Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from               to              
Commission file number 1-13883
CALIFORNIA WATER SERVICE GROUP
(Exact name of registrant as specified in its charter)
Delaware
 
77-0448994
(State or other jurisdiction
 
(I.R.S. Employer identification No.)
of incorporation or organization)
 
 
1720 North First Street, San Jose, CA
 
95112
(Address of principal executive offices)
 
(Zip Code)
408-367-8200
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated Filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o  

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act) Yes o  No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common shares outstanding as of June 30, 2018 — 48,070,000
 


Table of Contents

TABLE OF CONTENTS
 
 
Page


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Table of Contents

PART I FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
The condensed consolidated financial statements presented in this filing on Form 10-Q have been prepared by management and are unaudited.
CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited (In thousands, except per share data)
 
June 30,
2018
 
December 31,
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, $0.01 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 (Note 10)


 


TOTAL CAPITALIZATION AND LIABILITIES
$
2,789,514

 
$
2,740,375

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited (In thousands, except per share data)
For the three months ended
 
June 30,
2018
 
June 30,
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 declared per share of common stock
 
$
0.1875

 
$
0.1800

 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements


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CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited (In thousands, except per share data)
For the six months ended
 
June 30,
2018
 
June 30,
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 declared per share of common stock
 
$
0.3750

 
$
0.3600

 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements


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CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited (In thousands)
For the six months ended:
 
June 30,
2018
 
June 30,
2017
Operating activities:
 
 

 
 

Net income
 
$
10,477

 
$
19,663

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
42,582

 
39,328

Change in value of life insurance contracts
 
817

 
(1,208
)
Allowance for equity funds used during construction
 
(1,621
)
 
(1,658
)
Changes in operating assets and liabilities:
 
 

 
 

Receivables and unbilled revenue
 
(14,431
)
 
(35,533
)
Accounts payable
 
6,417

 
3,242

Other current assets
 
(4,207
)
 
(7,048
)
Other current liabilities
 
(4,168
)
 
(747
)
Other changes in noncurrent assets and liabilities
 
13,705

 
19,687

Net cash provided by operating activities
 
49,571

 
35,726

Investing activities:
 
 

 
 

Utility plant expenditures
 
(133,900
)
 
(108,712
)
Life insurance proceeds
 
2,054

 
450

Purchase of life insurance contracts
 
(2,054
)
 
(1,216
)
Net cash used in investing activities
 
(133,900
)
 
(109,478
)
Financing activities:
 
 

 
 

Short-term borrowings
 
111,000

 
140,000

Repayment of short-term borrowings
 
(61,000
)
 
(47,000
)
Repayment of long-term debt
 
(12,264
)
 
(2,407
)
Advances and contributions in aid of construction
 
8,385

 
10,312

Refunds of advances for construction
 
(3,498
)
 
(4,430
)
Repurchase of common stock
 
(1,364
)
 
(1,236
)
Dividends paid
 
(18,017
)
 
(17,278
)
Net cash provided by financing activities
 
23,242

 
77,961

Change in cash, cash equivalents, and restricted cash
 
(61,087
)
 
4,209

Cash, cash equivalents, and restricted cash at beginning of period
 
95,352

 
25,935

Cash, cash equivalents, and restricted cash at end of period
 
$
34,265

 
$
30,144

Supplemental information:
 
 

 
 

Cash paid for interest (net of amounts capitalized)
 
$
17,344

 
$
15,932

Income tax refund
 

 
$
(1,697
)
Supplemental disclosure of non-cash activities:
 
 

 
 

Accrued payables for investments in utility plant
 
$
30,696

 
$
28,494

Utility plant contribution by developers
 
8,653

 
7,212

 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements


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CALIFORNIA WATER SERVICE GROUP
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2018
Dollar amounts in thousands unless otherwise stated
Note 1. Organization and Operations and Basis of Presentation
 
California Water Service Group (the Company) is a holding company that provides water utility and other related services in California, Washington, New Mexico and Hawaii through its wholly-owned subsidiaries. California Water Service Company (Cal Water), Washington Water Service Company (Washington Water), New Mexico Water Service Company (New Mexico Water), and Hawaii Water Service Company, Inc. (Hawaii Water) provide regulated utility services under the rules and regulations of their respective state’s regulatory commissions (jointly referred to herein as the Commissions). CWS Utility Services and HWS Utility Services LLC provide non-regulated water utility and utility-related services.
 
The Company operates in one reportable segment, providing water and related utility services.
 
Basis of Presentation
 
The unaudited condensed consolidated interim financial information has been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (SEC) and therefore do not contain all of the information and footnotes required by GAAP and the SEC for annual financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2017, included in its annual report on Form 10-K as filed with the SEC on March 1, 2018.
 
The preparation of the Company’s unaudited condensed consolidated interim financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses for the periods presented. These include, but are not limited to, estimates and assumptions used in determining the Company’s regulatory asset and liability balances based upon probability assessments of regulatory recovery, revenues earned but not yet billed, asset retirement obligations, allowance for doubtful accounts, pension and other employee benefit plan liabilities, and income tax-related assets and liabilities. Actual results could differ from these estimates.
 
In the opinion of management, the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of normal recurring transactions that are necessary to provide a fair presentation of the results for the periods covered. The results for interim periods are not necessarily indicative of the results for any future period.
Due to the seasonal nature of the water business, the results for interim periods are not indicative of the results for a 12-month period. Revenue and income are generally higher in the warm, dry summer months when water usage and sales are greater. Revenue and income are generally lower in the winter months when cooler temperatures and rainfall curtail water usage and sales.
Note 2. Summary of Significant Accounting Policies
Operating revenue
The following tables disaggregate the Company’s operating revenue by source for the three and six month periods ended June 30, 2018 and 2017:
 
Three Months Ended June 30
 
2018
 
2017
Revenue from contracts with customers
$
171,772

 
$
162,593

Regulatory balancing account revenue
860

 
8,539

Total operating revenue
$
172,632

 
$
171,132


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Six Months Ended June 30
 
2018
 
2017
Revenue from contracts with customers
$
306,026

 
$
275,405

Regulatory balancing account revenue
(1,147
)
 
17,763

Total operating revenue
$
304,879

 
$
293,168

Revenue from contracts with customers
The Company principally generates operating revenue from contracts with customers by providing regulated water and wastewater services at tariff-rates authorized by the Commissions in the states in which they operate and non-regulated water and wastewater services at rates authorized by contracts with government agencies. Revenue from contracts with customers reflects amounts billed for the volume of consumption at authorized per unit rates, for a service charge, and for other authorized charges.
The Company satisfies its performance obligation to provide water and wastewater services over time as services are rendered. The Company applies the invoice practical expedient and recognizes revenue from contracts with customers in the amount for which the Company has a right to invoice. The Company has a right to invoice for the volume of consumption, for the service charge, and for other authorized charges.
The measurement of sales to customers is generally based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, the Company estimates consumption since the date of the last meter reading and a corresponding unbilled revenue is recognized. The estimate is based upon the number of unbilled days that month and the average daily customer billing rate from the previous month (which fluctuates based upon customer usage).
Contract terms are generally short-term and at will by customers and, as a result, no separate financing component is recognized for the Company's collections from customers, which generally require payment within 30 days of billing. The Company applies judgment, based principally on historical payment experience, in estimating its customers’ ability to pay.
Certain customers are not billed for volumetric consumption, but are instead billed a flat rate at the beginning of each monthly service period. The amount billed is initially deferred and subsequently recognized over the monthly service period, as the performance obligation is satisfied. The deferred revenue balance, which is included in "accrued expenses and other liabilities" on the consolidated balance sheets, is inconsequential.
In the following tables, revenue from contracts with customers is disaggregated by class of customers for the three and six month periods ended June 30, 2018 and 2017:
 
Three Months Ended June 30
 
2018
 
2017
Residential
$
109,849

 
$
102,171

Business
32,125

 
29,543

Industrial
7,941

 
6,408

Public authorities
8,251

 
7,874

Other
13,606

 
16,597

Total revenue from contracts with customers
$
171,772

 
$
162,593

 
Six Months Ended June 30
 
2018
 
2017
Residential
$
201,167

 
$
178,036

Business
59,182

 
51,569

Industrial
15,520

 
13,363

Public authorities
13,695

 
12,020

Other
16,462

 
20,417

Total revenue from contracts with customers
$
306,026

 
$
275,405

Regulatory balancing account revenue
The Company’s ability to recover revenue requirements authorized by the California Public Utilities Commission (CPUC) in its triennial General Rate Case (GRC), is decoupled from the volume of the sales. Regulatory balancing account revenue

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is revenue related to rate mechanisms authorized in California by the CPUC, which allow the Company to recover the authorized revenue and are not considered contracts with customers.
The Water Revenue Adjustment Mechanism (WRAM) allows the Company to recognize the adopted level of volumetric revenues. The variance between adopted volumetric revenues and actual billed volumetric revenues for metered accounts is recorded as regulatory balancing account revenue.
Cost-recovery rates, such as the Modified Cost Balancing Account (MCBA), provide for recovery of the adopted levels of expenses for purchased water, purchased power, pump taxes, water conservation program costs and certain other operating expenses. Variances between adopted and actual costs are recorded as regulatory balancing account revenue.
Each district's WRAM and MCBA regulatory assets and liabilities are allowed to be netted against one another. The Company recognizes regulatory balancing account revenues that have been authorized for rate recovery, are objectively determinable and probable of recovery, and are expected to be collected within 24 months. To the extent that regulatory balancing account revenue is estimated to be collectible beyond 24 months, recognition is deferred.
Non-regulated Revenue
The following tables disaggregate the Company’s non-regulated revenue by source for the three and six month periods ended June 30, 2018 and 2017:
 
Three Months Ended June 30
 
2018
 
2017
Operating and maintenance revenue
$
2,297

 
$
2,053

Other non-regulated revenue
1,981

 
1,178

Non-regulated revenue from contracts with customers
$
4,278

 
$
3,231

Lease revenue
$
567

 
$
508

Total non-regulated revenue
$
4,845

 
$
3,739

 
Six Months Ended June 30
 
2018
 
2017
Operating and maintenance revenue
$
5,462

 
$
3,966

Other non-regulated revenue
2,724

 
2,220

Non-regulated revenue from contracts with customers
$
8,186

 
$
6,186

Lease revenue
$
1,078

 
$
1,015

Total non-regulated revenue
$
9,264

 
$
7,201

Operating and maintenance services are provided for non-regulated water and wastewater systems owned by private companies and municipalities. The Company negotiates formal agreements with the customers, under which they provide operating, maintenance and customer billing services related to the customers’ water system. The formal agreements outline the fee schedule for the services provided. The agreements typically call for a fee-per-service or a flat-rate amount per month. The Company satisfies its performance obligation of providing operating and maintenance services over time as services are rendered; as a result, the Company employs the invoice practical expedient and recognizes revenue in the amount that it has the right to invoice. Contract terms are generally short-term and, as a result, no separate financing component is recognized for its collections from customers, which generally require payment within 30 days of billing.
Other non-regulated revenue primarily relates to services for the design and installation of water mains and other water infrastructure for customers outside the regulated service areas and insurance program administration. Other non-regulated revenue is inconsequential.
The Company is the lessor in operating lease agreements with telecommunications companies under which cellular phone antennas are placed on the Company's property. Lease revenue is not considered revenue from contracts with customers and is recognized following current operating lease standards.




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 Cash, Cash Equivalents, and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown on the Condensed Consolidated Statements of Cash Flows:
 
June 30, 2018
 
December 31, 2017
Cash and cash equivalents
33,668

 
94,776

Restricted cash (included in "taxes, prepaid expenses and other assets")
597

 
576

Total cash, cash equivalents, and restricted cash shown in the statements of cash flows
$
34,265

 
$
95,352

 Adoption of New Accounting Standards
In May of 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (codified in ASC 606), which amends the existing revenue recognition guidance. The Company completed an evaluation of the new revenue standard and implemented the standard on January 1, 2018 using the modified retrospective method for all contracts. The reported results for the first three and six months of 2018 reflect the application of ASC 606 guidance, while prior period amounts were not adjusted and continue to be reported in accordance with the accounting standards in effect for those periods. Other than increased disclosures regarding revenues related to contracts with customers, the implementation did not have a significant impact on the Company’s consolidated financial statements (see "Operating Revenue" section of note 2 above).
In August of 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. This update adds and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The Company will continue to classify proceeds from the settlement of insurance claims on the basis of the nature of the loss and from the settlement of Company-owned life insurance policies as cash inflows on the Condensed Consolidated Statements of Cash Flows. The Company implemented the standard on January 1, 2018 and retrospectively applied the standard in the comparative period. The standard does not have a significant impact to the Company's consolidated financial statements.
In November of 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash. The update requires the Company to combine restricted cash with cash and cash equivalents when reconciling the beginning and end of period balances in the Condensed Consolidated Statements of Cash Flows. The Company implemented the standard on January 1, 2018 and retrospectively applied the standard in the comparative period.
The following table shows the effect of the accounting change to the Condensed Consolidated Statements of Cash Flows:
 
Six Months Ended June 30, 2017
Condensed Consolidated Statements of Cash Flows line item
As Reported on Form 10-Q
 
Adjusted Balance on Form 10-Q
 
Increase (Decrease) from Retrospective Adoption
Change in restricted cash
$
(598
)
 
$

 
$
598

Net cash used in investing activities
$
(110,076
)
 
$
(109,478
)
 
$
598

Change in cash, cash equivalents, and restricted cash
$
3,611

 
$
4,209

 
$
598

Cash, cash equivalents, and restricted cash at beginning of period
$
25,492

 
$
25,935

 
$
443

Cash, cash equivalents, and restricted cash at end of period
$
29,103

 
$
30,144

 
$
1,041

In March of 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented as non-operating items. In addition, the standard only allows the service cost component to be eligible for capitalization.
The standard became effective as of January 1, 2018. The presentation amendments were applied retrospectively and the capitalization amendments were applied prospectively on and after the effective date. The Company applied the practical expedient that permits the Company to use the amounts disclosed in its pension and other postretirement benefit plan footnote from the prior comparative periods as the estimation basis for applying the retrospective presentation

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requirements. The Commissions have authorized the Company to recover the other components of net periodic benefit cost through the Company’s capital program and thus on and after the effective date, the other components of net periodic benefit cost that have previously been recorded as part of utility plant have been recognized as a regulatory asset (see note 9). As a result, the changes required by the standard did not have a material impact on the results of operations.
The following tables show the effect of the accounting change to the Condensed Consolidated Statements of Income for the three and six month periods ended June 30, 2017:
 
Three Months Ended June 30, 2017
Condensed Consolidated Statement of Income line item
As Reported on Form 10-Q
 
Adjusted Balance on Form 10-Q
 
Increase (Decrease) from Retrospective Adoption
Administrative and general
$
23,796

 
$
21,413

 
$
(2,383
)
Income taxes
$
9,635

 
$
10,606

 
$
971

Total operating expenses
$
145,873

 
$
144,461

 
$
(1,412
)
Net operating income
$
25,259

 
$
26,671

 
$
1,412

Other components of net periodic benefit cost
$

 
$
(2,383
)
 
$
2,383

Income tax expense on other income and expense
$
(1,217
)
 
$
(246
)
 
$
971

Net other income
$
1,787

 
$
375

 
$
(1,412
)
 
Six Months Ended June 30, 2017
Condensed Consolidated Statement of Income line item
As Reported on Form 10-Q
 
Adjusted Balance on Form 10-Q
 
Increase (Decrease) from Retrospective Adoption
Administrative and general
$
49,045

 
$
44,159

 
$
(4,886
)
Income taxes
$
8,751

 
$
9,722

 
$
971

Total operating expenses
$
259,859

 
$
255,944

 
$
(3,915
)
Net operating income
$
33,309

 
$
37,224

 
$
3,915

Other components of net periodic benefit cost
$

 
$
(4,886
)
 
$
4,886

Income tax expense on other income and expense
$
(2,106
)
 
$
(1,135
)
 
$
971

Net other income
$
3,085

 
$
(830
)
 
$
(3,915
)
New Accounting Standards Issued But Not Yet Adopted
In February of 2016, the FASB issued ASU 2016-02, Leases, which amends the guidance relating to the definition of a lease, recognition of lease assets and liabilities on the balance sheet, and the related disclosure requirements. In November of 2017, the FASB tentatively decided to amend the new leasing guidance such that entities may elect not to restate their comparative periods in the period of adoption. The guidance requires lessees to recognize an asset and liability on the balance sheet for all of their lease obligations. Operating leases were previously not recognized on the balance sheet. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company will adopt the standard using the modified retrospective method for its existing leases and expects this standard to increase lease assets and lease liabilities on the Condensed Consolidated Balance Sheets. The Company intends to elect certain practical expedients and will carry forward historical conclusions related to (1) contracts that contain leases, (2) existing lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. The Company will also apply the practical expedient that will allow the Company to elect, as an accounting policy, by asset class, to include both lease and nonlease components as a single component and account for it as a lease. The Company will apply the short-term lease exception for lessees which will allow the Company to not have to apply the recognition requirements of the new leasing guidance for short-term leases and to recognize lease payments in net income on a straight line basis over the lease term. The Company does not expect that the guidance will have a material impact on the Condensed Consolidated Statements of Income, Condensed Consolidated Statements of Cash Flows, and lease disclosures.

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Note 3. Stock-based Compensation
Equity Incentive Plan
During the six months ended June 30, 2018 and 2017, the Company granted annual Restricted Stock Awards (RSAs) of 46,135 and 48,717, respectively, to officers and directors of the Company. During those same periods, 13,306 RSAs and 14,186 RSAs, respectively, were canceled. During the three months ended June 30, 2018 and 2017, no RSAs were granted and 3,842 RSAs and 3,284 RSAs, respectively, were canceled. RSAs granted to officers vest over 36 months with the first year cliff vesting. RSAs granted to directors generally vest at the end of 12 months. During the first six months of 2018 and 2017, the RSAs granted were valued at $35.40 and $36.75 per share, respectively, based upon the fair value of the Company’s common stock on the date of grant.
During the six months ended June 30, 2018 and 2017, the Company granted 28,594 and 31,389 performance-based Restricted Stock Unit Awards (RSUs), respectively, to officers. During those same periods, the Company issued 48,753 RSUs and 38,709 RSUs, respectively, to officers, and canceled 24,009 RSUs and 19,735 RSUs, respectively. During the three months ended June 30, 2018 and 2017, the Company did not grant, issue or cancel any RSUs. Each RSU award reflects a target number of shares that may be issued to the award recipient. The 2018 and 2017 awards may be earned upon completion of the three-year performance period and are recognized as expense ratably over the period using a fair value of $35.40 per share and $36.75 per share, respectively, and an estimate of RSUs earned during the period. The Company has recorded compensation costs for the RSAs and RSUs in administrative and general operating expenses in the amount of $1.5 million for the six months ended June 30, 2018 and 2017.
Note 4. Equity
The Company’s changes in total common stockholders’ equity for the six months ended June 30, 2018 were as follows:
 
Total Common
Stockholders’ Equity
Balance at December 31, 2017
$
693,462

Common stock issued
1

Share-based compensation expense
1,373

Repurchase of common stock
(1,364
)
Common stock dividends declared
(18,017
)
Net income
10,477

Balance at June 30, 2018
$
685,932

 

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Note 5. Earnings Per Share
The computations of basic and diluted earnings per share are noted in the table below. Basic earnings per share are computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts were exercised or converted into common stock. RSAs are included in the weighted average common shares outstanding because the shares have all the same voting and dividend rights as issued and unrestricted common stock. RSUs are not included in diluted shares for financial reporting until authorized by the Organization & Compensation Committee of the Board of Directors.
 
Three Months Ended June 30
 
2018
 
2017
 
(In thousands, except per share data)
Net income available to common stockholders
$
13,022

 
$
18,531

Weighted average common shares outstanding, basic
48,073

 
48,020

Weighted average common shares outstanding, dilutive
48,073

 
48,020

Earnings per share - basic
$
0.27

 
$
0.39

Earnings per share - diluted
$
0.27

 
$
0.39

 
Six Months Ended June 30
 
2018
 
2017
 
(In thousands, except per share data)
Net income available to common stockholders
$
10,477

 
$
19,663

Weighted average common shares outstanding, basic
48,051

 
48,002

Weighted average common shares outstanding, dilutive
48,051

 
48,002

Earnings per share - basic
$
0.22

 
$
0.41

Earnings per share - diluted
$
0.22

 
$
0.41


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Table of Contents

Note 6. Pension Plan and Other Postretirement Benefits
The Company provides a qualified, defined-benefit, non-contributory pension plan for substantially all employees. The Company makes annual contributions to fund the amounts accrued for in the qualified pension plan. The Company also maintains an unfunded, non-qualified, supplemental executive retirement plan. The costs of the plans are charged to expense or are capitalized in utility plant as appropriate.
 
The Company offers medical, dental, vision, and life insurance benefits for retirees and their spouses and dependents. Participants are required to pay a premium, which offsets a portion of the cost.
 
Cash contributions by the Company related to pension plans were $16.0 million and $14.8 million for the six months ended June 30, 2018 and 2017, respectively. Cash contributions by the Company related to other postretirement benefit plans were $2.7 million for the six months ended June 30, 2018 and no cash contributions were made for the six months ended June 30, 2017. The total 2018 estimated cash contribution to the pension plans is $33.4 million and to the other postretirement benefit plans is $10.1 million.

The following table lists components of net periodic benefit costs for the pension plans and other postretirement benefits. The data listed under “pension plan” includes the qualified pension plan and the non-qualified supplemental executive retirement plan. The data listed under “other benefits” is for all other postretirement benefits.
 
 
Three Months Ended June 30
 
Pension Plan
 
Other Benefits
 
2018
 
2017
 
2018
 
2017
Service cost
$
7,402

 
$
5,865

 
$
2,550

 
$
2,019

Interest cost
5,995

 
5,791

 
1,484

 
1,491

Expected return on plan assets
(6,862
)
 
(6,029
)
 
(1,416
)
 
(1,218
)
Amortization of prior service cost
1,263

 
1,445

 
11

 
11

Recognized net actuarial loss
2,797

 
1,752

 
773

 
649

Net periodic benefit cost
$
10,595

 
$
8,824

 
$
3,402

 
$
2,952


 
Six Months Ended June 30
 
Pension Plan
 
Other Benefits
 
2018
 
2017
 
2018
 
2017
Service cost
$
14,804

 
$
11,730

 
$
5,100

 
$
4,038

Interest cost
11,989

 
11,581

 
2,969

 
2,982

Expected return on plan assets
(13,725
)
 
(12,058
)
 
(2,832
)
 
(2,436
)
Amortization of prior service cost
2,526

 
2,890

 
21

 
22

Recognized net actuarial loss
5,595

 
3,504

 
1,547

 
1,298

Net periodic benefit cost
$
21,189

 
$
17,647

 
$
6,805

 
$
5,904

Service cost portion of the pension plan and other postretirement benefits is recognized in administrative and general within the Condensed Consolidated Statements of Income. Other components of net periodic benefit costs include interest costs, expected return on plan assets, amortization of prior service costs, and recognized net actuarial loss and are reported together as other components of net periodic benefit costs within the Condensed Consolidated Statements of Income (see note 2).
Note 7. Short-term and Long-term Borrowings
Both short-term unsecured 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 and interest coverage ratio.

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Table of Contents

The outstanding borrowings on the Company lines of credit were $55.1 million as of June 30, 2018 and December 31, 2017. There were $270.0 million and $220.0 million borrowings on the Cal Water lines of credit as of June 30, 2018 and December 31, 2017, respectively. The average borrowing rate for borrowings on the Company and Cal Water lines of credit during the six months ended June 30, 2018 was 2.72% compared to 1.82% for the same period last year.
Note 8. Income Taxes
The Company adjusts its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company also records the tax effect of unusual or infrequently occurring discrete items.
The provision for income taxes is shown in the tables below:
 
Three Months Ended June 30
 
2018
 
2017
Income tax expense
$
3,527

 
$
10,852

 
Six Months Ended June 30
 
2018
 
2017
Income tax expense
$
2,540

 
$
10,857

The income tax expense decreased $7.3 million to $3.5 million for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017 mostly due to the federal income tax rate reduction from 35% to 21%, effective January 1, 2018, and a decrease in operating income.
The income tax expense decreased $8.3 million to $2.5 million in the first six months of 2018, as compared to $10.9 million in the first six months of 2017. The decrease was mainly due to the federal income tax rate reduction from 35% to 21%, effective January 1, 2018, and a decrease in operating income.
The Company's 2018 effective tax rate, before discrete items, is estimated to be in the range from 23% to 25%.

For year ended December 31, 2017, the Company recorded a provisional re-measurement of its deferred tax balances (related mostly to timing differences for plant-related items) which was offset by a change from a net deferred income tax regulatory asset to a net regulatory liability. The Company is continuing to work with state regulators to finalize the customer net refund of $108.0 million to ensure compliance with federal normalization rules.

The final transition impacts of the Tax Cuts and Jobs Act (TCJA) may differ from the recorded amounts, possibly materially, due to, among other things, regulatory decisions that could differ from the Company’s determination of how the impacts of the TCJA are allocated between customers and shareholders. In addition, while the Company was able to make reasonable estimates of the impact of the reduction in federal tax rate and the elimination of bonus depreciation due to the enactment of the TCJA; the Company has not completed analysis for areas of the TCJA around Internal Revenue Code Section 162(m), full expensing of fixed assets, and other asset related items of the TCJA. Changes in interpretations, guidance on legislative intent, and any changes in accounting standards for income taxes in response to the TCJA could impact the recorded amounts. The Company will finalize and record any adjustments related to the TCJA within the one year measurement period provided under Staff Accounting Bulletin No. 118. The balances relating to TCJA impact continue to be provisional as of June 30, 2018.

The Company had unrecognized tax benefits of approximately $11.5 million and $10.2 million as of June 30, 2018 and 2017, respectively. Included in the balance of unrecognized tax benefits as of June 30, 2018 and 2017 are approximately $2.2 million and $2.3 million, respectively, of tax benefits that, if recognized, would result in an adjustment to the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly within the next 12 months.


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Note 9. Regulatory Assets and Liabilities
Regulatory assets and liabilities were comprised of the following as of June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
December 31, 2017
Regulatory Assets
 

 
 

Pension and retiree group health
$
213,920

 
$
214,249

Property-related temporary differences (tax benefits flowed through to customers)
87,988

 
87,323

Other accrued benefits
28,741

 
28,251

Net WRAM and MCBA long-term accounts receivable
32,892

 
34,879

Asset retirement obligations, net
17,824

 
17,126

Interim rates long-term accounts receivable
4,568

 
4,568

Tank coating
11,467

 
10,998

Health care balancing account
442

 
496

Pension balancing account
5,136

 
2,322

Other components of net periodic benefit cost
1,754

 

Other regulatory assets
565

 
935

Total Regulatory Assets
$
405,297

 
$
401,147

 
 
 
 
Regulatory Liabilities
 

 
 

Future tax benefits due to customers
$
168,384

 
$
168,343

Health care balancing account
11,127

 
7,749

Conservation program
4,531

 
2,273

Pension balancing account
13

 
364

Net WRAM and MCBA long-term payable
938

 
513

Tax accounting memorandum account
4,767

 

Cost of capital memorandum account
2,834

 

Other regulatory liabilities
161

 
464

Total Regulatory Liabilities
$
192,755

 
$
179,706

Short-term regulatory assets and liabilities are excluded from the above table.
The short-term regulatory assets were $33.3 million as of June 30, 2018 and $36.8 million as of December 31, 2017. As of June 30, 2018 and December 31, 2017, the short-term regulatory assets primarily consist of net WRAM and MCBA receivables.
The short-term portions of regulatory liabilities were $56.3 million as of June 30, 2018 and $59.3 million as of December 31, 2017. The short-term regulatory liabilities as of June 30, 2018, primarily consist of 1,2,3 trichloropropane (TCP) settlement proceeds. As of December 31, 2017, the short-term regulatory liabilities primarily consist of TCP settlement proceeds and net WRAM and MCBA liability balances.
The tax accounting and cost of capital memorandum account regulatory liabilities are related to the estimated customer refunds due to changes in the federal income tax rate and to the cost of capital decision for Cal Water.
The other components of net periodic benefit cost regulatory asset are authorized by the Commissions and are probable for rate recovery through the capital program (see Note 2).

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Table of Contents

Note 10. Commitments and Contingencies
Commitments
The Company has significant commitments to lease certain office spaces and water systems and to purchase water from water wholesalers. These commitments are described in Form 10-K for the year ended December 31, 2017. 
Effective April 3, 2018, the City of Commerce has renewed a lease agreement for Cal Water to operate the City of Commerce’s water system for the next 15 years. Cal Water has run the City of Commerce water system since 1985 and is responsible for all operations, maintenance, water quality assurance, and customer service programs to provide a reliable supply of water that meets federal and state standards to customers served by the City of Commerce system. The City of Commerce will remain responsible for financing infrastructure improvements and setting its customers’ water rates.
As of June 30, 2018, there were no other significant changes from December 31, 2017.
Contingencies
Groundwater Contamination
The Company has undertaken litigation against third parties to recover past and anticipated costs related to groundwater contamination in our service areas. The cost of litigation is expensed as incurred and any settlement is first offset against such costs. The CPUC’s general policy requires all proceeds from groundwater contamination litigation to be used first to pay transactional expenses, then to make customers whole for water treatment costs to comply with the CPUC’s water quality standards. The CPUC allows for a risk-based consideration of contamination proceeds which exceed the costs of the remediation described above and may result in some sharing of proceeds with the shareholder, determined on a case by case basis. The CPUC has authorized various memorandum accounts that allow the Company to track significant litigation costs to request recovery of these costs in future filings and uses of proceeds to comply with CPUC’s general policy.
Other Legal Matters
From time to time, the Company is involved in various disputes and litigation matters that arise in the ordinary course of business. The status of each significant matter is reviewed and assessed for potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount of the range of loss can be estimated, a liability is accrued for the estimated loss in accordance with the accounting standards for contingencies. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. While the outcome of these disputes and litigation matters cannot be predicted with any certainty, management does not believe when taking into account existing reserves the ultimate resolution of these matters will materially affect the Company’s financial position, results of operations, or cash flows. As of June 30, 2018 and December 31, 2017, the Company recognized a liability of $3.2 million and $6.1 million, respectively, for known legal matters. The decrease is mainly due to several large claims being resolved in the first six months of 2018. The cost of litigation is expensed as incurred and any settlement is first offset against such costs. Any settlement in excess of the cost to litigate is accounted for on a case by case basis, dependent on the nature of the settlement.
Note 11. Fair Value of Financial Assets and Liabilities
The accounting guidance for fair value measurements and disclosures provides a single definition of fair value and requires certain disclosures about assets and liabilities measured at fair value. A hierarchical framework for disclosing the observability of the inputs utilized in measuring assets and liabilities at fair value is established by this guidance. The three levels in the hierarchy are as follows:
 
Level 1 - Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Plan has the ability to access.
 
Level 2 - Inputs to the valuation methodology include:
Quoted market prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets or liabilities in inactive markets;
Inputs other than quoted prices that are observable for the asset or liability; and
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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Table of Contents

If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
 
Specific valuation methods include the following:
 
Accounts receivable and accounts payable carrying amounts approximated the fair value because of the short-term maturity of the instruments.
 
Long-term debt fair values were estimated using the published quoted market price, if available, or the discounted cash flow analysis, based on the current rates available using a risk-free rate (a U.S. Treasury securities yield curve) plus a risk premium of 1.70%.
Advances for construction fair values were estimated using broker quotes from companies that frequently purchase these investments.
 
June 30, 2018
 
 
 
Fair Value
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Total
Long-term debt, including current maturities
$
519,554

 

 
$
570,197

 

 
$
570,197

Advances for construction
185,286

 

 
77,626

 

 
77,626

Total
$
704,840

 
$

 
$
647,823

 
$

 
$
647,823

 
 
December 31, 2017
 
 
 
Fair Value
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Total
Long-term debt, including current maturities
$
531,713

 
$

 
$
607,492

 
$

 
$
607,492

Advances for construction
182,502

 

 
75,083

 

 
75,083

Total
$
714,215

 

 
$
682,575

 
$

 
$
682,575

 
Note 12. Condensed Consolidating Financial Statements
On April 17, 2009, Cal Water issued $100.0 million aggregate principal amount of 5.875% First Mortgage Bonds due 2019, and on November 17, 2010, Cal Water 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. As a result of these guarantee arrangements, the Company is required to present the following condensed consolidating financial information. The investments in affiliates are accounted for and presented using the “equity method” of accounting.
 
The following tables present the Condensed Consolidating Balance Sheets as of June 30, 2018 and December 31, 2017, the Condensed Consolidating Statements of Income for the three and six months ended June 30, 2018 and 2017, and the Condensed Consolidating Statements of Cash Flows for the six months ended June 30, 2018 and 2017 of (i) California Water Service Group, the guarantor of the First Mortgage Bonds and the parent company; (ii) California Water Service Company, the issuer of the First Mortgage Bonds and a 100% owned consolidated subsidiary of California Water Service Group; and (iii) the other 100% owned non-guarantor consolidated subsidiaries of California Water Service Group. No other subsidiary of the Company guarantees the securities. The Condensed Consolidating Statement of Cash Flows for the six months ended June 30, 2018 and 2017 reflect the retrospective adoption of ASU 2016-18 (refer to Note 2 for more details). The Condensed Consolidating Statements of Income for the three and six months ended June 30, 2017 reflect the retrospective adoption of ASU 2017-07 (refer to Note 2 for more details).

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Table of Contents

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2018
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS
 

 
 

 
 

 
 

 
 

Utility plant:
 

 
 

 
 

 
 

 
 

Utility plant
$
1,321

 
$
2,890,709

 
$
209,783

 
$
(7,197
)
 
$
3,094,616

Less accumulated depreciation and amortization
(966
)
 
(908,107
)
 
(57,333
)
 
2,054

 
(964,352
)
Net utility plant
355

 
1,982,602

 
152,450

 
(5,143
)
 
2,130,264

Current assets:
 
 
 
 
 

 
 
 
 
Cash and cash equivalents
2,048

 
24,494

 
7,126

 

 
33,668

Receivables and unbilled revenue
1

 
129,007

 
5,000

 

 
134,008

Receivables from affiliates
23,616

 
771

 
207

 
(24,594
)
 

Other current assets
293

 
19,812

 
1,789

 

 
21,894

Total current assets
25,958

 
174,084

 
14,122

 
(24,594
)
 
189,570

Other assets:
 
 
 
 
 

 
 
 
 
Regulatory assets

 
401,325

 
3,972

 

 
405,297

Investments in affiliates
690,883

 

 

 
(690,883
)
 

Long-term affiliate notes receivable
25,601

 

 

 
(25,601
)
 

Other assets
59

 
60,707

 
3,821

 
(204
)
 
64,383

Total other assets
716,543

 
462,032

 
7,793

 
(716,688
)
 
469,680

TOTAL ASSETS
$
742,856

 
$
2,618,718

 
$
174,365

 
$
(746,425
)
 
$
2,789,514

CAPITALIZATION AND LIABILITIES
 

 
 

 
 

 
 

 
 

Capitalization:
 

 
 

 
 

 
 

 
 

Common stockholders’ equity
$
685,932

 
$
618,145

 
$
77,963

 
$
(696,108
)
 
$
685,932

Affiliate long-term debt

 

 
25,601

 
(25,601
)
 

Long-term debt, less current maturities

 
413,800

 
730

 

 
414,530

Total capitalization
685,932

 
1,031,945

 
104,294

 
(721,709
)
 
1,100,462

Current liabilities:
 

 
 

 
 

 
 

 
 

Current maturities of long-term debt

 
104,720

 
304

 

 
105,024

Short-term borrowings
55,100

 
270,000

 

 

 
325,100

Payables to affiliates

 
709

 
23,885

 
(24,594
)
 

Accounts payable

 
89,872

 
3,160

 

 
93,032

Accrued expenses and other liabilities
69

 
95,475

 
3,600

 

 
99,144

Total current liabilities
55,169

 
560,776

 
30,949

 
(24,594
)
 
622,300

Unamortized investment tax credits

 
1,724

 

 

 
1,724

Deferred income taxes
1,755

 
191,704

 
2,772

 
(122
)
 
196,109

Pension and postretirement benefits other than pensions

 
256,431

 

 

 
256,431

Regulatory liabilities and other

 
235,289

 
3,623

 

 
238,912

Advances for construction

 
184,787

 
499

 

 
185,286

Contributions in aid of construction

 
156,062

 
32,228

 

 
188,290

TOTAL CAPITALIZATION AND LIABILITIES
$
742,856

 
$
2,618,718

 
$
174,365

 
$
(746,425
)
 
$
2,789,514


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Table of Contents

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2017
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS
 

 
 

 
 

 
 

 
 

Utility plant:
 

 
 

 
 

 
 

 
 

Utility plant
$
1,321

 
$
2,771,259

 
$
204,795

 
$
(7,196
)
 
$
2,970,179

Less accumulated depreciation and amortization
(919
)
 
(868,762
)
 
(54,543
)
 
2,010

 
(922,214
)
Net utility plant
402

 
1,902,497

 
150,252

 
(5,186
)
 
2,047,965

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
4,728

 
80,940

 
9,108

 

 
94,776

Receivables and unbilled revenue

 
110,928

 
4,526

 

 
115,454

Receivables from affiliates
19,952

 
4,093

 
43

 
(24,088
)
 

Other current assets
80

 
16,569

 
994

 

 
17,643

Total current assets
24,760

 
212,530

 
14,671

 
(24,088
)
 
227,873

Other assets:
 

 
 

 
 

 
 

 
 

Regulatory assets

 
397,333

 
3,814

 

 
401,147

Investments in affiliates
698,690

 

 

 
(698,690
)
 

Long-term affiliate notes receivable
26,441

 

 

 
(26,441
)
 

Other assets
192

 
59,581

 
3,822

 
(205
)
 
63,390

Total other assets
725,323

 
456,914

 
7,636

 
(725,336
)
 
464,537

TOTAL ASSETS
$
750,485

 
$
2,571,941

 
$
172,559

 
$
(754,610
)
 
$
2,740,375

CAPITALIZATION AND LIABILITIES
 

 
 

 
 

 
 

 
 

Capitalization:
 

 
 

 
 

 
 

 
 

Common stockholders’ equity
$
693,462

 
$
626,300

 
77,647

 
$
(703,947
)
 
$
693,462

Affiliate long-term debt

 

 
26,441

 
(26,441
)
 

Long-term debt, less current maturities

 
514,952

 
841

 

 
515,793

Total capitalization
693,462

 
1,141,252

 
104,929

 
(730,388
)
 
1,209,255

Current liabilities:
 

 
 

 
 

 
 

 
 

Current maturities of long-term debt

 
15,598

 
322

 

 
15,920

Short-term borrowings
55,100

 
220,000

 

 

 
275,100

Payables to affiliates

 
580

 
23,508

 
(24,088
)
 

Accounts payable

 
90,561

 
3,394

 

 
93,955

Accrued expenses and other liabilities
271

 
104,002

 
1,711

 

 
105,984

Total current liabilities
55,371

 
430,741

 
28,935

 
(24,088
)
 
490,959

Unamortized investment tax credits

 
1,724

 

 

 
1,724

Deferred income taxes
1,652

 
189,004

 
2,424

 
(134
)
 
192,946

Pension and postretirement benefits other than pensions

 
252,141

 

 

 
252,141

Regulatory and other liabilities

 
220,779

 
3,348

 

 
224,127

Advances for construction

 
181,979

 
523

 

 
182,502

Contributions in aid of construction

 
154,321

 
32,400

 

 
186,721

TOTAL CAPITALIZATION AND LIABILITIES
$
750,485

 
$
2,571,941

 
$
172,559

 
$
(754,610
)
 
$
2,740,375



20

Table of Contents

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended June 30, 2018
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Operating revenue
$

 
$
162,296

 
$
10,336

 
$

 
$
172,632

Operating expenses:
 

 
 

 
 

 
 

 
 

Operations:
 

 
 

 
 

 
 

 
 

Water production costs

 
63,209

 
2,164

 

 
65,373

Administrative and general

 
22,047

 
2,336

 

 
24,383

Other operations

 
19,138

 
1,732

 
(146
)
 
20,724

Maintenance

 
5,192

 
197

 

 
5,389

Depreciation and amortization
24

 
19,664

 
1,286

 
(21
)
 
20,953

Income tax (benefit) expense
(122
)
 
3,940

 
328

 
201

 
4,347

Property and other taxes

 
5,682

 
725

 

 
6,407

Total operating (income) expenses
(98
)
 
138,872

 
8,768

 
34

 
147,576

Net operating income
98

 
23,424

 
1,568

 
(34
)
 
25,056

Other income and expenses:
 

 
 

 
 

 
 

 
 

Non-regulated revenue
557

 
4,739

 
252

 
(703
)
 
4,845

Non-regulated expenses

 
(5,975
)
 
(140
)
 

 
(6,115
)
Other components of net periodic benefit cost

 
(2,337
)
 
(126
)
 

 
(2,463
)
Allowance for equity funds used during construction

 
710

 

 

 
710

Income tax (expense) benefit on other income and expenses
(156
)
 
783

 
(5
)
 
197

 
819

Net other income (loss)
401

 
(2,080
)
 
(19
)
 
(506
)
 
(2,204
)
Interest:
 

 
 

 
 

 
 

 
 

Interest expense
411

 
9,718

 
562

 
(557
)
 
10,134

Allowance for borrowed funds used during construction

 
(270
)
 
(34
)
 

 
(304
)
Net interest expense
411

 
9,448

 
528

 
(557
)
 
9,830

Equity earnings of subsidiaries
12,934

 

 

 
(12,934
)
 

Net income
$
13,022

 
$
11,896

 
$
1,021

 
$
(12,917
)
 
$
13,022


21

Table of Contents

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended June 30, 2017
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Operating revenue
$

 
$
161,174

 
$
9,958

 
$

 
$
171,132

Operating expenses:
 

 
 

 
 

 
 

 
 

Operations:
 

 
 

 
 

 
 

 
 

Water production costs

 
62,089

 
2,042

 

 
64,131

Administrative and general

 
18,907

 
2,506

 

 
21,413

Other operations

 
16,729

 
1,725

 
(126
)
 
18,328

Maintenance

 
4,509

 
199

 

 
4,708

Depreciation and amortization
26

 
18,102

 
1,113

 
(23
)
 
19,218

Income tax (benefit) expense
(123
)
 
10,012

 
454

 
263

 
10,606

Property and other taxes

 
5,315

 
742

 

 
6,057

Total operating (income) expenses
(97
)
 
135,663

 
8,781

 
114

 
144,461

Net operating income
97

 
25,511

 
1,177

 
(114
)
 
26,671

Other income and expenses:
 

 
 

 
 

 
 

 
 

Non-regulated revenue
496

 
3,469

 
396

 
(622
)
 
3,739

Non-regulated expenses

 
(1,428
)
 
(186
)
 

 
(1,614
)
Other components of net periodic benefit cost

 
(2,240
)
 
(143
)
 

 
(2,383
)
Allowance for equity funds used during construction

 
879

 

 

 
879

Income tax expense on other income and expenses
(202
)
 
(278
)
 
(19
)
 
253

 
(246
)
Net other income
294

 
402

 
48

 
(369
)
 
375

Interest:
 

 
 

 
 

 
 

 
 

Interest expense
275

 
8,795

 
505

 
(496
)
 
9,079

Allowance for borrowed funds used during construction

 
(542
)
 
(22
)
 

 
(564
)
Net interest expense
275

 
8,253

 
483

 
(496
)
 
8,515

Equity earnings of subsidiaries
18,415

 

 

 
(18,415
)
 

Net income
$
18,531

 
$
17,660

 
$
742

 
$
(18,402
)
 
$
18,531



22

Table of Contents

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the six months ended June 30, 2018
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Operating revenue
$

 
$
285,866

 
$
19,013

 
$

 
$
304,879

Operating expenses:
 

 
 

 
 

 
 

 
 

Operations:
 

 
 

 
 

 
 

 
 

Water production costs

 
108,832

 
4,147

 

 
112,979

Administrative and general

 
45,653

 
5,049

 

 
50,702

Other operations

 
35,355

 
3,301

 
(292
)
 
38,364

Maintenance

 
10,436

 
392

 

 
10,828

Depreciation and amortization
47

 
39,277

 
2,387

 
(43
)
 
41,668

Income tax (benefit) expense
(200
)
 
3,600

 
320

 
398

 
4,118

Property and other taxes

 
11,689

 
1,422

 

 
13,111

Total operating (income) expenses
(153
)
 
254,842

 
17,018

 
63

 
271,770

Net operating income
153

 
31,024

 
1,995

 
(63
)
 
33,109

Other income and expenses:
 

 
 

 
 

 
 

 
 

Non-regulated revenue
1,088

 
8,983

 
572

 
(1,379
)
 
9,264

Non-regulated expenses

 
(11,268
)
 
(284
)
 

 
(11,552
)
Other components of net periodic benefit cost

 
(4,784
)
 
(225
)
 

 
(5,009
)
Allowance for equity funds used during construction

 
1,621

 

 

 
1,621

Income tax (expense) benefit on other income and expenses
(304
)
 
1,524

 
(29
)
 
386

 
1,577

Net other income (loss)
784

 
(3,924
)
 
34

 
(993
)
 
(4,099
)
Interest:
 

 
 

 
 

 
 

 
 

Interest expense
669

 
18,652

 
1,099

 
(1,088
)
 
19,332

Allowance for borrowed funds used during construction

 
(728
)
 
(71
)
 

 
(799
)
Net interest expense
669

 
17,924

 
1,028

 
(1,088
)
 
18,533

Equity earnings of subsidiaries
10,209

 

 

 
(10,209
)
 

Net income
$
10,477

 
$
9,176

 
$
1,001

 
$
(10,177
)
 
$
10,477


23

Table of Contents

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the six months ended June 30, 2017
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Operating revenue
$

 
$
274,516

 
$
18,652

 
$

 
$
293,168

Operating expenses:
 

 
 

 
 

 
 

 
 

Operations:
 

 
 

 
 

 
 

 
 

Water production costs

 
102,278

 
3,921

 

 
106,199

Administrative and general

 
39,028

 
5,131

 

 
44,159

Other operations

 
31,129

 
3,575

 
(252
)
 
34,452

Maintenance

 
10,415

 
405

 

 
10,820

Depreciation and amortization
49

 
36,213

 
2,203

 
(46
)
 
38,419

Income tax (benefit) expense
(226
)
 
9,066

 
362

 
520

 
9,722

Property and other taxes
(4
)
 
10,727

 
1,450

 

 
12,173

Total operating (income) expenses
(181
)
 
238,856

 
17,047

 
222

 
255,944

Net operating income
181

 
35,660

 
1,605

 
(222
)
 
37,224

Other income and expenses:
 

 
 

 
 

 
 

 
 

Non-regulated revenue
977

 
6,604

 
850

 
(1,230
)
 
7,201

Non-regulated expenses

 
(3,175
)
 
(493
)
 

 
(3,668
)
Other components of net periodic benefit cost

 
(4,595
)
 
(291
)
 

 
(4,886
)
Allowance for equity funds used during construction

 
1,658

 

 

 
1,658

Income tax expense on other income and expenses
(398
)
 
(1,161
)
 
(77
)
 
501

 
(1,135
)
Net other income (loss)
579

 
(669
)
 
(11
)
 
(729
)
 
(830
)
Interest:
 

 
 

 
 

 
 

 
 

Interest expense
510

 
17,265

 
991

 
(977
)
 
17,789

Allowance for borrowed funds used during construction

 
(1,018
)
 
(40
)
 

 
(1,058
)
Net interest expense
510

 
16,247

 
951

 
(977
)
 
16,731

Equity earnings of subsidiaries
19,413

 

 

 
(19,413
)
 

Net income
$
19,663

 
$
18,744

 
$
643

 
$
(19,387
)
 
$
19,663



24

Table of Contents

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2018
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Operating activities:
 

 
 

 
 

 
 

 
 

Net income
$
10,477

 
$
9,176

 
$
1,001

 
$
(10,177
)
 
$
10,477

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

 
 

 
 

 
 

Equity earnings of subsidiaries
(10,209
)
 

 

 
10,209

 

Dividends received from affiliates
18,017

 

 

 
(18,017
)
 

Depreciation and amortization
47

 
40,146

 
2,432

 
(43
)
 
42,582

Changes in value of life insurance contracts

 
817

 

 

 
817

Allowance for equity funds used during construction

 
(1,621
)
 

 

 
(1,621
)
Changes in operating assets and liabilities
(417
)
 
(16,439
)
 
467

 

 
(16,389
)
Other changes in noncurrent assets and liabilities
1,610

 
11,653

 
431

 
11

 
13,705

Net cash provided by operating activities
19,525

 
43,732

 
4,331

 
(18,017
)
 
49,571

Investing activities:
 
 
 
 
 

 
 
 
 
Utility plant expenditures

 
(128,683
)
 
(5,217
)
 

 
(133,900
)
Changes in affiliate advances
58

 
3,323

 
(194
)
 
(3,187
)
 

Issuance of affiliate short-term borrowings
(3,700
)
 

 

 
3,700

 

Reduction of affiliates long-term debt
818

 

 

 
(818
)
 

Life insurance proceeds

 
2,054

 

 

 
2,054

Purchase of life insurance contracts

 
(2,054
)
 

 

 
(2,054
)
Net cash used in investing activities
(2,824
)
 
(125,360
)
 
(5,411
)
 
(305
)
 
(133,900
)
Financing Activities:
 

 
 

 
 

 
 

 
 

Short-term borrowings

 
111,000

 

 

 
111,000

Repayment of short-term borrowings

 
(61,000
)
 

 

 
(61,000
)
Changes in affiliate advances

 
129

 
(3,316
)
 
3,187

 

Proceeds from affiliate short-term borrowings

 

 
3,700

 
(3,700
)
 

Repayment of affiliates long-term borrowings

 

 
(818
)
 
818

 

Repayment of long-term debt

 
(12,136
)
 
(128
)
 

 
(12,264
)
Advances and contributions in aid of construction

 
8,029

 
356

 

 
8,385

Refunds of advances for construction

 
(3,489
)
 
(9
)
 

 
(3,498
)
Repurchase of common stock
(1,364
)
 

 

 

 
(1,364
)
Dividends paid to non-affiliates
(18,017
)
 

 

 

 
(18,017
)
Dividends paid to affiliates

 
(17,330
)
 
(687
)
 
18,017

 

Net cash (used in) provided by financing activities
(19,381
)
 
25,203

 
(902
)
 
18,322

 
23,242

Change in cash, cash equivalents, and restricted cash
(2,680
)
 
(56,425
)
 
(1,982
)
 

 
(61,087
)
Cash, cash equivalents, and restricted cash at beginning of period
4,728

 
81,453

 
9,171

 

 
95,352

Cash, cash equivalents, and restricted cash at end of period
$
2,048

 
$
25,028

 
$
7,189

 

 
$
34,265


25

Table of Contents

CALIFORNIA WATER SERVICE GROUP
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2017
(In thousands)
 
 
Parent
Company
 
Cal Water
 
All Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Operating activities:
 

 
 

 
 

 
 

 
 

Net income
$
19,663

 
$
18,744

 
$
643

 
$
(19,387
)
 
$
19,663

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

 
 

 
 

 
 

Equity earnings of subsidiaries
(19,413
)
 

 

 
19,413

 

Dividends received from affiliates
17,278

 

 

 
(17,278
)
 

Depreciation and amortization
47

 
37,074

 
2,253

 
(46
)
 
39,328

Changes in value of life insurance contracts

 
(1,208
)
 

 

 
(1,208
)
Allowance for equity funds used during construction

 
(1,658
)
 

 

 
(1,658
)
Changes in operating assets and liabilities
(172
)
 
(40,755
)
 
841

 

 
(40,086
)
Other changes in noncurrent assets and liabilities
1,520

 
17,650

 
497

 
20

 
19,687

Net cash provided by operating activities
18,923

 
29,847

 
4,234

 
(17,278
)
 
35,726

Investing activities:
 

 
 

 
 

 
 

 
 

Utility plant expenditures

 
(105,684
)
 
(3,028
)
 

 
(108,712
)
Changes in affiliate advances
429

 
2,491

 
(138
)
 
(2,782
)
 

Issuance of affiliate short-term borrowings
(2,610
)
 

 

 
2,610

 

Reduction of affiliates long-term debt
668

 

 

 
(668
)
 

Life insurance proceeds

 
450

 

 

 
450

Purchase of life insurance contracts

 
(1,216
)
 

 

 
(1,216
)
Net cash used in investing activities
(1,513
)
 
(103,959
)
 
(3,166
)
 
(840
)
 
(109,478
)
Financing Activities:
 

 
 

 
 

 
 

 
 

Short-term borrowings

 
140,000

 

 

 
140,000

Repayment of short-term borrowings
(2,000
)
 
(45,000
)
 

 

 
(47,000
)
Changes in affiliate advances

 
(238
)
 
(2,544
)
 
2,782

 

Proceeds from affiliate short-term borrowings

 

 
2,610

 
(2,610
)
 

Repayment of affiliates long-term borrowings

 

 
(668
)
 
668

 

Repayment of long-term debt

 
(2,161
)
 
(246
)
 

 
(2,407
)
Advances and contributions in aid for construction

 
10,225

 
87

 

 
10,312

Refunds of advances for construction

 
(4,430
)
 

 

 
(4,430
)
Repurchase of common stock
(1,236
)
 

 

 

 
(1,236
)
Dividends paid to non-affiliates
(17,278
)
 

 

 

 
(17,278
)
Dividends paid to affiliates

 
(16,484
)
 
(794
)
 
17,278

 

Net cash (used in) provided by financing activities
(20,514
)
 
81,912

 
(1,555
)
 
18,118

 
77,961

Change in cash, cash equivalents, and restricted cash
(3,104
)
 
7,800

 
(487
)
 

 
4,209

Cash, cash equivalents, and restricted cash at beginning of period
5,216

 
13,595

 
7,124

 

 
25,935

Cash, cash equivalents, and restricted cash at end of period
$
2,112

 
$
21,395

 
$
6,637

 

 
$
30,144



26

Table of Contents

Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. 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:
governmental and regulatory commissions’ decisions, including decisions on proper disposition of property;
consequences of eminent domain actions relation 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;
housing and customer growth trends;
the impact of opposition to rate increases;
our ability to recover costs;
availability of water supplies;
issues with the implementation, maintenance or security of our information technology systems;
civil disturbances or terrorist threats or acts, 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 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;
the risks set forth in “Risk Factors” included in the Company's annual report on 2017 Form 10-K.
 
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.

27

Table of Contents

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 2017 Form 10-K. They include:
revenue recognition;
regulated utility accounting;
income taxes;
pension and postretirement health care benefits;
For the six month period ended June 30, 2018, except for changes to revenue recognition from the adoption of ASC 606 (see Note 2), 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.
RESULTS OF SECOND QUARTER 2018 OPERATIONS
COMPARED TO SECOND QUARTER 2017 OPERATIONS
Dollar amounts in thousands unless otherwise stated
 
Overview
Net income for the three month period ended June 30, 2018, was $13.0 million or $0.27 earnings per diluted common share compared to net income of $18.5 million or $0.39 earnings per diluted common share for the three month period ended June 30, 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 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, 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.
Operating Revenue
Operating revenue increased $1.5 million, or 0.9%, to $172.6 million in the second quarter of 2018 as compared to the second quarter of 2017. The factors that impacted the operating revenue for the second quarter of 2018 as compared to the second quarter of 2017 are as follows:
Net change due to rate changes, usage, and other (1)
$
(665
)
MCBA Revenue (2)
(502
)
Other balancing account revenue (3)
929

Deferral of revenue (4)
1,738

Net operating revenue increase
$
1,500


1.
The net change due to rate changes, usage, and other in the above table was mainly driven by a $4.5 million reduction in revenue as a result of the impacts of recognizing the cost of capital and tax accounting memorandum accounts and a $2.5 million decrease in accrued unbilled revenue, partially offset by rate increases of $5.8 million. The components of the rate increases are as follows:

28

Table of Contents

General rate case
32

Escalation rate increases
3,954

Purchased water and pump tax offset increases
1,348

Rate base offset increases
527

Total increase in rates
$
5,829


2.
The MCBA revenue decrease resulted from an increase in adopted water production costs relative to actual water production costs in the second quarter of 2018 as compared to the second quarter of 2017. As required by the MCBA mechanism, the increase in adopted water production costs relative to actual water production costs in California also decreased operating revenue for the same amount.

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. The increase in revenue was mainly due to an increase in actual pension expenses relative to adopted in the second quarter of 2018 as compared to the second quarter of 2017.

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 decreased in the second quarter of 2018 as compared to the second quarter of 2017 due to a decrease in the balancing account revenue expected to be collected beyond 24 months, which increases revenue.

Total Operating Expenses
 
Total operating expenses increased $3.1 million, or 2.2%, to $147.6 million in the second quarter of 2018, as compared to $144.5 million in the second quarter of 2017.
 
Water production costs consists of purchased water, purchased power, and pump taxes. It represents the largest component of total operating expenses, accounting for approximately 44.3% of total operating expenses in the second quarter of 2018, as compared to 44.4% of total operating expenses in the second quarter of 2017. Water production costs increased 1.9% as compared to the same period last year mainly due to a 3.2% increase in water production and higher wholesaler water rates.
Sources of water as a percent of total water production are listed in the following table:
 
Three Months Ended June 30
 
2018
 
2017
Well production
48
%
 
48
%
Purchased
47
%
 
47
%
Surface
5
%
 
5
%
Total
100
%
 
100
%
The components of water production costs are shown in the table below:
 
Three Months Ended June 30
 
2018
 
2017
 
Change
Purchased water
$
53,961

 
$
53,322

 
$
639

Purchased power
7,819

 
7,601

 
218

Pump taxes
3,593

 
3,208

 
385

Total
$
65,373

 
$
64,131

 
$
1,242


Administrative and general and other operations expenses increased $5.4 million to $45.1 million in the second quarter of 2018, as compared to $39.7 million in the second quarter of 2017. The increase was due primarily to a $1.4 million increase in the recognition of previously deferred costs associated with the deferred operating revenue, pension benefit cost increase of $1.4 million, employee wage cost increase of $1.0 million, an increase in water quality testing costs of $0.3 million due to TCP, and the write-off of $0.3 million of costs that were previously capitalized. Changes in employee

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pension benefit costs for regulated California operations do not affect net income, because the Company is authorized to track these costs in balancing accounts for future recovery, which create a corresponding change to operating revenue. At June 30, 2018, there were 1,171 employees and at June 30, 2017, there were 1,157 employees. 

Maintenance expense increased $0.7 million, or 14.5%, to $5.4 million in the second quarter of 2018, as compared to $4.7 million in the second quarter of 2017, mostly due to decreases in transmission and distribution mains repairs.
 
Depreciation and amortization expense increased $1.8 million, or 9.0%, to $21.0 million in the second quarter of 2018, as compared to $19.2 million in the second quarter of 2017, due to 2017 capital additions.

Income taxes decreased $6.3 million, to $4.3 million in the second quarter of 2018, as compared to $10.6 million in the second quarter of 2017. The decrease was mainly due to the federal income tax rate reduction from 35% to 21%, 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%.
Property and other taxes increased $0.3 million, or 5.8%, to $6.4 million in the second quarter of 2018, as compared to $6.1 million in the second quarter of 2017, mostly due to an increase in assessed property values in 2017 and increased local franchise taxes.
Other Income and Expenses
Net other loss increased $2.6 million to a net other 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.    
Interest Expense
Net interest expense increased $1.3 million, or 15.4%, to $9.8 million in the second quarter of 2018, as compared to $8.5 million in the second quarter of 2017. The increase was due primarily to an increase in short-term financing for capital investments as well as increased short-term interest rates.
RESULTS OF THE SIX MONTHS ENDED JUNE 30, 2018 OPERATIONS
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2017 OPERATIONS
Dollar amounts in thousands unless otherwise stated 
Overview
Net income for the six months ended June 30, 2018, was $10.5 million or $0.22 per diluted common share compared to a net income of $19.7 million or $0.41 per diluted common share for the six months ended June 30, 2017, a decrease of $9.2 million. The decrease in net income was primarily due to $3.9 million of new business development expenses, a reduction in operating revenue of $2.8 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 employee 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 rate increases 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 that was partially offset by a $1.1 million benefit from Company-owned life insurance.
Operating Revenue
Operating revenue increased $11.7 million, or 4.0%, to $304.9 million in the first six months of 2018 as compared to the first six months of 2017. The factors that impacted the operating revenue for the first six months of 2018 as compared to 2017 are as follows:
Net change due to rate changes, usage, and other (1)
$
2,157

MCBA Revenue (2)
3,675

Other balancing account revenue (3)
2,224

Deferral of revenue (4)
3,655

Net operating revenue increase
$
11,711


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1.
The net change due to rate changes, usage, and other in the above table was mainly driven by rate increases of $11.6 million, partially offset by a $7.6 million reduction in revenue as a result of the impacts of recognizing the cost of capital and tax accounting memorandum accounts and a $3.2 million decrease in accrued unbilled revenue. The components of the rate increases are as follows: 
General rate case
$
1,771

Escalation rate increases
6,371

Purchased water and pump tax offset increases
2,415

Rate base offset increases
1,089

Total increase in rates
$
11,646

2.
The MCBA revenue increase resulted from an increase in actual water production costs relative to adopted water production costs in the first six months of 2018 as compared to the first six months of 2017. The actual water production costs increased as a result of an increase in customer consumption in the first six months of 2018 as compared to the first six months of 2017. As required by the MCBA mechanism, the increase in actual water production costs relative to adopted water production costs in California also increased operating revenue for the same amount.
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. The increase in revenue was mainly due to an increase in actual health care and pension expenses relative to adopted in the first six months of 2018 as compared to the first six months of 2017, which was partially offset by a decrease in actual conservation expenses relative to adopted in the first six months of 2018 as compared to the first six months of 2017.
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 decreased in the first six months of 2018 as compared to the first six months of 2017 due to decrease in the balancing account revenue expected to be collected beyond 24 months, which increases revenue.
Total Operating Expenses
Total operating expenses increased $15.9 million, or 6.2%, to $271.8 million in the first six months of 2018, as compared to $255.9 million in the first six months of 2017.
Water production costs consists of purchased water, purchased power, and pump taxes. It represents the largest component of total operating expenses, accounting for approximately 41.6% of total operating expenses in the first six months of 2018, as compared to 41.5% of total operating expenses in the first six months of 2017. Water production costs increased 6.4% as compared to the same period last year mainly due to an increase in wholesaler rates and an increase of 5.8% in water production.
Sources of water as a percent of total water production are listed in the following table:
 
Six Months Ended June 30
 
2018
 
2017
Well production
47
%
 
48
%
Purchased
48
%
 
47
%
Surface
5
%
 
5
%
Total
100
%
 
100
%






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The components of water production costs are shown in the table below:
 
Six Months Ended June 30
 
2018
 
2017
 
Change
Purchased water
$
92,484

 
$
87,690

 
$
4,794

Purchased power
13,342

 
12,509

 
833

Pump taxes
7,153

 
6,000

 
1,153

Total
$
112,979

 
$
106,199

 
$
6,780

Administrative and general and other operations expenses increased $10.5 million, or 13.3%, to $89.1 million in the first six months of 2018, as compared to $78.6 million in the first six months of 2017. The increase was due primarily to a $3.0 million increase in the recognition of previously deferred costs associated with the deferred operating revenue, pension benefit cost increase of $2.5 million, employee wage cost increase of $1.7 million, employee health care cost increase of $0.7 million, additional uninsured loss expenses of $0.7 million, and building maintenance and security cost increase of $0.5 million. Changes in employee pension and employee and retiree medical costs for regulated California operations do not affect net income, because the Company tracks these costs in balancing accounts for future recovery, which create corresponding changes to operating revenue. 
Depreciation and amortization expense increased $3.3 million, or 8.5%, to $41.7 million in the first six months of 2018, as compared to $38.4 million in the first six months of 2017, mostly due to 2017 utility plant additions.
Income taxes decreased $5.6 million, or 57.6%, to $4.1 million in the first six months of 2018, as compared to $9.7 million in the first six months of 2017. The decrease was mainly due to the federal income tax rate reduction from 35% to 21%, 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%.
Property and other taxes increased $0.9 million, or 7.7%, to $13.1 million in the first six months of 2018, as compared to $12.2 million in the first six months of 2017, due primarily to an increase in assessed property values in 2017 and increased local franchise taxes.
Other Income and Expenses
Net other loss increased $3.3 million to $4.1 million in the first six months of 2018, as compared to net other loss of $0.8 million in the first six months of 2017, due primarily to $3.9 million of new business development expenses, 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 that was partially offset by a $1.1 million benefit from Company-owned life insurance.    
Interest Expense
Net interest expense increased $1.8 million, or 10.8%, to $18.5 million in the first six months of 2018, as compared to $16.7 million in the first six months of 2017. The increase was due primarily to an increase in short-term financing for capital investments as well as increased short-term interest rates.
REGULATORY MATTERS
2018 California Regulatory Activity
California GRC filing
On December 15, 2016, the CPUC voted to approve Cal Water's 2015 GRC settlement agreement. The approved decision, which was proposed by the presiding Administrative Law Judge in November 2016, authorized Cal Water to increase gross revenue by approximately $45.0 million starting on January 1, 2017, up to $17.2 million in 2018, up to $16.3 million in 2019, and up to $30.0 million upon completion and approval of the Company’s advice letter projects. The 2019 revenue increases are subject to the CPUC’s earnings test protocol.
The CPUC’s decision also authorized Cal Water to invest $658.8 million in water system improvements throughout California over the three-year period of 2016-2018 in order to continue to provide safe and reliable water to its customers. This figure includes $197.3 million of water system infrastructure improvements that will be subject to the CPUC’s advice letter procedure.

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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, 2018, Cal Water filed a GRC requesting new water infrastructure investments of $828.5 million in accordance with the rate case plan for all of its regulated operating districts for the years 2019, 2020, and 2021. The CPUC will evaluate the new water infrastructure improvement investments along with operating budgets to establish water rates that reflect the actual cost of service. The required filing begins an approximately 18-month review process, with any changes in customer rates expected to become effective in 2020. Cal Water has proposed to the CPUC 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. In 75% of Cal Water’s service areas, the utility is proposing infrastructure improvements that will cost the typical residential customer less than $5 per month, and in 90% of service areas, the proposed increase is less than $6 per month. More than half of Cal Water’s proposed $828.5 million of new infrastructure improvements relate to its transmission and distribution pipeline replacement program, and all are necessary to enhance reliability, augment water supply, and upgrade aging water system infrastructure. The plans also reflect Cal Water's aggressive cost-control measures to reduce operating and administrative costs.
Cost of Capital Application
In April of 2017, Cal Water, along with three other water utilities, filed an application to adopt a new cost of capital and capital structure for 2018. On March 22. 2018, the CPUC adopted a revised decision in the cost of capital proceeding for Cal Water and three other water utilities for the years 2018, 2019, and 2020, establishing for Cal Water a 9.20% return on equity and a 5.51% cost of debt, with a capital structure of 46.60% long-term debt and 53.40% common equity, and an authorized return on rate base of 7.48%, compared with Cal Water’s prior return on equity of 9.43%, cost of debt of 6.24%, and authorized return on rate base of 7.94%. The adopted capital structure did not change. The adopted returns on debt and equity will reduce Cal Water’s 2018 adopted revenue by approximately $6.9 million. The CPUC also authorized continuation of the water cost of capital adjustment mechanism, which provides for an adjustment in the return on equity if the cost of long-term debt as defined by an index of utility debt rates varies from the most recent index by 100 basis points or more in 2019 and 2020.
On March 30, 2018, Cal Water submitted an advice letter that established the Cost of Capital Memorandum Account (CoC MA) to track the difference between current rates and rates based upon the new cost of capital adopted by the CPUC as if the new cost of capital had been in effect beginning January 1, 2018. For the three and six months ended June 30, 2018, Cal Water recorded a $1.7 million and $2.8 million, respectively, reduction to revenue with a corresponding regulatory liability due to the CoC MA.
In May of 2018, Cal Water submitted an advice letter to adopt the new cost of capital and capital structure for 2018 in customer rates. The annual adopted gross revenue reduction associated with the May 2018 filing was $6.9 million. The new rates became effective on July 1, 2018.
2018 Tax Accounting Memorandum Account (TAMA)
On December 22, 2017, the CPUC sent a letter to All Class A and B Water and Sewer Utilities on the subject of “Changes in Federal Tax Rates for 2018.” The CPUC required Cal Water to establish a memo account to track the impact of the TCJA on Cal Water. The TAMA will track the revenue requirement impact of the TCJA not otherwise reflected in rates from January 1, 2018 until current rates are modified to reflect all impacts of the TCJA. The Hawaii Water, Washington Water, and New Mexico Water Commissions have similar requirements to track the impact of the changes to the federal tax law. For the three and six months ended June 30, 2018, the Company recorded a $2.8 million and $4.8 million, respectively, reduction to revenue with a corresponding regulatory liability due to the changes required by the TCJA.
In May of 2018, Cal Water submitted an advice letter to adopt the new federal corporate income tax rate in customer rates. The annual adopted gross revenue reduction associated with the May 2018 filing was $11.1 million. The new rates became effective on July 1, 2018.
Escalation increase requests
As a part of the decision on the 2015 GRC, Cal Water was authorized to request annual escalation rate increases for 2018 for those districts that passed the earnings test. In November of 2017, Cal Water requested escalation rate increases in all of its regulated districts. The annual adopted gross revenue associated with the November 2017 filing was $15.9 million. The new rates became effective on January 1, 2018.

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WRAM and MCBA filings
In April of 2018, Cal Water submitted an advice letter to true up the revenue under-collections in the 2017 annual WRAMs/MCBAs of its regulated districts. A net under-collection of $50.1 million is being recovered from customers in the form of 12, 18, and greater-than-18-month surcharges. The new rates became effective April 15, 2018. This surcharge is in addition to surcharges/surcredits authorized in prior years which have not yet expired.
Expense Offset filings
Expense offsets are dollar-for-dollar increases in revenue to match increased expenses, and therefore do not affect net operating income. In October of 2017, Cal Water submitted advice letters to request offsets for increases in purchased water costs and pump taxes in five of its regulated districts totaling $2.2 million. The new rates became effective on January 1, 2018.
In May and June of 2018, Cal Water submitted advice letters to request offsets for increases in purchased water costs and pump taxes in five of its regulated districts totaling $3.8 million. The new rates became effective on July 1, 2018.
Rate base Offset filings
For construction projects that are authorized in GRCs as advice letter projects, companies are allowed to file rate base offsets to increase revenues after the plant is placed into service. In November of 2017, Cal Water submitted an advice letter to recover $1.4 million of annual revenue increase for a rate base offset in one of its regulated districts. The new rates became effective on January 1, 2018.
During the first six months of 2018, Cal Water submitted advice letters to recover $2.1 million of annual revenue increases for rate base offsets in all of its regulated districts. The new rates became effective on July 1, 2018.
California Drought Memorandum Account
In March of 2018, Cal Water submitted an advice letter to request recovery of 2016 and 2017 incremental drought expenses of $3.2 million. The advice letter requires a Commission resolution and Cal Water may recover less than the requested amount. Cal Water anticipates a decision on the matter by the end of 2018.
Travis Air Force Base
On September 29, 2016, Cal Water entered into a 50-year agreement with the U.S. Department of Defense to acquire the water distribution assets of and distribute water to most of Travis Air Force Base beginning in 2018. On May 31, 2017, Cal Water submitted an application to the CPUC seeking approval to distribute water service to most of the base and to establish rates for its service.
The water system utilizes surface water treated at a water treatment plant and groundwater from five wells, and includes distribution piping, storage tanks, hydrants, and other appurtenances to serve about 15,280 active and reserve personnel and civilians on the 6,400-acre base. If approved, Cal Water will make initial capital improvements of about $12.7 million, with an anticipated capital investment of about $52.0 million over the 50-year term of the utility service contract. Cal Water included an infrastructure improvement plan for the proposed regulated Travis district in Cal Water’s July 2, 2018 GRC filing, proposing a revenue increase of $4.7 million over the years 2020, 2021, and 2022.
2018 Regulatory Activity—Other States
2017 Waikoloa (Hawaii Water) GRC Filings
In December of 2017, Hawaii Water filed GRC applications requesting an additional $3.8 million in annual revenues for its Waikoloa Village and Resort Systems with the Hawaii Public Utilities Commission. The GRCs seek recovery of capital investments in the Waikoloa Village and Waikoloa Resort Systems as well as increases in operating expenses since the previous rate case. If approved, the Company anticipates rates would become effective in the fourth quarter of 2018.
2018 Washington Water GRC Filing
On July 2, 2018, Washington Water 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 application requests an increase of $1.6 million in annual revenue, which is an increase of 13.8% over 2017 revenue. Washington Water is requesting recovery for numerous water system upgrades and additions that Washington Water has made since its last GRC, which include new pumping equipment, water treatment facilities, wells, water mains, and new storage. Increases in operating costs are also a factor in the proposed increase. The application reflects increases in

34

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materials, equipment, depreciation expense due to the addition of new facilities, and increases in employee wages and health care costs. If approved, the new rates will become effective on August 1, 2018; however, the UTC has the authority to set final rates that are either lower or higher than Washington Water's request, depending on the results of its investigation.
LIQUIDITY
Cash flow from Operations
Cash flow from operations for the first six months of 2018 was $49.6 million compared to $35.7 million for the same period in 2017. 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 six months of 2018, we made contributions of $16.3 million to our employee pension plan compared to contributions of $14.8 million made during the first six months of 2017. During the first six months of 2018, we made contributions of $2.7 million to the other postretirement benefit plans and no cash contributions were made during the six months ended June 30, 2017. The total 2018 estimated cash contribution to the pension plans is $33.4 million and to the other postretirement benefit plans is $10.1 million.
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 bank lines of credit 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 more than normal precipitation falls in our service areas or temperatures are lower than normal, especially in the summer months.
Investing Activities
During the first six months of 2018 and 2017, we used $133.9 million and $108.7 million, respectively, of cash for company-funded and developer-funded utility plant expenditures. The 2018 budget estimates utility plant expenditures to be between $200.0 and $220.0 million. Annual expenditures fluctuate each year due to the availability of construction resources and our ability to obtain construction permits in a timely manner.
Financing Activities
Net cash provided by financing activities was $23.2 million during the first six months of 2018 compared to $78.0 million of net cash provided by financing activities for the same period in 2017.
During the first six months of 2018 and 2017, we borrowed $111.0 million and $140.0 million, respectively, on our unsecured revolving credit facilities. Repayments of unsecured revolving credit facilities borrowings during the first six months of 2018 were $61.0 million and $47.0 million for the same period in 2017. We also repaid $11.8 million of First Mortgage Bonds that matured in the first six months of 2018.
The undercollected net WRAM and MCBA receivable balances were $65.8 million and $54.8 million as of June 30, 2018 and June 30, 2017, respectively. The undercollected balances were primarily financed by Cal Water using short-term and long-term financing arrangements to meet operational cash requirements. Interest on the undercollected balances, the interest recoverable from customers, is limited to the current 90-day commercial paper rates which is significantly lower than Cal Water’s short and long-term financing rates.
Short-term and Long-Term Financing
During the first six months of 2018, we utilized cash generated from operations and borrowings on the unsecured revolving credit facilities to fund operations and capital investments. We did not sell Company common stock during the first six months of 2018 and 2017. 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 $300.0 million under its revolving credit facility; however, all borrowings need to be repaid within 24 months unless otherwise authorized by the CPUC. The proceeds from the revolving credit facilities may be used for working capital purposes, including the short-term financing of utility plant projects. The base loan rate may vary from LIBOR plus 72.5 basis points to LIBOR

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plus 95 basis points, depending on the Company’s total capitalization ratio. Likewise, the unused commitment fee may vary from 8 basis points to 12.5 basis points based on the same ratio.
As of June 30, 2018 and December 31, 2017, there were short-term borrowings of $325.1 million and $275.1 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 June 30, 2018, we are in compliance with all of the covenant requirements and are eligible to use the full amount of our credit facilities.
Bond principal and other long-term debt payments were $12.3 million during the first six months of 2018 and $2.4 million during the first six months of 2017.
Long-term financing, which includes senior notes, 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 utility plant expenditures plan 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.
Dividends
During the first six months of 2018, our quarterly common stock dividend payments were $0.3750 per share compared to $0.3600 during the first six months of 2017. For the full year 2017, the payout ratio was 51% 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.
At the July 25, 2018 meeting, the Company's Board of Directors declared the third quarter dividend of $0.1875 per share payable on August 17, 2018, to stockholders of record on August 6, 2018. This was our 294th consecutive quarterly dividend.
2018 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 and Cal Water have a syndicated unsecured revolving line of credit of $150.0 million and $300.0 million, respectively, for short-term borrowings. As of June 30, 2018, the Company’s and Cal Water’s availability on these unsecured revolving lines of credit was $94.9 million and $30.0 million, respectively.
Book Value and Stockholders of Record
Book value per common share was $14.27 at June 30, 2018 compared to $14.44 at December 31, 2017. There were approximately 1,926 stockholders of record for our common stock as of May 7, 2018. 
Utility Plant Expenditures
During the first six months of 2018, utility plant expenditures totaled $133.9 million for company-funded and developer-funded projects. The 2018 budget estimates company-funded utility plant expenditures to be between $200.0 and $220.0 million. The actual amount may vary from the budget number due to timing of actual payments related to current year and prior year projects. We do not control third-party-funded utility plant expenditures and therefore are unable to estimate the amount of such projects for 2018.
As of June 30, 2018, construction work in progress was $210.4 million compared to $167.9 million as of June 30, 2017. Work in progress includes projects that are under construction but not yet complete and placed in service.

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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 46.5% 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 the State of California. Our annual groundwater extraction from adjudicated groundwater basins approximates 6.8 billion gallons or 14.4% 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 28.0 billion gallons or 58.9% of our total annual water supply pumped from wells. Our annual groundwater extraction from unmanaged groundwater basins approximates 12.7 billion gallons or 26.7% 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. Well pump taxes were $3.6 million and $3.2 million for the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, well pump taxes were $7.2 million and $6.0 million, respectively. In 2014, the State of California enacted the Sustainable Groundwater Management Act of 2014. The law and its implementing regulations required 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 in the future, groundwater will be produced mainly from 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 the cool winter months. Rain and snow during the winter months in California replenish underground water aquifers and fill reservoirs, providing the water supply for subsequent delivery to customers. As of June 30, 2018, the State of California snowpack water content during the 2017-2018 water year is 79% of long-term averages (per the California Department of Water Resources, Northern Sierra Precipitation Accumulation report). In January of 2014, California's Governor Brown proclaimed a drought emergency and directed State officials to take all necessary actions to make water immediately available. On April 7, 2017, the Governor declared an end to the drought emergency in 54 of California’s 58 counties. Two of Cal Water's districts remain under a declared drought; these were areas where groundwater was impacted by five years of drought conditions. Management believes that supply pumped from underground aquifers and purchased from wholesale suppliers will be adequate to meet customer demand during 2018 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 current treatment processes.
On May 31, 2018, California's Governor Brown 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. By June 30, 2022, the California State Water Resources Control Board, in conjunction with the California Department of Water Resources, will 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 an urban water use target by November 1, 2023 and each November 1 thereafter that compares actual urban water use to the target. Management believes that Cal Water is well-positioned to comply with all regulations required of utilities.

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CONTRACTUAL OBLIGATIONS
Effective April 3, 2018, the City of Commerce has renewed a lease agreement for Cal Water to operate the City of Commerce’s water system for the next 15 years. Cal Water has run the City of Commerce water system since 1985 and is responsible for all operations, maintenance, water quality assurance, and customer service programs to provide a reliable supply of water that meets federal and state standards to customers served by the City of Commerce system. The City of Commerce will remain responsible for financing infrastructure improvements and setting its customers’ water rates.
During the six months ended June 30, 2018, there were no other material changes in contractual obligations outside the normal course of business.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We do not hold, trade in or issue derivative financial instruments and therefore are not exposed to risks these instruments present. Our market risk to interest rate exposure is limited because the cost of long-term financing and short-term bank borrowings, including interest costs, is covered in consumer water rates as approved by the Commissions. We do not have foreign operations; therefore, we do not have a foreign currency exchange risk. Our business is sensitive to commodity prices and is most affected by changes in purchased water and purchased power costs.
 
Historically, the CPUC’s balancing account or offsettable expense procedures allowed for increases in purchased water, pump tax, and purchased power costs to be flowed through to consumers. Traditionally, a significant percentage of our net income and cash flows come from California regulated operations; therefore the CPUC’s actions have a significant impact on our business. See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Matters.”

Item 4.
 
CONTROLS AND PROCEDURES
 
(a) Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(c) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for timely decisions regarding required disclosure.
 
In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Accordingly, our disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives.
 
Our management, with the participation of our CEO and our CFO, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018. Based on that evaluation, we concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
 
(b) Changes to Internal Control over Financial Reporting
There was no change in our internal controls over financial reporting that occurred during the quarter ended June 30, 2018, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS 
From time to time, the Company is involved in various disputes and litigation matters that arise in the ordinary course of business. The status of each significant matter is reviewed and assessed for potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount of the range of loss can be estimated, a liability is accrued for the estimated loss in accordance with the accounting standards for contingencies. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. While the outcome of these disputes and litigation matters cannot be predicted with any certainty, management does not believe when taking into account existing reserves the ultimate resolution of these matters will materially affect the Company’s financial position, results of operations, or cash flows. In the future, we may be involved in disputes and litigation related to a wide range of matters, including employment, construction, environmental issues and operations. Litigation can be time-consuming and expensive and could divert management’s time and attention from our business. In addition, if we are subject to additional lawsuits or disputes, we might incur significant legal costs and it is uncertain whether we would be able to recover the legal costs from customers or other third parties. For more information refer to note 10.
Item 1A.
RISK FACTORS
There have been no material changes to the Company’s risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year-ended December 31, 2017 filed with the SEC on March 1, 2018.
Item 5.
OTHER INFORMATION
The Company confirmed in a Form 8K filing on April 26, 2018 that it has made a proposal to acquire San Jose Water Group (SJW) for $68.25 per share in an all-cash transaction valued at approximately $1.9 billion including the assumption of debt. The proposal represents a 20% premium to SJW’s closing stock price on April 25, 2018 and has been rejected by the SJW Board of Directors.
During the second quarter of 2018, the Company has begun soliciting proxies in opposition to resolutions related to the pending merger between SJW and Connecticut Water Service, Inc. The Company has also commenced a tender offer to acquire all outstanding shares of SJW for $68.25 per share in cash. The offer is scheduled to expire at 5:00 p.m., New York City time, on September 28, 2018.

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Item 6.
EXHIBITS
Exhibit
 
Description
4

 
The Company agrees to furnish upon request to the Securities and Exchange Commission a copy of each instrument defining the rights of holders of long-term debt of the Company
 
 
 
10.1

 
 

 
 
10.2

 
 

 
 
31.1

 
 

 
 
31.2

 
 

 
 
32

 
 

 
 
101.INS

 
XBRL Instance Document
 

 
 
101.SCH

 
XBRL Taxonomy Extension Schema Document
 

 
 
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document
 

 
 
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document
 

 
 
101.LAB

 
XBRL Taxonomy Extension Label Linkbase Document
 

 
 
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document


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SIGNATURES
 
Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
CALIFORNIA WATER SERVICE GROUP
 
Registrant
 
 
July 26, 2018
By:
/s/ Thomas F. Smegal III
 
 
Thomas F. Smegal III
 
 
Vice President,
 
 
Chief Financial Officer and Treasurer


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