California Water Service Group: Form 10-Q for the period ended Sep 30, 2022

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 (Act). The forward-looking statements are intended to qualify under provisions of the federal securities laws for "safe harbor" treatment established by the Act. Forward-looking statements 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 "will," "would," “expects,” “intends,” “plans,” “believes,” “may,” “estimates,” “assumes,” “anticipates,” “projects,” "progress," “predicts,” "hopes," "targets," “forecasts,” “should,” “seeks,” or variations of these words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not guarantees of future performance. They are based on numerous assumptions that we believe are reasonable, but they are open to a wide range of uncertainties and business risks. Consequently, actual results may vary materially from what is contained in a forward-looking statement.

Factors which may cause actual results to be different than those expected or anticipated include, but are not limited to:

• the impact of the ongoing COVID-19 pandemic and related public health measures;
• our ability to invest or apply the proceeds from the issuance of common stock in an accretive manner;
• governmental and regulatory commissions' decisions, including decisions on proper disposition of property;
• consequences of eminent domain actions relating to our water systems;
• changes in regulatory commissions' policies and procedures, such as the CPUC’s decision in 2020 to preclude companies from proposing fully decoupled WRAMs in their next GRC filing (which impacted our 2021 GRC filing related to our operations commencing in 2023);
• the outcome and timeliness of regulatory commissions' actions concerning rate relief and other matters, including with respect to our 2021 GRC filing and our Cost of Capital filing;
• increased risk of inverse condemnation losses as a result of climate change and drought;
• our ability to renew leases to operate water systems owned by others 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, especially as a result of Public Safety Power Shutoff (PSPS) programs;
• housing and customer growth;
• the impact of opposition to rate increases;
• our ability to recover costs;
• availability of water supplies;
• issues with the implementation, maintenance or security of our information technology systems;
• civil disturbances or terrorist threats or acts;
• the adequacy of our efforts to mitigate physical and cyber security risks and threats;
• the ability of our enterprise risk management processes to identify or address risks adequately;
• labor relations matters as we negotiate with the unions;
• changes in customer water use patterns and the effects of conservation, including as a result of drought conditions;
• our ability to complete, in a timely manner or at all, successfully integrate, and achieve anticipated benefits from announced acquisitions;
• the impact of weather, climate change, natural disasters, and actual or threatened public health emergencies, including disease outbreaks, on our operations, water quality, water availability, water sales and operating results and the adequacy of our emergency preparedness;
• restrictive covenants in or changes to the credit ratings on our current or future debt that could increase our financing costs or affect our ability to borrow, make payments on debt or pay dividends;
• risks associated with expanding our business and operations geographically;
• the impact of stagnating or worsening business and economic conditions, including inflationary pressures, general economic slowdown or a recession, increasing interest rates, and changes in monetary policy;
• the impact of market conditions and volatility on unrealized gains or losses on our non-qualified benefit plan investments and our operating results;
• the impact of weather and timing of meter reads on our accrued unbilled revenue; and
• the risks set forth in “Risk Factors” included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

In light of these risks, uncertainties and assumptions, investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this quarterly report or as of the date of any document incorporated by reference in this report, as applicable. When considering forward-looking statements, investors should keep in mind the cautionary statements in this quarterly report and the documents incorporated by reference. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING ESTIMATES

We maintain our accounting records in accordance with GAAP and as directed by the Commissions to which our operations are subject. The process of preparing financial statements in accordance with GAAP requires the use of estimates on the part of management. The estimates used by management are based on historic experience and an understanding of current facts and circumstances. Management believes that the following accounting policies are critical because they involve a higher degree of complexity and judgment, and can have a material impact on our results of operations, financial condition, and cash flows of the business. These policies and their key characteristics are discussed in detail in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. They include:

• revenue recognition;
• regulated utility accounting;
• income taxes; and
• pension and postretirement health care benefits.

For the nine months ended September 30, 2022, 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.

COVID-19

During 2021 and for the nine months ended September 30, 2022 and through October 27, 2022, the COVID-19 pandemic has not had a significant impact on our business or operations. We have resumed shutoffs for non-payment in all of our regulated utilities.

If we need to close any of our facilities due to outbreaks of COVID-19 or if a critical number of our employees become too ill to work, our business operations could be materially adversely affected in a rapid manner. Company employees have returned to the office full-time. We continue to be vigilant for employee and customer safety, we encourage and incentivize vaccination, and we follow local masking rules as applicable. The impact of the COVID-19 pandemic is fluid and continues to evolve, and therefore, we cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted.

RESULTS OF THIRD QUARTER 2022 OPERATIONS

COMPARED TO THIRD QUARTER 2021 OPERATIONS

Dollar amounts in thousands unless otherwise stated

Overview

Net Income Attributable to California Water Service Group

Net income attributable to California Water Service Group for the third quarter of 2022 was $55.9 million or $1.03 earnings per diluted common share, compared to net income attributable to California Water Service Group of $62.4 million or $1.20 earnings per diluted common share for the third quarter of 2021.

The $6.5 million decrease in net income was primarily due to an increase in total operating expenses of $15.8 million, driven mostly by increases in water production costs of $3.8 million, administrative and general expenses of $2.6 million, other operations expenses of $2.0 million, depreciation and amortization expense of $1.6 million, and income taxes of $4.2 million. Additionally, there was a $2.0 million decrease in unrealized gains on non-qualified benefit plan investments during the third quarter of 2022 compared to the third quarter of 2021. The expense increases were partially offset by an increase in operating revenue of $9.6 million, driven primarily by rate increases of $12.3 million and accrued unbilled revenue increase of $3.4 million, which was partially offset by decreases from changes in regulatory balance account revenue of $4.7 million and changes in deferred revenue of $3.8 million.

The change in accrued unbilled revenue was driven by weather and timing of when meter reads were completed during the month of September 2022 compared to September 2021. The change to unrealized gains on non-qualified benefit plan investments was caused by unfavorable market conditions, which is a factor outside our immediate control. Our net income and net other income in future periods are expected to continue to be similarly affected, potentially significantly, by increases or decreases in unrealized gains or losses on non-qualified benefit plan investments, particularly during periods of significant market volatility or significantly favorable or unfavorable market conditions.

Operating revenue increased $9.6 million, or 3.7%, to $266.3 million in the third quarter of 2022 as compared to the third quarter of 2021, with such change attributed to the following:

1. The net change due to WRAM, rate changes, usage, and other in the above table was primarily driven by rate increases, the components of which are set forth in the table below, and a $3.4 million increase in accrued unbilled revenue.

2. MCBA revenue is the variance between adopted water production costs and actual water production costs. For the third quarter of 2022, we recorded a decrease to revenue of $4.8 million as compared to a decrease to revenue of $0.9 million for the third quarter 2021. The MCBA revenue decrease in the third quarter of 2022 as compared to the third quarter of 2021 resulted from a decrease in actual water production costs relative to adopted water production costs in the third quarter of 2022 due to an 8.9% decrease in purchased water production.

3. The other balancing account revenue consists of the pension, conservation and health care balancing account revenues. Pension and conservation balancing account revenues are the differences between actual expenses and adopted rate recovery. Health care balancing account revenue is 85% of the difference between actual health care expenses and adopted rate recovery. For the third quarter of 2022, we recognized a net decrease to revenue of $1.7 million for these balancing accounts as compared to a net decrease to revenue of $0.9 million for the third quarter of 2021.

4. The deferral of revenue consists of amounts that are expected to be collected from customers beyond 24 months following the end of the accounting period in which these revenues were recorded. The deferral increased in the third quarter of 2022 as compared to the third quarter of 2021 due to an increase in the balancing account revenue expected to be collected beyond 24 months.

Total Operating Expenses

Total operating expenses increased $15.8 million, or 8.5%, to $201.4 million in the third quarter of 2022, as compared to $185.6 million in the third quarter of 2021.

Water production cost consists of purchased water, purchased power, and pump taxes. It represents the largest component of total operating expenses, accounting for approximately 44.1% of total operating expenses for the third quarter of 2022, as compared to 45.8% of total operating expenses for the third quarter of 2021. Water production costs increased 4.5% in the third quarter of 2022 as compared to the same period last year primarily due to an increase in purchased water and power rates.

Sources of water as a percent of total water production are listed in the following table:

The components of water production costs are shown in the table below:

Administrative and general expense increased $2.6 million, or 8.5%, to $33.3 million in the third quarter of 2022, as compared to $30.7 million in the third quarter of 2021. The increase was primarily due to increases of $1.5 million in uninsured loss costs and $1.0 million in employee labor costs. Changes in employee pension benefits and employee and retiree medical costs for regulated California operations generally do not affect net income, as the Company has been allowed by the CPUC to record these costs in balancing accounts for future recovery, creating a corresponding change to revenue.

Other operations expenses increased $2.0 million, or 8.1%, to $26.7 million in the third quarter of 2022, as compared to $24.7 million in the third quarter of 2021. The increase was primarily due to increases of $2.5 million in bad debt costs, $0.8 million in conservation program expenses, and $0.5 million of employee labor costs, which was partially offset by a reduction in costs associated with deferred WRAM and MCBA operating revenue. Changes in conservation program expense for regulated California operations generally do not affect net income, as the Company has been allowed by the CPUC to record these costs in balancing accounts for future recovery, creating a corresponding change to revenue.

Maintenance expense increased $0.7 million, or 9.0%, to $8.4 million in the third quarter of 2022, as compared to $7.7 million in the third quarter of 2021, due to repairs of mains.

Depreciation and amortization expense increased $1.6 million, or 5.9%, to $28.8 million in the third quarter of 2022, as compared to $27.2 million in the third quarter of 2021, mostly due to utility plant placed in service in 2021.

Income tax expense increased $4.2 million to $5.9 million in the third quarter of 2022, as compared to $1.7 million in the third quarter of 2021. The increase was primarily due to a $4.0 million decrease in TCJA refunds to ratepayers in the third quarter of 2022 as compared to the prior year.

Property and other taxes increased $0.9 million to $9.4 million in the third quarter of 2022, as compared to $8.5 million in the same period of 2021, mostly due to an increase in assessed property values for utility plant in service.

Other Income and Expenses

Net other income decreased $0.5 million to $2.1 million in the third quarter of 2022, as compared to a net other income of $2.6 million in the third quarter of 2021, due primarily to a $2.0 million decrease in unrealized gains on certain non-qualified benefit plan investments, which was partially offset by a $1.9 million increase in other components of net periodic benefit credit.

Interest Expense

Net interest expense increased $0.1 million, or 0.8%, to $11.3 million in the third quarter of 2022, as compared to $11.2 million in the third quarter of 2021. The increase was due primarily to an increase in interest rates.

RESULTS OF THE NINE MONTHS ENDED SEPTEMBER 30, 2022 OPERATIONS

COMPARED THE NINE MONTHS ENDED SEPTEMBER 30, 2021 OPERATIONS

Dollar amounts in thousands unless otherwise stated

Overview

Net Income Attributable to California Water Service Group

Net income attributable to California Water Service Group for the first nine months of 2022 was $76.4 million or $1.41 earnings per diluted common share, compared to net income attributable to California Water Service Group of $97.6 million or $1.91 earnings per diluted common share for the first nine months of 2021.

The $21.2 million decrease in net income was primarily due to a decrease of $11.4 million in unrealized gains on certain non-qualified benefit plan investments, a decrease of $9.4 million in accrued unbilled revenue, and an increase of $1.3 million of financing costs. Additionally, there was an increase in operating expenses of $42.8 million that was driven primarily by increases in water production costs of $6.5 million, administrative and general expenses of $6.6 million, other operations expenses of $18.6 million, maintenance expenses of $2.3 million, depreciation and amortization expense of $4.9 million, income taxes of $2.3 million, and property and other taxes of $1.7 million. These operating expense increases were partially offset by rate increases of $24.5 million, an increase of $10.8 million in operating revenue from a change in deferred revenue, and a $2.7 million gain from company-owned life insurance.

The change in accrued unbilled revenue was driven by weather and timing of when meter reads were completed during the month of September 2022 compared to September 2021. In the first nine months of 2022, accrued unbilled revenue added $10.7 million to revenue compared to $20.1 million in the same period last year. We expect the difference between 2022 and 2021 annual accrued unbilled revenue to be less than $2.0 million by the end of the year. Changes to unrealized gains on certain benefit plan investments were caused by unfavorable market conditions, which is a factor outside our immediate control. Our net income and net other income in future periods are expected to continue to be similarly affected, potentially significantly, by increases or decreases in unrealized gains or losses on non-qualified benefit plan investments, particularly during periods of significant market volatility or significantly favorable or unfavorable market conditions

Operating Revenue

Operating revenue increased $27.9 million, or 4.5%, to $645.5 million for the first nine months of 2022 as compared to the first nine months of 2021, with such change attributed to the following:

1. The net change due to WRAM, rate changes, usage, and other in the above table was primarily driven by rate increases, the components of which are set forth in the table below and a $4.7 million increase in Hawaii Water due to an increase in customer usage. The increase was partially offset by a $9.4 million decrease in accrued unbilled revenue.

2. MCBA revenue is the variance between adopted water production costs and actual water production costs. For the first nine months of 2022, we recognized $3.1 million of MCBA revenue as compared to $10.1 million of MCBA revenue for the first nine months of 2021. The MCBA revenue decrease in the first nine months of 2022 as compared to the first nine months of 2021 resulted from a decrease in actual water production costs relative to adopted water production costs due to a 7.5% decrease in purchased water production.

3. The other balancing account revenue consists of the pension, conservation and health care balancing account revenues. Pension and conservation balancing account revenues are the differences between actual expenses and adopted rate recovery. Health care balancing account revenue is 85% of the difference between actual health care expenses and adopted rate recovery. For the first nine months of 2022 and 2021, we recognized a net decrease to revenue of $5.5 million for these balancing accounts as compared to a net decrease of $4.8 million for the first nine months of 2021. The decrease in revenue was primarily due to a decrease in actual pension expenses relative to adopted in the first nine months of 2022 as compared to the first nine months of 2021 partially offset by increase in actual conservation expenses relative to adopted.

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 nine months of 2022 as compared to the first nine months of 2021 due to a decrease in the balancing account revenue expected to be collected beyond 24 months.

Total Operating Expenses

Total operating expenses increased $42.8 million, or 8.5%, to $544.1 million for the first nine months of 2022, as compared to $501.3 million for the first nine months of 2021.

Water production costs consists of purchased water, purchased power, and pump taxes. It represents the largest component of total operating expenses, accounting for approximately 40.7% of total operating expenses in the first nine months of 2022, as compared to 42.8% of total operating expenses in the first nine months of 2021. Water production costs increased 3.0% in the first nine months of 2022 as compared to the same period last year primarily due to increased purchased water and power rates.

Sources of water as a percent of total water production are listed in the following table:

The components of water production costs are shown in the table below:

26

Administrative and general expenses increased $6.6 million, or 7.1%, to $99.4 million in the first nine months of 2022, as compared to $92.8 million in the first nine months of 2021. The increase was primarily due to increases in outside legal and consulting service costs of $2.3 million, training and travel costs of $1.8 million, uninsured loss costs of $1.7 million, and employee labor costs of $1.5 million. Changes in employee pension benefits and employee and retiree medical costs for regulated California operations generally do not affect net income, as the Company has been allowed by the CPUC to record these costs in balancing accounts for future recovery, creating a corresponding change to revenue.

Other operations expenses increased $18.6 million, or 29.4%, to $81.9 million in the first nine months of 2022, as compared to $63.3 million in the first nine months of 2021. The increase was primarily due to an increase in the costs associated with the reduction of deferred revenue of $8.8 million, credit losses of $2.8 million, conservation program expenses of $2.1 million, water and wastewater treatment costs of $1.3 million, and employee labor cost of $0.9 million. Changes in conservation program expense for regulated California operations generally do not affect net income, as the Company has been allowed by the CPUC to record these costs in balancing accounts for future recovery, creating a corresponding change to revenue.

Maintenance expense increased $2.3 million, or 10.8%, to $23.4 million in the first nine months of 2022, as compared to $21.1 million in the first nine months of 2021, mostly due to an increase in repairs of services, tanks, and equipment.

Depreciation and amortization expense increased $4.9 million, or 6.0%, to $86.4 million in the first nine months of 2022, as compared to $81.5 million in the first nine months of 2021, mostly due to capital additions in 2021.

Income tax expense increased $2.3 million to $5.9 million in the first nine months of 2022, as compared to $3.6 million in the first nine months of 2021. The increase was primarily due to a higher effective tax rate that resulted from a decrease in the refunds of excess deferred federal income taxes.

Property and other taxes increased $1.7 million to $25.9 million in the first nine months of 2022, as compared to $24.2 million in the same period of 2021, mostly due to an increase in assessed property values.

Other Income and Expenses

Net other income decreased $5.4 million to $7.7 million in the first nine months of 2022, as compared to net other income of $13.1 million in the first nine months of 2021, due primarily to a $11.4 million decrease in unrealized gains on non-qualified benefit plan investments, which was partially offset by a $2.7 million gain on company owned life insurance and $4.0 million increase in other components of net periodic benefit credit.

Interest Expense

Net interest expense increased $1.3 million, or 4.2%, to $33.2 million in the first nine months of 2022, as compared to $31.9 million in the first nine months of 2021. The increase was due primarily to an increase in interest rates.

REGULATORY MATTERS

California Regulatory Activity

2021 GRC Filing

California Public Advocates Office reviewed Cal Water's 2021 GRC filing and submitted its report in February 2022. Cal Water reviewed California Public Advocates Office recommendations, evaluated the validity of the underlying data, and composed and filed rebuttal testimony with the CPUC in April 2022. Settlement negotiations with the California Public Advocates Office and intervenors began in the second quarter of 2022 and evidentiary hearings were held in the second quarter of 2022. A partial settlement with the California Public Advocates Office primarily addressing non-revenue matters was submitted on September 2, 2022. One intervenor submitted comments on the settlement on September 30, 2022, to which Cal Water filed a response. The CPUC will evaluate the proposal along with proposals of other parties and, in accordance with the assigned Commissioner’s scoping ruling, would be expected to issue a decision in the fourth quarter of 2022; however, the timing of the final decision is uncertain. We anticipate partial interim rate increases will be authorized to be added to customer billings effective January 1, 2023.

2021 Cost of Capital Application

On May 3, 2021, Cal Water filed its required application with the CPUC to review its cost of capital for 2022 through 2024. Cal Water currently has an approved return on equity of 9.2%, a cost of debt of 5.51%, and a 53.4% equity capital structure. Cal Water requested a return on equity of 10.35%, a cost of debt of 4.23%, and a 53.4% equity capital structure. The California Public Advocates Office recommends a return on equity of 7.81%, a cost of debt of 4.23%, and a 49.4% equity capital structure. Evidentiary hearings were held in May 2022 and the case was submitted to the CPUC at the end of the second quarter of 2022. The CPUC will evaluate the proposal along with proposals of other parties, and in accordance with its standard process, is currently expected to issue a decision in the fourth quarter of 2022. We have not reserved for any potential outcome of the proceeding as we have determined that it is not probable that the proceeding will be approved retroactively to January 1, 2022. In the event that the CPUC adopts the cost of capital components retroactively to January 1, 2022, the reduced cost of debt, if adopted at our proposed equity capital structure, would reduce 2022 annual revenue by $11.0 million.

California Drought Memorandum Account (DRMA)

In June 2021, Cal Water submitted advice letters to request a DRMA to track the incremental operational and administrative costs incurred to further implement updated Rule 14.1 for voluntary conservation measures and Schedule 14.1 for implementation of our Water Shortage Contingency Plan, including activities related to enhanced conservation efforts, staffing, and capital expenditures to ensure a safe, reliable supply of water. The DRMA would also track monies paid by customers for fines, penalties, or other compliance measures associated with water use violations; and penalties paid by Cal Water to its water wholesalers. The DRMA was approved by the CPUC with an effective date of June 14, 2021. Cal Water has incurred $1.4 million of cumulative DRMA related costs, of which $0.8 million was incurred in the first nine months of 2022.

The California State Governor has issued a drought declaration for all California counties through a series of State of Emergency Proclamations with the most recent on March 28, 2022. Given these drought proclamations and current water usage levels in all of its service areas, Cal Water has activated Stage 2 of the “Water Use Restrictions of its Water Shortage Contingency Plan” of Schedule 14.1 in all of its service areas.

In Stage 1, irrigating ornamental landscape with potable water is prohibited during the hours of 8:00 a.m. and 6:00 p.m. For Stage 2, irrigating ornamental landscapes with potable water is limited to no more than three days per week as well as prohibited during the hours of 8:00 a.m. and 6:00 p.m. In addition this stage states that new connections may not install single-pass cooling systems for air conditioning or other cooling system applications unless required for health or safety reasons.

Escalation Increase Requests

As part of the decision on the 2018 GRC, Cal Water was authorized to request annual escalation rate increases for 2022 for those districts that passed the earnings test. In November of 2021, Cal Water requested escalation rate increases for 2022 in 19 of its regulated districts. The increase in annual adopted gross revenue associated with the November 2021 filing was $21.7 million. The new rates were implemented on January 1, 2022.

Expense Offset Requests

Expense offsets are dollar-for-dollar increases in revenue to match increased expenses, and therefore do not affect net operating income. In December of 2021, Cal Water submitted an advice letter to request offsets for increases in purchased water costs and pump taxes in seven of its regulated districts totaling $5.2 million. The new rates were implemented on January 1, 2022.

In June of 2022, Cal Water submitted an advice letter to request offsets for increases in purchased water costs and pump taxes in four of its regulated districts totaling $12.7 million. The new rates were implemented on August 1, 2022.

Rate Base Offset Requests

For construction projects authorized in GRCs as advice letter projects, Cal Water is allowed to request rate base offsets to increase revenues after the project goes into service. In November of 2021, Cal Water submitted an advice letter to recover $0.2 million of annual revenue increase for a rate base offset in one of its regulated districts. The new rates were implemented on January 1, 2022.

In March of 2022, Cal Water submitted an advice letter to recover $0.1 million of annual revenue increase for a rate base offset in one of its regulated districts. The new rates were implemented on April 15, 2022.

WRAM/MCBA Filings

In April of 2022, Cal Water submitted an advice letter to true up the revenue under-collections for the 2021 annual WRAMs/MCBAs of its regulated districts. A net under-collection of $54.1 million is being recovered/refunded from/to customers in the form of 12, 18, and greater-than-18-month surcharges and 12 month surcredits. The new rates incorporate net WRAM/MCBA balances that were previously approved for recovery and were implemented on April 15, 2022.

Regulatory Activity - Other States

Kona Water Service Company GRC (Hawaii Water)

In May of 2021, Hawaii Water submitted a request for a private letter ruling (PLR) to the IRS on the treatment of deferred taxes because of the TCJA. A favorable decision on the PLR was received on November 18, 2021. The Consumer Advocates and Hawaii Water submitted a joint stipulation to the Hawaii Public Utility Commission (HPUC) incorporating the PLR into revised water rates on March 2, 2022. Hawaii Water is awaiting approval from the HPUC.

HOH Utilities Company (Hawaii Water)

In June of 2021, Hawaii Water signed an agreement to acquire the assets of HOH Utilities Company, a wastewater utility located in the growing Poipu/Koloa area of Kauai County on the island of Kauai. The acquisition is subject to satisfaction of customary closing conditions, including approval by the HPUC.

Hawaii Water is expected to own and manage the wastewater utility, which currently serves almost 1,800 residential, commercial, and resort customers in Poipu and Koloa, including three hotels, condominiums, multi-family housing, a golf course, and single-family homes.

Hawaii Water received HPUC approval for the acquisition in June of 2022.

Kalaeloa Water Company GRC (Hawaii Water)

In August of 2021, a GRC application requesting an increase of revenues for Kalaeloa was submitted with the HPUC. In June of 2022, Hawaii Water and the Consumer Advocate submitted a full settlement agreement to the HPUC for approval. The HPUC issued a decision approving the settlement agreement in September of 2022. The approved revenue increase for Kalaeloa is $0.15 million or 4.9%.

Animas Valley Land and Water Co., LLC (New Mexico Water)

In October of 2020, New Mexico Water signed a purchase agreement with Animas Valley Land and Water Co., LLC (AV Water) and court-appointed receiver C. Randel Lewis to acquire the Morning Star Water System assets of AV Water and provide regulated water utility service to its approximately 2,000 customer connections in northwest New Mexico.

In April of 2022, New Mexico Water closed its purchase of the Morningstar Water system. The New Mexico Public Regulation Commission granted approval of the transaction, and the utility commenced operation of the water system as of April 14, 2022.

LIQUIDITY

Cash flow from Operations

Cash flow from operations for the first nine months of 2022 was $199.8 million compared to $179.2 million for the same period in 2021. The increase in the first nine months of 2022 as compared to 2021 was primarily due to net receipt of $17.2 million from the Water Arrearages Payment Program. Cash generated by operations varies during the year due to customer billings and timing of collections and contributions to our benefit plans.

During the first nine months of 2022, we made contributions of $12.4 million to our employee pension plan compared to contributions of $18.9 million during the first nine months of 2021. During the first nine months of 2022, we made contributions of $0.5 million to the other postretirement benefit plans compared to contributions of $1.9 million during the first nine months of 2021. The full-year 2022 estimated cash contribution to the pension plans and other postretirement benefits plans are expected to be approximately $16.1 million and $0.7 million, respectively.

The water business is seasonal. Billed revenue is lower in the cool, wet winter months when less water is used compared to the warm, dry summer months when water use is highest. This seasonality results in the possible need for short-term borrowings under the unsecured revolving credit facilities in the event cash is not available to cover operating costs during the winter period. The increase in cash flows during the summer allows short-term borrowings to be paid down. Customer water usage can be lower than normal in drought years and when greater-than-normal precipitation falls in our service areas or temperatures are lower than normal, especially in the summer months. Aged accounts receivable past due more than 60 days decreased from $26.2 million as of December 31, 2021 to $15.8 million as of September 30, 2022 mostly due to the application of $16.9 million of Water Arrearages Payment Program funds.

Investing Activities

During the first nine months of 2022 and 2021, we used $222.1 million and $207.7 million, respectively, of cash for Company-funded and developer-funded utility plant expenditures. Annual expenditures fluctuate each year due to the availability of construction resources and our ability to obtain construction permits in a timely manner. For 2022, the Company's capital program will be dependent in part on the timing and nature of regulatory approvals in connection with Cal Water's 2021 GRC filing. The Company proposed to the CPUC spending $1.0 billion on water infrastructure investments in 2022-2024. Capital expenditures in California are evaluated in the context of the pending GRC and may change as the case moves forward.

Financing Activities

Net cash provided by financing activities was $61.4 million during the first nine months of 2022 compared to $132.6 million of net cash provided by financing activities for the same period in 2021. For 2022, this includes our issuance of $57.1 million of Company common stock through our at-the-market equity program and $1.6 million through our employee stock purchase plan. For 2021, this includes our issuance of $280.0 million of First Mortgage Bonds, $127.0 million of Company common stock through our at-the-market equity program, and $1.5 million through our employee stock purchase plan.

During the first nine months of 2022 and 2021, we borrowed $95.0 million and $180.0 million, respectively, on our unsecured revolving credit facilities. We made a repayment on our unsecured revolving credit facilities of $60.0 million and $430.0 million during the first nine months of 2022 and 2021, respectively.

The net WRAM and MCBA receivable balances were $94.8 million and $72.7 million as of September 30, 2022 and 2021, respectively. The receivable balances were primarily financed by Cal Water using short-term and long-term financing arrangements to meet operational cash requirements. Interest on the receivable balances, which represents the interest recoverable from customers, is limited to the then-current 90-day commercial paper rates which typically are significantly lower than Cal Water’s short and long-term financing rates.

Long-term Financing

During the first nine months of 2022, we utilized cash generated from operations, borrowings on the unsecured revolving credit facilities, and cash received from the sale of Company common stock through our at-the-market equity program to fund operations and capital investments.

In future periods, management anticipates funding our utility plant needs through a relatively balanced approach between debt and equity.

Short-term liquidity is provided by our unsecured revolving credit facilities and internally generated funds. Long-term financing is accomplished through the use of both debt and equity. The Company and subsidiaries that it designates may borrow up to $150.0 million under the Company’s revolving credit facility. Cal Water may borrow up to $400.0 million under its revolving credit facility; however, all borrowings must be repaid within 24 months unless a different period is required or authorized by the CPUC. The proceeds from the unsecured revolving credit facilities may be used for working capital purposes.

As of September 30, 2022 and December 31, 2021, there were short-term borrowings of $70.0 million and $35.0 million, respectively, outstanding on the unsecured revolving credit facilities.

Given our ability to access our lines of credit on a daily basis, cash balances are managed to levels required for daily cash needs and excess cash is invested in short-term or cash equivalent instruments. Minimal operating levels of cash are maintained for Washington Water, New Mexico Water, Hawaii Water and Texas Water.

Both short-term credit agreements contain affirmative and negative covenants and events of default customary for credit facilities of this type including, among other things, limitations and prohibitions relating to additional indebtedness, liens, mergers, and asset sales. Also, these unsecured credit agreements contain financial covenants governing the Company and its subsidiaries’ consolidated total capitalization ratio not to exceed 66.7% and an interest coverage ratio of three or more. As of September 30, 2022, we are in compliance with all of the covenant requirements and are eligible to use the full amount of the undrawn portion of our unsecured revolving credit facilities.

Long-term financing, which includes First Mortgage Bonds, other debt securities, and common stock, has typically been used to replace short-term borrowings and fund utility plant expenditures. Internally generated funds, after making dividend payments, provide positive cash flow, but have not been at a level to meet the needs of our utility plant expenditure requirements. Management expects this trend to continue given our planned utility plant expenditures for the next five years. Some utility plant expenditures are funded by payments received from developers for contributions in aid of construction or advances for construction. Funds received for contributions in aid of construction are non-refundable, whereas funds classified as advances in construction are generally refundable over 40 years. Management believes long-term financing is available to meet our cash flow needs through issuances in both debt and equity instruments.

Equity Issuance

On April 29, 2022, we entered into an equity distribution agreement to sell shares of our common stock having an aggregate gross sales price of up to $350.0 million from time to time depending on market conditions through an at-the-market equity program over the next three years. We intend to use the net proceeds from these sales, after deducting commissions on such sales and offering expenses, for general corporate purposes, which may include working capital, construction and acquisition expenditures, investments and repurchases, and redemptions of securities.

Summarized Financial Information for Guarantors and the Issuer of Guaranteed Securities.

On April 17, 2009, Cal Water (Issuer) issued $100.0 million aggregate principal amount of 5.500% First Mortgage Bonds due 2040, all of which are fully and unconditionally guaranteed by the Company (Guarantor). Certain subsidiaries of the Company do not guarantee the security and are referred to as Non-guarantors. The Guarantor fully, absolutely, irrevocably and unconditionally guarantees the due and punctual payment when due, whether at stated maturity, by acceleration, by notice of prepayment or otherwise, of the principal of, premium, if any, and interest on the bonds. The bonds rank equally among Cal Water's other First Mortgage Bonds.

The following tables present summarized financial information of the Issuer subsidiary and the Guarantor. The information presented below excludes eliminations necessary to arrive at the information on a consolidated basis. In presenting the summarized financial statements, the equity method of accounting has been applied to the Guarantor interests in the Issuer. The summarized information excludes financial information of the Non-guarantors, including earnings from and investments in these entities.

(in thousands)

31

(in thousands)

Dividends

During the first nine months of 2022, our quarterly common stock dividend payments were $0.7500 per share compared to $0.6900 per share during the first nine months of 2021. For the full year 2021, the payout ratio was 46.9% 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 October 26, 2022 meeting, the Company's Board of Directors declared the fourth quarter dividend of $0.2500 per share payable on November 18, 2022, to stockholders of record on November 7, 2022. This was our 311th consecutive quarterly dividend.

2022 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 $400.0 million, respectively, for short-term borrowings. As of September 30, 2022, the Company’s and Cal Water’s availability on these unsecured revolving lines of credit was $80.0 million and $400.0 million, respectively.

Book Value and Stockholders of Record

Book value per common share was $23.23 at September 30, 2022 compared to $21.92 at December 31, 2021. There were approximately 1,886 stockholders of record for our common stock as of August 8, 2022.

Utility Plant Expenditures

During the first nine months of 2022, utility plant expenditures totaled $222.1 million for Company-funded and developer-funded projects. For 2022, the Company's capital program will be dependent in part on the timing and nature of regulatory approvals in connection with Cal Water's 2021 GRC filing. The Company proposed to the CPUC spending $1.0 billion on water infrastructure investments in 2022-2024. Capital expenditures in California are evaluated in the context of the pending GRC and may change as the case moves forward.

As of September 30, 2022, construction work in progress was $269.6 million. Construction work in progress includes projects that are under construction but not yet complete and placed in service.

WATER SUPPLY

Our source of supply varies among our operating districts. Certain districts obtain all of their supply from wells; some districts purchase all of their supply from wholesale suppliers; and other districts obtain supply from a combination of wells and wholesale suppliers. A small portion of supply comes from surface sources and is processed through Company-owned water treatment plants. To the best of management's knowledge, we are meeting water quality, environmental, and other regulatory standards for all Company-owned systems.

Historically, approximately half of our annual water supply is pumped from wells. State groundwater management agencies operate differently in each state. Some of our wells extract ground water from water basins under state ordinances. These are adjudicated groundwater basins, in which a court has settled the dispute between landowners, or other parties over how much annual groundwater can be extracted by each party. All of our adjudicated groundwater basins are located in the State of California. Our annual groundwater extraction from adjudicated groundwater basins approximates 5.4 billion gallons or 10.3% of our total annual water supply pumped from wells. Historically, we have extracted less than 100% of our annual adjudicated groundwater rights and have the right to carry forward up to 20% of the unused amount to the next annual period. All of our remaining wells extract ground water from managed or unmanaged water basins. There are no set limits for the ground water extracted from these water basins. Our annual groundwater extraction from managed groundwater basins approximates 32.1 billion gallons or 61.1% of our total annual water supply pumped from wells. Our annual groundwater extraction from unmanaged groundwater basins approximates 15.0 billion gallons or 28.6% 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 financially support these groundwater recharge facilities by paying well pump taxes. Our well pump taxes were $3.7 million and $4.2 million for the three months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021, our well pump taxes were $11.9 million and $11.4 million, respectively. In 2014, the State of California enacted the Sustainable Groundwater Management Act of 2014. The law and its implementing regulations require most basins to select a sustainability agency by 2017, develop a sustainability plan by 2022, and show progress toward sustainability by 2027. We expect that after the act's provisions are fully implemented, substantially all the Company's California groundwater will be produced from sustainably managed and adjudicated basins.

California's normal weather pattern yields little precipitation between mid-spring and mid-fall. The Washington Water service areas receive precipitation in all seasons, with the heaviest amounts during the winter. New Mexico Water's rainfall is heaviest in the summer monsoon season. Hawaii Water receives precipitation throughout the year, with the largest amounts in the winter months. Water usage in all service areas is highest during the warm and dry summers and declines in 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 13, 2022, the State of California snowpack water content during the 2022-2023 water year is 16% of long-term averages (per the California Department of Water Resources, Northern Sierra Precipitation Accumulation report). The northern Sierra region is the most important for the state’s urban water supplies. The central and southern portions of the Sierras have recorded 0% of long-term averages. Management believes that, notwithstanding lower-than-average snowpack water content, supply pumped from underground aquifers and purchased from wholesale suppliers will be adequate to meet customer demand for the remainder of 2022 and thereafter. Long-term water supply plans are developed for each of our districts to help assure an adequate water supply under various operating and supply conditions. Some districts have unique challenges in meeting water quality standards, but management believes that supplies will meet current standards using currently available treatment processes.

On May 31, 2018, California's Governor signed two bills (Assembly Bill 1668 and Senate Bill 606) into law that will establish long-term standards for water use efficiency. The bills revise and expand the existing urban water management plan requirements to include five-year drought risk assessments, water shortage contingency plans, and annual water supply/demand assessments. The California State Water Resources Control Board, in conjunction with the California Department of Water Resources, is expected to establish long-term water use standards for indoor residential use, outdoor residential use, water losses, and other uses. Cal Water will also be required to calculate and report on urban water use target 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 such regulations.

CONTRACTUAL OBLIGATIONS

During the nine months ended September 30, 2022, there were no material changes in contractual obligations outside the normal course of business other than as set forth below.

On August 16, 2022, BVRT Utility Holding Company (BVRT), a majority owned subsidiary of Texas Water, entered into a long-term water supply agreement with the Guadalupe Blanco River Authority (GBRA) through its wholly owned subsidiary, Camino Real Utility (Camino Real). We have provided a limited guarantee to GBRA for the agreed upon obligations. GBRA is a water conservation and reclamation district established by the Texas Legislature that oversees water resources for 10 counties. Under the terms of the agreement with GBRA, Camino Real will receive up to 2,419 acre-feet of potable water annually. The GBRA agreement involves four off-takers, including Camino Real, and GBRA plans to extend a potable water pipeline from the City of Lockhart to the City of Mustang Ridge and surrounding areas. Camino Real will be the utility service provider in this fast-growing area of the Austin metropolitan region and will provide potable water, recycled water, and wastewater services to portions of the City of Mustang Ridge and surrounding areas. Camino Real expects to invest over $40 million in capital in the first phase of the water supply pipeline project as one of four off-takers. In the third quarter of 2022, Camino Real committed $21.5 million for the pipeline project. As of September 30, 2022, this committed cash has not been transferred to GBRA and is classified as part of restricted cash on the Condensed Consolidated Balance Sheets. We currently expect this committed cash to be transferred to GBRA in the fourth quarter of 2022.

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.”

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(e) under the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, 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 Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, management, including the Chief Executive Officer and Chief Financial Officer, 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 Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2022. 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 September 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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, 2021 filed with the SEC on February 24, 2022.