California Water Service Group: Form 10-Q for the period ended Mar 31, 2023

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 (the PSLRA). The forward-looking statements are intended to qualify under provisions of the federal securities laws for "safe harbor" treatment established by the PSLRA. 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,” "could," “estimates,” “assumes,” “anticipates,” “projects,” "progress," “predicts,” "hopes," "targets," “forecasts,” “should,” “seeks,” "indicates," or variations of these words or similar expressions are intended to identify forward-looking statements. Examples of forward-looking statements in this quarterly report include, but are not be limited to, statements describing our intention, indication or expectation regarding dividends or targeted payout ratio, our expectations, anticipations or beliefs regarding governmental, legislative, judicial, administrative or regulatory timelines, decisions, approvals, authorizations, requirements or other actions, including with respect to the 2021 GRC Filing, our cost of capital application, rate amounts or cost recovery mechanics, certain PFAS regulations, and associated impacts, such as our estimated revenue benefit or capital requirements, our intentions and plans to remediate the material weakness in our internal control over financial reporting, estimates of, or expectations regarding, capital expenditures, funding needs or other capital requirements, obligations, contingencies or commitments, our beliefs regarding adequacy of water supplies, our expectations regarding stock-based compensation and estimated contributions to our pension plans and other postretirement benefit plans, our estimated annual effective tax rate and expectations regarding tax benefits, our intentions regarding use of net proceeds from any future equity or debt issuances or borrowings or our intentions or anticipations regarding our sources of funding, capital structure or capital allocation plans. 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:

• 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 California Public Utilities Commission (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, instability of certain financial institutions, 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;
• the ongoing impact of the COVID-19 pandemic and related public health measures; 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, 2022.

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 quarterly 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, 2022 (2022 Annual Report on Form 10-K). They include:

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

For the three months ended March 31, 2023, 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 2022 and the first three months of 2023, 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 seek to be vigilant for employee and customer safety, we seek to encourage and incentivize vaccination, and our employees are required to 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.

2021 GRC FILING

On July 2, 2021, Cal Water filed its 2021 GRC requesting water infrastructure improvements of $1.0 billion in accordance with the rate case plan for all of its regulated operating districts (except Grand Oaks) for the years 2022, 2023, and 2024. A partial settlement with the California Public Advocates Office primarily addressing non-revenue matters was submitted on September 2, 2022. The CPUC continues to evaluate the proposal along with proposals of other parties. A final decision on the case was previously expected to be issued in late 2022 in accordance with the CPUC's rate case plan, with new rates going into effect on January 1, 2023; however, due to unspecified delays at the CPUC, the timing of a final decision is uncertain. As part of the 2021 GRC Filing, Cal Water has proposed the use of a MWRAM and ICBA as the CPUC issued a decision effective August 27, 2020 requiring that Class A companies submitting GRC filings after the effective date be (i) precluded from proposing the use of a full decoupling WRAM in their next GRCs and (ii) allowed the use of MWRAM. In addition, the CPUC's decision allowed ICBAs to replace the MCBA. We expect the MWRAM to be implemented in 2023 and effective retroactive back to January 1, 2023. For the first quarter of 2023, we did not record a regulatory asset or regulatory liability for the MWRAM and ICBA mechanisms. In addition, we did not record WRAM or MCBA adjustments in the first quarter of 2023, as the mechanisms concluded on December 31, 2022.

INTERIM RATES MEMORANDUM ACCOUNT (IRMA) AND DROUGHT RESPONSE MEMORANDUM ACCOUNT (DREMA)

The IRMA tracks the difference between the current rates that continue to be billed starting January 1, 2023 (considered to be interim rates), and the rates that will eventually be approved pursuant to the CPUC's decision concerning Cal Water's 2021 GRC Filing plus any additional revenue changes approved since July 1, 2021 (final rates).

The DREMA tracks lost revenues associated with reduced sales revenue when customer demand is affected by requests for voluntary and mandatory usage reductions in California and is in effect for us for the first quarter of 2023 as our regulated service territories in California were under voluntary and mandatory usage reductions. The final value of the DREMA will depend on the resolution of the 2021 GRC Filing.

First quarter 2023 operating revenue does not include any benefit of new revenue mechanisms (MWRAM and DREMA) or rate relief (tracked in the IRMA) due to the delay in the approval of our 2021 GRC Filing. We currently estimate the adverse impact of the delayed decision on first quarter 2023 operating revenue to be between approximately $24.0 million and $34.0 million, which is based on the current positions of the parties to the 2021 GRC Filing and consumption driven regulatory mechanisms.

RESULTS OF THE THREE MONTHS ENDED MARCH 31, 2023 OPERATIONS

COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2022 OPERATIONS

Dollar amounts in thousands, unless otherwise stated

Overview

Net (Loss) Income Attributable to California Water Service Group

Net loss attributable to California Water Service Group for the first three months of 2023 was $22.2 million or $0.40 loss per diluted common share, compared to net income attributable to California Water Service Group of $1.1 million or $0.02 earnings per diluted common share for the first three months of 2022.

The $23.3 million decrease in net income was primarily due to a decrease in operating revenue of $41.9 million partially offset by a decrease in total operating expenses of $15.3 million. The total operating expense decrease was primarily due to a decrease in water production costs of $6.5 million, a decrease in other operations expenses of $9.2 million, and an increase in income tax benefit of $4.2 million. These decreases were partially offset by increases in administrative and general expense of $2.6 million, depreciation and amortization expenses of $1.1 million and maintenance expenses of $0.6 million. Additionally, there was an increase of $4.5 million in net other income, primarily due to a $1.7 million unrealized gain on non-qualified benefit plan investments during the first quarter of 2023 compared to a $2.9 million unrealized loss on certain non-qualified benefit plan investments in the first quarter of 2022.

The change in unrealized gains on non-qualified benefit plan investments was caused by favorable 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 decreased $41.9 million, or 24.2%, to $131.1 million for the first three months of 2023 as compared to the first three months of 2022, with such change attributed to the following:

1. The net change due to rate changes, usage, and other in the above table was primarily driven by an 8.8% decrease in customer usage, which we believe is primarily due to higher winter precipitation in our California service territories and water conservation compared to the same period in 2022.

2. WRAM revenue decrease is due to the mechanism concluding as of December 31, 2022; as a result, no WRAM revenue was recorded for the first quarter of 2023. In the first quarter of 2022, we recognized $3.8 million of WRAM revenue as actual billed volumetric revenue was lower than adopted volumetric revenue.

3. MCBA revenue decrease is due to the mechanism concluding as of December 31, 2022; as a result, no MCBA revenue was recorded for the first quarter of 2023. In the first quarter of 2022, we recognized $8.3 million of MCBA revenue as actual water production costs were higher than adopted water production costs. As required by the MCBA mechanism, the difference in actual water production costs and adopted water production costs in California was recorded to operating revenue.

4. 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. In the first three months of 2023, the adjustments for these balancing accounts was recorded as an increase to the originating expense accounts by $3.4 million rather than as an operating revenue decrease. In the first three months of 2022, actual pension and health care costs were below the adopted costs and a decrease to revenue of $1.8 million was recognized for the difference.

5. 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 first three months of 2023 as compared to the first three months of 2022 primarily due to an increase in the net WRAM and MCBA balance and the recovery periods for this net balance extending beyond 24 months from the end of the accounting period as requested in the April 2023 WRAM/MCBA advice letter filing.

Total Operating Expenses

Total operating expenses decreased $15.3 million, or 9.3%, to $148.6 million for the first three months of 2023, as compared to $163.9 million for the first three months of 2023.

Water production costs consists of purchased water, purchased power, and pump taxes. It represents the largest component of total operating expenses, accounting for approximately 37.0% of total operating expenses in the first three months of 2023 as compared to 37.6% of total operating expenses in the first three months of 2022. Water production costs decreased 10.6% in the first three months of 2023 as compared to the same period last year primarily due to an 8.8% decrease in customer usage, which we believe is primarily due to higher winter precipitation in our California service territories and water conservation compared to the same period in 2022.

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:

21

Administrative and general expenses increased $2.6 million, or 7.7%, to $36.0 million in the first three months of 2023, as compared to $33.4 million in the first three months of 2022. The increase was primarily due to increases in labor costs of $2.5 million primarily driven by annual increases in employee wages, employee medical costs of $0.6 million, company 401k matches of $0.4 million, and travel and meals costs of $0.4 million. The increases were partially offset by decreased uninsured loss costs of $1.6 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.

Other operations expenses decreased $9.3 million, or 35.8%, to $16.6 million in the first three months of 2023, as compared to $25.9 million in the first three months of 2022. The decrease was primarily due to increase in deferred costs associated with deferred revenue of $15.4 million (see deferral of revenue above), which was partially offset by increases in water treatment costs of $1.9 million, employee labor costs of $1.0 million, credit losses of $0.9 million, waste water production and treatment costs of $0.9 million, district office maintenance costs of $0.6 million, conservation program costs of $0.4 million, and customer accounts costs of $0.3 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.

Maintenance expense increased $0.7 million, or 8.9%, to $8.0 million in the first three months of 2023, as compared to $7.3 million in the first three months of 2022, mostly due to an increase in repair costs of transmissions and distribution mains and equipment.

Depreciation and amortization expense increased $1.1 million, or 4.0%, to $29.9 million in the first three months of 2023, as compared to $28.8 million in the first three months of 2022, mostly due to utility plant placed in service in 2022.

Income tax benefit increased $4.2 million to $5.6 million in the first three months of 2023, as compared to $1.4 million in the first three months of 2022. The increase in income tax benefit was primarily due to an increase in the pre-tax operating loss in the first three months of 2023 as compared to the same period of 2022.

Property and other taxes increased $0.4 million to $8.8 million in the first three months of 2023, as compared to $8.4 million in the same period of 2022, mostly due to an increase in assessed property values.

Other Income and Expenses

Net other income increased $4.5 million to $7.2 million in the first three months of 2023, as compared to net other income of $2.7 million in the first three months of 2022, due primarily to a $4.6 million increase in unrealized gains on non-qualified benefit plan investments and a $1.2 million increase in other components of net periodic benefit credit, which was partially offset by a $0.4 million gain on company owned life insurance in the first quarter of 2022.

Interest Expense

Net interest expense increased $1.1 million, or 9.7%, to $12.0 million in the first three months of 2023, as compared to $10.9 million in the first three months of 2022. The increase was due primarily to an increase in interest rates and higher outstanding line of credit balances.

REGULATORY MATTERS

California Regulatory Activity

2021 GRC Interim Rates

In June of 2022, Cal Water filed a motion requesting authority for the establishment of an IRMA in the event the CPUC did not issue a final decision for the 2021 GRC Filing in time for new rates to be implemented on January 1, 2023. In November of 2022, the Administrative Law Judge (ALJ) granted Cal Water’s request for the IRMA. Accordingly, on December 27, 2022, Cal Water requested that the IRMA, which was approved by the CPUC, track the difference between interim rates and final rates. After the CPUC's decision is issued and final rates are implemented, then Cal Water expects to file for recovery of the IRMA. Once approved, customer bills are expected to be adjusted to account for the difference between interim rates and final rates back to January 1, 2023.

In January of 2023, Cal Water filed a motion requesting a modification to the November 2022 ruling to apply an inflationary rate increase to interim rates. In the motion, Cal Water requested inflationary rate increases of 1.5% in Marysville and 4% for all other ratemaking areas except Selma, Travis Air Force Base, and Visalia for whom a rate increase was not requested. In February of 2023, the ALJ granted Cal Water's request. Cal Water is expecting to implement the increased interim inflation rates on May 5, 2023.

2021 Cost of Capital Application

On May 3, 2021, after an approved extension from a 2020 due date, 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 capital structure of 53.4% equity and 46.6% debt. Cal Water requested a return on equity of 10.35%, a cost of debt of 4.23%, and a capital structure of 53.4% equity and 46.6% debt. The California Public Advocates Office recommended a return on equity of 7.81%, a cost of debt of 4.23%, and a capital structure of 49.4% equity and 50.6% debt. Evidentiary hearings were held in May 2022 and the case was submitted to the CPUC at the end of the second quarter of 2022. In the first quarter 2023, the CPUC extended its statutory deadline to issue a decision to August 10, 2023. In the event that the CPUC adopts the cost of capital components retroactively to January 1, 2022, we estimate the reduced cost of debt, if adopted at our proposed equity capital structure, would reduce authorized annual revenue by approximately $11.0 million. The actual amount could be different depending on the final cost of equity and capital structure adopted by the CPUC. 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.

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. As of March 31, 2023, Cal Water has incurred $2.2 million of cumulative DRMA related costs, of which $0.3 million was incurred in the first three months of 2023.

California's Governor issued a drought declaration for all California counties through a series of State of Emergency Proclamations. Given these drought proclamations and current water usage levels in all of its service areas, Cal Water activated Stage 2 of the “Water Use Restrictions of its Water Shortage Contingency Plan (WSCP)” of Schedule 14.1 in all of its service areas; as a result, Cal Water saw an increase in DRMA related costs in 2022.

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.

On March 24, 2023, the Governor issued an Executive Order (EO) that, among other things, ended the voluntary 15% water conservation target and ended the requirement that local water agencies implement Stage 2 of their drought contingency plans. This EO maintained the ban on wasteful water uses and retained the State of Emergency for all 58 California counties to allow for drought response and recovery efforts to continue.

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 2022, Cal Water submitted an advice letter to request offsets for increases in purchased water costs and pump taxes in five of its regulated districts totaling $5.1 million. The new rates were implemented on January 1, 2023.

WRAM/MCBA Filings

In April of 2023, Cal Water submitted an advice letter to true up the revenue under-collections for the 2022 annual WRAMs/MCBAs of its regulated districts. A net under-collection of $76.7 million is being recovered from customers in the form of 12, 18, and greater-than-18-month surcharges. The new surcharges incorporate net WRAM/MCBA balances that were previously approved for recovery and are expected to be implemented on May 5, 2023, except for Kern River Valley’s surcharge, which is expected to be implemented on January 15, 2024.

2018 GRC CEBA Filing

In March of 2023, Cal Water submitted an advice letter to amortize the CEBA from the 2018 GRC that tracked the difference between adopted and actual costs for the period of 2020-2022. $6.2 million is expected to be refunded to customers in some districts in the form of one-time or 12-month surcredits as actual conservation program costs during 2020-2022 were lower than the adopted conservation program costs. The new surcredits are expected to be implemented on May 5, 2023.

Regulatory Activity - Other States

2023 Washington Water GRC (Washington Water)

On April 10, 2023, Washington Water filed a GRC application with the Washington Utilities and Transportation Commission requesting an annual revenue increase of $3.0 million for its East Pierce Water System phased in over two years and an annual revenue increase of $0.6 million for its legacy Washington Water system. Washington Water has requested an effective date of July 14, 2023 for new rates.

Pukalani GRC (Hawaii Water)

On December 30, 2022, Hawaii Water filed a GRC application with the Hawaii Public Utilities Commission requesting an annual revenue increase of $0.6 million phased in over two years. Hawaii Water is requesting a fourth quarter of 2023 effective date for new rates.

LIQUIDITY

Cash flow from Operations

Cash flow from operations for the first three months of 2023 was $21.0 million compared to $54.2 million for the same period in 2022. The decrease in the first three months of 2023 as compared to 2022 was primarily due to net receipt of $20.8 million from the Water Arrearages Payment Program in 2022. 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 three months of 2023, we made contributions of $2.9 million to our employee pension plan compared to contributions of $5.1 million during the first three months of 2022. During the first three months of 2023, we made contributions of $0.2 million to the other postretirement benefit plans compared to contributions of $0.1 million during the first three months of 2022. The full-year 2023 estimated cash contribution to the pension plans and other postretirement benefits plans are expected to be approximately $2.9 million and $0.2 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 Company and Cal Water 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.

Investing Activities

During the first three months of 2023 and 2022, we used $82.0 million and $68.5 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 2023, 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 Filing and may change as the case moves forward.

Financing Activities

Net cash provided by financing activities was $62.5 million during the first three months of 2023 compared to $5.7 million of net cash provided by financing activities for the same period in 2022. For 2023, this includes our issuance of $18.2 million of Company common stock through our at-the-market equity program and $0.6 million through our employee stock purchase plan. For 2022, this includes our issuance of $0.6 million through our employee stock purchase plan.

During the first three months of 2023 and 2022, we borrowed $95.0 million and $30.0 million, respectively, on our previous unsecured revolving credit facilities. We made a repayment on our previous unsecured revolving credit facilities of $35.0 million and $15.0 million during the first three months of 2023 and 2022, respectively. During the first three months of 2023, we also paid $1.6 million in issuance costs for the Company and Cal Water facilities entered into on March 31, 2023, as described below.

On March 31, 2023, the Company and Cal Water entered into the Company and Cal Water facilities, which provide for unsecured revolving credit facilities of up to an initial aggregate amount of $600.0 million for a term of five years. The Company and subsidiaries that it designates may borrow up to $200.0 million under the Company facility. Cal Water may borrow up to $400.0 million under the Cal Water facility. Additionally, the credit facilities may be increased by up to an incremental $150.0 million under the Cal Water facility and $50.0 million under the Company facility, subject in each case to certain conditions.

The net WRAM and MCBA receivable balances were $100.3 million and $79.6 million as of March 31, 2023 and 2022, 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.

Short-term and Long-term Financing

During the first three months of 2023, we utilized cash generated from operations, borrowings on our previous 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 long term debt and equity.

Short-term liquidity is provided by the Company and Cal Water 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 $200.0 million under the Company facility. Cal Water may borrow up to $400.0 million under the Cal Water facility; however, all borrowings must be repaid within 12 months unless a different period is required or authorized by the CPUC. The proceeds from the Company and Cal Water facilities may be used for working capital purposes.

As of March 31, 2023 and December 31, 2022, there were short-term borrowings of $130.0 million and $70.0 million, respectively, outstanding on the Company and Cal Water 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.

The Company and Cal Water facilities 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, the Company and Cal Water facilities 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 March 31, 2023, we are in compliance with all of the covenant requirements and are eligible to use the full amount of the undrawn portion of the Company and Cal Water 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.

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.

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Dividends

During the first three months of 2023, our quarterly common stock dividend payments were $0.26 per share compared to $0.25 per share during the first three months of 2022. For the full year 2022, the payout ratio was 56.5% of net income. On a long-term basis, our goal is to achieve a dividend payout ratio of 60% of net income.

At the April 26, 2023 meeting, the Company's Board of Directors declared the second quarter dividend of $0.26 per share payable on May 19, 2023, to stockholders of record on May 8, 2023. This was our 313th consecutive quarterly dividend.

2023 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 $200.0 million and $400.0 million, respectively, for short-term borrowings. As of March 31, 2023, the Company’s and Cal Water’s availability on these unsecured revolving lines of credit was $165.0 million and $305.0 million, respectively.

Book Value and Stockholders of Record

Book value per common share was $23.19 at March 31, 2023 compared to $23.70 at December 31, 2022. There were approximately 1,863 stockholders of record for our common stock as of February 6, 2023.

Utility Plant Expenditures

During the first three months of 2023, utility plant expenditures totaled $82.0 million for Company-funded and developer-funded projects. For 2023, 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 March 31, 2023, construction work in progress was $275.2 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 5.7 billion gallons or 10.8% 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 31.5 billion gallons or 59.9% of our total annual water supply pumped from wells. Our annual groundwater extraction from unmanaged groundwater basins approximates 15.4 billion gallons or 29.3% 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 $3.9 million and $4.3 million for the three months ended March 31, 2023 and 2022, respectively. In 2014, the State of California enacted the Sustainable Groundwater Management Act of 2014 (SGM Act). The law and its implementing regulations required most basins to select a sustainability agency by 2017, develop a sustainability plan by the end of 2022, and show progress toward sustainability by 2027. We expect that after the SGM 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. Typically, 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 March 30, 2023, the State of California snowpack water content during the 2022-2023 water year was 190% 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 233% and 298%, respectively, of long-term averages. Management believes that supply pumped from underground aquifers and purchased from wholesale suppliers will be adequate to meet customer demand during 2023 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 were intended to 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 targets by November 1, 2023, and each November 1 thereafter, that compare actual urban water use to the targets. Management believes that Cal Water is well positioned to comply with all such regulations.

In March of 2023, the United States Environmental Protection Agency issued proposed maximum contaminant levels for six per- and polyfluoroalkyl substances (PFAS). Based on current information, if the regulation is adopted in its current form, we expect that we would have three years to comply with the final PFAS regulations and we estimate that capital investments of approximately $200.0 million would be required to comply.

CONTRACTUAL OBLIGATIONS

During the three months ended March 31, 2023, there were no material changes in contractual obligations outside the normal course of business.

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 March 31, 2023. Based on this evaluation of our disclosure controls and procedures, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures were not effective as of March 31, 2023, because of the material weakness in our internal control over financial reporting that was disclosed in our 2022 Annual Report on Form 10-K.

(b) Plan for Remediation of the Material Weakness in Internal Control over Financial Reporting

As previously described in Item 9A of our 2022 Annual Report on Form 10-K, Company management, with the oversight of the Audit Committee of the Board of Directors, is actively engaged in the planning for and implementation of remediation efforts to address the material weakness. Management plans to implement the following control in order to remediate the material weakness:

• Monthly, members of the rates and accounting departments will meet to evaluate the nature of all regulatory activity (examples include advice letter filings, GRC applications, testimony, and settlements) that has occurred during the month and expected to occur in the subsequent months. Accounting will determine the required accounting for the discussed activity and a memo will be written and reviewed to conclude on any accounting.

Management is committed to continuous improvement of the Company’s financial reporting controls and will continue to diligently review the Company’s internal controls over financial reporting. As management continues to evaluate and work to improve internal controls over financial reporting, the Company may determine to take additional measures to address the material weakness or determine to modify certain of the remediation measures described above.

Management took steps to evaluate the remediation plan in the first quarter of 2023 and plans to fully implement the plan in the second quarter of 2023.

(c) Changes to Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control 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, 2022 filed with the SEC on March 1, 2023.