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 March 31, 2020



☐	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

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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 March 31, 2020 and December 31, 2019	3
Condensed Consolidated Statements of Loss (unaudited) For the Three Months Ended March 31, 2020 and 2019	4
Condensed Consolidated Statements of Cash Flows (unaudited) For the Three Months Ended March 31, 2020 and 2019	5
Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3 Quantitative and Qualitative Disclosure about Market Risk	32
Item 4 Controls and Procedures	32
PART II Other Information	33
Item 1 Legal Proceedings	33
Item 1A Risk Factors	33
Item 6 Exhibits	34
Signatures	34

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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)



	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

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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

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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

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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.

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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.

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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		Additional Paid-in Capital			Retained Earnings			Total Stockholders' Equity
	(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		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

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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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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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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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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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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: