SAN JOSE, Calif., July 26, 2018 (GLOBE NEWSWIRE) -- California Water Service Group (NYSE: CWT) today announced net income of $13.0 million or $0.27 earnings per diluted common share for the second quarter of 2018, compared to net income of $18.5 million or $0.39 earnings per diluted common share for the second quarter of 2017.

The $5.5 million decrease in net income was driven primarily by $3.6 million of new business development expenses, a reduction in operating revenue of $1.7 million due to the cost of capital decision for California Water Service (Cal Water), $1.7 million in additional depreciation and amortization costs, $1.2 million in additional wage costs, a $0.7 million increase in maintenance expense, and $1.3 million in additional interest expenses all of which were partially offset by rate increases of $4.5 million.

In addition, there were other changes driven primarily by factors outside the Company’s immediate control that decreased net income, including a $2.5 million reduction in unbilled revenue accrual, a $0.6 million reduction in unrealized income from certain benefit plan investments due to market conditions, and a $0.4 million decrease in gain on sale of property that was partially offset by a $1.1 million benefit from Company-owned life insurance.

“Our results for the second quarter were in line with expectations, and I’m pleased by efforts in two key areas that will add value over the longer term,” said President and Chief Executive Officer Martin A. Kropelnicki.

“First, on July 2, 2018, as scheduled, we filed a General Rate Case requesting new water infrastructure investments of $828.5 million throughout California over the three-year period from January 1, 2019 to December 31, 2021. More than half of Cal Water’s proposed infrastructure improvements relate to its transmission and distribution pipeline replacement program, and all are necessary to upgrade aging water system infrastructure. The filing requests the California Public Utilities Commission to increase revenues by $50.7 million, or 7.6%, in 2020; $31.5 million, or 4.4%, in 2021; and $33.0 million, or 4.4%, in 2022. These requested infrastructure improvements enable the delivery of safe, reliable, and high-quality water supply for both our customers’ everyday needs and for emergency response by firefighters and other first responders,” he said.

“Second, we continued our efforts to engage with the SJW Group Board of Directors to discuss a transaction between our two companies that will deliver substantial value to SJW Group customers and stockholders as well as Cal Water’s customers and shareholders,” said President and Chief Executive Officer Martin A. Kropelnicki.

Additional Financial Results for the Second Quarter of 2018

Total revenue increased 0.9% to $172.6 million in the second quarter of 2018 compared to $171.1 million in the second quarter of 2017. Rate increases added $4.5 million, rate increases for water production cost offsets added $1.3 million, balancing account adjustments added $0.9 million, and deferred revenue adjustments added $1.7 million. These increases were partially offset by a $1.7 million reduction in revenue associated with the cost of capital decision for Cal Water, a $2.8 million reduction to revenue due to the requirements of regulators to credit customers for the decrease in the corporate federal income tax rate from 35 percent to 21 percent, effective January 1, 2018, and a $2.5 million decrease in accrued unbilled revenue.

Total operating expenses increased $3.1 million, or 2.2%, to $147.6 million in the second quarter of 2018 compared to $144.5 million in the second quarter of 2017.

Water production expenses increased $1.3 million, or 1.9%, to $65.4 million in the second quarter of 2018 compared to $64.1 million in the second quarter of 2017, primarily due to increases in purchased water quantities and higher wholesale water rates. The California revenue decoupling mechanisms record an increase to revenue equal to the increase in California water production costs.

Administrative & General and Other Operations expenses increased $5.4 million to $45.1 million in the second quarter of 2018, primarily due to a $1.4 million increase in the recognition of previously deferred costs associated with the deferred operating revenue, a pension benefit cost increase of $1.4 million, increases in employee wages of $1.0 million, an increase of $0.3 million in water quality testing costs due to additional TCP testing requirements, and the write-off of $0.3 million of costs previously capitalized. Changes in employee pension benefits for regulated California operations generally do not affect earnings, as the Company is allowed by the California Public Utilities Commission (CPUC) to record these costs in balancing accounts for future recovery, creating a corresponding change to revenue.

Maintenance expenses increased $0.7 million, or 14.5%, to $5.4 million in the first quarter of 2018, due to increased costs for repairs of transmission & distribution mains and services.

Income tax expense decreased $6.3 million, primarily due to the federal income tax rate reduction from 35 percent to 21 percent, effective January 1, 2018, and a decrease in operating income. The Company’s estimated combined effective income tax rate for 2018 is in the range from 23 to 25 percent.

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

Net other loss, net of income tax benefits, increased $2.6 million to a net loss of $2.2 million in the second quarter of 2018, as compared to a net other income of $0.4 million in the second quarter of 2017, principally due to $3.6 million of new business development expenses, a $0.6 million reduction in unrealized income from certain benefit plan investments due to market conditions, and a $0.4 million decrease in gain on sale of property that was partially offset by a $1.1 million benefit from Company-owned life insurance. Year-to-Date Results

For the six-month period ended June 30, 2018, net income was $10.5 million or $0.22 earnings per diluted common share, compared to net income of $19.7 million or $0.41 earnings per diluted common share for the six-month period ended June 30, 2017.

The $9.2 million decrease in net income was primarily due to $3.9 million of new business development expenses, a reduction in operating revenue of $2.9 million due to the cost of capital decision for Cal Water, $3.2 million in additional depreciation and amortization costs, $2.5 million in additional wage costs, a $0.7 million increase in uninsured loss costs due to water main breaks, and $1.8 million in additional interest expenses which were partially offset by a rate increase of $9.2 million. In addition, there were other changes driven primarily by factors outside the Company’s immediate control that decreased net income, including a $3.2 million reduction in unbilled revenue accrual, a $2.0 million reduction in unrealized income from certain benefit plan investments due to market conditions, and a $0.6 million decrease in gain on sale of property which was partially offset by a $1.1 million benefit from Company owned life insurance.

Water System Improvements

During the first six months of 2018, the total Company-funded and developer-funded capital investment was $133.9 million, an increase of $25.2 million, or 23.2%, compared to $108.7 million in the first six months of 2017. The increase was primarily due to Cal Water TCP water treatment projects.

California Revenue Decoupling Mechanisms

The under-collected net receivable balance in the Water Revenue Adjustment Mechanism (WRAM) and Modified Cost Balancing Account (MCBA) was $65.8 million as of June 30, 2018, a decrease of 4.8%, or $3.3 million, from the balance of $69.1 million as of December 31, 2017. Cal Water used its CPUC-authorized Sales Reconciliation Mechanism (SRM) to adjust its adopted sales forecast for 2018.

Regulatory Update

On July 2, 2018, Cal Water filed a General Rate Case requesting new water infrastructure investments of $828.5 million throughout California over the three-year period from January 1, 2019 to December 31, 2021. The filing begins an 18-month review process, with any changes in customer rates expected to become effective in 2020. Cal Water has proposed to the Commission to increase revenues by $50.7 million, or 7.6%, in 2020; $31.5 million, or 4.4%, in 2021; and $33.0 million, or 4.4%, in 2022 as compared to the last authorized revenue.

Other Information

All stockholders and interested investors are invited to listen to the second quarter 2018 conference call, which will be held today at 11:00 a.m. ET, by dialing 1-833-832-5130 or 1-509-844-0151 and keying in ID# 5397913. A replay of the call will be available from 2:00 p.m. ET on Thursday, July 26, 2018 through September 24, 2018, at 1-855-859-2056 or 1-404-537-3406, ID# 5397913. The replay will also be available under the investor relations tab at www.calwatergroup.com. The call will be hosted by President and Chief Executive Officer Martin A. Kropelnicki and Vice President and Chief Financial Officer Thomas F. Smegal. Prior to the call, the Company will post a slide presentation on its website. The presentation can be found at www.calwatergroup.com/docs/2018q2slides.pdf after 6:00 a.m. PT.

California Water Service Group is the parent company of California Water Service, Washington Water Service, New Mexico Water Service, Hawaii Water Service, CWS Utility Services, and HWS Utility Services. Together, these companies provide regulated and non-regulated water service to nearly 2 million people in California, Washington, New Mexico, and Hawaii. California Water Service Group’s common stock trades on the New York Stock Exchange under the symbol “CWT.” Additional information is available online at www.calwatergroup.com.

This news release contains forward-looking statements within the meaning established by the Private Securities Litigation Reform Act of 1995 ("Act"). The forward-looking statements are intended to qualify under provisions of the federal securities laws for "safe harbor" treatment established by the Act. Forward-looking statements are based on currently available information, expectations, estimates, assumptions and projections, and management's judgment about the Company, the water utility industry and general economic conditions. Such words as would, expects, intends, plans, believes, estimates, assumes, anticipates, projects, predicts, forecasts or variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not guarantees of future performance. They are subject to uncertainty and changes in circumstances. Actual results may vary materially from what is contained in a forward-looking statement. Factors that may cause a result different than expected or anticipated include, but are not limited to: governmental and regulatory commissions' decisions; consequences of eminent domain actions relating to our water systems; changes in regulatory commissions' policies and procedures; the timeliness of regulatory commissions' actions concerning rate relief; inability to renew leases to operate city water systems on beneficial terms; changes in California State Water Resources Control Board water quality standards; changes in environmental compliance and water quality requirements; electric power interruptions; changes in customer water use patterns and the effects of conservation; the impact of weather and climate on water availability, water sales and operating results; the unknown impact of contagious diseases on the Company’s operations; civil disturbances or terrorist threats or acts, or apprehension about the possible future occurrences of acts of this type; labor relations matters as we negotiate with the unions; restrictive covenants in or changes to the credit ratings on our current or future debt that could increase our financing costs or affect our ability to borrow, make payments on debt or pay dividends; and, other risks and unforeseen events. When considering forward-looking statements, you should keep in mind the cautionary statements included in this paragraph, as well as the annual 10-K, Quarterly 10-Q, and other reports filed from time-to-time with the Securities and Exchange Commission (SEC). The Company assumes no obligation to provide public updates of forward-looking statements.

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands, except per share data)			June 30,				December 31,
			2018				2017
ASSETS
Utility plant:
	Utility plant		$	3,094,616			$	2,970,179
	Less accumulated depreciation and amortization			(964,352	)			(922,214	)
		Net utility plant		2,130,264				2,047,965
Current assets:
	Cash and cash equivalents			33,668				94,776
	Receivables:
		Customers		44,700				32,451
		Regulatory balancing accounts		33,257				36,783
		Other		19,859				16,464
	Unbilled revenue			36,192				29,756
	Materials and supplies at weighted average cost			6,714				6,463
	Taxes, prepaid expenses, and other assets			15,180				11,180
		Total current assets		189,570				227,873
Other assets:
	Regulatory assets			405,297				401,147
	Goodwill			2,615				2,615
	Other assets			61,768				60,775
		Total other assets		469,680				464,537
Total Assets			$	2,789,514			$	2,740,375
CAPITALIZATION AND LIABILITIES
Capitalization:
	Common stock, $.01 par value; 68,000 shares authorized, 48,070 and 48,012 outstanding in 2018 and 2017, respectively		$	481			$	480
	Additional paid-in capital			336,238				336,229
	Retained earnings			349,213				356,753
		Total common stockholders' equity		685,932				693,462
	Long-term debt, less current maturities			414,530				515,793
		Total capitalization		1,100,462				1,209,255
Current liabilities:
	Current maturities of long-term debt			105,024				15,920
	Short-term borrowings			325,100				275,100
	Accounts payable			93,032				93,955
	Regulatory balancing accounts			56,317				59,303
	Accrued interest			5,751				6,122
	Accrued expenses and other liabilities			37,076				40,559
		Total current liabilities		622,300				490,959
Unamortized investment tax credits				1,724				1,724
Deferred income taxes				196,109				192,946
Pension and postretirement benefits other than pensions				256,431				252,141
Regulatory liabilities and other				238,912				224,127
Advances for construction				185,286				182,502
Contributions in aid of construction				188,290				186,721
Commitments and contingencies
Total Capitalization and Liabilities			$	2,789,514			$	2,740,375

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,
			2018				2017
Operating revenue			$	172,632			$	171,132
Operating expenses:
	Operations:
		Water production costs		65,373				64,131
		Administrative and general		24,383				21,413
		Other operations		20,724				18,328
	Maintenance			5,389				4,708
	Depreciation and amortization			20,953				19,218
	Income taxes			4,347				10,606
	Property and other taxes			6,407				6,057
	Total operating expenses			147,576				144,461
		Net operating income		25,056				26,671
Other income and expenses:
	Non-regulated revenue			4,845				3,739
	Non-regulated expenses			(6,115	)			(1,614	)
	Other components of net periodic benefit cost			(2,463	)			(2,383	)
	Allowance for equity funds used during construction			710				879
	Income tax benefit (expense) on other income and expenses			819				(246	)
		Net other (loss) income		(2,204	)			375
Interest expense:
	Interest expense			10,134				9,079
	Allowance for borrowed funds used during construction			(304	)			(564	)
		Net interest expense		9,830				8,515
Net income			$	13,022			$	18,531
Earnings per share
	Basic		$	0.27			$	0.39
	Diluted		$	0.27			$	0.39
Weighted average shares outstanding
	Basic			48,073				48,020
	Diluted			48,073				48,020
Dividends per share of common stock			$	0.1875			$	0.1800
For the Six Months ended:
			June 30,				June 30,
			2018				2017
Operating revenue			$	304,879			$	293,168
Operating expenses:
	Operations:
		Water production costs		112,979				106,199
		Administrative and general		50,702				44,159
		Other operations		38,364				34,452
	Maintenance			10,828				10,820
	Depreciation and amortization			41,668				38,419
	Income taxes			4,118				9,722
	Property and other taxes			13,111				12,173
	Total operating expenses			271,770				255,944
		Net operating income		33,109				37,224
Other income and expenses:
	Non-regulated revenue			9,264				7,201
	Non-regulated expenses			(11,552	)			(3,668	)
	Other components of net periodic benefit cost			(5,009	)			(4,886	)
	Allowance for equity funds used during construction			1,621				1,658
	Income tax benefit (expense) on other income and expenses			1,577				(1,135	)
		Net other loss		(4,099	)			(830	)
Interest expense:
	Interest expense			19,332				17,789
	Allowance for borrowed funds used during construction			(799	)			(1,058	)
		Net interest expense		18,533				16,731
Net income			$	10,477			$	19,663
Earnings per share
	Basic		$	0.22			$	0.41
	Diluted		$	0.22			$	0.41
Weighted average shares outstanding
	Basic			48,051				48,002
	Diluted			48,051				48,002
Dividends per share of common stock			$	0.3750			$	0.3600

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

Source: California Water Service Group

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