cwt-20200930

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 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 September 30, 2020 — 49,840,000

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TABLE OF CONTENTS


			Page
PART I Financial Information			3
Item 1 Financial Statements			3
Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2020 and December 31, 2019			3
Condensed Consolidated Statements of Income (unaudited) For the Three Months Ended September 30, 20 20 and 201 9			4
Condensed Consolidated Statements of Income (unaudited) For the Nine Months Ended September 30, 2020 and 2019			5
Condensed Consolidated Statements of Cash Flows (unaudited) For the Nine Months Ended September 30, 2020 and 2019			6
Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3 Quantitative and Qualitative Disclosure about Market Risk			40
Item 4 Controls and Procedures			40
PART II Other Information			41
Item 1 Legal Proceedings			41
Item 1A Risk Factors			41
Item 6 Exhibits			42
Signatures			43

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PART I FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

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

CALIFORNIA WATER SERVICE GROUP

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited (In thousands, except per share data)


	September 30, 2020		December 31, 2019
ASSETS
Utility plant:
Utility plant	$	3,835,194	$	3,550,485
Less accumulated depreciation and amortization	(1,238,880)		(1,144,115)
Net utility plant	2,596,314		2,406,370
Current assets:
Cash and cash equivalents	113,312		42,653
Receivables:
Customers, net	53,397		32,058
Regulatory balancing accounts	54,415		38,225
Other, net	15,056		14,187
Unbilled revenue, net	46,247		34,879
Materials and supplies at weighted average cost	8,611		7,745
Taxes, prepaid expenses, and other assets	14,726		14,965
Total current assets	305,764		184,712
Other assets:
Regulatory assets	484,435		433,322
Goodwill	30,349		2,615
Other assets	89,572		84,289
Total other assets	604,356		520,226
TOTAL ASSETS	$	3,506,434	$	3,111,308
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $0.01 par value; 68,000 shares authorized, 49,840 and 48,532 outstanding in 2020 and 2019, respectively	$	498	$	485
Additional paid-in capital	422,391		362,275
Retained earnings	467,303		417,146
Total common stockholders’ equity	890,192		779,906
Long-term debt, net	785,055		786,754
Total capitalization	1,675,247		1,566,660
Current liabilities:
Current maturities of long-term debt, net	21,883		21,868
Short-term borrowings	375,100		175,100
Accounts payable	127,158		108,463
Regulatory balancing accounts	11,003		4,462
Accrued interest	14,233		5,810
Accrued expenses and other liabilities	54,446		43,018
Total current liabilities	603,823		358,721
Deferred income taxes	245,456		222,590
Pension and postretirement benefits other than pensions	261,081		258,907
Regulatory liabilities and other	257,054		271,831
Advances for construction	196,853		191,062
Contributions in aid of construction	266,920		241,537
Commitments and contingencies (Note 10)
TOTAL CAPITALIZATION AND LIABILITIES	$	3,506,434	$	3,111,308

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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CALIFORNIA WATER SERVICE GROUP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Unaudited (In thousands, except per share data)


For the three months ended	September 30, 2020		September 30, 2019
Operating revenue	$	304,108	$	232,537
Operating expenses:
Operations:
Water production costs	85,344		80,568
Administrative and general	29,208		26,779
Other operations	29,746		24,550
Maintenance	7,129		7,065
Depreciation and amortization	24,699		22,273
Income taxes	13,804		12,194
Property and other taxes	8,116		7,541
Total operating expenses	198,046		180,970
Net operating income	106,062		51,567
Other income and expenses:
Non-regulated revenue	3,934		4,118
Non-regulated expenses	(2,865)		(4,351)
Other components of net periodic benefit cost	(1,008)		(1,857)
Allowance for equity funds used during construction	973		1,868
Income tax (expense) benefit on other income and expenses	(245)		330
Net other income	789		108
Interest expense:
Interest expense	11,162		10,279
Allowance for borrowed funds used during construction	(671)		(1,028)
Net interest expense	10,491		9,251
Net income	$	96,360	$	42,424
Earnings per share:
Basic	$	1.94	$	0.88
Diluted	1.94		0.88
Weighted average shares outstanding:
Basic	49,576		48,141
Diluted	49,576		48,141

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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CALIFORNIA WATER SERVICE GROUP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Unaudited (In thousands, except per share data)


For the nine months ended	September 30, 2020		September 30, 2019
Operating revenue	$	605,155	$	537,679
Operating expenses:
Operations:
Water production costs	210,462		190,795
Administrative and general	85,827		81,310
Other operations	69,618		64,913
Maintenance	20,924		19,212
Depreciation and amortization	73,733		66,967
Income taxes	10,489		13,524
Property and other taxes	22,470		21,902
Total operating expenses	493,523		458,623
Net operating income	111,632		79,056
Other income and expenses:
Non-regulated revenue	11,969		14,149
Non-regulated expenses	(11,811)		(10,470)
Other components of net periodic benefit cost	(3,770)		(4,308)
Allowance for equity funds used during construction	4,292		5,087
Income taxes on other income and expenses	(152)		(985)
Net other income	528		3,473
Interest expense:
Interest expense	33,573		33,532
Allowance for borrowed funds used during construction	(2,747)		(2,783)
Net interest expense	30,826		30,749
Net income	$	81,334	$	51,780
Earnings per share:
Basic	$	1.66	$	1.08
Diluted	1.66		1.08
Weighted average shares outstanding:
Basic	49,034		48,121
Diluted	49,034		48,121

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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CALIFORNIA WATER SERVICE GROUP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited (In thousands)


For the nine months ended	September 30, 2020		September 30, 2019
Operating activities:
Net income	$	81,334	$	51,780
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	75,550		68,522
Change in value of life insurance contracts	(621)		(3,433)
Allowance for equity funds used during construction	(4,292)		(5,087)
Changes in operating assets and liabilities:
Receivables and unbilled revenue	(41,374)		(29,436)
Accounts payable	7,199		16,735
Other current assets	(536)		(3,937)
Other current liabilities	16,304		11,597
Other changes in noncurrent assets and liabilities	(36,900)		21,602
Net cash provided by operating activities	96,664		128,343
Investing activities:
Utility plant expenditures	(221,261)		(194,942)
Purchase of life insurance contracts	(2,335)		(2,216)
Business acquisition, net of cash acquired	(39,544)		—
Net cash used in investing activities	(263,140)		(197,158)
Financing activities:
Short-term borrowings	270,000		210,000
Repayment of short-term borrowings	(70,000)		(120,000)
Issuance of long-term debt, net of expenses of $1,569 for 2019	—		398,431
Repayment of long-term debt	(1,535)		(401,630)
Advances and contributions in aid of construction	19,862		21,266
Refunds of advances for construction	(7,017)		(5,560)
Repurchase of common stock	(1,578)		(2,355)
Issuance of common stock	58,573		1,278
Dividends paid	(31,177)		(28,507)
Net cash provided by financing activities	237,128		72,923
Change in cash, cash equivalents, and restricted cash	70,652		4,108
Cash, cash equivalents, and restricted cash at beginning of period	43,298		47,715
Cash, cash equivalents, and restricted cash at end of period	$	113,950	$	51,823
Supplemental information:
Cash paid for interest (net of amounts capitalized)	$	21,862	$	22,060
Supplemental disclosure of non-cash activities:
Accrued payables for investments in utility plant	$	47,015	$	31,676
Utility plant contribution by developers	$	22,762	$	23,955

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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CALIFORNIA WATER SERVICE GROUP

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 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 tables disaggregate the Company’s operating revenue by source for the three and nine months ended September 30, 2020 and 2019:


	Three Months Ended September 30
	2020		2019
Revenue from contracts with customers	$	222,474	$	214,963
Regulatory balancing account revenue (a)	81,634		17,574
Total operating revenue	$	304,108	$	232,537


	Nine Months Ended September 30
	2020		2019
Revenue from contracts with customers	$	529,804	$	499,840
Regulatory balancing account revenue (a)	75,351		37,839
Total operating revenue	$	605,155	$	537,679

(a) The adjustments 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 first six months ended June 30, 2020 were recorded in the three months ended September 30, 2020 as the Company received a proposed decision for its 2018 General Rate Case for Cal Water (2018 GRC) in October of 2020. The Company also recorded an adjustment for its interim rate memorandum account (IRMA) where it was authorized to track the effect of the delay in the resolution of the 2018 GRC on customer billings.

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 condensed consolidated balance sheets, is inconsequential.

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In the following tables, revenue from contracts with customers is disaggregated by class of customers for the three and nine months ended September 30, 2020 and 2019:


	Three Months Ended September 30
	2020		2019
Residential	$	151,938	$	139,137
Business	36,951		38,247
Industrial	7,496		9,077
Public authorities	12,862		12,482
Other (a)	13,227		16,020
Total revenue from contracts with customers	$	222,474	$	214,963


	Nine Months Ended September 30
	2020		2019
Residential	$	360,935	$	330,745
Business	93,175		95,433
Industrial	21,996		23,866
Public authorities	26,470		24,566
Other (a)	27,228		25,230
Total revenue from contracts with customers	$	529,804	$	499,840

(a) Other includes the accrued unbilled revenue.

Regulatory balancing account revenue

The Company’s ability to recover revenue requirements authorized by the California Public Utilities Commission (CPUC) in its triennial general rate case (GRC) is decoupled from the volume of the sales. Regulatory balancing account revenue is revenue related to rate mechanisms authorized in California by the CPUC, which allow the Company to recover the authorized revenue and are not considered contracts with customers. 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.

Due to the delay in the resolution of the 2018 GRC, the CPUC authorized Cal Water to track the effect of the delay on customer billings in IRMA effective January 1, 2020. Variances between actual customer billings and those that would have been billed assuming the GRC had been effective January 1, 2020 are recorded as regulatory balancing account revenue. In the third quarter of 2020, Cal Water determined that the IRMA met regulatory asset 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.

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Non-regulated Revenue

The following tables disaggregate the Company’s non-regulated revenue by source for the three and nine months ended September 30, 2020 and 2019:


	Three Months Ended September 30
	2020		2019
Operating and maintenance revenue	$	2,680	$	2,929
Other non-regulated revenue	625		626
Non-regulated revenue from contracts with customers	$	3,305	$	3,555
Lease revenue	$	629	$	563
Total non-regulated revenue	$	3,934	$	4,118


	Nine Months Ended September 30
	2020		2019
Operating and maintenance revenue	$	7,969	$	9,248
Other non-regulated revenue	2,223		3,189
Non-regulated revenue from contracts with customers	$	10,192	$	12,437
Lease revenue	$	1,777	$	1,712
Total non-regulated revenue	$	11,969	$	14,149

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.

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 and Unbilled Revenue are inconsequential. Customer receivables include receivables for water and wastewater services provided to residential customers, business, industrial, public authorities, and other customers. The overall risks related to the Company’s receivables are low as water and wastewater services are seen as essential services. The estimate for the allowance for credit losses is based on a historical loss ratio, in conjunction with a qualitative assessment of elements that impact the collectability of receivables to determine if the allowance for credit losses should be further adjusted in accordance with the accounting guidance for credit losses. Management contemplates available current information such as changes in economic factors, regulatory matters, industry trends, payment options and programs available to customers, and the methods that the Company is able to utilize to ensure payment.

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During the third quarter of 2020, the Company reviewed its allowance for credit losses utilizing a quantitative assessment, which included trend analysis of customer billing and collection, aging by customer class, and unemployment rates since the outbreak of COVID-19 in the first quarter of 2020. The Company also utilized a qualitative assessment, which considered the future collectability on customer outstanding balances, management's estimate of the cash recovery, and a general assessment of the economic conditions of the locations the Company serves due to the outbreak of COVID-19. The Company is complying with the CPUC requirements to suspend customer disconnections for non-payment and ceased agency collection activities, and anticipates this situation will continue until April 1, 2021. Based on the above assessments, the Company expects an increase in customer receivable write-offs as compared to historical experiences and adjusted its allowance for credit losses, accordingly.

The following table presents the activity in the allowance for credit losses for the period ended September 30, 2020:


Allowance for credit losses	As of September 30, 2020
Beginning balance	771
Provision for credit loss expense	2,895
Write-offs	(1,317)
Recoveries	396
Total ending allowance balance	$	2,745

Cash, Cash Equivalents, and Restricted Cash

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


	September 30, 2020		December 31, 2019
Cash and cash equivalents	113,312		42,653
Restricted cash (included in "taxes, prepaid expenses and other assets")	638		645
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows	$	113,950	$	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 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.

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Note 3. Stock-based Compensation

Equity Incentive Plan

The following table lists the number of Restricted Stock Awards (RSAs) granted and canceled during the three and nine months ended September 30, 2020 and 2019:


	Three Months Ended September 30		Nine Months Ended September 30
	2020	2019	2020	2019
RSAs granted	—	—	39,915	36,183
RSAs canceled	2,153	2,739	9,338	14,394

During the first nine 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 cliff vest at the end of 12 months.

The following table lists the number of performance-based Restricted Stock Unit Awards (RSUs) granted, issued, and canceled during the three and nine months ended September 30, 2020 and 2019:


	Three Months Ended September 30		Nine Months Ended September 30
	2020	2019	2020	2019
RSUs granted	—	—	32,720	26,473
RSUs issued	—	—	41,731	62,726
RSUs canceled	—	—	22,936	31,177

Each RSU award reflects a target number of shares that may be issued to the award recipient. 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 $1.8 million and $1.4 million for the three months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, the Company has recorded compensation costs for the RSAs and RSUs in the amount of $3.1 million and $5.3 million, respectively.

Note 4. Equity

The Company sold 432,420 shares of common stock through its at-the-market equity program and raised proceeds of $20.1 million net of $0.2 million in commissions paid under the equity distribution agreement during the three months ended September 30, 2020. During the nine months ended September 30, 2020, the Company sold 1,225,572 shares of common stock through its at-the-market equity program and raised proceeds of $57.3 million net of $0.6 million in commissions paid under the equity distribution agreement.

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The Company’s changes in total common stockholders’ equity for the nine months ended September 30, 2020 and 2019 were as follows:


	Nine months ended September 30, 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
Net income						5,281		5,281
Issuance of common stock	686	7		32,056				32,063
Repurchase of common stock	(2)	—		(105)				(105)
Dividends paid on common stock ($0.2125 per share)						(10,356)		(10,356)
Balance at June 30, 2020	49,398	494		400,080		381,449		782,023
Net income						96,360		96,360
Issuance of common stock	444	4		22,410				22,414
Repurchase of common stock	(2)	—		(99)				(99)
Dividends paid on common stock ($0.2125 per share)						(10,506)		(10,506)
Balance at September 30, 2020	49,840	498		422,391		467,303		890,192


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

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Note 5. Earnings Per Share

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


	Three Months Ended September 30
	2020		2019
	(In thousands, except per share data)
Net income available to common stockholders	$	96,360	$	42,424
Weighted average common shares outstanding, basic	49,576		48,141
Weighted average common shares outstanding, dilutive	49,576		48,141
Earnings per share - basic	$	1.94	$	0.88
Earnings per share - diluted	$	1.94	$	0.88


	Nine Months Ended September 30
	2020		2019
	(In thousands, except per share data)
Net income available to common stockholders	$	81,334	$	51,780
Weighted average common shares outstanding, basic	49,034		48,121
Weighted average common shares outstanding, dilutive	49,034		48,121
Earnings per share - basic	$	1.66	$	1.08
Earnings per share - diluted	$	1.66	$	1.08

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 $25.8 million and $12.5 million for the nine months ended September 30, 2020 and 2019, respectively. Cash contributions made by the Company to the other postretirement benefit plans were $5.7 million and $5.6 million for the nine months ended September 30, 2020 and 2019, respectively. The total 2020 estimated cash contribution to the pension plans and other postretirement benefits plans are expected to be approximately $38.0 million and $7.5 million, respectively.

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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 September 30
	Pension Plan				Other Benefits
	2020		2019		2020		2019
Service cost	$	9,378	$	6,910	$	1,746	$	2,082
Interest cost	6,440		6,941		808		1,407
Expected return on plan assets	(8,284)		(7,581)		(1,804)		(1,475)
Amortization of prior service cost	1,058		1,262		50		49
Recognized net actuarial loss	3,208		1,821		(27)		214
Net periodic benefit cost	$	11,800	$	9,353	$	773	$	2,277


	Nine Months Ended September 30
	Pension Plan				Other Benefits
	2020		2019		2020		2019
Service cost	$	27,002	$	20,039	$	5,959	$	5,606
Interest cost	19,306		20,225		3,229		4,081
Expected return on plan assets	(24,815)		(22,714)		(5,427)		(4,346)
Amortization of prior service cost	3,172		3,786		148		148
Recognized net actuarial loss	9,599		4,445		—		421
Net periodic benefit cost	$	34,264	$	25,781	$	3,909	$	5,910

Service cost portion of the pension plan and other postretirement benefits is recognized in "administrative and general" expenses within the Condensed Consolidated Statements of Income. Other components of net periodic benefit costs include interest costs, expected return on plan assets, amortization of prior service costs, and recognized net actuarial loss and are reported together as "other components of net periodic benefit cost" within the Condensed Consolidated Statements of Income.

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 September 30, 2020 and December 31, 2019, respectively. There were $270.0 million and $120.0 million of borrowings on the Cal Water line of credit as of September 30, 2020 and December 31, 2019, respectively. The average borrowing rate for borrowings on the Company and Cal Water lines of credit during the nine months ended September 30, 2020 was 1.74% compared to 3.38% 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 tables below:


	Three Months Ended September 30
	2020		2019
Income tax expense	$	14,049	$	11,864


	Nine Months Ended September 30
	2020		2019
Income tax expense	$	10,641	$	14,509

The income tax expense increased $2.1 million to $14.0 million for the three months ended September 30, 2020 as compared to $11.9 million for the three months ended September 30, 2019. The increase was mainly due to an increase in operating income, partially offset by tax repair benefit and amortization of excess deferred income tax as a result of the Tax Cuts and Jobs Acts (TCJA) in the 2018 GRC proposed decision.

The income tax expense decreased $3.9 million to $10.6 million for the nine months ended September 30, 2020 as compared to income tax expense of $14.5 million for the nine months ended September 30, 2019. The decrease was mainly due to tax repair benefit and amortization of excess deferred income tax as a result of TCJA in the 2018 GRC proposed decision.

The Company’s effective tax rate was 11.6% and 21.9% for the nine months ended September 30, 2020, and 2019, respectively. The lower effective rate for the nine months ended September 30, 2020, was primarily due to the amortization of the excess deferred taxes as a result of the TCJA in the proposed decision for the 2018 GRC.

The US federal income tax rate was lowered by TCJA to 21% in 2018 from 35% in 2017. For the year ended December 31, 2018, the Company recorded a re-measurement of its deferred tax balances. The final impact may differ from the recorded amounts, possibly materially, due to regulatory decisions that could differ from the Company’s determination of how the impacts 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 excess deferred tax 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 $12.9 million and $10.6 million as of September 30, 2020 and 2019, respectively. Included in the balance of unrecognized tax benefits, is approximately $3.5 million and $3.1 million, respectively, of tax benefits that, if recognized, would result in an adjustment to the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly within the next 12 months.

During the nine months ended September 30, 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 September 30, 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

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majority of open matters in the case. The key matters not included in the settlement, and which were litigated, were continuation of the WRAM, MCBA, PCBA, and HCBA. On October 14, 2020, an Administrative Law Judge (ALJ) with the CPUC issued a proposed decision that is subject to adoption by the CPUC no earlier than the CPUC’s November 19, 2020 meeting. If adopted as proposed, the decision would approve the settlement reached in October of 2019 by Cal Water and the CPUC’s Public Advocates Office, allow Cal Water to continue its decoupling balancing accounts through 2022, and allow Cal Water to retain its PCBA and HCBA. Under this proposed decision, Cal Water would be authorized to invest $828.0 million in its districts throughout California through 2021. This includes $148 million of water system infrastructure upgrades that would be recovered via the CPUC’s advice letter procedure once those projects are completed. The proposed decision also authorizes total revenue of up to $698.7 million for 2020.

The Company determined that the proposed decision provides additional evidence about conditions that existed as of September 30, 2020. As of November 6, 2020, the Company believes it is probable the proposed decision will be adopted by the CPUC without any material variation and accordingly, the Company recorded regulatory assets and associated revenues resulting from the regulatory mechanisms approved in the proposed decision as of September 30, 2020. In the unlikely event that the CPUC does not approve the proposed decision as issued, the Company will need to adjust regulatory asset balances and revenues in the fourth quarter of 2020.

Regulatory assets and liabilities were comprised of the following as of September 30, 2020 and December 31, 2019:


	Recovery Period	September 30, 2020		December 31, 2019
Regulatory Assets
Pension and retiree group health	Indefinitely	$	207,828	$	208,321
Property-related temporary differences (tax benefits flowed through to customers)	Indefinitely	107,962		104,931
Other accrued benefits	Indefinitely	21,434		20,030
Net WRAM and MCBA long-term accounts receivable	1 - 2 years	40,036		25,465
Asset retirement obligations, net	Indefinitely	21,018		19,567
Interim rates long-term accounts receivable	1 year	21,672		4,642
Tank coating	10 years	14,209		13,535
Recoverable property losses	10 years	4,775		5,000
PCBA	1 year	32,819		21,465
Other components of net periodic benefit cost	Indefinitely	6,316		5,145
Other regulatory assets	Various	6,366		5,221
Total Regulatory Assets		$	484,435	$	433,322

Regulatory Liabilities
Future tax benefits due to customers		$	173,048	$	194,501
HCBA		7,407		4,271
CEBA		2,926		2,742
Net WRAM and MCBA long-term payable		374		211
Tax accounting memorandum account		711		806
Cost of capital memorandum account		15		151
1,2,3 trichloropropane (TCP) settlement proceeds		9,084		8,426
Other regulatory liabilities		374		305
Total Regulatory Liabilities		$	193,939	$	211,413

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

The short-term regulatory assets were $54.4 million as of September 30, 2020 and $38.2 million as of December 31, 2019. As of September 30, 2020, the short-term regulatory assets primarily consist of net WRAM and MCBA receivables and IRMA receivables. As of December 31, 2019, the short-term regulatory assets primarily consist of net WRAM and MCBA receivables.

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The short-term portions of regulatory liabilities were $11.0 million as of September 30, 2020 and $4.5 million as of December 31, 2019. The short-term regulatory liabilities as of September 30, 2020, primarily consist of 2015 GRC CEBA refunds and TCJA customer 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.

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 September 30, 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 September 30, 2020 and December 31, 2019, the Company recognized a liability of $2.4 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 Company has the ability to access.

Level 2 - Inputs to the valuation methodology include:

•Quoted market prices for similar assets or liabilities in active markets;

•Quoted prices for identical or similar assets or liabilities in inactive markets;

•Inputs other than quoted prices that are observable for the asset or liability; and

•Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.

Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Specific valuation methods include the following:

Accounts receivable and accounts payable carrying amounts approximated the fair value because of the short-term maturity of the instruments.

Long-term debt fair values were estimated using the published quoted market price of similar securities, 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.


	September 30, 2020
			Fair Value
	Cost		Level 1		Level 2		Level 3		Total
Long-term debt, including current maturities, net	$	806,938	—		$	991,973	—		$	991,973
Advances for construction	196,853		—		82,150		—		82,150
Total	$	1,003,791	$	—	$	1,074,123	$	—	$	1,074,123


	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 5.50% 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 September 30, 2020 and December 31, 2019, the Condensed Consolidating Statements of Income for the three and nine months ended September 30, 2020 and 2019, and the Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 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 September 30, 2020

(In thousands)


	Parent Company		Cal Water		All Other Subsidiaries		Consolidating Adjustments		Consolidated
ASSETS
Utility plant:
Utility plant	$	1,318	$	3,559,329	$	281,744	$	(7,197)	$	3,835,194
Less accumulated depreciation and amortization	(1,177)		(