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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 March 31, 2020
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 
 
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 March 31, 2020 — 48,714,000
 


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)
 
March 31,
2020
 
December 31,
2019
ASSETS
 

 
 

Utility plant:
 

 
 

Utility plant
$
3,616,418

 
$
3,550,485

Less accumulated depreciation and amortization
(1,169,447
)
 
(1,144,115
)
Net utility plant
2,446,971

 
2,406,370

Current assets:
 

 
 

Cash and cash equivalents
140,406

 
42,653

Receivables:
 

 
 

Customers, net
32,729

 
32,058

Regulatory balancing accounts
24,970

 
38,225

Other, net
14,428

 
14,187

Unbilled revenue, net
31,149

 
34,879

Materials and supplies at weighted average cost
8,135

 
7,745

Taxes, prepaid expenses, and other assets
18,265

 
14,965

Total current assets
270,082

 
184,712

Other assets:
 

 
 

Regulatory assets
442,819

 
433,322

Goodwill
2,615

 
2,615

Other assets
78,358

 
84,289

Total other assets
523,792

 
520,226

TOTAL ASSETS
$
3,240,845

 
$
3,111,308

CAPITALIZATION AND LIABILITIES
 

 
 

Capitalization:
 

 
 

Common stock, $0.01 par value; 68,000 shares authorized, 48,714 and 48,532 outstanding in 2020 and 2019, respectively
$
487

 
$
485

Additional paid-in capital
368,129

 
362,275

Retained earnings
386,524

 
417,146

Total common stockholders’ equity
755,140

 
779,906

Long-term debt, net
786,467

 
786,754

Total capitalization
1,541,607

 
1,566,660

Current liabilities:
 

 
 

Current maturities of long-term debt, net
21,864

 
21,868

Short-term borrowings
335,100

 
175,100

Accounts payable
99,019

 
108,463

Regulatory balancing accounts
3,474

 
4,462

Accrued interest
14,545

 
5,810

Accrued expenses and other liabilities
39,125

 
43,018

Total current liabilities
513,127

 
358,721

Unamortized investment tax credits
1,575

 
1,575

Deferred income taxes
218,451

 
222,590

Pension and postretirement benefits other than pensions
260,337

 
258,907

Regulatory liabilities and other
268,917

 
270,256

Advances for construction
194,046

 
191,062

Contributions in aid of construction
242,785

 
241,537

Commitments and contingencies (Note 10)


 


TOTAL CAPITALIZATION AND LIABILITIES
$
3,240,845

 
$
3,111,308

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

3

Table of Contents

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
Unaudited (In thousands, except per share data)
For the three months ended
 
March 31,
2020
 
March 31,
2019
Operating revenue
 
$
125,563

 
$
126,111

Operating expenses:
 
 

 
 

Operations:
 
 

 
 

Water production costs
 
53,976

 
45,592

Administrative and general
 
29,680

 
29,097

Other operations
 
13,974

 
17,821

Maintenance
 
7,073

 
6,455

Depreciation and amortization
 
24,492

 
22,368

Income tax benefit
 
(3,937
)
 
(2,991
)
Property and other taxes
 
7,228

 
7,293

Total operating expenses
 
132,486

 
125,635

Net operating (loss) income
 
(6,923
)
 
476

Other income and expenses:
 
 

 
 

Non-regulated revenue
 
3,827

 
4,901

Non-regulated expenses
 
(8,454
)
 
(2,219
)
Other components of net periodic benefit cost
 
(1,430
)
 
(1,259
)
Allowance for equity funds used during construction
 
1,614

 
1,533

Income tax benefit (expense) on other income and expenses
 
913

 
(828
)
Net other (loss) income
 
(3,530
)
 
2,128

Interest expense:
 
 

 
 

Interest expense
 
10,798

 
11,075

Allowance for borrowed funds used during construction
 
(944
)
 
(831
)
Net interest expense
 
9,854

 
10,244

Net loss
 
$
(20,307
)
 
$
(7,640
)
Loss per share:
 
0

 

Basic
 
$
(0.42
)
 
$
(0.16
)
Diluted
 
(0.42
)
 
(0.16
)
Weighted average shares outstanding:
 
 

 
 

Basic
 
48,583

 
48,086

Diluted
 
48,583

 
48,086

 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements


4

Table of Contents

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (In thousands)
For the three months ended:
 
March 31,
2020
 
March 31,
2019
Operating activities:
 
 

 
 

Net loss
 
$
(20,307
)
 
$
(7,640
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
25,093

 
22,893

Change in value of life insurance contracts
 
4,717

 
(2,254
)
Allowance for equity funds used during construction
 
(1,614
)
 
(1,533
)
Changes in operating assets and liabilities:
 
 

 
 

Receivables and unbilled revenue
 
7,261

 
5,147

Accounts payable
 
(7,379
)
 
(4,233
)
Other current assets
 
(3,768
)
 
(5,027
)
Other current liabilities
 
3,316

 
5,268

Other changes in noncurrent assets and liabilities
 
(3,252
)
 
7,520

Net cash provided by operating activities
 
4,067

 
20,141

Investing activities:
 
 

 
 

Utility plant expenditures
 
(65,270
)
 
(59,881
)
Net cash used in investing activities
 
(65,270
)
 
(59,881
)
Financing activities:
 
 

 
 

Short-term borrowings
 
170,000

 
60,000

Repayment of short-term borrowings
 
(10,000
)
 

Repayment of long-term debt
 
(197
)
 
(226
)
Advances and contributions in aid of construction
 
6,432

 
6,044

Refunds of advances for construction
 
(2,157
)
 
(1,790
)
Repurchase of common stock
 
(1,373
)
 
(2,074
)
Issuance of common stock
 
6,511

 
454

Dividends paid
 
(10,315
)
 
(9,493
)
Net cash provided by financing activities
 
158,901

 
52,915

Change in cash, cash equivalents, and restricted cash
 
97,698

 
13,175

Cash, cash equivalents, and restricted cash at beginning of period
 
43,298

 
47,715

Cash, cash equivalents, and restricted cash at end of period
 
$
140,996

 
$
60,890

Supplemental information:
 
 

 
 

Cash paid for interest (net of amounts capitalized)
 
$
909

 
$
3,352

Supplemental disclosure of non-cash activities:
 
 

 
 

Accrued payables for investments in utility plant
 
$
38,018

 
$
29,737

Utility plant contribution by developers
 
$
8,007

 
$
4,111

 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements


5

Table of Contents

CALIFORNIA WATER SERVICE GROUP
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2020
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, 2019 as filed with the SEC on February 27, 2020.
 
The preparation of the Company’s unaudited condensed consolidated interim financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses for the periods presented. These include, but are not limited to, estimates and assumptions used in determining the Company’s regulatory asset and liability balances based upon probability assessments of regulatory recovery, revenues earned but not yet billed, asset retirement obligations, allowance for credit losses, pension and other employee benefit plan liabilities, and income tax-related assets and liabilities. Actual results could differ from these estimates.
 
In the opinion of management, the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of normal recurring transactions that are necessary to provide a fair presentation of the results for the periods covered.
Due to the seasonal nature of the water business, the results for interim periods are not indicative of the results for a 12-month period. Revenue and income are generally higher in the warm, dry summer months when water usage and sales are greater. Revenue and income are generally lower in the winter months when cooler temperatures and rainfall curtail water usage and sales.

6

Table of Contents

Note 2. Summary of Significant Accounting Policies
Operating revenue
The following table disaggregates the Company’s operating revenue by source for the three months ended March 31, 2020 and 2019:
 
Three Months Ended March 31
 
2020
 
2019
Revenue from contracts with customers
$
134,833

 
$
117,410

Regulatory balancing account revenue (a)
(9,270
)
 
8,701

Total operating revenue
$
125,563

 
$
126,111

(a) As further discussed below, no amounts were recorded for the Company’s Water Revenue Adjustment Mechanism (WRAM), Modified Cost Balancing Account (MCBA), Pension Cost Balancing Account (PCBA), and Health Cost Balancing Account (HCBA) for the three months ended March 31, 2020 due to the delay in the resolution of the 2018 General Rate Case (GRC).
 
 
 
 

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 table, revenue from contracts with customers is disaggregated by class of customers for the three months ended March 31, 2020 and 2019:
 
Three Months Ended March 31
 
2020
 
2019
Residential
$
92,544

 
$
84,259

Business
27,693

 
25,481

Industrial
7,878

 
7,264

Public authorities
5,897

 
4,471

Other (a)
821

 
(4,065
)
Total revenue from contracts with customers
$
134,833

 
$
117,410

(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 GRC, is decoupled from the volume of the sales. Regulatory balancing account revenue is revenue related to rate mechanisms authorized in California by the CPUC, which allow the Company to recover the authorized revenue and are not considered contracts with customers. These mechanisms include the following:
The 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 MCBA, Conservation Expense Balancing Account (CEBA), PCBA, and HCBA, generally provide for recovery of the adopted levels of expenses for purchased water, purchased power, pump taxes, water conservation program costs, pension, and health care. Variances between adopted and actual costs are recorded as regulatory balancing account revenue.
The WRAM, MCBA, PCBA, and HCBA are being litigated in the pending 2018 GRC, which is further discussed in Note 9. As the mechanisms are being litigated, the Company did not record regulatory assets for the WRAM, MCBA, PCBA, and HCBA for the first three months of 2020. The Company determined that these mechanisms did not meet the regulatory asset recognition criteria under accounting standards for regulated utilities. As the CEBA is not being litigated in the pending 2018 GRC, the Company recorded a regulatory liability for the CEBA for the first three months of 2020. The Company determined that the CEBA met the regulatory liability recognition criteria under accounting standards for regulated utilities.
Each district's WRAM and MCBA regulatory assets and liabilities are allowed to be netted against one another. The Company recognizes regulatory balancing account revenues that have been authorized for rate recovery, are objectively determinable and probable of recovery, and are expected to be collected within 24 months. To the extent that regulatory balancing account revenue is estimated to be collectible beyond 24 months, recognition is deferred.
Non-regulated Revenue
The following table disaggregates the Company’s non-regulated revenue by source for the three months ended March 31, 2020 and 2019:
 
Three Months Ended March 31
 
2020
 
2019
Operating and maintenance revenue
$
2,499

 
$
3,046

Other non-regulated revenue
765

 
1,296

Non-regulated revenue from contracts with customers
$
3,264

 
$
4,342

Lease revenue
$
563

 
$
559

Total non-regulated revenue
$
3,827

 
$
4,901

 
 
 
 

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.

8

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Allowance for credit losses
The Company measures expected credit losses for Customer Receivables, Other Receivables, and Unbilled Revenue on an aggregated level. These receivables are generally trade receivables due in one year or less or expected to be billed and collected in one year or less. The expected credit losses for Other Receivables is inconsequential. Although the Company has residential, business, industrial, public authorities, and other customers, the risk characteristics of each of these customer classes is similar as the Company has determined that the differences in the customer write-off behavior among its customer classes is inconsequential. The overall risks related to the Company’s receivables is low as water and wastewater services are seen as essential services. The estimate for the allowance for credit losses is based off of a historical loss ratio that is adjusted for current conditions and reasonable and supportable forecasts. For the first quarter of 2020, the estimate includes an adjustment made for the effects of COVID-19 pandemic. As the states in which the Company operates have issued ‘shelter-in-place” and social distancing ordinances, the Company is expecting segments of its customer base to experience employment layoffs and business closures which will negatively impact their ability to pay utility bills. The Company has also ceased all shutoffs for nonpayment during the pandemic.
The following table presents the activity in the allowance for credit losses for the period ended March 31, 2020:
 
As of March 31, 2020
Allowance for credit losses
Customer Receivables
 
Unbilled Revenue
Beginning balance
374

 
397

Provision for credit loss expense
263

 
244

Write-offs
(242
)
 
(277
)
Recoveries
41

 
38

Total ending allowance balance
$
436

 
$
402


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:
 
March 31, 2020
 
December 31, 2019
Cash and cash equivalents
140,406

 
42,653

Restricted cash (included in "taxes, prepaid expenses and other assets")
590

 
645

Total cash, cash equivalents, and restricted cash shown in the statements of cash flows
$
140,996

 
$
43,298


Adoption of New Accounting Standards
In June of 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changed the impairment model for certain financial assets that have a contractual right to receive cash, including trade and loan receivables. The new model required recognition based upon an estimation of expected credit losses rather than recognition of losses when it is probable that they have been incurred. ASU 2016-13 was effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company adopted the standard utilizing the modified retrospective method for its trade receivables and unbilled revenue on January 1, 2020. Based on the composition of the Company’s trade receivables and unbilled revenue, and expected future losses, the adoption of ASU 2016-13 did not have a material impact on its consolidated financial statements.
In January of 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminated the second step of the goodwill impairment test that required a hypothetical purchase price allocation to measure goodwill impairment. Under the new guidance, a goodwill impairment loss will be measured at the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 was effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. The Company adopted the standard on January 1, 2020 and the adoption of the standard did not have a material impact on its consolidated financial statements.
In August of 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure for Fair Value Measurement, which modified the disclosure requirements on fair value

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measurements. The modifications in this update eliminated, amended, and added disclosure requirements for fair value measurements. ASU 2018-13 was effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company adopted the standard in part prospectively and in part retrospectively, in accordance with the requirements of ASU 2018-13, on January 1, 2020. Since the Company, does not have level 3 fair value measurements or transfers between level 1 and level 2 fair value measurements, the adoption of the standard did not have a material impact on its footnote disclosures.
Note 3. Stock-based Compensation
Equity Incentive Plan
The following table lists the number of annual Restricted Stock Awards (RSAs) granted and canceled during the three months ended March 31, 2020 and 2019:
 
Three Months Ended March 31
 
2020
 
2019
RSAs granted
39,915

 
36,183

RSAs canceled
5,034

 
8,334

During the first three months of 2020 and 2019, the RSAs granted were valued at $51.41 and $52.83 per share, respectively, based upon the fair value of the Company’s common stock on the date of grant. RSAs granted to officers vest over 36 months with the first year cliff vesting. RSAs granted to directors generally vest at the end of 12 months.
The following table lists the number of Restricted Stock Unit Awards (RSUs) granted, issued, and canceled during the three months ended March 31, 2020 and 2019:
 
Three Months Ended March 31
 
2020
 
2019
RSUs granted
32,720

 
26,473

RSUs issued
41,731

 
62,726

RSUs canceled
22,936

 
31,177

The 2020 and 2019 RSUs granted may be issued upon completion of the three-year performance period and are recognized as expense ratably over the period using a fair value of $51.41 per share and $52.83 per share, respectively, and an estimate of RSUs earned during the period.
The Company has recorded compensation costs for the RSAs and RSUs in administrative and general operating expenses in the amount of $0.8 million and $2.7 million for the three months ended March 31, 2020 and 2019, respectively.

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Note 4. Equity
The Company sold 115,834 shares of common stock through its at-the-market equity program and raised proceeds of $6.0 million net of $0.1 million in commissions paid under the equity distribution agreement during the first three months of 2020. The Company also incurred $0.1 million of equity issuance costs during the first three months of 2020.
The Company’s changes in total common stockholders’ equity for the three months ended March 31, 2020 and 2019 were as follows:
 
Three months ended March 31, 2020
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Total
Stockholders'
Equity
 
Shares
 
Amount
 
 
 
 
(In thousands)
Balance at January 1, 2020
48,532

 
$
485

 
$
362,275

 
$
417,146

 
$
779,906

Net loss
 
 
 
 
 
 
(20,307
)
 
(20,307
)
Issuance of common stock
210

 
2

 
7,227

 


 
7,229

Repurchase of common stock
(28
)
 

 
(1,373
)
 


 
(1,373
)
Dividends paid on common stock ($0.2125 per share)
 
 
 
 
 
 
(10,315
)
 
(10,315
)
Balance at March 31, 2020
48,714

 
487

 
368,129

 
386,524

 
755,140

 
Three months ended March 31, 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



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Note 5. Loss Per Share
The computations of basic and diluted loss per share are noted in the table below. Basic loss per share is computed by dividing the net loss 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 March 31
 
2020
 
2019
 
(In thousands, except per share data)
Net loss available to common stockholders
$
(20,307
)
 
$
(7,640
)
Weighted average common shares outstanding, basic
48,583

 
48,086

Weighted average common shares outstanding, dilutive
48,583

 
48,086

Loss per share - basic
$
(0.42
)
 
$
(0.16
)
Loss per share - diluted
$
(0.42
)
 
$
(0.16
)

 
 
 
 

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 to the pension plans were $7.9 million for the three months ended March 31, 2020. There were no cash contributions made to the pension plans for the three months ended March 31, 2019. Cash contributions made by the Company to the other postretirement benefit plans were $2.2 million and $1.4 million for the three months ended March 31, 2020 and 2019, respectively. The total 2020 estimated cash contribution to the pension plans is $38.0 million and to the other postretirement benefit plans is $7.5 million.























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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 March 31
 
Pension Plan
 
Other Benefits
 
2020
 
2019
 
2020
 
2019
Service cost
$
8,811

 
$
6,565

 
$
2,106

 
$
1,762

Interest cost
6,433

 
6,642

 
1,210

 
1,337

Expected return on plan assets
(8,265
)
 
(7,567
)
 
(1,811
)
 
(1,435
)
Amortization of prior service cost
1,057

 
1,262

 
49

 
49

Recognized net actuarial loss
3,196

 
1,312

 
14

 
104

Net periodic benefit cost
$
11,232

 
$
8,214

 
$
1,568

 
$
1,817


 
 
 
 
 
 
 
 

Service cost portion of the pension plan and other postretirement benefits is recognized in "administrative and general" expenses within the Condensed Consolidated Statements of Loss. 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 Loss.
Note 7. Short-term and Long-term Borrowings
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 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. 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 revolving credit facilities 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 $105.1 million and $55.1 million as of March 31, 2020 and December 31, 2019, respectively. There were $230.0 million and $120.0 million of borrowings on the Cal Water line of credit as of March 31, 2020 and December 31, 2019, respectively. The average borrowing rate for borrowings on the Company and Cal Water lines of credit during the three months ended March 31, 2020 was 2.59% compared to 3.22% for the same period last year.

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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 table below:
 
Three Months Ended March 31
 
2020
 
2019
Income tax benefit
$
(4,850
)
 
$
(2,163
)
 
 
 
 

The income tax benefit increased $2.7 million to $4.9 million for the three months ended March 31, 2020 as compared to $2.2 million for the three months ended March 31, 2019. The increase was due to an increase in pre-tax loss of $15.4 million for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

The Company's 2020 effective tax rate, before discrete items, is estimated to be 19.3%.

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 $11.7 million and $10.1 million as of March 31, 2020 and 2019, respectively. Included in the balance of unrecognized tax benefits, is approximately $3.3 million and $3.0 million, respectively, of tax benefits that, if recognized, would result in an adjustment to the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly within the next 12 months.
During the three months ended March 31, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, deferral of certain payroll  taxes,  technical  corrections  to  tax  depreciation  methods  for  qualified  improvement  property,  net  operating  loss carryback periods, alternative minimum tax credit refunds and modifications to the net interest deduction limitations which are not expected to have a material impact to the Company’s consolidated financial statements. The Company evaluated the provisions of the CARES Act and determined that it did not have a material effect on the Company's consolidated financial statements as of March 31, 2020.
Note 9. Regulatory Assets and Liabilities
The CPUC follows a rate case plan which requires Cal Water to file a GRC for each of its regulated operating districts every three years. In a GRC proceeding, the CPUC not only considers the utility's rate setting requests, but may also consider other issues that affect the utility's rates and operations. The CPUC is generally required to issue its GRC decision prior to the first day of the test year or authorize interim rates. In accordance with the rate case plan, Cal Water filed its 2018 GRC application in July of 2018 requesting rate changes effective January 1, 2020. On October 8, 2019, Cal Water jointly filed a formal settlement agreement for its 2018 GRC with the Public Advocates Office of the CPUC covering the majority of open matters in the case. The key matters not included in the settlement which are currently being litigated are: continuation of the WRAM, MCBA, PCBA, and HCBA. Recognition of regulatory assets for these litigated matters have therefore not been recorded for the period ended March 31, 2020. If the CPUC approves the settlement agreement, Cal Water would be authorized to include in rates $609.0 million to $628.0 million of new projects throughout the state in 2019 to 2021, along with approximately $200.0 million for completion of additional projects which commenced in 2018 and prior periods. Included in these figures are $148.0 million of advice letter authorizations, which would not be included in rates until related projects are completed. Cal Water anticipates that if the settlement were adopted, it would plan to make capital investments of approximately $809.0 million to $828.0 million in the 2019-2021 period. Cal Water's 2018 GRC decision has been delayed and Cal Water has been granted interim rate relief beginning January 1, 2020. The results of the

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Table of Contents

2018 GRC may differ from what is contained in the GRC application. The Company currently expects a decision from the CPUC in mid-2020.
Regulatory assets and liabilities were comprised of the following as of March 31, 2020 and December 31, 2019:
 
Recovery Period
 
March 31, 2020
 
December 31, 2019
Regulatory Assets
 
 
 

 
 

Pension and retiree group health
Indefinitely
 
$
208,157

 
$
208,321

Property-related temporary differences (tax benefits flowed through to customers)
Indefinitely
 
105,600

 
104,931

Other accrued benefits
Indefinitely
 
20,885

 
20,030

Net WRAM and MCBA long-term accounts receivable
1-2 years
 
31,693

 
25,465

Asset retirement obligations, net
Indefinitely
 
20,045

 
19,567

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

 
4,642

Tank coating
10 years
 
14,426

 
13,535

Recoverable property losses
10 years
 
4,856

 
5,000

PCBA
1 year
 
21,465

 
21,465

Other components of net periodic benefit cost
Indefinitely
 
5,503

 
5,145

Other regulatory assets
Various
 
5,547

 
5,221

Total Regulatory Assets
 
 
$
442,819

 
$
433,322

 
 
 
 
 
 
Regulatory Liabilities
 
 
 

 
 

Future tax benefits due to customers
 
 
$
194,459

 
$
194,501

HCBA
 
 
4,271

 
4,271

CEBA
 
 
559

 
2,742

Net WRAM and MCBA long-term payable
 
 
135

 
211

Tax accounting memorandum account
 
 
853

 
806

Cost of capital memorandum account
 
 
154

 
151

1,2,3 trichloropropane (TCP) settlement proceeds
 
 
9,491

 
8,426

Other regulatory liabilities
 
 
345

 
305

Total Regulatory Liabilities
 
 
$
210,267

 
$
211,413


Short-term regulatory assets and liabilities are excluded from the above table.
The short-term regulatory assets were $25.0 million as of March 31, 2020 and $38.2 million as of December 31, 2019. As of March 31, 2020 and December 31, 2019, the short-term regulatory assets primarily consist of net WRAM and MCBA receivables.
The short-term portions of regulatory liabilities were $3.5 million as of March 31, 2020 and $4.5 million as of December 31, 2019. The short-term regulatory liabilities as of March 31, 2020, primarily consist of 2015 GRC CEBA refunds. As of December 31, 2019, the short-term regulatory liabilities primarily consist of TCP settlement proceeds, tax accounting memorandum account refunds, and cost of capital memorandum account refunds.

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Table of Contents

Note 10. Commitments and Contingencies
Commitments
The Company has significant commitments to purchase water from water wholesalers. The Company also has operating and finance leases for water systems, offices, land easements, licenses, equipment, and other facilities. These commitments and leases are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. 

As of March 31, 2020, there were no significant changes in these commitments from December 31, 2019.
Contingencies
Groundwater Contamination
The Company has undertaken litigation against third parties to recover past and anticipated costs related to groundwater contamination in our service areas. The cost of litigation is expensed as incurred and any settlement is first offset against such costs. The CPUC’s general policy requires all proceeds from groundwater contamination litigation to be used first to pay transactional expenses, then to make customers whole for water treatment costs to comply with the CPUC’s water quality standards. The CPUC allows for a risk-based consideration of contamination proceeds which exceed the costs of the remediation described above and may result in some sharing of proceeds with the shareholder, determined on a case by case basis. The CPUC has authorized various memorandum accounts that allow the Company to track significant litigation costs and to request recovery of these costs in future filings.
Other Legal Matters
From time to time, the Company is involved in various disputes and litigation matters that arise in the ordinary course of business. The status of each significant matter is reviewed and assessed for potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount of the range of loss can be estimated, a liability is accrued for the estimated loss in accordance with the accounting standards for contingencies. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. While the outcome of these disputes and litigation matters cannot be predicted with any certainty, management does not believe when taking into account existing reserves the ultimate resolution of these matters will materially affect the Company’s financial position, results of operations, or cash flows. As of March 31, 2020 and December 31, 2019, the Company recognized a liability of $2.0 million and $2.5 million, respectively, for known legal matters. The cost of litigation is expensed as incurred and any settlement is first offset against such costs. Any settlement in excess of the cost to litigate is accounted for on a case by case basis, dependent on the nature of the settlement.
Note 11. Fair Value of Financial Assets and Liabilities
The accounting guidance for fair value measurements and disclosures provides a single definition of fair value and requires certain disclosures about assets and liabilities measured at fair value. A hierarchical framework for disclosing the observability of the inputs utilized in measuring assets and liabilities at fair value is established by this guidance. The three levels in the hierarchy are as follows:
 
Level 1 - Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the 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.
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.
 


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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.
 
March 31, 2020
 
 
 
Fair Value
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Total
Long-term debt, including current maturities, net
$
808,331

 

 
$
989,749

 

 
$
989,749

Advances for construction
194,046

 

 
82,078

 

 
82,078

Total
$
1,002,377

 
$

 
$
1,071,827

 
$

 
$
1,071,827

 
 
December 31, 2019
 
 
 
Fair Value
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Total
Long-term debt, including current maturities, net
$
808,622

 
$

 
$
873,454

 
$

 
$
873,454

Advances for construction
191,062

 

 
79,550

 

 
79,550

Total
$
999,684

 

 
$
953,004

 
$

 
$
953,004


Note 12. Condensed Consolidating Financial Statements
On November 17, 2010, Cal Water issued $100.0 million aggregate principal amount of 5.500% First Mortgage Bonds due 2040, all of which is fully and unconditionally guaranteed by the Company. As a result of this guarantee arrangement, the Company is required to present the following condensed consolidating financial information. The investments in affiliates are accounted for and presented using the “equity method” of accounting.
The following tables present the Condensed Consolidating Balance Sheets as of March 31, 2020 and December 31, 2019, the Condensed Consolidating Statements of (Loss) Income for the three months ended March 31, 2020 and 2019, and the Condensed Consolidating Statements of Cash Flows for the three months ended March 31, 2020 and 2019 of (i) California Water Service Group, the guarantor of the First Mortgage Bonds and the parent company; (ii) California Water Service Company, the issuer of the First Mortgage Bonds and a 100% owned consolidated subsidiary of California Water Service Group; and (iii) the other 100% owned non-guarantor consolidated subsidiaries of California Water Service Group. No other subsidiary of the Company guarantees the securities.

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Table of Contents

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 2020
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS
 

 
 

 
 

 
 

 
 

Utility plant:
 

 
 

 
 

 
 

 
 

Utility plant
$
1,318

 
$
3,395,699

 
$
226,598

 
$
(7,197
)
 
$
3,616,418

Less accumulated depreciation and amortization
(1,130
)
 
(1,103,286
)
 
(67,230
)
 
2,199

 
(1,169,447
)
Net utility plant
188

 
2,292,413

 
159,368

 
(4,998
)
 
2,446,971

Current assets:
 
 
 
 
 

 
 
 
 
Cash and cash equivalents
56,356

 
74,655

 
9,395

 

 
140,406

Receivables and unbilled revenue, net

 
98,794

 
4,482

 

 
103,276

Receivables from affiliates
23,212

 
1,704

 
24

 
(24,940
)
 

Other current assets
634

 
23,251

 
2,515

 

 
26,400

Total current assets
80,202

 
198,404

 
16,416

 
(24,940
)
 
270,082

Other assets:
 
 
 
 
 

 
 
 
 
Regulatory assets

 
438,075

 
4,744

 

 
442,819

Investments in affiliates
752,501

 

 

 
(752,501
)
 

Long-term affiliate notes receivable
29,579

 

 

 
(29,579
)
 

Other assets
458

 
75,228

 
5,508

 
(221
)
 
80,973

Total other assets
782,538

 
513,303

 
10,252

 
(782,301
)
 
523,792

TOTAL ASSETS
$
862,928

 
$
3,004,120

 
$
186,036

 
$
(812,239
)
 
$
3,240,845

CAPITALIZATION AND LIABILITIES
 

 
 

 
 

 
 

 
 

Capitalization:
 

 
 

 
 

 
 

 
 

Common stockholders’ equity
$
755,140

 
$
676,674

 
$
81,031

 
$
(757,705
)
 
$
755,140

Affiliate long-term debt

 

 
29,579

 
(29,579
)
 

Long-term debt, net

 
786,040

 
427

 

 
786,467

Total capitalization
755,140

 
1,462,714

 
111,037

 
(787,284
)
 
1,541,607

Current liabilities:
 

 
 

 
 

 
 

 
 

Current maturities of long-term debt, net

 
21,743

 
121

 

 
21,864

Short-term borrowings
105,100

 
230,000

 

 

 
335,100

Payables to affiliates
797

 
25

 
24,118

 
(24,940
)
 

Accounts payable

 
94,979

 
4,040

 

 
99,019

Accrued expenses and other liabilities
334

 
53,721

 
3,089

 

 
57,144

Total current liabilities
106,231

 
400,468

 
31,368

 
(24,940
)
 
513,127

Unamortized investment tax credits

 
1,575

 

 

 
1,575

Deferred income taxes
1,557

 
213,617

 
3,292

 
(15
)
 
218,451

Pension and postretirement benefits other than pensions

 
260,337

 

 

 
260,337

Regulatory liabilities and other

 
261,072

 
7,845

 

 
268,917

Advances for construction

 
193,568

 
478

 

 
194,046

Contributions in aid of construction

 
210,769

 
32,016

 

 
242,785

TOTAL CAPITALIZATION AND LIABILITIES
$
862,928

 
$
3,004,120

 
$
186,036

 
$
(812,239
)
 
$
3,240,845


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Table of Contents

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2019
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS
 

 
 

 
 

 
 

 
 

Utility plant:
 

 
 

 
 

 
 

 
 

Utility plant
$
1,318

 
$
3,332,331

 
$
224,033

 
$
(7,197
)
 
$
3,550,485

Less accumulated depreciation and amortization
(1,107
)
 
(1,079,627
)
 
(65,561
)
 
2,180

 
(1,144,115
)
Net utility plant
211

 
2,252,704

 
158,472

 
(5,017
)
 
2,406,370

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
3,096

 
29,098

 
10,459

 

 
42,653

Receivables and unbilled revenue, net

 
114,999

 
4,350

 

 
119,349

Receivables from affiliates
25,803

 
3,621

 
209

 
(29,633
)
 

Other current assets
90

 
20,615

 
2,005

 

 
22,710

Total current assets
28,989

 
168,333

 
17,023

 
(29,633
)
 
184,712

Other assets:
 

 
 

 
 

 
 

 
 

Regulatory assets

 
428,639

 
4,683

 

 
433,322

Investments in affiliates
777,170

 

 

 
(777,170
)
 

Long-term affiliate notes receivable
30,060

 

 

 
(30,060
)
 

Other assets
409

 
81,591

 
5,125

 
(221
)
 
86,904

Total other assets
807,639

 
510,230

 
9,808

 
(807,451
)
 
520,226

TOTAL ASSETS
$
836,839

 
$
2,931,267

 
$
185,303

 
$
(842,101
)
 
$
3,111,308

CAPITALIZATION AND LIABILITIES
 

 
 

 
 

 
 

 
 

Capitalization: