Press Release

California Water Service Group Announces Earnings for the Third Quarter 2017

SAN JOSE, CA – California Water Service Group (NYSE: CWT) today announced net income of $33.8 million or $0.70 earnings per diluted common share for the third quarter of 2017, compared to a net income of $22.9 million or $0.48 earnings per diluted common share for the third quarter of 2016.

The $10.9 million increase in net income was primarily the result of rate changes authorized in California Water Service Company’s (Cal Water’s) 2015 General Rate Case (GRC) decision. Also increasing net income was an increase in unbilled revenue, increases resulting from the adoption of allowance for equity funds used during construction (equity AFUDC) in 2017, and a decrease in emergency drought incremental expenses over the same period last year. These factors were partially offset by increases in administrative and general, other operations, maintenance, depreciation and amortization, and interest expenses.

For the third quarter, total revenue increased $27.5 million to $211.7 million, compared to revenue of $184.3 million for the same period last year. Rate increases added $14.4 million, $2.4 million of which was related to increased water costs. Accrued unbilled revenue added $3.4 million. Decoupling mechanisms and other balancing accounts, including changes in deferred revenue, increased revenue $6.7 million.

According to President and Chief Executive Officer Martin A. Kropelnicki, quarterly operating results were in line with the Company’s expectations.

 “In addition to delivering solid financial results, we continued to maintain and improve our water systems to fulfill our promise to provide customers with quality, service, and value. We also worked with our cities and counties to improve joint emergency response capabilities, which is particularly important in light of the recent fires in California. Safety is paramount in everything we do, especially given the importance of our service to the customers and communities we serve,” he added.

Total operating expenses increased $16.3 million, or 10.6%, to $170.5 million for the third quarter of 2017, compared to operating expenses of $154.2 million for the third quarter of 2016.

Water production expenses increased $5.1 million, or 7.2%, to $75.3 million for the third quarter of 2017, compared to prior year water production expenses of $70.2 million, primarily due to a 5.5% increase in customer usage and an average increase of 0.8% in wholesale supplier rates.

Administrative and general and other operations expenses increased $2.7 million to $46.1 million in the third quarter of 2017, as compared to $43.4 million in the third quarter of 2016. Driving this increase was a change in deferred expenses which increased expenses $3.2 million. The company’s deferred expenses and corresponding deferred revenue are related to the timing of recovery of regulatory balancing accounts. In addition, the company expensed $1.1 million of capital costs in the third quarter as compared to $3.2 million in the same period last year. Other changes included increased health care costs and uninsured loss expenses and decreases in incremental drought expenses. Changes in employee pension and other postretirement benefit costs, water conservation program costs, and medical costs for regulated California operations generally do not affect earnings, because the Company tracks these costs in balancing accounts for future recovery, which creates a corresponding change to operating revenue.

Depreciation and amortization expense increased $3.3 million, or 21.1%, to $19.2 million in the third quarter of 2017, as compared to $15.9 million in the third quarter of 2016, due to 2016 capital additions.

Income tax expense increased $4.1 million, or 31.0%, to $17.3 million in the third quarter of 2017, as compared to $13.2 million in the third quarter of 2016 due primarily to an increase in operating income. The Company’s fiscal year 2017 effective tax rate is estimated at 37%.

Other income, net of income taxes, increased $0.7 million in the third quarter of 2017 to $1.2 million mostly due to the implementation of equity AFUDC and an increase in the unrealized gains on certain benefit plan investments.

Net interest expense increased $0.9 million, or 11.2%, to $8.6 million in the third quarter of 2017, as compared to $7.7 million in the third quarter of 2016. The increase was due to increased use of short term financing for capital investments as well as increased short-term interest rates.

The under-collected net water revenue adjustment mechanism (WRAM) and modified cost balancing account (MCBA) net receivable balance increased 12.4% or $6.8 million to $61.6 million as of September 30, 2017 from $54.8 million as of June 30, 2017. The increase was due to water sales volumes, which on a year to date basis were 19% less than those adopted in the recent California GRC. Year-to-date sales were up 4.9% compared to the same period last year, but they are still below those recorded prior to the California drought.

Year-to-Date Results

For the nine-month period ended September 30, 2017, net income was $53.5 million or $1.11 earnings per diluted common share, compared to net income of $33.6 million or $0.70 earnings per diluted common share for the nine-month period ended September 30, 2016.

The $19.9 million increase in net income was primarily the result of increased rates adopted in the recent California GRC and decreases in emergency drought incremental costs and maintenance expenses, as well as increases resulting from the implementation of equity AFUDC in 2017 and unrealized gains on certain benefit plan investments. These factors were partially offset by increases in depreciation and amortization, interest, and employee wage expenses.

Water System Improvements

During the first nine months of 2017, the total Company-funded and developer-funded capital investment was $180.4 million, an increase of $14.0 million, or 8.4%, compared to $166.4 million in the first nine months of 2016.

 

Regulatory Update

Cal Water expects to submit an advice letter to request recovery of 2016 and 2017 incremental drought expenses before the end of the year.

Cal Water will also submit advice letters to implement escalation rate increases in its California operations before the end of the year with rates effective in January 2018.

On September 15, 2017, the Hawaii Public Utilities Commission issued a proposed decision authorizing a $0.8 million increase in revenues on an annual basis. Pursuant to a settlement agreement between Hawaii Water and the Consumer Advocate, the revenue increase will be phased-in over four years, $0.2 million per year. The first phase of the increase was effective on October 18, 2017.

Other Information

All stockholders and interested investors are invited to listen to the third quarter of 2017 conference call on October 26, 2017 at 8:00 a.m. PDT (11:00 a.m. EDT) by dialing 1-833-832-5130 or 1-509-844-0151 and keying in ID# 97457125. A replay of the call will be available from 11:00 a.m. PDT (2:00 p.m. EDT) on October 26, 2017 through December 26, 2017, at 1-855-859-2056 or 1-404-537-3406, ID # 97457125. The replay will also be available under the investor relations tab at www.calwatergroup.com. Prior to the call, Cal Water will post a slide presentation on its website. The presentation can be found at www.calwatergroup.com/docs/2017q3slides.pdf after 6:00 a.m. PDT. The call will be hosted by President and Chief Executive Officer Martin A. Kropelnicki and Vice President and Chief Financial Officer Thomas F. Smegal III.

California Water Service Group is the parent company of California Water Service, Washington Water Service, New Mexico Water Service, Hawaii Water Service, CWS Utility Services, and HWS Utility Services. Together, these companies provide regulated and non-regulated water service to nearly 2 million people in California, Washington, New Mexico, and Hawaii. California Water Service Group’s common stock trades on the New York Stock Exchange under the symbol “CWT.” Additional information is available online at www.calwatergroup.com.

This news release contains forward-looking statements within the meaning established by the Private Securities Litigation Reform Act of 1995 ("Act"). The forward-looking statements are intended to qualify under provisions of the federal securities laws for "safe harbor" treatment established by the Act. Forward-looking statements are based on currently available information, expectations, estimates, assumptions and projections, and management's judgment about the Company, the water utility industry and general economic conditions. Such words as would, expects, intends, plans, believes, estimates, assumes, anticipates, projects, predicts, forecasts or variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not guarantees of future performance. They are subject to uncertainty and changes in circumstances. Actual results may vary materially from what is contained in a forward-looking statement. Factors that may cause a result different than expected or anticipated include, but are not limited to: governmental and regulatory commissions' decisions; consequences of eminent domain actions relating to our water systems; changes in regulatory commissions' policies and procedures; the timeliness of regulatory commissions' actions concerning rate relief; inability to renew leases to operate city water systems on beneficial terms; changes in California State Water Resources Control Board water quality standards; changes in environmental compliance and water quality requirements; electric power interruptions; changes in customer water use patterns and the effects of conservation; the impact of weather and climate on water availability, water sales and operating results; the unknown impact of contagious diseases, on the Company’s operations; civil disturbances or terrorist threats or acts, or apprehension about the possible future occurrences of acts of this type; labor relations matters as we negotiate with the unions; restrictive covenants in or changes to the credit ratings on our current or future debt that could increase our financing costs or affect our ability to borrow, make payments on debt or pay dividends; and, other risks and unforeseen events. When considering forward-looking statements, you should keep in mind the cautionary statements included in this paragraph, as well as the annual 10-K, Quarterly 10-Q, and other reports filed from time-to-time with the Securities and Exchange Commission (SEC). The Company assumes no obligation to provide public updates of forward-looking statements.

 

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CALIFORNIA WATER SERVICE GROUP            
CONDENSED CONSOLIDATED BALANCE SHEETS            
Unaudited            
             
(In thousands, except per share data)   September 30,     December 31  
    2017     2016  
ASSETS                
Utility plant:                
  Utility plant   $ 2,892,666     $ 2,717,339  
  Less accumulated depreciation and amortization     (910,742 )     (858,062 )
    Net utility plant     1,981,924       1,859,277  
Current assets:                
  Cash and cash equivalents     28,341       25,492  
  Receivables                
    Customers     46,963       30,305  
    Regulatory balancing accounts     31,364       30,332  
    Other     16,438       17,158  
  Unbilled revenue     38,491       25,228  
  Materials and supplies at average cost     6,344       6,292  
  Taxes, prepaid expenses, and other assets     12,544       7,262  
    Total current assets     180,485       142,069  
Other assets:                
  Regulatory assets     379,884       355,930  
  Goodwill     2,615       2,615  
  Other assets     58,196       51,854  
    Total other assets     440,695       410,399  
TOTAL ASSETS   $ 2,603,104     $ 2,411,745  
                 
CAPITALIZATION AND LIABILITIES                
Capitalization:                
  Common stock, $.01 par value   $ 480     $ 480  
  Additional paid-in capital     335,516       334,856  
  Retained earnings     351,727       324,135  
    Total common stockholders' equity     687,723       659,471  
  Long-term debt, less current maturities     519,700       531,745  
    Total capitalization     1,207,423       1,191,216  
Current liabilities:                
  Current maturities of long-term debt     36,015       26,208  
  Short-term borrowings     195,100       97,100  
  Accounts payable     89,394       77,813  
  Regulatory balancing accounts     4,545       4,759  
  Accrued interest     12,763       5,661  
  Accrued expenses and other liabilities     42,544       38,689  
    Total current liabilities     380,361       250,230  
Unamortized investment tax credits     1,798       1,798  
Deferred income taxes     329,506       298,924  
Pension and postretirement benefits other than pensions     227,819       222,691  
Regulatory liability and other     91,006       83,648  
Advances for construction     182,820       182,448  
Contributions in aid of construction     182,371       180,790  
Commitments and contingencies             -  
TOTAL CAPITALIZATION AND LIABILITIES   $ 2,603,104     $ 2,411,745  
                 
                 
             
             
CALIFORNIA WATER SERVICE GROUP            
CONDENSED CONSOLIDATED STATEMENTS OF INCOME            
Unaudited            
(In thousands, except per share data)            
             
For the Three-Months ended:            
    September 30,     September 30,  
    2017     2016  
                 
Operating revenue   $ 211,731     $ 184,268  
Operating expenses:                
  Operations:                
    Water production costs     75,261       70,175  
    Administrative and general     24,886       23,844  
    Other operations     21,208       19,561  
  Maintenance     6,057       5,545  
  Depreciation and amortization     19,231       15,884  
  Income taxes     17,348       13,247  
  Property and other taxes     6,544       5,957  
    Total operating expenses     170,535       154,213  
                   
    Net operating income     41,196       30,055  
                 
Other income and expenses:                
  Non-regulated revenue     3,542       3,397  
  Non-regulated expenses     (2,576 )     (2,517 )
  Allowance for equity funds used during construction     1,105          
  Income tax expense on other income and expenses     (841 )     (349 )
    Net other income     1,230       531  
                 
Interest expense:                
  Interest Expense     9,284       8,485  
  Allowance for borrowed funds used during construction     (707 )     (774 )
    Net interest expense     8,577       7,711  
                 
Net income   $ 33,849     $ 22,875  
                 
Earnings per share                
  Basic   $ 0.70     $ 0.48  
  Diluted   $ 0.70     $ 0.48  
Weighted average shares outstanding                
  Basic     48,017       47,969  
  Diluted     48,017       47,969  
Dividends per share of common stock   $ 0.1800     $ 0.1725  
                 
                 
                 
                 
For the Nine-Months ended:                
      September 30,       September 30,  
      2017       2016  
                 
Operating revenue   $ 504,899     $ 458,440  
Operating expenses:                
  Operations:                
    Water production costs     181,460       168,833  
    Administrative and general     73,931       75,037  
    Other operations     55,660       57,766  
  Maintenance     16,877       17,542  
  Depreciation and amortization     57,650       47,772  
  Income taxes     26,099       19,192  
  Property and other taxes     18,717       17,439  
    Total operating expenses     430,394       403,581  
                   
    Net operating income     74,505       54,859  
                 
Other income and expenses:                
  Non-regulated revenue     10,743       10,589  
  Non-regulated expenses     (6,244 )     (8,306 )
  Allowance for equity funds used during construction     2,763          
  Income tax expense on other income and expenses     (2,947 )     (914 )
    Net other income     4,315       1,369  
                 
Interest expense:                
  Interest Expense     27,073       24,984  
  Allowance for borrowed funds used during construction     (1,765 )     (2,341 )
    Net interest expense     25,308       22,643  
                 
Net income   $ 53,512     $ 33,585  
                 
Earnings per share                
  Basic   $ 1.11     $ 0.70  
  Diluted   $ 1.11     $ 0.70  
Weighted average shares outstanding                
  Basic     48,007       47,949  
  Diluted     48,007       47,952  
Dividends per share of common stock   $ 0.5400     $ 0.5175