October 28, 2021 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

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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, 2021


☐			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:


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 ☒

As of September 30, 2021 — there were approximately 52,608,000 shares of common stock outstanding.

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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, 2021 and December 31, 2020			3
Condensed Consolidated Statements of Operations (unaudited) For the Three Months Ended September 30, 2021 and 2020			4
Condensed Consolidated Statements of Operations (unaudited) For the Nine Months Ended September 30, 2021 and 2020			5
Condensed Consolidated Statements of Cash Flows (unaudited) For the Nine Months Ended September 30, 2021 and 2020			6
Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3 Quantitative and Qualitative Disclosure about Market Risk			33
Item 4 Controls and Procedures			33
PART II Other Information			34
Item 1 Legal Proceedings			34
Item 1A Risk Factors			34
Item 6 Exhibits			34
Signatures			35

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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, 2021		December 31, 2020
ASSETS
Utility plant:
Utility plant	$	4,124,024	$	3,890,423
Less accumulated depreciation and amortization	(1,327,655)		(1,239,865)
Net utility plant	2,796,369		2,650,558
Current assets:
Cash and cash equivalents	140,368		44,555
Receivables:
Customers, net	67,807		44,025
Regulatory balancing accounts	85,027		96,241
Other, net	20,448		20,331
Unbilled revenue, net	54,129		34,069
Materials and supplies at weighted average cost	9,383		8,831
Taxes, prepaid expenses, and other assets	16,246		17,964
Total current assets	393,408		266,016
Other assets:
Regulatory assets	328,505		325,376
Goodwill	36,815		31,842
Other assets	124,592		120,456
Total other assets	489,912		477,674
TOTAL ASSETS	$	3,679,689	$	3,394,248
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $0.01 par value; 68,000 shares authorized, 52,608 and 50,334 outstanding in 2021 and 2020, respectively	$	526	$	503
Additional paid-in capital	580,760		448,632
Retained earnings	534,685		472,209
Noncontrolling interests	4,689		—
Total equity	1,120,660		921,344
Long-term debt, net	1,059,724		781,100
Total capitalization	2,180,384		1,702,444
Current liabilities:
Current maturities of long-term debt, net	5,180		5,127
Short-term borrowings	120,000		370,000
Accounts payable	148,415		131,725
Regulatory balancing accounts	19,273		34,636
Accrued interest	17,170		6,178
Accrued expenses and other liabilities	50,900		41,040
Total current liabilities	360,938		588,706
Deferred income taxes	284,193		276,032
Pension and postretirement benefits other than pensions	114,192		115,581
Regulatory liabilities and other	257,108		247,810
Advances for construction	198,344		195,625
Contributions in aid of construction	284,530		268,050
Commitments and contingencies (Note 10)
TOTAL CAPITALIZATION AND LIABILITIES	$	3,679,689	$	3,394,248

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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CALIFORNIA WATER SERVICE GROUP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited (In thousands, except per share data)


For the three months ended	September 30, 2021		September 30, 2020
Operating revenue	$	256,723	$	304,108
Operating expenses:
Operations:
Water production costs	84,951		85,344
Administrative and general	30,712		29,208
Other operations	24,686		29,746
Maintenance	7,739		7,129
Depreciation and amortization	27,232		24,699
Income taxes	1,705		13,804
Property and other taxes	8,546		8,116
Total operating expenses	185,571		198,046
Net operating income	71,152		106,062
Other income and expenses:
Non-regulated revenue	5,813		3,934
Non-regulated expenses	(5,779)		(2,865)
Other components of net periodic benefit credit (cost)	1,853		(1,008)
Allowance for equity funds used during construction	898		973
Income tax expense on other income and expenses	(207)		(245)
Net other income	2,578		789
Interest expense:
Interest expense	11,737		11,162
Allowance for borrowed funds used during construction	(506)		(671)
Net interest expense	11,231		10,491
Net income	62,499		96,360
Net income attributable to noncontrolling interests	70		—
Net income attributable to California Water Service Group	$	62,429	$	96,360
Earnings per share of common stock:
Basic	$	1.20	$	1.94
Diluted	1.20		1.94
Weighted average shares outstanding:
Basic	51,823		49,576
Diluted	51,823		49,576

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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CALIFORNIA WATER SERVICE GROUP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited (In thousands, except per share data)


For the nine months ended	September 30, 2021		September 30, 2020
Operating revenue	$	617,583	$	605,155
Operating expenses:
Operations:
Water production costs	214,688		210,462
Administrative and general	92,837		85,827
Other operations	63,318		69,618
Maintenance	21,118		20,924
Depreciation and amortization	81,516		73,733
Income taxes	3,576		10,489
Property and other taxes	24,213		22,470
Total operating expenses	501,266		493,523
Net operating income	116,317		111,632
Other income and expenses:
Non-regulated revenue	16,759		11,969
Non-regulated expenses	(12,354)		(11,811)
Other components of net periodic benefit credit (cost)	7,520		(3,770)
Allowance for equity funds used during construction	2,290		4,292
Income tax expense on other income and expenses	(1,077)		(152)
Net other income	13,138		528
Interest expense:
Interest expense	33,165		33,573
Allowance for borrowed funds used during construction	(1,253)		(2,747)
Net interest expense	31,912		30,826
Net income	97,543		81,334
Net loss attributable to noncontrolling interests	(79)		—
Net income attributable to California Water Service Group	$	97,622	$	81,334
Earnings per share of common stock:
Basic	$	1.91	$	1.66
Diluted	1.91		1.66
Weighted average shares outstanding:
Basic	51,119		49,034
Diluted	51,119		49,034

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, 2021		September 30, 2020
Operating activities:
Net income	$	97,543	$	81,334
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	83,673		75,550
Change in value of life insurance contracts	(2,097)		(621)
Allowance for equity funds used during construction	(2,290)		(4,292)
Changes in operating assets and liabilities:
Receivables and unbilled revenue	(43,220)		(41,374)
Accounts payable	(2,914)		7,199
Other current assets	1,654		(536)
Other current liabilities	16,541		16,304
Other changes in noncurrent assets and liabilities	30,268		(36,900)
Net cash provided by operating activities	179,158		96,664
Investing activities:
Utility plant expenditures	(207,748)		(221,261)
Purchase of life insurance contracts	(2,335)		(2,335)
Business acquisition, net of cash acquired	(6,451)		(39,544)
Return of investment	1,000		—
Net cash used in investing activities	(215,534)		(263,140)
Financing activities:
Short-term borrowings	180,000		270,000
Repayment of short-term borrowings	(430,000)		(70,000)
Issuance of long-term debt, net of debt issuance costs of $1,064 for 2021 and $0 for 2020	278,936		—
Repayment of long-term debt	(1,522)		(1,535)
Advances and contributions in aid of construction	21,663		19,862
Refunds of advances for construction	(8,204)		(7,017)
Repurchase of common stock	(1,593)		(1,578)
Issuance of common stock	128,507		58,573
Dividends paid	(35,146)		(31,177)
Net cash provided by financing activities	132,641		237,128
Change in cash, cash equivalents, and restricted cash	96,265		70,652
Cash, cash equivalents, and restricted cash at beginning of period	45,129		43,298
Cash, cash equivalents, and restricted cash at end of period	$	141,394	$	113,950
Supplemental information:
Cash paid for interest (net of amounts capitalized)	$	20,162	$	21,862
Supplemental disclosure of non-cash activities:
Accrued payables for investments in utility plant	$	63,047	$	47,015
Utility plant contribution by developers	$	22,666	$	22,762

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, 2021

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, Hawaii, and Texas 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), Hawaii Water Service Company, Inc. (Hawaii Water), and TWSC, Inc. (Texas 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, 2020 as filed with the SEC on February 25, 2021.

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.

Noncontrolling Interests

Noncontrolling interests in the Company’s condensed consolidated financial statements represents a 30.20% interest not owned by Texas Water in a consolidated subsidiary. Texas Water obtained control over the subsidiary on May 1, 2021. Since the Company controls this subsidiary, its financial statements are consolidated with those of the Company, and the noncontrolling owner’s 30.20% share of the subsidiary’s net assets and results of operations is deducted and reported as noncontrolling interests on the condensed consolidated balance sheet and as net income or loss attributable to noncontrolling interests in the condensed consolidated statement of operations.

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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, 2021 and 2020:


	Three Months Ended September 30
	2021		2020
Revenue from contracts with customers	$	238,352	$	222,474
Regulatory balancing account revenue (a)	18,371		81,634
Total operating revenue	$	256,723	$	304,108


	Nine Months Ended September 30
	2021		2020
Revenue from contracts with customers	$	597,337	$	529,804
Regulatory balancing account revenue (a)	20,246		75,351
Total operating revenue	$	617,583	$	605,155

(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 nine months ended September 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 unaudited 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, 2021 and 2020:


	Three Months Ended September 30
	2021		2020
Residential	$	164,311	$	151,938
Business	43,450		36,951
Industrial	7,347		7,496
Public authorities	14,126		12,862
Other (a)	9,118		13,227
Total revenue from contracts with customers	$	238,352	$	222,474


	Nine Months Ended September 30
	2021		2020
Residential	$	400,653	$	360,935
Business	106,902		93,175
Industrial	19,409		21,996
Public authorities	30,886		26,470
Other (a)	39,487		27,228
Total revenue from contracts with customers	$	597,337	$	529,804

(a) Other includes 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 an interim rates memorandum account (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. Rates for the 2018 GRC were implemented on February 1, 2021; as a result, Cal Water recorded an IRMA regulatory asset for all of 2020 and for January of 2021.

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, 2021 and 2020:


	Three Months Ended September 30
	2021		2020
Operating and maintenance revenue	$	4,110	$	2,680
Other non-regulated revenue	894		625
Non-regulated revenue from contracts with customers	5,004		3,305
Lease revenue	809		629
Total non-regulated revenue	$	5,813	$	3,934


	Nine Months Ended September 30
	2021		2020
Operating and maintenance revenue	$	12,122	$	7,969
Other non-regulated revenue	2,550		2,223
Non-regulated revenue from contracts with customers	14,672		10,192
Lease revenue	2,087		1,777
Total non-regulated revenue	$	16,759	$	11,969

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 expected credit losses for business, industrial, public authorities, and other customers are inconsequential. 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.

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. 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 in the states in which the Company operates. The Company is also complying with the CPUC requirements to suspend customer disconnections for non-payment and ceased agency collection activities, and anticipates this situation will continue until further notice.

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The following table presents the activity in the allowance for credit losses for the period ended September 30, 2021 and December 31, 2020:


Allowance for credit losses	September 30, 2021		December 31, 2020
Beginning balance	$	5,246	$	771
Provision for credit loss expense	(723)		5,716
Write-offs	(2,118)		(1,730)
Recoveries	408		489
Total ending allowance balance	$	2,813	$	5,246

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, 2021		December 31, 2020
Cash and cash equivalents	$	140,368	$	44,555
Restricted cash (included in "taxes, prepaid expenses and other assets")	1,026		574
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows	$	141,394	$	45,129

Adoption of New Accounting Standards

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions for performing intraperiod tax allocations, recognizing deferred taxes for investments, and calculating income taxes in interim periods. The guidance also simplifies the accounting for franchise taxes, transactions that result in a step-up in the tax basis of goodwill, and the effect of enacted changes in tax laws or rates in interim periods. The Company adopted ASU 2019-12 in the first quarter of 2021 and the adoption did not have a material impact to the Company’s Condensed Consolidated Financial Statements.

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Note 3. Stock-based Compensation

The Company's equity incentive plan was approved and amended by stockholders on April 27, 2005 and May 20, 2014. The Company is authorized to issue awards up to 2,000,000 shares of common stock.

During the first nine months of 2021, the Company granted Restricted Stock Awards (RSAs) to Officers and to members of the Board of Directors. An RSA share represents a restricted share of the Company's common stock and is valued based on the fair market value of the Company's common stock at the date of grant. RSAs granted to Officers vest over 36 months with the first year cliff vesting. In general, RSAs granted to Board members vest at the end of 12 months. The RSAs are recognized as expense evenly over 36 months for the shares granted to Officers and 12 months for the shares granted to Board members. As of September 30, 2021, there was approximately $2.3 million of total unrecognized compensation cost related to RSAs. The cost is expected to be recognized over a weighted average period of 1.5 years.

A summary of the status of the outstanding RSAs as of September 30, 2021 is presented below:


	Number of RSA Shares	Weighted-Average Grant-Date Fair Value
RSAs at January 1, 2021	51,561	$	50.92
Granted	50,981	53.92
Vested	(36,039)	50.57
Forfeited	—	—
RSAs at September 30, 2021	66,503	$	53.41

During the first nine months of 2021, the Company granted performance-based Restricted Stock Units (RSUs) to Officers. An RSU represents the right to receive a share of the Company's common stock. Each award reflects a target number shares of common stock that may be issued to the award recipient. The 2021 awards may be earned upon the completion of a 3-year performance period. Whether RSUs are earned at the end of the performance period will be determined based on the achievement of certain performance objectives set by the Organization and Compensation Committee of the Board of Directors in connection with the issuance of the RSUs. The performance objectives are based on the Company's business plan covering the performance period. The performance objectives include achieving the budgeted return on equity, budgeted investment in utility plant, customer service standards, employee safety standards and water quality standards. Depending on the results achieved during the 3-year performance period, the actual number of shares that a grant recipient receives at the end of the performance period may range from 0% to 200% of the target shares granted, provided that the grantee is continuously employed by the Company through the vesting date. If prior to the vesting date employment is terminated by reason of death, disability or normal retirement, then a pro rata portion of this award will vest. RSUs are not included in diluted shares until earned. The RSUs are recognized as expense ratably over the 3-year performance period using a fair market value of the Company's common share at the date of grant and an estimated number of RSUs earned during the performance period. As of September 30, 2021, there was approximately $2.4 million of total unrecognized compensation cost related to RSUs. The cost is expected to be recognized over a weighted average period of 1.5 years.

A summary of the status of the outstanding RSUs as of September 30, 2021 is presented below:


	Number of RSU Shares	Weighted-Average Grant-Date Fair Value
RSUs at January 1, 2021	87,787	$	46.62
Granted	31,749	53.96
Performance criteria adjustment	12,257	52.96
Vested	(38,897)	52.96
Forfeited	(1,954)	35.40
RSUs at September 30, 2021	90,942	$	52.71

The Company has recorded compensation costs for the RSAs and RSUs that are included in administrative and general operating expenses in the amount of $1.9 million and $1.8 million for the three months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020, the Company has recorded compensation costs for the RSAs and RSUs in the amount of $4.5 million and $3.1 million, respectively.

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Note 4. Equity

The Company sold 1,064,957 shares of common stock through its at-the-market equity program and raised proceeds of $65.4 million net of $0.7 million in commissions paid under the equity distribution agreement during the three months ended September 30, 2021. During the three months ended September 30, 2020, 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.

The Company sold 2,185,873 shares of common stock through its at-the-market equity program and raised proceeds of $127.0 million net of $1.3 million in commissions paid under the equity distribution agreement during the nine months ended September 30, 2021. 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.

The Company’s changes in total equity for the nine months ended September 30, 2021 and 2020 were as follows:


	Nine months ended September 30, 2021
	Common Stock			Additional Paid-in Capital		Retained Earnings		Noncontrolling Interests		Total Equity
	Shares	Amount
	(In thousands)
Balance at January 1, 2021	50,334	$	503	$	448,632	$	472,209	$	—	$	921,344
Net loss						(3,032)		—		(3,032)
Issuance of common stock	528	5		24,481						24,486
Repurchase of common stock	(27)	—		(1,415)						(1,415)
Dividends paid on common stock ($0.2300 per share)						(11,581)		—		(11,581)
Balance at March 31, 2021	50,835	508		471,698		457,596		—		929,802
Net loss attributable to noncontrolling interests						—		(149)		(149)
Net income attributable to California Water Service Group						38,225		—		38,225
Issuance of common stock	702	7		40,895						40,902
Repurchase of common stock	(2)	—		(109)						(109)
Dividends paid on common stock ($0.2300 per share)						(11,702)		—		(11,702)
Acquisition of business with noncontrolling interest				—		—		5,294		5,294
Balance at June 30, 2021	51,535	515		512,484		484,119		5,145		1,002,263
Net income attributable to noncontrolling interests						—		70		70
Net income						62,429				62,429
Issuance of common stock	1,075	11		67,819						67,830
Repurchase of common stock	(2)	—		(69)						(69)
Dividends paid on common stock ($0.2300 per share)						(11,863)				(11,863)
Investment in business with noncontrolling interest				526				(526)		—
Balance at September 30, 2021	52,608	$	526	$	580,760	$	534,685	$	4,689	$	1,120,660

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	Nine months ended September 30, 2020
	Common Stock			Additional Paid-in Capital		Retained Earnings		Total 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

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Note 5. Earnings Per Share of Common Stock

The computations of basic and diluted earnings per share of common stock are noted in the table below. Basic earnings per share of common stock is computed by dividing the net income attributable to California Water Service Group 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 the basic and diluted shares calculation for financial reporting until authorized by the Organization & Compensation Committee of the Board of Directors.


	Three Months Ended September 30
	2021		2020
	(In thousands, except per share data)
Net income	$	62,499	$	96,360
Net income attributable to noncontrolling interests	70		—
Net income attributable to California Water Service Group	$	62,429	$	96,360
Weighted average common shares outstanding, basic	51,823		49,576
Weighted average common shares outstanding, dilutive	51,823		49,576
Earnings per share of common stock - basic	$	1.20	$	1.94
Earnings per share of common stock - diluted	$	1.20	$	1.94


	Nine Months Ended September 30
	2021		2020
	(In thousands, except per share data)
Net income	$	97,543	$	81,334
Net loss attributable to noncontrolling interests	(79)		—
Net income attributable to California Water Service Group	$	97,622	$	81,334
Weighted average common shares outstanding, basic	51,119		49,034
Weighted average common shares outstanding, dilutive	51,119		49,034
Earnings per share of common stock - basic	$	1.91	$	1.66
Earnings per share of common stock - diluted	$	1.91	$	1.66

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 $18.9 million and $25.8 million for the nine months ended September 30, 2021 and 2020, respectively. Cash contributions made by the Company to the other postretirement benefit plans were $1.9 million and $5.7 million for the nine months ended September 30, 2021 and 2020, respectively. The total 2021 estimated cash contribution to the pension plans and other postretirement benefits plans are expected to be approximately $23.5 million and $2.2 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
	2021		2020		2021		2020
Service cost	$	8,308	$	9,378	$	1,332	$	1,746
Interest cost	5,608		6,440		802		808
Expected return on plan assets	(9,873)		(8,284)		(2,194)		(1,804)
Amortization of prior service cost	248		1,058		48		50
Recognized net actuarial loss	2,881		3,208		(145)		(27)
Net periodic benefit cost	$	7,172	$	11,800	$	(157)	$	773


	Nine Months Ended September 30
	Pension Plan				Other Benefits
	2021		2020		2021		2020
Service cost	$	26,329	$	27,002	$	4,554	$	5,959
Interest cost	16,245		19,306		2,413		3,229
Expected return on plan assets	(29,605)		(24,815)		(6,577)		(5,427)
Amortization of prior service cost	755		3,172		145		148
Recognized net actuarial loss	6,729		9,599		(365)		—
Net periodic benefit cost	$	20,453	$	34,264	$	170	$	3,909

Service cost portion of the pension plan and other postretirement benefits is recognized in "administrative and general" expenses within the Condensed Consolidated Statements of Operations. 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 Operations.

Note 7. Short-term and Long-term Borrowings

On May 11, 2021, Cal Water completed the sale and issuance of $280.0 million in aggregate principal amount of First Mortgage Bonds (the Bonds) in a private placement. The Bonds consist of $130.0 million of 2.87% bonds, series ZZZ, maturing May 11, 2051, and $150.0 million of 3.02% bonds, series 1, maturing May 11, 2061. Interest on the bonds will accrue semi-annually and be payable in arrears on May 11 and November 11 of each year, commencing on November 11, 2021. The Bonds will rank equally with all of Cal Water’s other First Mortgage Bonds and will be secured by liens on Cal Water’s properties, subject to certain exceptions and permitted liens. Cal Water used the net proceeds from the sale of the Bonds to refinance existing indebtedness and for general corporate purposes. The Bonds were not registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

On March 29, 2019, the Company and Cal Water entered into certain syndicated credit agreements, which provide for unsecured revolving credit facilities of up to an initial aggregate amount of $550.0 million for a term of five years. The 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.

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The outstanding borrowings on the Company line of credit were $90.0 million and $100.0 million as of September 30, 2021 and December 31, 2020, respectively. There were $30.0 million and $270.0 million of borrowings on the Cal Water line of credit as of September 30, 2021 and December 31, 2020, respectively. The average borrowing rate for borrowings on the Company and Cal Water lines of credit during the nine months ended September 30, 2021 was 0.98% compared to 1.74% for the same period last year.

Note 8. Income Taxes

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

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


	Three Months Ended September 30
	2021		2020
Income tax expense	$	1,913	$	14,049


	Nine Months Ended September 30
	2021		2020
Income tax expense	$	4,654	$	10,641

Income tax expense decreased $12.1 million to $1.9 million in the third quarter of 2021 as compared to $14.0 million in the third quarter of 2020. The decrease was primarily due to decreases in pre-tax net operating income and effective tax rate. The effective tax rate decrease resulted from an increase of $7.5 million in refunds of 2017 excess deferred income taxes partially offset by a reduction in state tax benefits from repairs deductions.

Income tax expense decreased $5.9 million to $4.7 million in the first nine months of 2021 as compared to $10.6 million in the first nine months of 2020. The decrease was due to a decrease in the effective tax rate from an increase of $7.5 million in refunds of 2017 excess federal deferred income taxes partially offset by a reduction in state tax benefits from repairs deductions.

The Company’s effective tax rate was 4.3% before discrete items as of September 30, 2021 and 11.6% as of September 30, 2020. The decrease in effective tax rate was primary due to an increase in refunds of 2017 excess deferred income taxes partially offset by a reduction in state tax benefits from repairs deductions.

The Company had unrecognized tax benefits of approximately $14.9 million and $12.9 million as of September 30, 2021 and 2020, respectively. Included in the balance of unrecognized tax benefits as of September 30, 2021 and 2020, is $3.9 million and $3.5 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.

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Note 9. Regulatory Assets and Liabilities

Regulatory assets and liabilities were comprised of the following as of September 30, 2021 and December 31, 2020:


	Recovery Period	September 30, 2021		December 31, 2020
Regulatory Assets
Pension and retiree group health	Indefinitely	$	59,094	$	59,588
Property-related temporary differences (tax benefits flowed through to customers)	Indefinitely	124,854		120,365
Other accrued benefits	Indefinitely	22,744		21,692
Net WRAM and MCBA long-term accounts receivable	1 - 2 years	34,606		33,136
Asset retirement obligations, net	Indefinitely	22,668		21,110
IRMA long-term accounts receivable	1 - 3 years	11,614		14,705
Tank coating	10 years	13,513		14,018
Recoverable property losses	9 years	4,018		4,531
PCBA	1 year	21,178		19,647
Other components of net periodic benefit cost	Indefinitely	4,255		6,736
General district balancing account receivable	1 year	511		1,830
Low-income rate assistance (LIRA) and Rate support fund (RSF) accounts receivable	1 year	5,803		5,310
Other regulatory assets	Various	3,647		2,708
Total Regulatory Assets		$	328,505	$	325,376

Regulatory Liabilities
Future tax benefits due to customers		$	152,204	$	151,011
Retiree group health		18,472		18,472
HCBA		8,733		5,320
CEBA		6,210		3,837
Net WRAM and MCBA long-term payable		118		479
Other regulatory liabilities		1,092		1,599
Total Regulatory Liabilities		$	186,829	$	180,718

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

The short-term regulatory assets were $85.0 million as of September 30, 2021 and $96.2 million as of December 31, 2020. These short-term regulatory assets primarily consist of net WRAM and MCBA, IRMA, and PCBA receivables.

The short-term portions of regulatory liabilities were $19.3 million as of September 30, 2021 and $34.6 million as of December 31, 2020. The short-term regulatory liabilities as of September 30, 2021 and December 31, 2020 primarily consist of TCJA and HCBA refunds and TCP settlement proceeds.

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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, 2020.

As of September 30, 2021, there were no significant changes in these commitments from December 31, 2020.

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, 2021 and December 31, 2020, the Company recognized a liability of $2.2 million and $2.6 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.

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 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 0.60%.

September 30, 2021

Fair Value

Cost

Level 1

Level 2

Level 3

Total

Long-term debt, including current maturities, net

1,064,904

Form: 10-Q

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