Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019



☐	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 September 30, 2019 — 48,145,000

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TABLE OF CONTENTS



	Page
PART I Financial Information	3
Item 1 Financial Statements	3
Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2019 and December 31, 2018	3
Condensed Consolidated Statements of Income (unaudited) For the Three Months Ended September 30, 2019 and 2018	4
Condensed Consolidated Statements of Income (unaudited) For the Nine Months Ended September 30, 2019 and 2018	5
Condensed Consolidated Statements of Cash Flows (unaudited) For the Nine Months Ended September 30, 2019 and 2018	6
Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3 Quantitative and Qualitative Disclosure about Market Risk	46
Item 4 Controls and Procedures	46
PART II Other Information	47
Item 1 Legal Proceedings	47
Item 1A Risk Factors	47
Item 5 Other Information	47
Item 6 Exhibits	48
Signatures	49

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PART I FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

The condensed consolidated financial statements presented in this filing on Form 10-Q have been prepared by management and are unaudited.

CALIFORNIA WATER SERVICE GROUP

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited (In thousands, except per share data)



	September 30, 2019			December 31, 2018
ASSETS
Utility plant:
Utility plant	$	3,411,219		$	3,229,446
Less accumulated depreciation and amortization	(1,067,965		)	(996,723		)
Net utility plant	2,343,254			2,232,723
Current assets:
Cash and cash equivalents	51,257			47,176
Receivables:
Customers	45,624			30,037
Regulatory balancing accounts	33,437			42,394
Other	16,977			17,101
Unbilled revenue	42,562			33,427
Materials and supplies at weighted average cost	7,804			6,586
Taxes, prepaid expenses, and other assets	14,395			11,981
Total current assets	212,056			188,702
Other assets:
Regulatory assets	382,484			353,569
Goodwill	2,615			2,615
Other assets	82,845			60,095
Total other assets	467,944			416,279
TOTAL ASSETS	$	3,023,254		$	2,837,704
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $0.01 par value; 68,000 shares authorized, 48,145 and 48,065 outstanding in 2019 and 2018, respectively	$	481		$	481
Additional paid-in capital	341,988			337,623
Retained earnings	415,326			392,053
Total common stockholders’ equity	757,795			730,157
Long-term debt, net	807,478			710,027
Total capitalization	1,565,273			1,440,184
Current liabilities:
Current maturities of long-term debt, net	5,280			104,911
Short-term borrowings	155,100			65,100
Accounts payable	108,593			95,580
Regulatory balancing accounts	6,887			12,213
Accrued interest	14,410			5,674
Accrued expenses and other liabilities	43,674			37,688
Total current liabilities	333,944			321,166
Unamortized investment tax credits	1,649			1,649
Deferred income taxes	229,237			213,033
Pension and postretirement benefits other than pensions	203,557			193,538
Regulatory liabilities and other	260,812			256,522
Advances for construction	190,272			186,342
Contributions in aid of construction	238,510			225,270
Commitments and contingencies (Note 10)
TOTAL CAPITALIZATION AND LIABILITIES	$	3,023,254		$	2,837,704

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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CALIFORNIA WATER SERVICE GROUP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Unaudited (In thousands, except per share data)



For the three months ended	September 30, 2019			September 30, 2018
Operating revenue	$	232,537		$	221,288
Operating expenses:
Operations:
Water production costs	80,568			78,818
Administrative and general	26,779			26,493
Other operations	24,550			21,943
Maintenance	7,065			6,768
Depreciation and amortization	22,273			21,009
Income taxes	12,194			11,786
Property and other taxes	7,541			7,142
Total operating expenses	180,970			173,959
Net operating income	51,567			47,329
Other income and expenses:
Non-regulated revenue	4,118			4,703
Non-regulated expenses	(4,351		)	(4,897		)
Other components of net periodic benefit cost	(1,857		)	(1,975		)
Allowance for equity funds used during construction	1,868			1,023
Income tax benefit on other income and expenses	330			305
Net other income (loss)	108			(841		)
Interest expense:
Interest expense	10,279			10,875
Allowance for borrowed funds used during construction	(1,028		)	(560		)
Net interest expense	9,251			10,315
Net income	$	42,424		$	36,173
Earnings per share:	0			—
Basic	$	0.88		$	0.75
Diluted	0.88			0.75
Weighted average shares outstanding:
Basic	48,141			48,070
Diluted	48,141			48,070

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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CALIFORNIA WATER SERVICE GROUP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Unaudited (In thousands, except per share data)



For the nine months ended	September 30, 2019			September 30, 2018
Operating revenue	$	537,679		$	530,779
Operating expenses:
Operations:
Water production costs	190,795			191,797
Administrative and general	81,310			77,195
Other operations	64,913			60,307
Maintenance	19,212			17,596
Depreciation and amortization	66,967			62,677
Income taxes	13,524			16,950
Property and other taxes	21,902			20,253
Total operating expenses	458,623			446,775
Net operating income	79,056			84,004
Other income and expenses:
Non-regulated revenue	14,149			13,967
Non-regulated expenses	(10,470		)	(16,449		)
Other components of net periodic benefit cost	(4,308		)	(6,984		)
Allowance for equity funds used during construction	5,087			2,644
Income tax (expense) benefit on other income and expenses	(985		)	1,882
Net other income (loss)	3,473			(4,940		)
Interest expense:
Interest expense	33,532			30,207
Allowance for borrowed funds used during construction	(2,783		)	(1,359		)
Net interest expense	30,749			28,848
Net income	$	51,780		$	50,216
Earnings per share:
Basic	$	1.08		$	1.04
Diluted	1.08			1.04
Weighted average shares outstanding:
Basic	48,121			48,058
Diluted	48,121			48,058

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 nine months ended:	September 30, 2019			September 30, 2018
Operating activities:
Net income	$	51,780		$	50,216
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	68,522			64,131
Change in value of life insurance contracts	(3,433		)	124
Allowance for equity funds used during construction	(5,087		)	(2,644		)
Changes in operating assets and liabilities:
Receivables and unbilled revenue	(29,436		)	(18,471		)
Accounts payable	16,735			18,133
Other current assets	(3,937		)	(1,392		)
Other current liabilities	11,597			8,762
Other changes in noncurrent assets and liabilities	21,602			644
Net cash provided by operating activities	128,343			119,503
Investing activities:
Utility plant expenditures	(194,942		)	(212,856		)
Life insurance proceeds	—			3,491
Purchase of life insurance contracts	(2,216		)	(4,925		)
Net cash used in investing activities	(197,158		)	(214,290		)
Financing activities:
Short-term borrowings	210,000			141,000
Repayment of short-term borrowings	(120,000		)	(341,000		)
Issuance of long-term debt, net of expenses of $1,569 for 2019 and $617 for 2018	398,431			299,383
Repayment of long-term debt	(401,630		)	(12,499		)
Advances and contributions in aid of construction	21,266			13,630
Refunds of advances for construction	(5,560		)	(5,462		)
Repurchase of common stock	(2,355		)	(1,496		)
Issuance of common stock	1,278			—
Dividends paid	(28,507		)	(27,029		)
Net cash provided by financing activities	72,923			66,527
Change in cash, cash equivalents, and restricted cash	4,108			(28,260		)
Cash, cash equivalents, and restricted cash at beginning of period	47,715			95,352
Cash, cash equivalents, and restricted cash at end of period	$	51,823		$	67,092
Supplemental information:
Cash paid for interest (net of amounts capitalized)	$	22,060		$	19,956
Supplemental disclosure of non-cash activities:
Accrued payables for investments in utility plant	$	31,676		$	32,328
Utility plant contribution by developers	$	23,955		$	14,807

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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CALIFORNIA WATER SERVICE GROUP

Notes to Unaudited Condensed Consolidated Financial Statements

September 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 nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30
	2019		2018
Revenue from contracts with customers	$	214,963	$	209,541
Regulatory balancing account revenue	17,574		11,747
Total operating revenue	$	232,537	$	221,288

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	Nine Months Ended September 30
	2019		2018
Revenue from contracts with customers	$	499,840	$	515,567
Regulatory balancing account revenue	37,839		15,212
Total operating revenue	$	537,679	$	530,779

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 nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30
	2019		2018
Residential	$	139,137	$	138,939
Business	38,247		38,538
Industrial	9,077		8,987
Public authorities	12,482		12,180
Other (a)	16,020		10,897
Total revenue from contracts with customers	$	214,963	$	209,541



	Nine Months Ended September 30
	2019		2018
Residential	$	330,745	$	340,107
Business	95,433		97,720
Industrial	23,866		24,507
Public authorities	24,566		25,875
Other (a)	25,230		27,358
Total revenue from contracts with customers	$	499,840	$	515,567

(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 nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30
	2019		2018
Operating and maintenance revenue	$	2,929	$	2,816
Other non-regulated revenue	626		1,328
Non-regulated revenue from contracts with customers	$	3,555	$	4,144
Lease revenue	$	563	$	559
Total non-regulated revenue	$	4,118	$	4,703



	Nine Months Ended September 30
	2019		2018
Operating and maintenance revenue	$	9,248	$	8,278
Other non-regulated revenue	3,189		4,053
Non-regulated revenue from contracts with customers	$	12,437	$	12,331
Lease revenue	$	1,712	$	1,636
Total non-regulated revenue	$	14,149	$	13,967

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	$	3,153
2020	2,587
2021	1,880
2022	1,078
2023	584
Thereafter	871

Cash, Cash Equivalents, and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown on the Condensed Consolidated Statements of Cash Flows:



	September 30, 2019		December 31, 2018
Cash and cash equivalents	51,257		47,176
Restricted cash (included in "taxes, prepaid expenses and other assets")	566		539
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows	$	51,823	$	47,715

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 non-lease components as a single component and account for it as a lease. The Company applied the short-term lease exception which allowed the Company to not have to apply the recognition 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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Note 3. Stock-based Compensation

Equity Incentive Plan

The following table lists the number of annual Restricted Stock Awards (RSAs) granted and canceled during the three and nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30		Nine Months Ended September 30
	2019	2018	2019	2018
RSAs granted	—	1,138	36,183	47,273
RSAs canceled	2,739	3,214	14,394	16,520

During the first nine 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.

The following table lists the number of Restricted Stock Unit Awards (RSUs) granted, issued, and canceled during the three and nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30		Nine Months Ended September 30
	2019	2018	2019	2018
RSUs granted	—	—	26,473	28,594
RSUs issued	—	—	62,726	48,753
RSUs canceled	—	—	31,177	24,009

The 2019 and 2018 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 $5.3 million and $2.3 million for the nine months ended September 30, 2019 and 2018, respectively. For the three months ended September 30, 2019 and 2018, the Company has recorded compensation costs for the RSAs and RSUs in the amount of $1.4 million and $0.8 million, respectively.

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Note 4. Equity

On October 31, 2019, the Company entered into an equity distribution agreement with Morgan Stanley & Co., LLC, Robert W. Baird & Co. Incorporated, Blaylock Van, LLC and Wells Fargo Securities, LLC to sell shares of its common stock having an aggregate gross sales price of up to $300.0 million from time to time depending on market conditions through an at-the-market equity program over the next three years. The Company intends to use the net proceeds from these sales, after deducting commissions on such sales and offering expenses, for general corporate purposes, which may include working capital, construction and acquisition expenditures, investments and repurchases, and redemptions of securities.

The Company’s changes in total common stockholders’ equity for the nine months ended September 30, 2019 and 2018 were as follows:



	Nine months ended September 30, 2019
	Common Stock				Additional Paid-in Capital			Retained Earnings			Total Stockholders' Equity
	Shares		Amount		Additional Paid-in Capital			Retained Earnings			Total Stockholders' Equity
	(In thousands)
Balance at January 1, 2019	48,065		$	481	$	337,623		$	392,053		$	730,157
Net loss								(7,640		)	(7,640		)
Issuance of common stock	109		—		3,179			—			3,179
Repurchase of common stock	(40	)	—		(2,074		)	—			(2,074		)
Dividends paid on common stock ($0.1975 per share)								(9,493		)	(9,493		)
Balance at March 31, 2019	48,134		481		338,728			374,920			714,129
Net income								16,996			16,996
Issuance of common stock	8		—		1,675			—			1,675
Repurchase of common stock	(2	)	—		(129		)	—			(129		)
Dividends paid on common stock ($0.1975 per share)								(9,507		)	(9,507		)
Balance at June 30, 2019	48,140		481		340,274			382,409			723,164
Net income								42,424			42,424
Issuance of common stock	9		—		1,866			—			1,866
Repurchase of common stock	(4	)	—		(152		)	—			(152		)
Dividends paid on common stock ($0.1975 per share)								(9,507		)	(9,507		)
Balance at September 30, 2019	48,145		481		341,988			415,326			757,795

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	Nine months ended September 30, 2018
	Common Stock				Additional Paid-in Capital			Retained Earnings			Total Stockholders' Equity
	Shares		Amount		Additional Paid-in Capital			Retained Earnings			Total Stockholders' Equity
	(In thousands)
Balance at January 1, 2018	48,012		$	480	$	336,229		$	362,512		$	699,221
Net loss								(762		)	(762		)
Issuance of common stock	95		1		635			—			636
Repurchase of common stock	(33	)	—		(1,239		)	—			(1,239		)
Dividends paid on common stock ($0.1875 per share)								(9,003		)	(9,003		)
Balance at March 31, 2018	48,074		481		335,625			352,747			688,853
Net income								14,805			14,805
Issuance of common stock	—		—		737			—			737
Repurchase of common stock	(4	)	—		(124		)	—			(124		)
Dividends paid on common stock ($0.1875 per share)								(9,014		)	(9,014		)
Balance at June 30, 2018	48,070		481		336,238			358,538			695,257
Net income								36,173			36,173
Issuance of common stock	1		—		853			—			853
Repurchase of common stock	(3	)	—		(131		)	—			(131		)
Dividends paid on common stock ($0.1875 per share)								(9,012		)	(9,012		)
Balance at September 30, 2018	48,068		481		336,960			385,699			723,140

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Note 5. Earnings Per Share

The computations of basic and diluted earnings per share are noted in the table below. Basic earnings per share are computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding during the period. RSAs are included in the weighted average common shares outstanding because the shares have all the same voting and dividend rights as issued and unrestricted common stock. RSUs are not included in diluted shares for financial reporting until authorized by the Organization & Compensation Committee of the Board of Directors.



	Three Months Ended September 30
	2019		2018
	(In thousands, except per share data)
Net income available to common stockholders	$	42,424	$	36,173
Weighted average common shares outstanding, basic	48,141		48,070
Weighted average common shares outstanding, dilutive	48,141		48,070
Earnings per share - basic	$	0.88	$	0.75
Earnings per share - diluted	$	0.88	$	0.75



	Nine Months Ended September 30
	2019		2018
	(In thousands, except per share data)
Net income available to common stockholders	$	51,780	$	50,216
Weighted average common shares outstanding, basic	48,121		48,058
Weighted average common shares outstanding, dilutive	48,121		48,058
Earnings per share - basic	$	1.08	$	1.04
Earnings per share - diluted	$	1.08	$	1.04

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Note 6. Pension Plan and Other Postretirement Benefits

The Company provides a qualified, defined-benefit, non-contributory pension plan for substantially all employees. The Company makes annual contributions to fund the amounts accrued for in the qualified pension plan. The Company also maintains an unfunded, non-qualified, supplemental executive retirement plan. The costs of the plans are charged to expense or are capitalized in utility plant as appropriate.

The Company offers medical, dental, vision, and life insurance benefits for retirees and their spouses and dependents. Participants are required to pay a premium, which offsets a portion of the cost.

Cash contributions made by the Company related to the pension plans were $12.5 million and $42.3 million for the nine months ended September 30, 2019 and 2018, respectively. Cash contributions made by the Company related to the other postretirement benefit plans were $5.6 million and $8.0 million for the nine months ended September 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 September 30
	Pension Plan						Other Benefits
	2019			2018			2019			2018
Service cost	$	6,910		$	6,966		$	2,082		$	1,966
Interest cost	6,941			6,007			1,407			1,183
Expected return on plan assets	(7,581		)	(7,052		)	(1,475		)	(1,397		)
Amortization of prior service cost	1,262			1,263			49			11
Recognized net actuarial loss	1,821			2,791			214			242
Net periodic benefit cost	$	9,353		$	9,975		$	2,277		$	2,005



	Nine Months Ended September 30
	Pension Plan						Other Benefits
	2019			2018			2019			2018
Service cost	$	20,039		$	21,770		$	5,606		$	7,066
Interest cost	20,225			17,996			4,081			4,152
Expected return on plan assets	(22,714		)	(20,777		)	(4,346		)	(4,229		)
Amortization of prior service cost	3,786			3,789			148			32
Recognized net actuarial loss	4,445			8,386			421			1,789
Net periodic benefit cost	$	25,781		$	31,164		$	5,910		$	8,810

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 $550.0 million for a term of five years. The revolving credit facilities amend, expand, and replace the Company’s and its subsidiaries’ prior credit facilities originally entered into on May 10, 2015. The new credit facilities extended the terms until March 29, 2024, and increased Cal Water’s unsecured revolving line of credit. The Company and subsidiaries that it designates may borrow up to $150.0 million under the Company’s revolving credit facility. Cal Water may borrow up to $400.0 million under its revolving credit facility. All borrowings must be repaid within 24 months unless a different period is required or authorized by the CPUC. Additionally, the credit facilities may be increased by up to an incremental $150.0 million under the Cal Water facility and $50.0 million under the Company facility, subject in each case to certain conditions. The proceeds from the revolving credit facilities may be used for working capital purposes, including the short-term financing of capital projects. Borrowings under the credit facilities typically have maturities varying between one and six months and will bear interest annually at a rate equal to (i) the base rate or (ii) the Eurodollar rate, plus an applicable margin of 0.650% to 0.875%, depending on the Company and its subsidiaries’ consolidated total capitalization ratio.

Both short-term unsecured credit agreements contain affirmative and negative covenants and events of default customary for credit facilities of this type including, among other things, limitations and prohibitions relating to additional indebtedness, liens, mergers, and asset sales. Also, these unsecured credit agreements contain financial covenants governing the Company and its subsidiaries’ consolidated total capitalization ratio and interest coverage ratio.

The outstanding borrowings on the Company line of credit were $55.1 million as of September 30, 2019 and December 31, 2018. There were $100.0 million and $10.0 million of borrowings on the Cal Water line of credit as of September 30, 2019 and December 31, 2018, respectively. The average borrowing rate for borrowings on the Company and Cal Water lines of credit during the nine months ended September 30, 2019 was 3.38% compared to 2.88% for the same period last year.

Note 8. Income Taxes

The Company adjusts its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company also records the tax effect of unusual or infrequently occurring discrete items.

The provision for income taxes is shown in the tables below:



	Three Months Ended September 30
	2019		2018
Income tax expense	$	11,864	$	11,481



	Nine Months Ended September 30
	2019		2018
Income tax expense	$	14,509	$	15,068

The income tax expense increased $0.4 million to $11.9 million for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. The increase is due to an increase in pre-tax net income of $6.6 million for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018.

The income tax expense decreased $0.6 million to $14.5 million for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The decrease is due to higher income tax benefit for the nine months ended September 30, 2019 as compared to the nine months ended September 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 $9.7 million as of September 30, 2019 and 2018, respectively. Included in the balance of unrecognized tax benefits as of September 30, 2019 and 2018 are approximately $3.1 million and $2.9 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 September 30, 2019 and December 31, 2018:



	Recovery Period	September 30, 2019		December 31, 2018
Regulatory Assets
Pension and retiree group health	Indefinitely	$	156,453	$	156,947
Property-related temporary differences (tax benefits flowed through to customers)	Indefinitely	100,943		99,376
Other accrued benefits	Indefinitely	21,183		20,588
Net WRAM and MCBA long-term accounts receivable	1-2 years	30,454		17,134
Asset retirement obligations, net	Indefinitely	19,619		18,197
Interim rates long-term accounts receivable	1 year	4,642		4,642
Tank coating	10 years	13,745		11,196
Recoverable property losses	10 years	5,539		1,275
Pension balancing account	1 year	20,158		16,494
Other components of net periodic benefit cost	Indefinitely	4,641		3,221
Other regulatory assets	Various	5,107		4,499
Total Regulatory Assets		$	382,484	$	353,569

Regulatory Liabilities
Future tax benefits due to customers		$	180,207	$	180,205
Health care balancing account		4,315		3,516
Conservation program		5,659		6,880
Net WRAM and MCBA long-term payable		67		222
Tax accounting memorandum account		785		5,039
Cost of capital memorandum account		148		2,834
1,2,3 trichloropropane settlement proceeds		9,204		12,142
Other regulatory liabilities		272		437
Total Regulatory Liabilities		$	200,657	$	211,275

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

The short-term regulatory assets were $33.4 million as of September 30, 2019 and $42.4 million as of December 31, 2018. As of September 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 $6.9 million as of September 30, 2019 and $12.2 million as of December 31, 2018. The short-term regulatory liabilities as of September 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 is recognized on a straight-line basis over the lease term. A subset of the Company’s leases contains variable lease payments that depend on changes in the CPI.

The Company determines if an arrangement is a lease at contract inception. Generally, a lease agreement exists if the Company determines that the arrangement gives the Company control over the use of an identified asset and obtains substantially all of the benefits from the identified asset.

The right-of-use (ROU) assets that are recorded represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s operating leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The ROU asset and lease liability may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Variable lease payments that are based on changes in CPI are included in the measurement of ROU asset and lease liability on the basis of the rate at lease commencement. Subsequent changes to the payments as a result of changes to the CPI rate are recognized in the period in which the obligation of these payments is incurred.

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Supplemental balance sheet information related to leases was as follows:



	As of September 30, 2019
Operating leases
Other assets	$	14,349

Accrued expenses and other liabilities	$	1,421
Regulatory liabilities and other	12,885
Total operating lease liabilities	$	14,306

Finance leases
Utility plant	$	18,207
Accumulated depreciation and amortization	(9,352		)
Net utility plant	$	8,855

Current maturities of long-term debt, net	$	670
Long-term debt, net	5,378
Total finance lease liabilities	$	6,048

Weighted average remaining lease term
Operating leases	155 months
Finance leases	80 months

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

The components of lease expense were as follows:



	Three Months Ended September 30		Nine Months Ended September 30
	2019
Operating lease cost	$	490	$	1,368

Finance lease cost:
Amortization of right-of-use assets	$	292	$	918
Interest on lease liabilities	85		264
Total finance lease cost	$	377	$	1,182

Short-term lease cost	$	543	$	716
Variable lease cost	66		198
Total lease cost	$	1,476	$	3,464

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Supplemental cash flow information related to leases was as follows:



	Nine Months Ended September 30
	2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,322
Operating cash flows from finance leases	264
Financing cash flows from finance leases	508
Non-cash activities: right-of-use assets obtained in exchange for lease obligations:
Operating leases	1,697
Finance leases	672

Maturities of lease liabilities as of September 30, 2019 are as follows:



Year Ending December 31,	Operating Leases		Finance Leases
2019 (a)	$	451	$	245
2020	1,892		986
2021	1,673		987
2022	1,516