Commitments and Contingencies

9 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

Commitments

The Company has significant commitments to purchase water from water wholesalers. These commitments are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

Leases

The Company has operating and finance leases for water systems, offices, land easements, licenses, equipment, and other facilities. The leases generally have remaining lease terms of 1 year to 50 years, some of which include options to extend the lease for up to 25 years. The exercise of lease renewal options is at the Company’s sole discretion. Most of the Company’s lease agreements contain mutual termination options that require prior written notice by either lessee or lessor. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Certain leases include options to purchase the leased property. The depreciable life of the assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option that is reasonably certain of exercise. Leases with an initial term of 12 months or less are not recorded on the balance sheet as the Company applied the short-term lease exception allowed by the FASB guidance. Lease expense for these leases is recognized on a straight-line basis over the lease term. A subset of the Company’s leases contains variable lease payments that depend on changes in the CPI.

The Company determines if an arrangement is a lease at contract inception. Generally, a lease agreement exists if the Company determines that the arrangement gives the Company control over the use of an identified asset and obtains substantially all of the benefits from the identified asset.

The right-of-use (ROU) assets that are recorded represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s operating leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The ROU asset and lease liability may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Variable lease payments that are based on changes in CPI are included in the measurement of ROU asset and lease liability on the basis of the rate at lease commencement. Subsequent changes to the payments as a result of changes to the CPI rate are recognized in the period in which the obligation of these payments is incurred.

Supplemental balance sheet information related to leases was as follows:



	As of September 30, 2019
Operating leases
Other assets	$	14,349

Accrued expenses and other liabilities	$	1,421
Regulatory liabilities and other	12,885
Total operating lease liabilities	$	14,306

Finance leases
Utility plant	$	18,207
Accumulated depreciation and amortization	(9,352		)
Net utility plant	$	8,855

Current maturities of long-term debt, net	$	670
Long-term debt, net	5,378
Total finance lease liabilities	$	6,048

Weighted average remaining lease term
Operating leases	155 months
Finance leases	80 months

Weighted average discount rate
Operating leases	3.7		%
Finance leases	5.5		%

The components of lease expense were as follows:



	Three Months Ended September 30		Nine Months Ended September 30
	2019
Operating lease cost	$	490	$	1,368

Finance lease cost:
Amortization of right-of-use assets	$	292	$	918
Interest on lease liabilities	85		264
Total finance lease cost	$	377	$	1,182

Short-term lease cost	$	543	$	716
Variable lease cost	66		198
Total lease cost	$	1,476	$	3,464

Supplemental cash flow information related to leases was as follows:



	Nine Months Ended September 30
	2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,322
Operating cash flows from finance leases	264
Financing cash flows from finance leases	508
Non-cash activities: right-of-use assets obtained in exchange for lease obligations:
Operating leases	1,697
Finance leases	672

Maturities of lease liabilities as of September 30, 2019 are as follows:



Year Ending December 31,	Operating Leases			Finance Leases
2019 (a)	$	451		$	245
2020	1,892			986
2021	1,673			987
2022	1,516			987
2023	1,396			1,506
2024	1,253			940
Thereafter	10,067			1,645
Total lease payments	$	18,248		$	7,296

Less imputed interest	$	(3,942	)	$	(1,248	)
Total	$	14,306		$	6,048

(a) Excludes payments made for the first nine months of 2019.

As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 and under the previous lease accounting standard, minimum lease payments, as of December 31, 2018, under non-cancelable operating leases by period were expected to be as follows:



2019	$	1,771
2020	1,709
2021	1,485
2022	1,355
2023	1,261
Thereafter	10,538
Total	$	18,119

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 and to request recovery of these costs in future filings.

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 September 30, 2019 and December 31, 2018, the Company recognized a liability of $2.6 million and $2.3 million, respectively, for known legal matters. 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.