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November 1, 2018 at 9:00 AM EDT

California Water Service Group Announces Earnings for the Third Quarter 2018

SAN JOSE, Calif., Nov. 01, 2018 (GLOBE NEWSWIRE) -- California Water Service Group (NYSE: CWT) today announced net income of $34.4 million or $0.72 earnings per diluted common share for the third quarter of 2018, compared to net income of $33.8 million or $0.70 earnings per diluted common share for the third quarter of 2017.  

The $0.6 million increase in net income was driven primarily by aggregate rate increases of $4.4 million, reflecting general rate increases net of California’s cost of capital decision. Other factors increasing net income included a $1.1 million reduction in write-offs of unrecoverable capital costs and an increase in tax benefits of $0.9 million.   The increases to net income were partially offset by a $1.8 million increase in depreciation and amortization, employee wage increases of $1.5 million, a $1.3 million increase in new business expenses, and a $1.7 million increase in interest expense. 

“Our results for the third quarter were in line with expectations,” said President and Chief Executive Officer Martin A. Kropelnicki.

“During the quarter, we had the Mendocino Complex wildfire, the largest in California history, threatening one of our service areas. We activated our emergency operations center for two weeks, staffed around the clock, to provide resources to firefighters and help protect our customers’ property. I’m so proud of our dedicated employees who kept the water flowing while dealing with the risk to themselves and their families from the fire,” he said.

“Finally, I am pleased that we continued our efforts in the quarter to complete capital programs to bring clean, reliable water service to customers. We now anticipate our capital investment for the year will be in the range of $240 to $260 million. Towards that goal, we successfully raised $300 million in first mortgage bonds in the quarter to refinance our California Water Service Company (Cal Water) line of credit. The refinancing supports planned improvements to transmission and distribution pipelines, which are necessary to upgrade aging water systems, to enable the delivery of safe, reliable, and high-quality water supply for both our customers’ everyday needs and for emergency use by firefighters and other first responders,” said President and Chief Executive Officer Martin A. Kropelnicki.        

Additional Financial Results for the Third Quarter of 2018
Total revenue increased 3.4% to $219.0 million in the third quarter of 2018 compared to $211.7 million in the third quarter of 2017.  The increase was mostly due to aggregate rate increases of $4.4 million, reflecting general rate increases net of the reduction for California’s cost of capital decision.  In addition, balancing account adjustments added $1.5 million and deferred revenue adjustments added $1.5 million.  

Total operating expenses increased $4.1 million, or 2.5%, to $173.4 million in the third quarter of 2018 compared to $169.3 million in the third quarter of 2017.

Water production expenses increased $3.5 million, or 4.7%, to $78.8 million in the third quarter of 2018 compared to $75.3 million in the third quarter of 2017, primarily due to increases in purchased water quantities and higher wholesale water rates.  The California revenue decoupling mechanisms record an increase to revenue equal to the increase in California water production costs.

Administrative and general and other operations expenses increased $4.4 million to $48.4 million in the third quarter of 2018, primarily due to increases in employee wage and benefit costs and uninsured losses associated with operations.  Changes in employee pension benefits and employee and retiree medical costs for regulated California operations generally do not affect earnings, as the Company is allowed by the California Public Utilities Commission (CPUC) to record these costs in balancing accounts for future recovery, creating a corresponding change to revenue.

Maintenance expenses increased $0.7 million, or 11.7%, to $6.8 million in the third quarter of 2018, due to increased costs for repairs of transmission and distribution mains and services.

Income taxes decreased $6.9 million primarily due to a decrease in the corporate federal income tax rate from 35 percent to 21 percent, effective January 1, 2018, an increase in tax benefits of $0.9 million, and a decrease in pre-tax income.  The Company estimates its combined effective income tax rate for 2018 in the range of 22 to 25 percent.

Depreciation and amortization expenses increased $1.8 million, to $21.0 million, in the third quarter of 2018, as compared to $19.2 million in the third quarter of 2017, due to a record increase in utility plant investment in 2017.

Net other loss, net of income tax benefits, increased $0.8 million in 2018, primarily due to $1.3 million of expenses associated with new business acquisition efforts.

Year-to-Date Results
For the nine-month period ended September 30, 2018, net income was $44.9 million or $0.93 earnings per diluted common share, compared to net income of $53.5 million or $1.11 earnings per diluted common share for the nine-month period ended September 30, 2017. 

The $8.6 million decrease in net income was primarily the result of $5.1 million increase in expenses associated with new business development, increase of $5.0 million in depreciation and amortization, employee wage increases of $4.0 million, and an increase of $3.5 million in interest expense.  In addition, there were other changes driven primarily by factors outside our immediate control that decreased net income, including a $2.7 million reduction in unbilled revenue accrual and a net $0.5 million decrease in the valuation of our benefit plan investments due to changes in market valuation offset by life insurance proceeds.  These decreases to net income were partially offset by aggregate rate increases of $10.8 million, reflecting general rate increases net of California’s cost of capital decision.

Water System Improvements
During the first nine months of 2018, the total company-funded and developer-funded capital investment was $212.9 million, an increase of $32.5 million, or 18.0%, compared to $180.4 million in the first nine months of 2017. The increase was primarily due to Cal Water projects constructed to treat 35 wells to remove 1,2,3 trichloropropane (TCP).

California Revenue Decoupling Mechanisms
The under-collected net receivable balance in the Water Revenue Adjustment Mechanism (WRAM) and Modified Cost Balancing Account (MCBA) was $60.0 million as of September 30, 2018, a decrease of 13.2%, or $9.1 million, from the balance of $69.1 million as of December 31, 2017. Cal Water used its CPUC-authorized Sales Reconciliation Mechanism (SRM) to adjust its adopted sales forecast for 2018.

Other Information
All stockholders and interested investors are invited to listen to the third quarter 2018 conference call, which will be held today at 11:00 a.m. ET, by dialing 1-833-832-5130 or 1-509-844-0151 and keying in ID# 9442499.  A replay of the call will be available from 2:00 p.m. ET on Thursday, November 1, 2018 through January 1, 2019, at 1-855-859-2056 or 1-404-537-3406, ID# 9442499.  The replay will also be available under the investor relations tab at www.calwatergroup.com. The call will be hosted by President and Chief Executive Officer Martin A. Kropelnicki and Vice President and Chief Financial Officer Thomas F. Smegal.  Prior to the call, the Company will post a slide presentation on its website.  The presentation can be found at www.calwatergroup.com/docs/2018q3slides.pdf  after 6:00 a.m. PDT.

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.


     
CALIFORNIA WATER SERVICE GROUP    
CONDENSED CONSOLIDATED BALANCE SHEETS    
Unaudited    
         
(In thousands, except per share data) September 30, December 31
      2018 2017
ASSETS    
Utility plant:    
  Utility plant $   3,169,726   $   2,970,179  
  Less accumulated depreciation and amortization     (983,984 )     (922,214 )
    Net utility plant     2,185,742       2,047,965  
Current assets:    
  Cash and cash equivalents     66,421       94,776  
  Receivables:    
    Customers     50,785       32,451  
    Regulatory balancing accounts     37,973       36,783  
    Other     20,903       16,464  
  Unbilled revenue     40,318       29,756  
  Materials and supplies at weighted average cost     6,563       6,463  
  Taxes, prepaid expenses, and other assets     12,576       11,180  
    Total current assets     235,539       227,873  
Other assets:    
  Regulatory assets     388,300       401,147  
  Goodwill     2,615       2,615  
  Other assets      64,666       60,775  
    Total other assets     455,581       464,537  
TOTAL ASSETS $   2,876,862   $   2,740,375  
         
CAPITALIZATION AND LIABILITIES    
Capitalization:    
  Common stock, $.01 par value; 68,000 shares authorized, 48,068 and 48,012 outstanding in 2018 and 2017, respectively $   481   $   480  
  Additional paid-in capital     336,960       336,229  
  Retained earnings     374,593       356,753  
    Total common stockholders' equity     712,034       693,462  
  Long-term debt, less current maturities     714,310       515,793  
    Total capitalization     1,426,344       1,209,255  
Current liabilities:    
  Current maturities of long-term debt     104,812       15,920  
  Short-term borrowings     75,100       275,100  
  Accounts payable     102,938       93,955  
  Regulatory balancing accounts     43,300       59,303  
  Accrued interest     13,111       6,122  
  Accrued expenses and other liabilities     42,629       40,559  
    Total current liabilities     381,890       490,959  
Unamortized investment tax credits     1,724       1,724  
Deferred income taxes     199,143       192,946  
Pension and postretirement benefits other than pensions     235,501       252,141  
Regulatory liabilities and Other     255,569       224,127  
Advances for construction     186,897       182,502  
Contributions in aid of construction     189,794       186,721  
         
TOTAL CAPITALIZATION AND LIABILITIES $   2,876,862   $   2,740,375  
         

 

     
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,
       2018   2017 
         
Operating revenue $   218,983   $   211,731  
Operating expenses:    
  Operations:    
    Water production costs     78,818       75,261  
    Administrative and general     26,493       22,749  
    Other operations     21,943       21,208  
  Maintenance     6,768       6,057  
  Depreciation and amortization     21,009       19,231  
  Income taxes     11,262       18,219  
  Property and other taxes     7,142       6,544  
  Total operating expenses     173,435       169,269  
    Net operating income     45,548       42,462  
Other income and expenses:    
  Non-regulated revenue     4,703       3,542  
  Non-regulated expenses     (4,897 )     (2,576 )
  Other components of net periodic benefit cost     (1,975 )     (2,137 )
  Allowance for equity funds used during construction     1,023       1,105  
  Income tax benefit on other income and expenses     305       30  
    Net other loss      (841 )     (36 )
Interest expense:    
  Interest expense     10,875       9,284  
  Allowance for borrowed funds used during construction     (560 )     (707 )
    Net interest expense     10,315       8,577  
Net income $   34,392   $   33,849  
Earnings per share     
  Basic $   0.72   $   0.70  
  Diluted  $   0.72   $   0.70  
Weighted average shares outstanding    
  Basic     48,070       48,017  
  Diluted      48,070       48,017  
Dividends declared per share of common stock $   0.1875   $   0.1800  
         
         
         
         
For the Nine Months ended:    
      September 30, September 30,
      2018 2017
         
Operating revenue $   523,862   $   504,899  
Operating expenses:    
  Operations:    
    Water production costs     191,797       181,460  
    Administrative and general     77,195       66,908  
    Other operations     60,307       55,660  
  Maintenance     17,596       16,877  
  Depreciation and amortization     62,677       57,650  
  Income taxes     15,380       27,941  
  Property and other taxes     20,253       18,717  
  Total operating expenses     445,205       425,213  
    Net operating income     78,657       79,686  
Other income and expenses:    
  Non-regulated revenue     13,967       10,743  
  Non-regulated expenses     (16,449 )     (6,244 )
  Other components of net periodic benefit cost     (6,984 )     (7,023 )
  Allowance for equity funds used during construction     2,644       2,763  
  Income tax benefit (expense) on other income and expenses     1,882       (1,105 )
    Net other loss      (4,940 )     (866 )
Interest expense:    
  Interest expense     30,207       27,073  
  Allowance for borrowed funds used during construction     (1,359 )     (1,765 )
    Net interest expense     28,848       25,308  
Net income $   44,869   $   53,512  
Earnings per share     
  Basic $   0.93   $   1.11  
  Diluted  $   0.93   $   1.11  
Weighted average shares outstanding    
  Basic     48,058       48,007  
  Diluted      48,058       48,007  
Dividends declared per share of common stock $   0.5625   $   0.5400  
         


Contact: Tom Smegal (408) 367-8200 (analysts)
Shannon Dean (310) 257-1435 (media)

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Source: California Water Service Group