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October 31, 2019 at 9:15 AM EDT

California Water Service Group Announces Third Quarter 2019 Earnings and Equity Program

SAN JOSE, Calif., Oct. 31, 2019 (GLOBE NEWSWIRE) -- California Water Service Group (NYSE: CWT) today announced net income of $42.4 million or $0.88 earnings per diluted common share for the third quarter of 2019, compared to net income of $36.2 million or $0.75 earnings per diluted common share for the third quarter of 2018. In addition, the Company announced the initiation of a $300 million three-year at-the-market equity sales program.

According to President and Chief Executive Officer Martin A. Kropelnicki, the activity in the quarter is indicative of the Company’s long-term strategy.

“Our third quarter results reflect continued execution on our plans and budget. We were pleased to reach the previously announced settlement with the Public Advocates Office on the bulk of our California infrastructure plans through 2021. We are embarking on a market equity program over the next three years to support these investments and maintain a balanced capital structure.”

“In addition, our team and systems have performed well through multiple Public Safety Power Shutoffs (PSPS),” Kropelnicki said. “Our preparation and training have kept service levels high despite the interruptions in electric service,” he said. 

Quarterly Net Income
The $6.2 million increase in net income was primarily due to general rate increases of $6.1 million, a $5.5 million increase in unbilled revenue accrual, a reduction of $1.3 million in business development expenses, and a $0.8 million increase in allowance for equity funds used during construction. These factors were offset by increases in operating expenses of $1.3 million for depreciation and amortization, $1.0 million in employee wages, $0.8 million in costs attributable to electric utilities’ PSPS programs and wildfire management, and $0.4 million in property taxes.

Unbilled revenue accrual is outside the Company’s immediate control. The quarter’s increase in unbilled revenue mirrored the accrual reduction from the first two quarters of 2019. Also outside the Company’s control this quarter was a $0.4 million decrease in unrealized gain on certain benefit plan investments. 

Equity Program Initiation by the Company
The Company entered into an equity distribution agreement today with Morgan Stanley & Co. LLC, Robert W. Baird & Co. Incorporated, Blaylock Van, LLC and Wells Fargo Securities, LLC to sell shares of its common stock having an aggregate gross sales price of up to $300 million from time to time depending on market conditions through an at-the-market equity offering program over the next three years. The Company intends to use the net proceeds from these sales, after deducting commissions on such sales and offering expenses, for general corporate purposes, which may include working capital, construction and acquisition expenditures, investments and repurchases, and redemptions of securities. 

Regulatory Update
On October 8, 2019, California Water Service (Cal Water), the largest subsidiary of the Company, jointly filed a formal settlement agreement in its 2018 General Rate Case (GRC) with the Public Advocates Office of the California Public Utilities Commission (CPUC) covering the majority of open matters in the case. The largest component of the GRC is Cal Water’s infrastructure improvement plan for 2019-2021. If the CPUC approves the settlement agreement, Cal Water would be authorized to include in rates $609 million to $628 million of new projects throughout the state in 2019 to 2021, along with approximately $200 million for completion of additional projects begun in 2018 and prior periods. Included in these figures are $148 million of advice letter authorizations, which would not be included in rates until the related projects are completed. 

Details of Financial Results for the Third Quarter of 2019
Total revenue increased 5.1% to $232.5 million in the third quarter of 2019 compared to $221.3 million in the third quarter of 2018. The increase in revenue was primarily due to rate increases of $7.9 million, of which $1.8 million was related to increased water costs, and $5.5 million was related to an increase in accrued unbilled revenue. These increases were partially offset by revenue balancing account changes which reduced revenue $1.6 million

Total operating expenses increased $7.0 million, or 4.0%, to $181.0 million in the third quarter of 2019 compared to $174.0 million in the third quarter of 2018.

Water production expenses increased $1.8 million, or 2.2%, to $80.6 million in the third quarter of 2019 compared to $78.8 million in the third quarter of 2018, primarily due to an increase in wholesaler water rates. Actual water production costs were less than adopted costs. As designed, the California revenue decoupling mechanisms record a decrease to revenue equal to the decrease in California water production costs relative to adopted water production costs.

Administrative and general and other operations expenses increased $2.9 million, to $51.3 million in the third quarter of 2019, primarily due to increases of $2.2 million in conservation program costs, $0.9 million of outside services, $0.5 million of costs attributable to electric utilities’ Public Safety Power Shutoff (PSPS) programs and wildfire management, $0.7 million of GRC settlement and asset impairment costs, and $0.6 million in employee wages which were partially offset by a $2.2 million deferral of costs associated with deferred revenues, and a $1.0 million decrease in health care costs. Changes in employee pension benefits, employee and retiree medical costs, and water conservation program costs for regulated California operations generally do not affect earnings, as the Company is allowed by the CPUC to record these costs in balancing accounts for future recovery, creating a corresponding change to revenue.

Maintenance expenses increased $0.3 million, or 4.4%, to $7.1 million in the third quarter of 2018, primarily due to increased costs of $0.3 million for wildfire management.

Income taxes increased $0.4 million due to an increase in pre-tax income from operations. The Company’s estimated combined effective income tax rate for 2019 is 22 percent.

Depreciation and amortization expense increased $1.3 million, to $22.3 million, in the third quarter of 2019, as compared to $21.0 million in the third quarter of 2018, due to utility plant investments through 2018.

Net other income, net of income taxes, increased $0.9 million in 2019, primarily due to a $1.3 million decrease in business development expense and a $0.8 million increase in allowance for equity funds used during construction. These were partially offset by the non-recurrence of a $0.5 million benefit from Company-owned life insurance which occurred in 2018 and a $0.4 million decrease in unrealized gain on certain benefit plan investments.

Year-to-Date Results
For the nine-month period ended September 30, 2019, net income was $51.8 million or $1.08 earnings per diluted common share, compared to net income of $50.2 million or $1.04 earnings per diluted common share for the nine-month period ended September 30, 2018. 

The $1.6 million increase in net income was driven primarily by $15.2 million of general rate increases, a $3.6 million increase in unrealized income from certain benefit plan investments due to market conditions, a $5.0 million reduction in business development expenses, and a $2.4 million increase in allowance for equity funds used during construction. These were partially offset by a $1.4 million reduction in unbilled revenue accrual, increased operating expenses of $11.8 million, increased net interest expenses of $1.9 million, and a $1.6 million decrease in benefit from Company owned life insurance.

Operating expense changes included increases of $4.3 million in depreciation and amortization, $4.2 million in employee wages, $2.7 million in outside services, $1.6 million in property taxes, and $1.1 million of costs attributable to electric utilities’ PSPS programs and wildfire management.

Water System Improvements
During the first nine months of 2019, the total Company-funded and developer-funded capital investment was $194.9 million, a decrease of $18 million, or 8.5%, compared to $212.9 million in the first nine months of 2018. The decrease in utility plant investment was primarily due to construction delays caused by wetter than normal weather in the first half of the year and coordination with the resolution of the 2018 California GRC.

California Revenue Decoupling Mechanisms
The under-collected net receivable balance in the Water Revenue Adjustment Mechanism and Modified Cost Balancing Account was $62.6 million as of September 30, 2019, an increase of 11.5%, or $6.5 million, from the balance of $56.1 million as of December 31, 2018.

Other Information
All stockholders and interested investors are invited to listen to the third quarter 2019 conference call on October 31, 2019 at 8:00 a.m. PT (11:00 a.m. ET) by dialing 1-833-832-5130 or 1-509-844-0151 and keying in ID # 7245767. A replay of the call will be available from 11:00 a.m. PT (2:00 p.m. ET) on October 31, 2019 through December 31, 2019, at 1-855-859-2056 or 1-404-537-3406, ID# 7245767. 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/2019q3slides.pdf after 6:00 a.m. PT. The call will be hosted by President and Chief Executive Officer Martin A. Kropelnicki, Vice President and Chief Financial Officer Thomas F. Smegal III, Vice President, Corporate Development and Chief Regulatory Affairs Officer Paul G. Townsley, and Vice President and Corporate Controller David B. Healey.

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.

Sales of the shares of the Company’s common stock through the managers, as the Company’s sales agents, may be made by any method deemed to be an “at the market” offering as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended, including by means of ordinary brokers’ transactions on the New York Stock Exchange at market prices or as otherwise agreed between the Company and the managers.

The public offering is being made pursuant to an effective shelf registration statement (including a prospectus) that has been filed with the Securities and Exchange Commission (“SEC”). Prior to investing, prospective investors should read the prospectus in that registration statement, the related prospectus supplement and other documents the Company has filed with the SEC for more complete information about the Company and the offering. These documents may be obtained for free by visiting EDGAR on the SEC website at http://www.sec.gov. In addition, copies of the prospectus and prospectus supplement relating to the shares of common stock offered in the offering may be obtained from: Morgan Stanley & Co. LLC, Attention: Prospectus Department, 180 Varick Street, Second Floor, New York, New York 10014; Robert W. Baird & Co. Incorporated, Attention: Syndicate Department, 777 East Wisconsin Ave., Milwaukee, WI 53202, by telephone: (800) 792-2473, or by email: syndicate@rwbaird.com; Blaylock Van, LLC, Attention: Prospectus Department, 600 Lexington Avenue, 3rd Floor, New York, New York 10022, by telephone: (212) 715-6603, or by email: sba@brv-LLC.com; or Wells Fargo Securities, LLC, Attention: Equity Syndicate Department, 375 Park Avenue, New York, New York 10152, by telephone: (800) 326-5897, or by email: cmclientsupport@wellsfargo.com.

This news release shall not constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of the Company's common stock in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction.

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: ability to invest or apply the proceeds from the issuance of common stock in an accretive manner; governmental and regulatory commissions' decisions, including decisions on proper disposition of property; 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 and other actions; increased risk of inverse condemnation losses as a result of climate conditions; inability to renew leases to operate water systems owned by others on beneficial terms; changes in California State Water Resources Control Board water quality requirements; changes in environmental compliance and water quality standards; electric power interruptions, especially as a result of Public Safety Power Shutoff programs for the 2019 fire season as we further develop approaches to manage that risk; housing and customer growth trends; the impact of opposition to rate increases; our ability to recover costs; availability of water supplies; issues with the implementation, maintenance or security of our information technology systems; civil disturbances or terrorist threats or acts; the adequacy of our efforts to mitigate physical and cyber security risks and threats; the ability of our enterprise risk management processes to identify or address risks adequately; labor relations matters as we negotiate with unions; changes in customer water use patterns and the effects of conservation; the impact of weather, climate, natural disasters, and diseases on water quality, water availability, water sales and operating results, and the adequacy of our emergency preparedness; 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.

Contact
Tom Smegal
408-367-8200 (analysts)

Shannon Dean
408-367-8243 (media)

 

CALIFORNIA WATER SERVICE GROUP          
CONDENSED CONSOLIDATED BALANCE SHEETS          
Unaudited          
               
(In thousands, except per share data) September 30     December 31  
      2019     2018  
ASSETS          
Utility plant:          
  Utility plant $   3,411,219     $   3,229,446  
  Less accumulated depreciation and amortization (1,067,965 )   (996,723 )
    Net utility plant 2,343,254     2,232,723  
Current assets:          
  Cash and cash equivalents 51,257     47,176  
  Receivables:          
    Customers 45,624     30,037  
    Regulatory balancing accounts 33,437     42,394  
    Other 16,977     17,101  
  Unbilled revenue 42,562     33,427  
  Materials and supplies at weighted average cost 7,804     6,586  
  Taxes, prepaid expenses, and other assets 14,395     11,981  
    Total current assets 212,056     188,702  
Other assets:          
  Regulatory assets 382,484     353,569  
  Goodwill 2,615     2,615  
  Other assets  82,845     60,095  
    Total other assets 467,944     416,279  
Total Assets $   3,023,254     $   2,837,704  
               
CAPITALIZATION AND LIABILITIES          
Capitalization:          
  Common stock, $.01 par value; 68,000 shares authorized, 48,145 and 48,065 outstanding in 2019 and 2018, respectively $   481     $   481  
  Additional paid-in capital 341,988     337,623  
  Retained earnings 415,326     392,053  
    Total common stockholders' equity 757,795     730,157  
  Long-term debt, net 807,478     710,027  
    Total capitalization 1,565,273     1,440,184  
Current liabilities:          
  Current maturities of long-term debt, net 5,280     104,911  
  Short-term borrowings 155,100     65,100  
  Accounts payable 108,593     95,580  
  Regulatory balancing accounts 6,887     12,213  
  Accrued interest 14,410     5,674  
  Accrued expenses and other liabilities 43,674     37,688  
    Total current liabilities 333,944     321,166  
Unamortized investment tax credits 1,649     1,649  
Deferred income taxes 229,237     213,033  
Pension and postretirement benefits other than pensions 203,557     193,538  
Regulatory liabilities and other 260,812     256,522  
Advances for construction 190,272     186,342  
Contributions in aid of construction 238,510     225,270  
Commitments and contingencies          
Total Capitalization and Liabilities $   3,023,254     $   2,837,704  


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,  
      2019     2018  
               
Operating revenue $   232,537     $   221,288  
Operating expenses:          
  Operations:          
    Water production costs 80,568     78,818  
    Administrative and general 26,779     26,493  
    Other operations 24,550     21,943  
  Maintenance 7,065     6,768  
  Depreciation and amortization 22,273     21,009  
  Income taxes 12,194     11,786  
  Property and other taxes 7,541     7,142  
  Total operating expenses 180,970     173,959  
    Net operating income 51,567     47,329  
Other income and expenses:          
  Non-regulated revenue 4,118     4,703  
  Non-regulated expenses (4,351 )   (4,897 )
  Other components of net periodic benefit cost (1,857 )   (1,975 )
  Allowance for equity funds used during construction 1,868     1,023  
  Income tax benefit on other income and expenses 330     305  
    Net other income (loss) 108     (841 )
Interest expense:          
  Interest expense 10,279     10,875  
  Allowance for borrowed funds used during construction (1,028 )   (560 )
    Net interest expense 9,251     10,315  
Net Income $   42,424     $   36,173  
Earnings per share           
  Basic $   0.88     $   0.75  
  Diluted  $   0.88     $   0.75  
Weighted average shares outstanding          
  Basic 48,141     48,070  
  Diluted  48,141     48,070  
Dividends per share of common stock $   0.1975     $   0.1875  

 


CALIFORNIA WATER SERVICE GROUP          
CONDENSED CONSOLIDATED STATEMENTS OF INCOME          
Unaudited          
(In thousands, except per share data)          
               
For the Nine Months ended:          
      September 30,     September 30,  
      2019     2018  
               
Operating revenue $ 537,679     $ 530,779  
Operating expenses:          
  Operations:          
    Water production costs 190,795     191,797  
    Administrative and general 81,310     77,195  
    Other operations 64,913     60,307  
  Maintenance 19,212     17,596  
  Depreciation and amortization 66,967     62,677  
  Income taxes 13,524     16,950  
  Property and other taxes 21,902     20,253  
  Total operating expenses 458,623     446,775  
    Net operating income 79,056     84,004  
Other income and expenses:          
  Non-regulated revenue 14,149     13,967  
  Non-regulated expenses (10,470 )   (16,449 )
  Other components of net periodic benefit cost (4,308 )   (6,984 )
  Allowance for equity funds used during construction 5,087     2,644  
  Income tax (expense) benefit on other income and expenses (985 )   1,882  
    Net other income (loss) 3,473     (4,940 )
Interest expense:          
  Interest expense 33,532     30,207  
  Allowance for borrowed funds used during construction (2,783 )   (1,359 )
    Net interest expense 30,749     28,848  
Net Income $ 51,780     $ 50,216  
Earnings per share           
  Basic $ 1.08     $ 1.04  
  Diluted  $ 1.08     $ 1.04  
Weighted average shares outstanding          
  Basic 48,121     48,058  
  Diluted  48,121     48,058  
Dividends per share of common stock $ 0.5925     $ 0.5625  

CWSG Logo 2019 4c.jpg

Source: California Water Service Group