CALIFORNIA WATER SERVICE GROUP Dollar amounts in thousands unless otherwise stated FORWARD LOOKING STATEMENTS This quarterly report, including all documents incorporated by reference, contains forward-looking statements within the meaning established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this quarterly report are based on currently available information, expectations, estimates, assumptions and projections, and our management's beliefs, assumptions, judgments and expectations about us, the water utility industry and general economic conditions, including statements regarding the anticipated impact on our business of the ongoing COVID-19 pandemic and related public health measures. These statements are not statements of historical fact. When used in our documents, statements that are not historical in nature, including words like "expects," "intends," "plans," "believes," "may," "estimates," "assumes," "anticipates," "projects," "predicts," "forecasts," "should," "seeks," or variations of these words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not guarantees of future performance. They are based on numerous assumptions that we believe are reasonable, but they are open to a wide range of uncertainties and business risks. Consequently, actual results may vary materially from what is contained in a forward-looking statement. Factors which may cause actual results to be different than those expected or anticipated include, but are not limited to: •the impact of the ongoing COVID-19 pandemic and related public health measures, including our receipt of state and federal COVID-19 financial relief funds in a timely manner; •our 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, such as the CPUC's decision in 2020 to preclude companies from proposing fully decoupled WRAMs in their next GRC filing (which impacted our 2021 GRC filing related to our operations commencing in 2023); •the outcome and timeliness of regulatory commissions' actions concerning rate relief and other actions; •increased risk of inverse condemnation losses as a result of climate conditions; •our ability to renew leases to operate water systems owned by others on beneficial terms; •changes inCalifornia State Water Resources Control Board water quality standards; 20 -------------------------------------------------------------------------------- Table of Contents •changes in environmental compliance and water quality requirements; •electric power interruptions, especially as a result ofPublic Safety Power Shutoff (PSPS) programs; •housing and customer growth; •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 the unions; •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, climate, natural disasters, and actual or threatened public health emergencies, including disease outbreaks, on our operations, water quality, water availability, water sales and operating results and the adequacy of our emergency preparedness; •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; •risks associated with expanding our business and operations geographically; and •the risks set forth in "Risk Factors" included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . In light of these risks, uncertainties and assumptions, investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this quarterly report or as of the date of any document incorporated by reference in this report, as applicable. When considering forward-looking statements, investors should keep in mind the cautionary statements in this quarterly report and the documents incorporated by reference. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. CRITICAL ACCOUNTING POLICIES We maintain our accounting records in accordance with GAAP and as directed by the Commissions to which our operations are subject. The process of preparing financial statements in accordance with GAAP requires the use of estimates on the part of management. The estimates used by management are based on historic experience and an understanding of current facts and circumstances. Management believes that the following accounting policies are critical because they involve a higher degree of complexity and judgment, and can have a material impact on our results of operations, financial condition, and cash flows of the business. These policies and their key characteristics are discussed in detail in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . They include: •revenue recognition; •regulated utility accounting; •income taxes; •pension and postretirement health care benefits; For the nine months endedSeptember 30, 2021 , there were no changes in the methodology for computing critical accounting estimates, no additional accounting estimates met the standards for critical accounting policies, and there were no material changes to the important assumptions underlying the critical accounting estimates. 21 -------------------------------------------------------------------------------- Table of ContentsCAL WATER'S 2018 GRC OnOctober 14, 2020 , an administrative law judge (ALJ) with the CPUC issued a proposed decision forCal Water's 2018 GRC filing. As ofNovember 6, 2020 , the proposed decision was subject to adoption by the CPUC no earlier than the CPUC'sNovember 19, 2020 meeting. BothCal Water and the CPUC's Public Advocates Office had an opportunity to provide their feedback on the proposed decision. If adopted as proposed, the decision would approve the settlement reached in October of 2019 byCal Water and the CPUC's Public Advocates Office, allowCal Water to continue its decoupling balancing accounts through 2022, and allowCal Water to retain its PCBA and HCBA. The proposed decision was approved as proposed by the CPUC onDecember 4, 2020 . We determined that the proposed decision provided additional evidence about conditions that existed as ofSeptember 30, 2020 . As ofNovember 6, 2020 , we concluded it was probable that the proposed decision would be adopted by the CPUC without any material variation and accordingly, we recorded regulatory assets and associated revenues resulting from the regulatory mechanisms approved in the proposed decision as ofSeptember 30, 2020 . COVID-19 During the course of 2020 and continuing into the first nine months of 2021, as a result of the COVID-19 pandemic, shelter-in-place and social distancing ordinances of varying durations and scope were implemented in all of the states in which we operate. Such governmental orders resulted in temporary closures of non-essential businesses and self-quarantining on non-essential workers. As an "essential business" during times of emergencies pursuant to theU.S. Critical Infrastructures Protection Act of 2001, we are working to continue to provide high quality water and wastewater services to our two million customers. During 2020 and for the nine months endedSeptember 30, 2021 and throughOctober 28, 2021 , the COVID-19 pandemic has not had a significant impact on our business or operations. We have ceased all shutoffs for non-payment during the pandemic and anticipate this situation will continue until further notice. We are expecting segments of our customer base to continue to experience employment layoffs and business closures that negatively impact their ability to pay utility bills. We have also incurred costs to promote the health and safety of our employees and facilities. If we need to close any of our facilities due to outbreaks of COVID-19 or if a critical number of our employees become too ill to work, our business operations could be materially adversely affected in a rapid manner. Company employees have returned to the office full-time. We continue to be vigilant for employee and customer safety, we encourage and incentivize vaccination, and we follow local masking rules as applicable. The impact of the COVID-19 pandemic is fluid and continues to evolve, and therefore, we cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted. RESULTS OF THIRD QUARTER 2021 OPERATIONS COMPARED TO THIRD QUARTER 2020 OPERATIONS Dollar amounts in thousands unless otherwise stated
Overview
Net Income Attributable toCalifornia Water Service Group Net income attributable toCalifornia Water Service Group for the third quarter of 2021 was$62.4 million or$1.20 earnings per diluted common share, compared to net income attributable toCalifornia Water Service Group of$96.4 million or$1.94 earnings per diluted common share for the third quarter of 2020. The$34.0 million decrease in net income was primarily due to the Company recording nine months of rate relief and regulatory balancing account revenue in the third quarter of 2020 because of a delayed decision on the 2018 GRC. In the third quarter of 2020, 2018 GRC interim rate relief revenue was$37.6 million and regulatory balancing account net revenue was$37.0 million ($18.9 million and$11.5 million , respectively, related to the third quarter of 2020). In the third quarter of 2021, there was also a$5.8 million decrease in accrued unbilled revenue, an increase in depreciation expense of$2.5 million , and a$1.7 million decrease in the unrealized gain from non-qualified benefit plan investments. These decreases were partially offset by a$3.6 million decrease in administrative and general and other operations expenses in the third quarter of 2021 as compared to the third quarter of 2020. 22 -------------------------------------------------------------------------------- Table of Contents Operating Revenue Operating revenue decreased$47.4 million , or 15.6%, to$256.7 million in the third quarter of 2021 as compared to the third quarter of 2020, with such change attributed to the following: Net change due to WRAM, IRMA, rate changes, usage, and other (1)$ (23,171) MCBA Revenue (2)
(12,742)
Other balancing account revenue (3)
(7,752)
Deferral of revenue (4)
(3,720)
Net operating revenue decrease $
(47,385)
1.The net change due to WRAM, IRMA rate changes, usage, and other in the above table was primarily driven by the delay in the resolution of the 2018 GRC. As a result of the delay, the CPUC authorizedCal Water to track the effect of the delay on customer billings in an IRMA effectiveJanuary 1, 2020 . Variances between actual customer billings and those that would have been billed assuming the GRC had been effectiveJanuary 1, 2020 are recorded as regulatory balancing account revenue. In October of 2020,Cal Water received a proposed decision on its 2018 GRC and was able to determine if the 2018 GRC had been resolved effectiveJanuary 1, 2020 , we would have billed customers an additional$18.9 million and$37.6 million for the three and nine months endedSeptember 30, 2020 . In addition, accrued unbilled revenue decreased$5.8 million . The decreases from the IRMA and accrued unbilled revenue were partially offset by rate increases, the components of which are set forth in the table below. General rate case$ 18 Escalation rate increases 2,597 Purchased water and pump tax offsets 1,620 Rate base offsets 1,839 Total increase in rates$ 6,074 2.MCBA revenue is the variance between adopted water production costs and actual water production costs. For the third quarter of 2021, we recognized a decrease of$0.9 million of MCBA revenue as compared to an increase to revenue of$11.8 million for the third quarter 2020. The MCBA revenue decrease in the third quarter of 2021 as compared to the third quarter of 2020 resulted from the delay in the resolution of the 2018 GRC. In October of 2020,Cal Water received a proposed decision that authorized the continuation of MCBA effectiveJanuary 1, 2020 ; as a result, in the third quarter of 2020, we recorded an increase to revenue for the MCBA for the three and nine months endedSeptember 30, 2020 of$1.1 million and$11.8 million , respectively. 3.The other balancing account revenue consists of the pension, conservation and health care balancing account revenues. Pension and conservation balancing account revenues are the differences between actual expenses and adopted rate recovery. Health care balancing account revenue is 85% of the difference between actual health care expenses and adopted rate recovery. For the third quarter of 2021, we recognized a$0.9 million decrease in revenue for these balancing accounts as actual conservation and health care costs were lower than adopted conservation and health care costs, while actual pension costs were lower than adopted pension costs. For the third quarter of 2020, we recognized a$6.8 million increase in revenue for these balancing accounts as actual pension costs were higher than adopted pension costs, while actual conservation and health care costs were lower than adopted conservation and health care costs. The decrease in revenue in the third quarter of 2021 as compared to the third quarter of 2020 was primarily due to the delay in the resolution of the 2018 GRC. In October of 2020,Cal Water received a proposed decision that authorized the continuation of the PCBA and HCBA effectiveJanuary 1, 2020 ; as a result, in the third quarter of 2020, we recorded an increase to revenue of$2.0 million and$8.2 for the three and nine months endedSeptember 30, 2020 , respectively, for the PCBA an HCBA. 4.The deferral of revenue consists of amounts that are expected to be collected from customers beyond 24 months following the end of the accounting period in which these revenues were recorded. The deferral increased in the third quarter of 2021 as compared to the third quarter of 2020 due to an increase in the balancing account revenue expected to be collected beyond 24 months. 23 -------------------------------------------------------------------------------- Table of Contents Total Operating Expenses Total operating expenses decreased$12.6 million , or 6.4%, to$185.6 million in the third quarter of 2021, as compared to$198.0 million in the third quarter of 2020. Water production cost consists of purchased water, purchased power, and pump taxes. It represents the largest component of total operating expenses, accounting for approximately 45.8% of total operating expenses for the third quarter of 2021, as compared to 43.1% of total operating expenses for the third quarter of 2020. Water production costs decreased 0.5% in the third quarter of 2021 as compared to the same period last year primarily due to decreases in purchased water quantities offset by an increase in rates from our purchased water wholesalers. Sources of water as a percent of total water production are listed in the following table: Three Months Ended September 30
2021 2020
Well production 49 % 47 %
Purchased 48 % 48 %
Surface 3 % 5 %
Total 100 % 100 %
The components of water production costs are shown in the table below:
Three Months Ended September 30
2021 2020 Change
Purchased water $ 67,604 $ 70,398 $ (2,794)
Purchased power 13,122 11,983 1,139
Pump taxes 4,225 2,963 1,262
Total $ 84,951 $ 85,344 $ (393)
Administrative and general and other operations expenses decreased $3.6 million ,
or 6.0%, to $55.4 million in the third quarter of 2021, as compared to $59.0
million in the third quarter of 2020. The decrease was due to decreases in bad
debt costs of $4.2 million and costs associated with deferred WRAM revenue of
$3.1 million partially offset by increases in employee and retiree medical costs
of $1.1 million , water and waste water treatment costs of $1.6 million , and
write off capital costs of $0.5 million . Changes in conservation program
expense, employee pension benefits, and employee and retiree medical costs for
regulated California operations generally do not affect net income, as the
Company has been allowed by the CPUC to record these costs in balancing accounts
for future recovery, creating a corresponding change to revenue.
Maintenance expense increased $0.6 million , or 8.6%, to $7.7 million in the
third quarter of 2021, as compared to $7.1 million in the third quarter of 2020,
mostly due to an increase in repairs of services and meters.
Depreciation and amortization expense increased $2.5 million , or 10.3%, to $27.2
million in the third quarter of 2021, as compared to $24.7 million in the third
quarter of 2020, mostly due to utility plant placed in service in 2020.
Income tax expense decreased $12.1 million to $1.7 million in the third quarter
of 2021, as compared to $13.8 million in the third quarter of 2020. The decrease
was primarily due to decreases in pre-tax net operating income and the effective
tax rate. The decrease in the effective tax rate resulted from a $7.5 million
increase in refunds of excess 2017 deferred federal income taxes partially
offset by a reduction in state tax benefits from repairs deductions in the third
quarter of 2021 as compared to the third quarter of 2020.
Property and other taxes increased $0.4 million to $8.5 million in the third
quarter of 2021, as compared to $8.1 million in the same period of 2020, mostly
due to an increase in assessed property values for utility plant place in
service.
Other Income and Expenses
Net other income increased $1.8 million to $2.6 million in the third quarter of
2021, as compared to a net other income of $0.8 million in the third quarter of
2020, due primarily to a $2.9 million decrease in other components of net
periodic benefit cost partially offset by a $1.7 million decrease in the
unrealized gain from non-qualified benefit plan investments.
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Interest Expense
Net interest expense increased $0.7 million , or 7.1%, to $11.2 million in the
third quarter of 2021, as compared to $10.5 million in the third quarter of
2020. The increase was due primarily to an increase in financing to support the
capital investment program from the 2018 GRC.
RESULTS OF THE NINE MONTHS ENDED
COMPARED THE NINE MONTHS ENDED
Dollar amounts in thousands unless otherwise statedOverview
Net Income Attributable toCalifornia Water Service Group Net income attributable toCalifornia Water Service Group for the first nine months of 2021 was$97.6 million or$1.91 earnings per diluted common share, compared to net income attributable toCalifornia Water Service Group of$81.3 million or$1.66 earnings per diluted common share for the first nine months of 2020. The$16.3 million increase in net income was primarily due to rate relief of$16.3 million , accrued unbilled revenue increase of$8.7 million , and an increase in the unrealized gain from non-qualified benefit plan investments of$1.5 million , which were partially offset by increases in depreciation expense of$7.8 million and property taxes of$1.7 million . Operating Revenue Operating revenue increased$12.4 million , or 2.1%, to$617.6 million for the first nine months of 2021 as compared to the first nine months of 2020, with such change attributed to the following: Net change due to WRAM, IRMA, rate changes, usage, and other (1)$ 32,396 MCBA Revenue (2)
(1,708)
Other balancing account revenue (3)
(9,997)
Deferral of revenue (4)
(8,263)
Net operating revenue increase $
12,428
1.The net change due to WRAM, IRMA, rate changes, usage, and other in the above table was primarily driven by rate increases, the components of which are set forth in the table below, a 2.5% increase in customer usage, and an$8.7 million increase in accrued unbilled revenue. General rate case$ 42 Escalation rate increases 6,136 Purchased water and pump tax offsets 4,263 Rate base offsets 5,858 Total increase in rates$ 16,299 2.MCBA revenue is the variance between adopted water production costs and actual water production costs. For the first nine months of 2021, we recognized$10.1 million of MCBA revenue as compared to$11.8 million of MCBA revenue for the first nine months of 2020. The MCBA revenue decrease in the first nine months of 2021 as compared to the first nine months of 2020 resulted from a decrease in actual water production costs relative to adopted water production costs. Actual water production costs decreased relative to adopted water production costs in the first nine months of 2021 as compared to the first nine months of 2020 due to a shift in water production mix from purchased water to well water in certain of our service territories. 3.The other balancing account revenue consists of the pension, conservation and health care balancing account revenues. Pension and conservation balancing account revenues are the differences between actual expenses and adopted rate recovery. Health care balancing account revenue is 85% of the difference between actual health care expenses and adopted rate recovery. For the first nine months of 2021, we recognized a net decrease to revenue of$4.8 million for these balancing accounts as compared to a net increase of$5.2 million of revenue for the first nine months of 2020. The decrease in revenue was primarily due to a decrease in actual pension expenses relative to adopted in the first nine months of 2021 as compared to the first nine months of 2020. 25 -------------------------------------------------------------------------------- Table of Contents 4.The deferral of revenue consists of amounts that are expected to be collected from customers beyond 24 months following the end of the accounting period in which these revenues were recorded. The deferral increased in the first nine months of 2021 as compared to the first nine months of 2020 due to an increase in the balancing account revenue expected to be collected beyond 24 months. Total Operating Expenses Total operating expenses increased$7.8 million , or 1.6%, to$501.3 million for the first nine months of 2021, as compared to$493.5 million for the first nine months of 2020. Water production costs consists of purchased water, purchased power, and pump taxes. It represents the largest component of total operating expenses, accounting for approximately 42.8% of total operating expenses in the first nine months of 2021, as compared to 42.6% of total operating expenses in the first nine months of 2020. Water production costs increased 2.0% in the first nine months of 2021 as compared to the same period last year primarily due to a 2.8% increase in water production. Sources of water as a percent of total water production are listed in the following table: Nine Months Ended September 30 2021 2020 Well production 48 % 45 % Purchased 48 % 50 % Surface 4 % 5 % Total 100 % 100 %
The components of water production costs are shown in the table below:
Nine Months Ended September 30
2021 2020 Change
Purchased water $ 174,508 $ 175,485 $ (977)
Purchased power 28,796 25,887 2,909
Pump taxes 11,384 9,090 2,294
Total $ 214,688 $ 210,462 $ 4,226
Administrative and general and other operations expenses increased $0.8 million ,
or 0.5%, to $156.2 million in the first nine months of 2021, as compared to
$155.4 million in the first nine months of 2020. The increase was primarily due
to a $3.4 million increase in employee wages, $2.7 million increase in water and
wastewater treatment cost, $1.4 million increase in uninsured losses, $0.9
million in district office expenses, $0.8 million increase in software
maintenance costs, $0.7 million of conservation program costs, and $0.5 million
of write off of capital costs, which was partially offset by a $6.7 million
decrease in costs associated with deferred WRAM revenue and $3.6 million
decrease in bad debt costs. Changes in employee pension benefits 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. Employee and retiree medical expenses are recovered up to 85% of the
variance between adopted and recorded expenses.
Maintenance expense increased $0.2 million , or 0.9%, to $21.1 million in the
first nine months of 2021, as compared to $20.9 million in the first nine months
of 2020, mostly due to an increase in repairs of transmission and distribution
mains, tanks, and services.
Depreciation and amortization expense increased $7.8 million , or 10.6%, to $81.5
million in the first nine months of 2021, as compared to $73.7 million in the
first nine months of 2020, mostly due to capital additions in 2020.
Income tax expense decreased $6.9 million to $3.6 million in the first nine
months of 2021, as compared to $10.5 million in the first nine months of 2020.
The decrease was primarily due to a decrease in the effective tax rate partially
offset by an increase in pre-tax net operating income. The decrease in the
effective tax rate for the first nine months of 2021 was due to a $7.5 million
increase in refunds of 2017 excess deferred federal income taxes partially
offset by a reduction in state tax benefits from repairs deductions.
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Property and other taxes increased $1.7 million to $24.2 million in the first
nine months of 2021, as compared to $22.5 million in the same period of 2020,
mostly due to an increase in assessed property values.
Other Income and Expenses
Net other income increased $12.6 million to $13.1 million in the first nine
months of 2021, as compared to a net other income of $0.5 million in the first
nine months of 2020, due primarily to a $11.3 million decrease in other
components of net periodic benefit cost and $1.5 million increase in unrealized
gain from non-qualified benefit plan investments due to favorable market
conditions partially offset by a $2.0 million decrease in allowance for equity
funds used during construction.
Interest Expense
Net interest expense increased $1.1 million , or 3.5%, to $31.9 million in the
first nine months of 2021, as compared to $30.8 million in the first nine months
of 2021. The increase was due primarily to an increase in financing to support
the capital investment program from the 2018 GRC.
REGULATORY MATTERS
2021 California Regulatory Activity
California GRC Filing
On October 14, 2020 , an ALJ with the CPUC issued a proposed decision for Cal
Water's 2018 GRC filing, which was approved by the CPUC on December 4, 2020 . The
new rates were implemented on February 1, 2021 .
The CPUC follows a rate case plan, which requires Cal Water to file a GRC for
each of its regulated operating districts (except Grand Oaks) every three years.
In a GRC proceeding, the CPUC not only considers the utility's rate setting
requests, but may also consider other issues that affect the utility's rates and
operations. The CPUC is generally required to issue its GRC decision prior to
the first day of the test year or authorize interim rates.
On July 2, 2021 , Cal Water filed its 2021 GRC requesting water infrastructure
investments of $1.0 billion in accordance with the rate case plan for all of its
regulated operating districts for the years 2022, 2023, and 2024. The CPUC will
evaluate the water infrastructure improvement investments along with operating
budgets to establish water rates that reflect the actual cost of service. The
CPUC will also evaluate Cal Water's proposed rate design changes that would
improve revenue stability and provide a discounted unit rate to the first six
units of water per month for residential customers. In the proposal, this block
of usage would be charged at 25% of the average rate. The CPUC has recognized
this six-unit block as essential for basic needs. The required filing begins an
approximately 18-month review process, with any changes in customer rates
expected to become effective in 2023. Cal Water has proposed to the CPUC to
increase revenues by $80.5 million , or 11.1%, in 2023; $43.6 million , or 5.4%,
in 2024; and $43.2 million , or 5.1%, in 2025 to support these investments. If
approved as filed, we expect that this would cost the average residential
customer less than an additional $5 per month across all of Cal Water's service
areas.
IRMA
The 2018 GRC was approved in December of 2020 and final rates for the 2018 GRC
were implemented as of February 1, 2021 ; as a result, Cal Water calculated and
recorded a regulatory asset of $55.7 million and a corresponding increase to
revenue for the difference between final rates and interim rates for the
13-month period January 1, 2020 to January 31, 2021 . Cal Water also recorded a
regulatory liability of $1.6 million and a corresponding decrease to regulatory
assets for LIRA and RSF program credits that would have been given to customers
had the rate case been approved on time.
In April of 2021, Cal Water submitted an advice letter to request amortization
of the IRMA. The new rates were implemented on April 15, 2021 . In May of 2021,
Cal Water submitted an advice letter to adjust the rates that were implemented
on April 15, 2021 . The updated rates were implemented on June 15, 2021 .
2020 Cost of Capital Application
On May 3, 2021 , Cal Water filed its required application with the CPUC to review
its cost of capital for 2022 through 2024. Cal Water requested a return on
equity of 10.35%, a cost of debt of 4.23%, and a 53.4% equity capital structure.
The CPUC will evaluate the proposal along with proposals of other parties and,
according to its standard process, is currently expected to issue a decision
early in 2022.
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California Drought Memorandum Account (DRMA)
In June of 2021, Cal Water submitted advice letters to request a DRMA to track
the incremental operational and administrative costs incurred to further
implement updated Rule 14.1 for voluntary conservation measures and Schedule
14.1 for mandatory rationing measures, including activities related to enhanced
conservation efforts, staffing, and capital expenditures to ensure a safe,
reliable supply of water. The DRMA would also track monies paid by customers for
fines, penalties, or other compliance measures associated with water use
violations; and penalties paid by Cal Water to its water wholesalers. The advice
letters were approved by the CPUC with an effective date of June 14, 2021 .
Escalation Increase Requests
As part of the decision on the 2018 GRC, Cal Water was authorized to request
annual escalation rate increases for 2021 for those districts that passed the
earnings test. In December of 2020, Cal Water requested escalation rate
increases for 2021 in 13 of its regulated districts. The annual adopted gross
revenue associated with the December 2020 filing was $8.2 million . The new rates
were implemented on February 1, 2021 .
Expense Offset Requests
Expense offsets are dollar-for-dollar increases in revenue to match increased
expenses, and therefore do not affect net operating income. In December of 2020,
Cal Water submitted an advice letter to request offsets for increases in
purchased water costs and pump taxes in seven of its regulated districts
totaling $5.5 million . The new rates were implemented on February 1, 2021 .
In September of 2021, Cal Water submitted an advice letter to request offsets
for increases in purchased water costs and pump taxes in one of its regulated
districts totaling $1.8 million . The new rates were implemented on October 1,
2021 .
Rate Base Offset Requests
For construction projects authorized in GRCs as advice letter projects, Cal
Water is allowed to request rate base offsets to increase revenues after the
project goes into service. In July of 2020, Cal Water submitted an advice letter
to recover $9.0 million of annual revenue increase for a rate base offset in one
of its regulated districts. The new rates were implemented on February 1, 2021 .
WRAM/MCBA Filings
In April of 2021, Cal Water submitted an advice letter to true up the revenue
under-collections for the 2020 annual WRAMs/MCBAs of its regulated districts. A
net under-collection of $39.6 million is being recovered/refunded from/to
customers in the form of 12, 18, and greather-than-18-month surcharges and 6 and
12 month surcredits. The new rates incorporate net WRAM/MCBA balances that were
previously approved for recovery, and were implemented on April 15, 2021 .
2015 GRC PCBA and HCBA Filings
During the first six months of 2021, Cal Water submitted advice letters to
amortize the PCBA and HCBA from the 2015 GRC that tracked the difference between
adopted and actual costs for the period of 2017-2019. For the PCBA, $21.3
million is being recovered from customers in the form of 12 and 24 month
surcharges as actual pension costs during 2017-2019 were higher than the adopted
pension costs. For the HCBA, $4.3 million is being refunded to customers in the
form of 12 month surcredits as actual health care costs during 2017-2019 were
lower than the adopted health care costs. The new rates were implemented on June
15, 2021 .
Regulatory Activity - Other States
Kona Water Service Company GRC (Hawaii Water)
In May of 2021, Hawaii Water submitted a private letter ruling (PLR) to the IRS
requesting a ruling on the treatment of deferred taxes as a result of the TCJA.
A decision on the PLR is expected later this year.
Kapalua Water Company and Kapalua Waste Treatment (Hawaii Water)
In the first quarter of 2021, Hawaii Water Service received approval from the
Hawaii Public Utilities Commission (HPUC) to acquire the assets of Kapalua Water
Company and Kapalua Waste Treatment Company from Maui Land and Pineapple
Company. Hawaii Water took control of the water and wastewater systems on May 1,
2021 .
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HOH Utilities Company (Hawaii Water)
In June of 2021, Hawaii Water signed an agreement to acquire the assets of HOH
Utilities Company , a wastewater utility located in the growing Poipu/Koloa area
of Kauai County on the island of Kauai . The acquisition is subject to
satisfaction of customary closing conditions, including approval by the HPUC.
Hawaii Water is expected to own and manage the wastewater utility, which
currently serves almost 1,800 residential, commercial, and resort customers in
Poipu and Koloa , including three hotels, condominiums, multi-family housing, a
golf course, and single-family homes.
An application for approval of the transaction was submitted to the HPUC in
September of 2021.
Kalaeloa Water Company GRC (Hawaii Water)
In August of 2021, a GRC application requesting an increase of revenues for
Kalaeloa was submitted with the HPUC. If approved, the combined increase for
water and sewer service revenue is $0.3 million . A commission decision is
expected in the third quarter of 2022.
BVRT Utility Holding Company (BVRT) (Texas Water)
In May of 2021, Texas Water became the majority owner of BVRT, a Texas -based
utility development company owning and operating four wastewater utilities
serving growing communities outside of Austin and San Antonio. Texas Water
initially invested funds to enable BVRT to continue to build wastewater
infrastructure and converted its investment to equity. BVRT's four wastewater
utilities currently serve or are under contract to serve over 4,000 connections,
with an estimated potential total build-out of more than 61,000 connections.
2021 Washington Water GRC (Washington Water )
On July 15, 2021 , Washington Water filed a GRC application with the Washington
Utilities and Transportation Commission (WUTC) requesting a phased-in
consolidation of its East Pierce Water System with its legacy Washington Water
system. The requested annual revenue increase is $3.1 million and is proposed to
be phased-in over 3 years. The WUTC will evaluate the GRC application and is
expected to issue a decision in the first quarter of 2022.
LIQUIDITY
Cash flow from Operations
Cash flow from operations for the first nine months of 2021 was $179.2 million
compared to $96.7 million for the same period in 2020. The increase in the first
nine months of 2021 as compared to 2020 was primarily due to billing the 2018
GRC rate relief for 2020 and 2021 in 2021. Cash generated by operations varies
during the year due to customer billings, and timing of collections and
contributions to our benefit plans.
During the first nine months of 2021, we made contributions of $18.9 million to
our employee pension plan compared to contributions of $25.8 million during the
first nine months of 2020. During the first nine months of 2021, we made
contributions of $1.9 million to the other postretirement benefit plans compared
to contributions of $5.7 million during the first nine months of 2020. The
full-year 2021 estimated cash contribution to the pension plans and other
postretirement benefits plans are expected to be approximately $23.5 million and
$2.2 million , respectively.
The water business is seasonal. Billed revenue is lower in the cool, wet winter
months when less water is used compared to the warm, dry summer months when
water use is highest. This seasonality results in the possible need for
short-term borrowings under the unsecured revolving credit facilities in the
event cash is not available to cover operating and utility plant costs during
the winter period. The increase in cash flows during the summer allows
short-term borrowings to be paid down. Customer water usage can be lower than
normal in drought years and when greater-than-normal precipitation falls in our
service areas or temperatures are lower than normal, especially in the summer
months.
Investing Activities
During the first nine months of 2021 and 2020, we used $207.7 million and $221.3
million , respectively, of cash for Company-funded and developer-funded utility
plant expenditures. Annual expenditures fluctuate each year due to the
availability of construction resources and our ability to obtain construction
permits in a timely manner. For 2021, we estimate utility plant expenditures to
be between $270.0 million and $300.0 million .
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Financing Activities
Net cash provided by financing activities was $132.6 million during the first
nine months of 2021 compared to $237.1 million of net cash provided by financing
activities for the same period in 2020. For 2021, this includes our issuance of
$280.0 million of First Mortgage Bonds, $127.0 million of Company common stock
through our at-the-market equity program, and $1.5 million through our employee
stock purchase plan. For 2020, this includes our issuance of $57.3 million of
Company common stock through our at-the-market equity program and $1.3 million
through our employee stock purchase plan.
During the first nine months of 2021 and 2020, we borrowed $180.0 million and
$270.0 million , respectively, on our unsecured revolving credit facilities. We
made a repayment on our unsecured revolving credit facilities of $430.0 million
and $70.0 million during the first nine months of 2021 and 2020, respectively.
The net WRAM and MCBA receivable balances were $72.7 million as of September 30,
2021 and 2020, respectively. The receivable balances were primarily financed by
Cal Water using short-term and long-term financing arrangements to meet
operational cash requirements. Interest on the receivable balances, which
represents the interest recoverable from customers, is limited to the
then-current 90-day commercial paper rates which typically are significantly
lower than Cal Water's short and long-term financing rates.
Short-Term and Long-Term Financing
During the first nine months of 2021, we utilized cash generated from
operations, borrowings on the unsecured revolving credit facilities, issuance of
First Mortgage Bonds, and cash received from the sale of Company common stock
through our at-the-market equity program to fund operations and capital
investments.
In future periods, management anticipates funding our utility plant needs
through a relatively balanced approach between debt and equity.
Short-term liquidity is provided by our unsecured revolving credit facilities
and internally generated funds. Long-term financing is accomplished through the
use of both debt and equity. The Company and subsidiaries that it designates may
borrow up to $150.0 million under the Company's revolving credit facility. Cal
Water may borrow up to $400.0 million under its revolving credit facility;
however, all borrowings must be repaid within 24 months unless a different
period is required or authorized by the CPUC. The proceeds from the unsecured
revolving credit facilities may be used for working capital purposes, including
the short-term financing of utility plant projects.
As of September 30, 2021 and December 31, 2020 , there were short-term borrowings
of $120.0 million and $370.0 million , respectively, outstanding on the unsecured
revolving credit facilities.
Given our ability to access our lines of credit on a daily basis, cash balances
are managed to levels required for daily cash needs and excess cash is invested
in short-term or cash equivalent instruments. Minimal operating levels of cash
are maintained for Washington Water , New Mexico Water, and Hawaii Water.
Both short-term credit agreements contain affirmative and negative covenants and
events of default customary for credit facilities of this type including, among
other things, limitations and prohibitions relating to additional indebtedness,
liens, mergers, and asset sales. Also, these unsecured credit agreements contain
financial covenants governing the Company and its subsidiaries' consolidated
total capitalization ratio not to exceed 66.7% and an interest coverage ratio of
three or more. As of September 30, 2021 , we are in compliance with all of the
covenant requirements and are eligible to use the full amount of the undrawn
portion of our unsecured revolving credit facilities.
Long-term financing, which includes First Mortgage Bonds, other debt securities,
and common stock, has typically been used to replace short-term borrowings and
fund utility plant expenditures. Internally generated funds, after making
dividend payments, provide positive cash flow, but have not been at a level to
meet the needs of our utility plant expenditure requirements. Management expects
this trend to continue given our planned utility plant expenditures for the next
five years. Some utility plant expenditures are funded by payments received from
developers for contributions in aid of construction or advances for
construction. Funds received for contributions in aid of construction are
non-refundable, whereas funds classified as advances in construction are
generally refundable over 40 years. Management believes long-term financing is
available to meet our cash flow needs through issuances in both debt and equity
instruments.
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OnMay 11, 2021 ,Cal Water completed the sale and issuance of$280.0 million in aggregate principal amount of First Mortgage Bonds (the Bonds) in a private placement. The Bonds consist of$130.0 million of 2.87% bonds, series ZZZ, maturingMay 11, 2051 , and$150.0 million of 3.02% bonds, series 1, maturingMay 11, 2061 . Interest on the bonds will accrue semi-annually and be payable in arrears onMay 11 andNovember 11 of each year, commencing onNovember 11, 2021 . The Bonds rank equally with all ofCal Water's other First Mortgage Bonds and are secured by liens onCal Water's properties, subject to certain exceptions and permitted liens.Cal Water used the net proceeds from the sale of the Bonds to refinance existing indebtedness and for general corporate purposes Summarized Financial Information for Guarantors and the Issuer ofGuaranteed Securities . OnApril 17, 2009 ,Cal Water (Issuer) issued$100.0 million aggregate principal amount of 5.500% First Mortgage Bonds due 2040, all of which are fully and unconditionally guaranteed by the Company (Guarantor). Certain subsidiaries of the Company do not guarantee the security and are referred to as Non-guarantors. The Guarantor fully, absolutely, irrevocably and unconditionally guarantees the due and punctual payment when due, whether at stated maturity, by acceleration, by notice of prepayment or otherwise, of the principal of, premium, if any, and interest on the bonds. The bonds rank equally amongCal Water's other First Mortgage Bonds. The following tables present summarized financial information of the Issuer subsidiary and the Guarantor. The information presented below excludes eliminations necessary to arrive at the information on a consolidated basis. In presenting the summarized financial statements, the equity method of accounting has been applied to the Guarantor interests in the Issuer. The summarized information excludes financial information of the Non-issuers, including earnings from and investments in these entities. Summarized Statement of Operations Nine Months Ended September 30, Twelve Months Ended December 31, (in thousands) 2021 2020 Issuer Guarantor Issuer Guarantor Net sales$ 568,420 $ -$ 745,034 $ - Gross profit$ 363,136 $ -$ 477,915 $ - Income from operations$ 110,303 $ 118 $ 130,761 $ 331 Equity in earnings of guarantor $ -$ 96,686 $ -$ 92,244 Net income$ 90,812 $ 97,543 $ 92,244 $ 92,760 Summarized Balance Sheet Information (in thousands) As of September 30, 2021 As of December 31, 2020 Issuer Guarantor Issuer Guarantor Current assets$ 360,258 $ 3,293 $ 227,030 $ 20,075 Intercompany receivable from non-issuer and issuer subsidiaries $ 749$ 44,036 $ 4,905 $ 20,022 Other assets$ 445,070 $ 1,114,548 $ 433,837 $ 943,665 Long-term intercompany receivable from non-issuer subsidiaries $ -$ 27,120 $ -$ 37,985 Net utility plant$ 2,578,907 $ 47 $ 2,459,992 $ 117 Total assets$ 3,384,984 $
1,189,044
Current liabilities$ 259,313 $ 90,000 $ 481,247 $ 100,124 Intercompany payable to guarantor and non-issuer subsidiary$ 5,242 $ -$ 402 $ - Long-term debt$ 1,059,468 $ -$ 780,790 $ - Other liabilities$ 1,057,076 $ 2,064 $ 1,034,098 $ 1,725 Total Liabilities$ 2,381,099 $ 92,064 $ 2,296,537 $ 101,849 Dividends During the first nine months of 2021, our quarterly common stock dividend payments were$0.6900 per share compared to$0.6375 per share during the first nine months of 2020. For the full year 2020, the payout ratio was 43.1% of net income. On a long-term basis, our goal is to achieve a dividend payout ratio of 60% of net income accomplished through future earnings growth. 31 -------------------------------------------------------------------------------- Table of Contents At theOctober 27, 2021 meeting, the Company's Board of Directors declared the third quarter dividend of$0.2300 per share payable onNovember 19, 2021 , to stockholders of record onNovember 8, 2021 . This was our 307th consecutive quarterly dividend. 2021 Financing Plan We intend to fund our utility plant needs in future periods through a relatively balanced approach between long-term debt and equity. The Company andCal Water have a syndicated unsecured revolving line of credit of$150.0 million and$400.0 million , respectively, for short-term borrowings. As ofSeptember 30, 2021 , the Company's andCal Water's availability on these unsecured revolving lines of credit was$60.0 million and$370.0 million , respectively. OnMay 11, 2021 ,Cal Water completed the sale and issuance of$280.0 million in aggregate principal amount of First Mortgage Bonds in a private placement and used the net proceeds from the sale to refinance existing indebtedness and for general corporate purposes. Book Value and Stockholders of Record Book value per common share was$21.21 atSeptember 30, 2021 compared to$18.30 atDecember 31, 2020 . There were approximately 1,929 stockholders of record for our common stock as ofAugust 9, 2021 . Utility Plant Expenditures During the first nine months of 2021, utility plant expenditures totaled$207.7 million for Company-funded and developer-funded projects. For 2021, we estimate utility plant expenditures to be between$270.0 million and$300.0 million . We do not control third-party-funded utility plant expenditures and therefore are unable to estimate the amount of such projects for 2021. As ofSeptember 30, 2021 , construction work in progress was$234.5 million . Construction work in progress includes projects that are under construction but not yet complete and placed in service. WATER SUPPLY Our source of supply varies among our operating districts. Certain districts obtain all of their supply from wells; some districts purchase all of their supply from wholesale suppliers; and other districts obtain supply from a combination of wells and wholesale suppliers. A small portion of supply comes from surface sources and is processed through Company-owned water treatment plants. To the best of management's knowledge, we are meeting water quality, environmental, and other regulatory standards for all Company-owned systems. Historically, approximately half of our annual water supply is pumped from wells. State groundwater management agencies operate differently in each state. Some of our wells extract ground water from water basins under state ordinances. These are adjudicated groundwater basins, in which a court has settled the dispute between landowners or other parties over how much annual groundwater can be extracted by each party. All of our adjudicated groundwater basins are located in theState of California . Our annual groundwater extraction from adjudicated groundwater basins approximates 5.8 billion gallons or 12.3% of our total annual water supply pumped from wells. Historically, we have extracted less than 100% of our annual adjudicated groundwater rights and have the right to carry forward up to 20% of the unused amount to the next annual period. All of our remaining wells extract ground water from managed or unmanaged water basins. There are no set limits for the ground water extracted from these water basins. Our annual groundwater extraction from managed groundwater basins approximates 27.5 billion gallons or 58.0% of our total annual water supply pumped from wells. Our annual groundwater extraction from unmanaged groundwater basins approximates 14.1 billion gallons or 29.7% of our total annual water supply pumped from wells. Most of the managed groundwater basins we extract water from have groundwater recharge facilities. We are required to pay well pump taxes to financially support these groundwater recharge facilities. Our well pump taxes were$4.2 million and$3.0 million for the three months endedSeptember 30, 2021 and 2020, respectively. For the nine months endedSeptember 30, 2021 and 2020 our well pump taxes were$11.4 million and$9.1 million , respectively. In 2014, theState of California enacted the Sustainable Groundwater Management Act of 2014. The law and its implementing regulations require most basins to select a sustainability agency by 2017, develop a sustainability plan by 2022, and show progress toward sustainability by 2027. We expect that after the act's provisions are fully implemented, substantially all the Company'sCalifornia groundwater will be produced from sustainably managed and adjudicated basins.California's normal weather pattern yields little precipitation between mid-spring and mid-fall. The Washington Water service areas receive precipitation in all seasons, with the heaviest amounts during the winter. New Mexico Water's rainfall is heaviest in the summer monsoon season. Hawaii Water receives precipitation throughout the year, with the largest amounts in the winter months. Water usage in all service areas is highest during the warm and dry summers and declines in 32 -------------------------------------------------------------------------------- Table of Contents the cool winter months. Rain and snow during the winter months inCalifornia replenish underground water aquifers and fill reservoirs, providing the water supply for subsequent delivery to customers. As ofAugust 31, 2021 , theState of California snowpack water content during the 2021-2022 water year is 0% of long-term averages (per theCalifornia Department of Water Resources , Northern Sierra Precipitation Accumulation report). The northern Sierra region is the most important for the state's urban water supplies. The central and southern portions of the Sierras have recorded 0% and 0%, respectively, of long-term averages. Management believes that, notwithstanding lower-than-average snowpack water content, supply pumped from underground aquifers and purchased from wholesale suppliers will be adequate to meet customer demand during 2021 and beyond. Long-term water supply plans are developed for each of our districts to help assure an adequate water supply under various operating and supply conditions. Some districts have unique challenges in meeting water quality standards, but management believes that supplies will meet current standards using currently available treatment processes. OnMay 31, 2018 ,California's Governor signed two bills (Assembly Bill 1668 and Senate Bill 606) into law that will establish long-term standards for water use efficiency. The bills revise and expand the existing urban water management plan requirements to include five year drought risk assessments, water shortage contingency plans, and annual water supply/demand assessments. ByJune 30, 2022 , theCalifornia State Water Resources Control Board , in conjunction with theCalifornia Department of Water Resources , is expected to establish long-term water use standards for indoor residential use, outdoor residential use, water losses and other uses.Cal Water will also be required to calculate and report on urban water use target byNovember 1, 2023 and eachNovember 1 thereafter that compares actual urban water use to the target. Management believes thatCal Water is well-positioned to comply with all such regulations. CONTRACTUAL OBLIGATIONS During the nine months endedSeptember 30, 2021 , there were no material changes in contractual obligations outside the normal course of business.
Item 3.
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