Weighted average discount rate
 
Operating leases
3.7
%
Finance leases
5.5
%

The components of lease expense were as follows:
 
Three Months Ended June 30
 
2019
Operating lease cost
$
457

 
 
Finance lease cost:
 
Amortization of right-of-use assets
$
313

Interest on lease liabilities
89

Total finance lease cost
$
402

 
 
Short-term lease cost
$
66

Variable lease cost
100

Total lease cost
$
1,025



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Six Months Ended June 30
 
2019
Operating lease cost
$
878

 
 
Finance lease cost:
 
Amortization of right-of-use assets
$
626

Interest on lease liabilities
179

Total finance lease cost
$
805

 
 
Short-term lease cost
$
173

Variable lease cost
132

Total lease cost
$
1,988

Supplemental cash flow information related to leases was as follows:
 
Six Months Ended June 30
 
2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
852

Operating cash flows from finance leases
179

Financing cash flows from finance leases
347

Non-cash activities: right-of-use assets obtained in exchange for lease obligations:
 
Operating leases
1,006

Finance leases
672


Maturities of lease liabilities as of June 30, 2019 are as follows:
Year Ending December 31,
Operating Leases
 
Finance Leases
2019 (a)
$
887

 
$
490

2020
1,809

 
986

2021
1,587

 
987

2022
1,460

 
987

2023
1,369

 
1,506

2024
1,175

 
940

Thereafter
9,938

 
1,645

Total lease payments
$
18,225

 
$
7,541

 
 
 
 
Less imputed interest
$
(4,019
)
 
$
(1,331
)
Total
$
14,206

 
$
6,210

(a) Excludes payments made for the first six months of 2019.






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Table of Contents

As previously disclosed in the Company's Annual Report on Form 10-K for the year ended 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


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 June 30, 2019 and December 31, 2018, the Company recognized a liability of $2.7 million and $2.3 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 Plan 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.

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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 1.83%.
Advances for construction fair values were estimated using broker quotes from companies that frequently purchase these investments.
 
June 30, 2019
 
 
 
Fair Value
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Total
Long-term debt, including current maturities, net
$
813,005

 

 
$
862,181

 

 
$
862,181

Advances for construction
189,642

 

 
79,834

 

 
79,834

Total
$
1,002,647

 
$

 
$
942,015

 
$

 
$
942,015

 
 
December 31, 2018
 
 
 
Fair Value
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Total
Long-term debt, including current maturities, net