GlobeNewswire Inc | Jul 30, 2020 09:00AM EDT

July 30, 2020

SAN JOSE, Calif., July 30, 2020 (GLOBE NEWSWIRE) -- California Water Service Group (NYSE: CWT) (the Company) today announced net income of $5.3 million or $0.11 earnings per diluted common share for the second quarter of 2020, compared to a net income of $17.0 million or $0.35 earnings per diluted common share for the second quarter of 2019.

The $11.7 million decrease in net income was primarily due to lack of resolution of the California General Rate Case (GRC), which meant that no revenue was recorded in the second quarter from general rate relief and previously approved regulatory mechanisms. Other impacts to the quarterly results included water production cost increases of $6.5 million, of which $5.7 million would have been offset by regulatory mechanisms requested in the GRC, administrative and general expense increases of $1.5 million, which would have been subject to $3.3 million of benefit costs offsets pursuant to regulatory mechanisms requested in the GRC, and depreciation expense increase of $2.2 million.

If during the second quarter, the California Public Utilities Commission (the CPUC) had approved the settlement agreement and the positions proposed by California Water Service Company (Cal Water), the Companys California operating subsidiary, on October 8, 2019, the Company estimates it would have added operating revenue of $29.1 million, subject to income taxes of 19.3%, and it would have had a $2.3 million decrease in income tax expense for Tax Cuts and Jobs Act income tax refunds.

In addition, a $3.0 million increase in unrealized gain on certain benefit plan investments partially offset the decrease to net income.

The CPUC granted Cal Waters request to continue charging existing rates beginning January 1, 2020 as interim rates, and is allowing Cal Water to track the difference between interim rates and rates that are eventually approved. The Company expects that the difference in interim and approved rates will be collected through customer surcharges over 12 months. The CPUC has the authority to adopt the settlement agreement or render a different decision. Had the CPUC approved the Cal Water proposal during the second quarter, the Company estimates proposed new rates would have added the following to the Companys second quarter results: $10.9 million of revenue for delayed service charge and quantity rate increases, and $18.2 million of revenue from disputed regulatory mechanisms which will be recognized if approved in the period in which such approval occurs.

The Company has evaluated and will continue to evaluate and monitor risk factors associated with COVID-19, such as: financial condition and operating results, access to financial capital resources, current and future ratemaking, and customer billing and collections. The Company has taken a positon to delay certain rate increases associated with the Water Revenue Adjustment Mechanism (WRAM) and has requested authorization that any rate increases resulting from the eventual GRC decision be delayed to 2021. Additionally, the Company continues to evaluate customer billing and anticipated collections in light of the COVID-19 pandemic, associated economic impacts, and regulatory orders restricting collection activities.

Due to an expected decrease in customer collections, the Company has increased its estimate for future credit losses.

According to President and Chief Executive Officer Martin A. Kropelnicki, a primary focus for the Company in recent weeks has been advocating for a favorable outcome on a proposal being considered by the CPUC that would eliminate the WRAM, which decouples water sales from revenues.

Clearly, the delay in our California GRC significantly impacted our financial results in the first half of this year. While we continue to await that decision, we are working with other interested parties to support decoupling water sales from revenue. The CPUCs current proposal would damage the states policy goals for water use efficiency based on an incomplete and insufficient analysis. A full and fair examination of the proposal would show that eliminating decoupling would reduce conservation and increase water rates for low-income customers, so it is critical for us to raise awareness on the issue, Kropelnicki said.

In addition to advocating for decoupling, which has been used for decades to promote efficiency in the electric and natural gas industries, the Company remained focused on completing critical infrastructure improvements, integrating the newly acquired water systems in the State of Washington, and responding to the coronavirus pandemic.

It has certainly been a challenging time, but Im proud of the progress weve made on improving our water systems and integrating our new Washington systems. But above all, weve made it a priority to do everything we possibly can to keep our employees healthy and take care of our customers during this unprecedented health crisis, he said.

Additional Financial Results for the Second Quarter of 2020

Total revenue decreased $3.5 million to $175.5 million in the second quarter of 2020 compared to $179.0 million in the second quarter of 2019. The decrease in revenue was mostly due to a delay in the California GRC decision, which precluded the Company from recording up to $29.1 million of additional revenue in the second quarter of 2020.

Total operating expenses increased $11.0 million, or 7.2%, to $163.0 million in the second quarter of 2020 compared to $152.0 million in the second quarter of 2019.

Water production expenses increased $6.5 million, or 10.1%, to $71.1 million in the second quarter of 2020 compared to $64.6 million in the second quarter of 2019, primarily due to a 2.0% increase in customer consumption, changes in wholesale water mix, and purchased water wholesaler rate increases. The delayed GRC decision prevented the use of Californias Modified Cost Balancing Account (MCBA) decoupling mechanism to offset water production costs of $5.7 million with revenue equal to the increase in California water production costs relative to adopted water production costs.

Administrative and general and other operations expenses increased $4.9 million to $52.8 million in the second quarter of 2020, due to a $2.7 million cost increase associated with the recording of previously deferred WRAM revenue, a $2.1 million increase in employee pension benefit costs, a $1.5 million increase in uninsured loss costs, a $0.7 million increase in outside service costs, and a $0.5 million increase in bad debt expense which were partially offset by decreases of $1.1 million in water conservation program costs and $0.9 million in workers compensation costs.

Maintenance expenses increased $1.0 million, or 18.1%, to $6.7 million in the second quarter of 2020, due to increased costs for repairs of services and mains.

Income taxes decreased $3.7 million due to a decrease in pre-tax income from operations. The Companys estimated combined effective income tax rate for 2020 is 19.3 percent.

Depreciation and amortization expense increased $2.2 million, to $24.5 million, in the second quarter of 2020, as compared to $22.3 million in the second quarter of 2019, due to an increase in utility plant investment in 2019.

Other income and expense, net of income tax benefits, increased $2.0 million in 2020, mostly due to a $3.0 million increase in unrealized gain on certain benefit plan investments partially offset by a $0.9 million decrease in non-regulated revenue.

Year-to-Date Results

For the six-month period ended June 30, 2020, the Company had a net loss of $15.0 million, or $0.31 loss per diluted common share, compared to net income of $9.4 million, or $0.19 earnings per diluted common share, for the six-month period ended June 30, 2019.

The $24.4 million decrease in net income was primarily due to lack of resolution of the California GRC, which meant that no revenue was recorded in the six month period from general rate relief and previously approved regulatory mechanisms. Other impacts to the year-to-date results included water production cost increases of $14.9 million, of which $10.7 million would have been offset by regulatory mechanisms requested in the GRC, administrative and general expense increase of $2.1 million, which would have been subject to $6.3 million of benefit costs offsets pursuant to regulatory mechanisms requested in the GRC, and $4.3 million of depreciation expense.

If during the six month period ended June 30, 2020, the CPUC had approved the settlement agreement and the positions proposed by Cal Water on October 8, 2019, the Company estimates it would have added operating revenue of $45.8 million, subject to income taxes of 19.3%, and it would have had a $4.1 million decrease in income tax expense for Tax Cuts and Jobs Act income tax refunds.

Additionally, a $4.0 million unrealized loss on certain benefit plan investments during the six-month period ended June 30, 2020 decreased net income.

Water System Improvements

Company-funded and developer-funded capital investments during the first six months of 2020 were $133.5 million, an increase of $11.6 million, or 9.5 %, compared to $121.9 million during the first six months of 2019. We increased borrowings on our lines of credit at the end of the first quarter to allow flexibility in how the Company finances capital investments and operations in connection with economic uncertainty and financial market volatility caused by the COVID-19 pandemic.

Liquidity Outlook

Our liquidity remains strong, we maintained $114.0 million of cash as of June 30, 2020 and have additional borrowing capacity of more than $170.0 million, subject to meeting the borrowing conditions on the Companys lines of credit facilities. We will continue our 2020 infrastructure improvement program, estimated between $260.0 to $290.0 million. Also, at our Board of Director meeting yesterday, the Board declared a cash dividend of $0.2125 per share of common stock.

WRAM Receivable

The under-collected net receivable balance in the WRAM and MCBA was $52.6 million as of June 30, 2020, a decrease of 16.0%, or $10.0 million, from the balance of $62.6 million as of December 31, 2019. The delay in the California GRC decision and uncertainty over the continuation of the WRAM mechanism resulted in not recording an estimated $19.8 million regulatory asset for the increase to the net receivable for WRAM and MCBA revenue adjustments during the first six months of 2020, which would have resulted in an increase in the net receivable balance.

Other Information

All stockholders and interested investors are invited to listen to the 2020 second quarter conference call on July 30, 2020 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 #8793806. Please dial in at least 15 minutes in advance of the call to ensure a timely connection. A replay of the call will be available from 11:00 a.m. PT (2:00 p.m. ET) on July 30, 2020 through September 30, 2020, at 1-855-859-2056 or 1-404-537-3406, ID #8793806. 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/q22020slides.pdfafter 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, 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, Inc., CWS Utility Services, and HWS Utility Services LLC. 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 Groups 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; natural disasters or calamities, epidemics, pandemics or disease outbreaks (including COVID-19) or any escalation or worsening of, or economic effects of, the foregoing; consequences of eminent domain actions relating to our water systems; changes in regulatory commissions' policies and procedures; the outcome and timeliness of regulatory commissions' actions concerning rate relief and other matters, including with respect to the GRC; 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; our ability to complete, successfully integrate and achieve anticipated benefits from announced acquisitions; the impact of weather and climate on water availability, water sales and operating results; 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.

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) June 30 December 31 2020 2019 ASSETS Utility plant: Utility plant $ $ 3,752,243 3,550,485 Less accumulated depreciation and ) ) amortization (1,214,427 (1,144,115 Net utility plant 2,537,816 2,406,370Current assets: Cash and cash equivalents 42,653 114,388 Receivables: Customers, net 46,087 32,058 Regulatory balancing accounts 23,738 38,225 Other, net 13,605 14,187 Unbilled revenue, net 39,599 34,879 Materials and supplies at weighted 8,375 7,745 average cost Taxes, prepaid expenses, and other 21,097 14,965 assets Total current assets 266,889 184,712Other assets: Regulatory assets 440,986 433,322 Goodwill 31,132 2,615 Other assets 84,289 83,110 Total other assets 555,228 520,226 TOTAL ASSETS $ $ 3,359,933 3,111,308 CAPITALIZATION AND LIABILITIES Capitalization: Common stock, $.01 par value; 68,000 shares authorized, 49,398 and 48,532 $ 494 $ 485 outstanding in 2020 and 2019, respectively Additional paid-in capital 362,275 400,080 Retained earnings 381,449 417,146 Total common stockholders' equity 782,023 779,906 Long-term debt, net 785,257 786,754 Total capitalization 1,567,280 1,566,660Current liabilities: Current maturities of long-term debt, 21,868 net 21,872 Short-term borrowings 375,100 175,100 Accounts payable 128,216 108,463 Regulatory balancing accounts 1,602 4,462 Accrued interest 5,330 5,810 Accrued expenses and other liabilities 45,432 43,018 Total current liabilities 577,552 358,721 Deferred income taxes 223,955 222,590 Pension and postretirement benefits other 261,119 258,907 than pensionsRegulatory liabilities and other 270,177 271,831 Advances for construction 195,056 191,062 Contributions in aid of construction 264,794 241,537Commitments and contingencies TOTAL CAPITALIZATION AND LIABILITIES $ $ 3,359,933 3,111,308

CALIFORNIA WATER SERVICE GROUP CONDENSED CONSOLIDATED STATEMENTS OF INCOME Unaudited (In thousands, except per share data) For the Three Months ended: June 30, June 30, 2020 2019 Operating revenue $ $ 175,484 179,031Operating expenses: Operations: Water production costs 71,142 64,635 Administrative and general 26,939 25,434 Other operations 25,898 22,542 Maintenance 6,722 5,692 Depreciation and amortization 24,542 22,326 Income taxes 622 4,321 Property and other taxes 7,126 7,068 Total operating expenses 162,991 152,018 Net operating income 12,493 27,013 Other income and expenses: Non-regulated revenue 5,130 4,208 Non-regulated expenses (492 ) (3,900 ) Other components of net periodic benefit (1,332 ) (1,192 ) cost Allowance for equity funds used during 1,705 1,686 construction Income tax expense on other income and (820 ) (487 ) expenses Net other income 3,269 1,237 Interest expense: Interest expense 11,613 12,178 Allowance for borrowed funds used during ) (924 ) construction (1,132 Net interest expense 10,481 11,254 Net income $ 5,281 $ 16,996 Earnings per share Basic $ 0.11 $ 0.35 Diluted $ 0.11 $ 0.35 Weighted average shares outstanding Basic 48,936 48,136 Diluted 48,936 48,136 Dividends per share of common stock $ 0.2125 $ 0.1975

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOMEUnaudited (In thousands, except per share data) For the Six Months ended: June 30, June 30, 2020 2019 Operating revenue $ $ 301,047 305,142Operating expenses: Operations: Water production costs 125,118 110,227 Administrative and general 54,531 56,619 Other operations 40,363 39,872 Maintenance 12,147 13,795 Depreciation and amortization 44,694 49,034 Income tax (benefit) expense ) 1,330 (3,315 Property and other taxes 14,361 14,354 Total operating expenses 295,477 277,653 Net operating income 5,570 27,489 Other income and expenses: Non-regulated revenue 8,035 10,031 Non-regulated expenses ) ) (8,946 (6,119 Other components of net periodic benefit ) (2,451 ) cost (2,762 Allowance for equity funds used during 3,319 3,219 construction Income tax benefit (expense) on other 93 (1,315 ) income and expenses Net other (loss) income (261 ) 3,365 Interest expense: Interest expense 23,253 22,411 Allowance for borrowed funds used during ) (1,755 ) construction (2,076 Net interest expense 20,335 21,498Net (loss) income $ ) $ 9,356 (15,026(Loss) earnings per share Basic $ (0.31 ) $ 0.19 Diluted $ (0.31 ) $ 0.19 Weighted average shares outstanding Basic 48,759 48,111 Diluted 48,111 48,759Dividends per share of common stock $ $ 0.3950 0.4250