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California Water Service Group$55.84$.761.38%

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 California Water Service Group Announces 2018 Earnings for Year and Fourth Quarter
   Thursday, February 28, 2019 9:15:00 AM ET

SAN JOSE, Calif., Feb. 28, 2019 (GLOBE NEWSWIRE) -- California Water Service Group (Company) (NYSE: CWT) today announced net income of $65.6 million and diluted earnings per share of $1.36 for 2018, compared to net income of $72.9 million and diluted earnings per share of $1.52 in 2017.  The 2017 as reported net income was increased for an immaterial error that understated operating revenue. 

The $7.3 million decrease in net income was driven primarily by a $6.9 million reduction in revenue due to the cost of capital decision for California Water Service (Cal Water) and a $5.0 million increase in new business development expenses.  In addition, increases in depreciation and amortization, labor, maintenance, property tax, and interest expenses were partially offset by rate increases, a California Public Utilities Commission (CPUC) authorization to recover $3.3 million of 2016 and 2017 incremental drought program costs, and a decrease in income taxes.

Also, there were other changes outside the Company’s immediate control that decreased net income, including a $5.4 million reduction in unrealized income from certain benefit plan investments due to market conditions, a $0.9 million reduction in unbilled revenue accrual, and a $0.7 million decrease in gain on sale of property that was partially offset by a $1.1 million benefit from Company-owned life insurance.

President and Chief Executive Officer Martin A. Kropelnicki said he was pleased with the results. 

“In addition to executing our infrastructure investment program, which improves quality, safety, and reliability for our customers, we tightly managed expenses to budget, and increased our dividend by five percent—the 52nd annual dividend increase,” he said.

“Beyond our financial results, we focused on delivering quality, service, and value to our customers and communities.  We responded to the devastating Mendocino Complex, Woolsey, and Camp Fires; we completed 36 treatment facilities in a 22 month period to meet the new California standard for 1,2,3-trichloropropane (TCP); and we worked side-by-side with community leaders and customers as our Palos Verdes Peninsula Water Reliability Project—the largest water system improvement in our Company’s history—got underway.  These are just a few highlights of our performance in 2018,” Kropelnicki said. 

The Company invested $271.7 million in infrastructure, including $22.1 million on TCP treatment.

Additional Financial Results for 2018

Total revenue increased 3.3% to $698.2 million in 2018 compared to $676.1 million in 2017, primarily due to rate increases.  Rate increases added $26.1 million, $5.8 million of which was related to increased water costs.  These factors were partially offset by a $10.7 million reduction in rates due to a decrease in the federal income tax rate, a $6.9 million reduction in rates due to the Cal Water cost of capital decision, and a $0.9 million decrease in accrued unbilled revenue.

Total operating expenses increased $18.6 million, or 3.3%, to $587.7  million in 2018 compared to the prior year.

Water production expenses increased $11.0 million, or 4.5%, to $252.8 million in 2018, primarily due to increases in purchased water quantities and higher wholesale water rates.  As designed, 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 $12.9 million to $180.6 million in 2018, primarily due to increases in costs associated with the deferral of operating revenue and employee wages and benefits, retiree medical, consulting, and outside service cost increases. These cost increases were partially offset by CPUC authorization to recover $3.3 million of 2016 and 2017 incremental drought program costs.  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 CPUC to record these costs in balancing accounts for future recovery, creating a corresponding change to revenue.

Maintenance expenses increased $2.0 million, or 8.7%, to $24.5 million in 2018, due to increased costs for repairs of transmission and distribution mains and services.

Income taxes decreased $16.7 million, or 47.3%, to $18.6 million in 2018, due to a decrease in pre-tax income, a decrease in the federal income tax rate from 35 percent to 21 percent beginning on January 1, 2018, and an increase in the tax benefit from the flow through method of accounting for “repairs” deductions on state corporate income tax filings. 

The net loss on other income and expenses increased $6.9 million in 2018, due primarily to a $5.0 million increase in new business development expenses and a $5.4 million reduction in unrealized income from certain benefit plan investments due to market conditions.

Fourth Quarter 2018 Results

For the fourth quarter of 2018, net income was $15.4 million and diluted earnings per share of $0.32, compared to net income of $15.1 million and diluted earnings per share of $0.31 in the fourth quarter of 2017.  The $0.3 million increase in net income resulted primarily from a CPUC authorization to recover $3.3 million of 2016 and 2017 incremental drought program costs, rate increases, and a $1.8 million increase in unbilled revenue accrual. These factors were partially offset by increases in depreciation and amortization, labor, maintenance, property tax, and interest expenses and a $3.4 million reduction in unrealized income from certain benefit plan investments due to market conditions. The 2017 fourth quarter as reported net income was increased for an immaterial error that understated operating revenue.     

Revenue for the fourth quarter increased $3.1 million, or 1.9%, to $167.4 million mostly due to rate increases of $6.2 million, of which $1.5 million related to increased water costs, and a $1.8 million increase in accrued unbilled revenue.  These factors were partially offset by a $4.3 million reduction in revenue due to rate decreases reflecting a lower cost of capital and lower federal income tax rate.    

Total operating expenses for the quarter decreased $0.3 million to $140.9 million.  Water production expenses increased $0.6 million mostly due to increases in purchased water quantities and wholesale water rates.  Administrative and general and other operations expenses decreased $2.1 million, or 4.6%, to $43.1 million mostly due to recovery of incremental droughts costs of $3.2 million for the years 2016 and 2017 and decreases in conservation program costs and uninsured losses.  Maintenance expense increased $1.2 million, or 21.1%, to $6.9 million.  Other income and expenses, net of income taxes, decreased $2.8 million to a net loss of $2.2 million mostly due to a $3.4 million reduction in unrealized income from certain benefit plan investments due to market conditions.  Net interest expense increased $0.4 million, or 4.5%, to $9.0 million

The under-collected net receivable balance in the Water Rate Adjustment Mechanism and Modified Cost Balancing Account (WRAM and MCBA) balancing accounts were $56.1 million as of December 31, 2018, a decrease of 18.8%, or $13.0 million, from the balance of $69.1 million as of December 31, 2017. Cal Water has a Sales Reconciliation Mechanism (SRM) in place for the second and third years of a general rate case (GRC) that allows the Company to adjust its adopted sales forecast if actual sales vary from adopted sales by more than 5.0% in the prior year.

Regulatory Update

As a part of the 2015 GRC decision, Cal Water was authorized to request annual escalation rate increases for 2019 for those districts that passed the earnings test. In November of 2018, Cal Water requested escalation rate increases in all of its regulated districts. The annual adopted gross revenue associated with the November 2018 filing was $16.2 million. The new rates became effective on January 1, 2019.

In March of 2018, Cal Water submitted an advice letter to request recovery of 2016 and 2017 incremental drought expenses of $3.3 million. On January 10, 2019, the CPUC approved Cal Water's request for recovery of the $3.3 million of incremental expenses; subsequently, Cal Water submitted an advice letter on January 15, 2019 to implement a surcharge to recover the incremental expenses from customers. The new rates are expected to become effective on April 15, 2019.

On December 13, 2018, the CPUC approved Cal Water owning and operating the Travis Air Force Base (TAFB) water system as a regulated water utility district. The decision enables Cal Water to acquire the water distribution assets of TAFB from the U.S. Department of Defense and begin providing water utility service in July 2019 to the base for a term of 50 years.  The CPUC will regulate water rates, rules, and tariffs for the system.

In December of 2017, Hawaii Water Service filed GRC applications requesting additional annual revenues for its Waikoloa Village and Waikoloa Resort systems with the Hawaii Public Utilities Commission (HPUC).  On January 1, 2019, the HPUC authorized Waikoloa Village rate increases of $0.8 million in 2019 and $0.1 million in 2020.  On January 7, 2019, the HPUC authorized Waikoloa Resort rate increases of $0.8 million in 2019, $0.8 million in 2020, and $0.1 million in 2021.

On July 2, 2018, Washington Water Service submitted a GRC application to the Washington Utilities and Transportation Commission (UTC) to increase revenues to cover the higher costs of providing a reliable, high-quality water supply.  The UTC authorized a rate increase of $1.1 million on November 30, 2018 and the new rates became effective on December 1, 2018.

On December 22, 2017, the CPUC sent a letter to all Class A and B water and sewer utilities, which include Cal Water, on the subject of “Changes in Federal Tax Rates for 2018.” The CPUC required Cal Water to establish a Tax Accounting Memorandum Account (TAMA) to track the impact of the changes to federal tax law.  The TAMA tracks the revenue requirement impact of the changes to federal tax law not otherwise reflected in rates from January 1, 2018 until the effective date of the revenue requirement changes adopted in Cal Water's next GRC.  The Company continues to work through the regulatory process in its other subsidiaries.

Other Information

All stockholders and interested investors are invited to listen to the 2018 year-end and fourth quarter conference call on February 28, 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 #9791277.  A replay of the call will be available from 1:00 p.m. PT (4:00 p.m. ET) on February 28, 2019 through April 30, 2019, at 1-855-859-2056 or 1-404-537-3406, ID #9791277.  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/2018slides.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 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 .

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 and other actions; inability to renew leases to operate city water systems on beneficial terms; changes in California State Water Resources Control Board water quality requirements; changes in environmental compliance and water quality requirements; electric power interruptions; housing and customer growth index; 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, or apprehension about the possible future occurrences of acts of this type; the adequacy of our efforts to mitigate physical and cyber security risks and threats; the ability of our enterprise risk management framework to identify or address risks adequately; labor relations matters as we negotiate with the unions; restrictive covenants in or changes to the credit ratings on current or future debt that could increase financing costs or affect the ability to borrow, make payments on debt, or pay dividends; 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 (310) 257-1435 (media)


    
CALIFORNIA WATER SERVICE GROUP   
CONDENSED CONSOLIDATED BALANCE SHEETS   
Unaudited   
      
(In thousands, except per share data)December 31 December 31
    2018   2017 
ASSETS    
Utility plant:   
 Utility plant$ 3,229,446  $  2,970,179 
 Less accumulated depreciation and amortization   (996,723)    (922,214)
  Net utility plant   2,232,723     2,047,965 
Current assets:   
 Cash and cash equivalents   47,176     94,776 
 Receivables:   
  Customers   30,037     32,451 
  Regulatory balancing accounts   42,394     36,783 
  Other   17,101     16,464 
 Unbilled revenue   33,427     29,756 
 Materials and supplies at weighted average cost   6,586     6,463 
 Taxes, prepaid expenses, and other assets   11,981     11,180 
  Total current assets   188,702     227,873 
Other assets:   
 Regulatory assets  (*)   353,569     405,482 
 Goodwill   2,615     2,615 
 Other    60,095     60,775 
  Total other assets   416,279     468,872 
TOTAL ASSETS$ 2,837,704  $  2,744,710 
      
CAPITALIZATION AND LIABILITIES   
Capitalization:   
 Common stock, $.01 par value; 68,000 shares authorized, 48,065 and 48,012 outstanding in 2018 and 2017, respectively$  481  $  480 
 Additional paid-in capital   337,623     336,229 
 Retained earnings (*)   392,053     362,512 
  Total common stockholders' equity   730,157     699,221 
 Long-term debt, less current maturities   710,027     515,793 
  Total capitalization   1,440,184     1,215,014 
Current liabilities:   
 Current maturities of long-term debt   104,911     15,920 
 Short-term borrowings   65,100     275,100 
 Accounts payable   95,580     93,955 
 Regulatory balancing accounts   12,213     59,303 
 Accrued interest   5,674     6,122 
 Accrued expenses and other liabilities   37,688     40,559 
  Total current liabilities   321,166     490,959 
Unamortized investment tax credits   1,649     1,724 
Deferred income taxes, net   213,033     194,617 
Pension and postretirement benefits other than pensions   193,538     252,141 
Regulatory liability and Other (*)   256,522     221,032 
Advances for construction   186,342     182,502 
Contributions in aid of construction   225,270     186,721 
     
TOTAL CAPITALIZATION AND LIABILITIES$ 2,837,704  $  2,744,710 
      
(*)The 2017 as reported net income was increased for an immaterial error that understated operating revenue. 
      

 

    
CALIFORNIA WATER SERVICE GROUP   
CONDENSED CONSOLIDATED STATEMENTS OF INCOME   
Unaudited   
(In thousands, except per share data)   
      
For the Three Months ended:   
   December 31, December 31,
    2018  2017 (*)
      
Operating revenue$  167,416  $  164,296 
Operating expenses:   
 Operations:   
 Water production costs   61,050     60,407 
 Administrative and general   23,586     26,418 
 Other operations   19,561     18,788 
 Maintenance   6,898     5,653 
 Depreciation and amortization   21,104     19,133 
 Income taxes   1,640     4,740 
 Property and other taxes   7,043     6,080 
 Total operating expenses   140,882     141,219 
  Net operating income   26,534     23,077 
Other income and expenses:   
 Non-regulated revenue   4,305     5,155 
 Non-regulated expenses   (6,288)    (2,483)
 Other components of net periodic benefit cost   (2,324)    (2,565)
 Allowance for equity funds used during construction   1,310     987 
 Income tax benefit (expense) on other income and expenses   835     (443)
  Net other (loss) income   (2,162)    651 
Interest expense:   
 Interest expense   9,710     9,215 
 Allowance for borrowed funds used during construction   (704)    (595)
  Net interest expense   9,006     8,620 
Net income$  15,366  $  15,108 
Earnings per share    
 Basic$  0.32  $  0.31 
 Diluted $  0.32  $  0.31 
Weighted average shares outstanding   
 Basic   48,067     48,014 
 Diluted    48,067     48,014 
Dividends per share of common stock$  0.1875  $  0.1800 
      
(*)The 2017 as reported net income was increased for an immaterial error that understated operating revenue. 
      
      
      
CALIFORNIA WATER SERVICE GROUP   
CONDENSED CONSOLIDATED STATEMENTS OF INCOME   
Unaudited   
(In thousands, except per share data)   
      
For the Twelve Months ended:   
   December 31, December 31,
    2018  2017 (*)
      
Operating revenue$  698,196  $  676,113 
Operating expenses:   
 Operations:   
 Water production costs   252,847     241,867 
 Administrative and general   100,781     93,326 
 Other operations   79,868     74,448 
 Maintenance   24,494     22,530 
 Depreciation and amortization   83,781     76,783 
 Income taxes   18,589     35,279 
 Property and other taxes   27,296     24,797 
 Total operating expenses   587,656     569,030 
  Net operating income   110,540     107,083 
Other income and expenses:   
 Non-regulated revenue   18,272     15,898 
 Non-regulated expenses   (22,737)    (8,727)
 Other components of net periodic benefit cost   (9,308)    (9,588)
 Allowance for equity funds used during construction   3,954     3,750 
 Income tax benefit (expense) on other income and expenses   2,717     (1,548)
  Net other loss    (7,102)    (215)
Interest expense:   
 Interest expense   39,917     36,288 
 Allowance for borrowed funds used during construction   (2,063)    (2,360)
  Net interest expense   37,854     33,928 
Net income$  65,584  $  72,940 
Earnings per share    
 Basic$  1.36  $  1.52 
 Diluted $  1.36  $  1.52 
Weighted average shares outstanding   
 Basic   48,060     48,009 
 Diluted    48,060     48,009 
Dividends per share of common stock$  0.7500  $  0.7200 
    
(*)The 2017 as reported net income was increased for an immaterial error that understated operating revenue. 
  

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Source: California Water Service Group


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