Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. CALIFORNIA WATER SERVICE GROUP (1035201) 10-K published on Feb 28, 2019 at 2:18 pm
Reporting Period: Dec 30, 2018
On December 13, 2018, the CPUC conditionally approved Cal Water’s request to own and operate the TAFB water system as a regulated water utility district. Approval was conditioned upon modifying the contract between Cal Water and the Department of Defense to more clearly assert the CPUC’s jurisdiction over a new Travis District. In January of 2019, Cal Water fulfilled the condition by submitting a contract amendment that was approved by the CPUC. The decision enables Cal Water to acquire the water distribution assets of TAFB from the U.S. Department of Defense and provide water utility service to the base for a term of 50 years. Subject to the terms of the contract with the Department of Defense and the CPUC decision, Cal Water will begin serving TAFB’s more than 15,000 active and reserve personnel and civilians in 2019. The CPUC will regulate water rates, rules, and tariffs for the system as part of Cal Water’s normal three-year rate case cycle.
On September 27, 2016, the Governor signed Senate Bill No. 1398 (SB 1398) which added Section 116885 to the Health and Safety Code. The new section stipulates that water systems compile an inventory of known lead service lines used in their distribution systems and identify areas that may have lead service lines used in its distribution system by July 1, 2018. After completing the inventory, the bill also requires water systems provide a timeline for replacement of those known lead service lines to the State Water Resources Control Board (SWRCB). For those that may have lead service lines, the bill requires water systems to either determine the existence or absence thereof by July 1, 2020, and provide that information to the SWRCB or provide a replacement timeline for those service lines whose lead content cannot be determined. Approval of the timeline rests with the SWRCB. Cal Water met the July 1, 2018 reporting deadline where it described 52% of its service lines were identified as not containing lead and the remaining 48% unknown. In order to meet the July 1, 2020 deadline, Cal Water needs to determine if the remaining 48% of service lines contain lead. If the absence of lead cannot be determined, plans must be made to replace the line pursuant to the requirements in SB 1398. A significant amount of field research is needed to meet the 2020 reporting deadline. To that end, in December of 2018, Cal Water submitted an advice letter that established the LSL MA, which gives Cal Water the opportunity to recover costs associated with this effort. Granted by the CPUC in January of 2019, the LSL MA will track all incremental expenses associated with studying and potentially replacing lead service lines for the benefit of Cal Water’s customers.
At December 31, 2018, we had 751 union employees. In January 2015, the Company negotiated a six-year contract. Wage increases for both unions in 2015, 2016, and 2017 was 3.25%, 2.75%, and 2.75%, respectively. For 2018, 2019, and 2020, union wage changes were tied to the changes in the Consumer Price Index (CPI) for Los Angeles, Riverside, and Orange County. In the
event an annual wage increase is determined to be greater than 3.25% or less that 2.0%, either party may request to re-open negotiations for wages only. Such notice must be served on the other party no later than 60 days after the publication of such CPI data. In 2018, the applicable CPI was 3.1%. Union wages were increased 3.1% for all union employees. The applicable CPI published in October of 2018 was 3.9%. The union requested to re-open wage negotiations due to increases in the 2018 CPI index above 3.25%. The Company and both unions negotiated an agreement for the 2019 and 2020 wage increases whereby the base pay for all employees was increased by 3.4% (the CPI for the Western US) effective January 1, 2019. In addition, the agreement established three regions for pay purposes (Region 1, Region 2, and Region 3). Employees in Region 2 will receive the 3.4% increase in base pay, plus a regional differential of 0.5% added to their pay (based on the CPI for the Los Angeles area) Employees in Region 3 will receive the 3.4% increase in base pay, plus a 0.9% regional differential (based on the CPI for the San Francisco area). For 2020, we will follow this same methodology to determine the base pay increase for all union positions (i.e. Region 1), plus the applicable regional differential for Region 2 and Region 3. The current agreement with the unions is effective through 2020. Management believes that it maintains good relationships with the unions.
In connection with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 1, 2018, the CEO and CFO evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2017. Based upon those evaluations, the CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of December 31, 2017. Subsequent to that evaluation and as a result of a computational error identified by management, the CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2017, and December 31, 2018, due to the material weakness described below relating to the accounting for regulatory assets and liabilities, specifically controls over the accuracy and completeness of the pension and healthcare cost balancing accounts as they relate to the values authorized in the 2015 General Rate Case (GRC).
Identification of the Material Weakness in Internal Controls over Financial Reporting: The Company did not design and maintain effective internal controls over its accounting for regulatory assets and liabilities, specifically controls over the accuracy and completeness of the pension balancing (PCBA) and healthcare balancing (HCBA) accounts as they relate to the amounts authorized in the 2015 GRC. Each account was initially recorded using an incorrect input amount from the 2015 GRC. The material weakness resulted in an error to revenue, regulatory assets, and regulatory liabilities balances for the year ended December 31, 2017 and for the first three quarters of 2018, included in the Company’s financial statements, that was identified during the fourth quarter of 2018. The error was corrected by revising the financial information for the prior year and for the three quarters of 2018 presented herein. Refer to Note 17 to the audited Consolidated Financial Statements for further information.