California Water Service Group: Form 10-Q for the period ended Mar 31, 2024

(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 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, regulatory compliance, decisions, approvals, authorizations, requirements or other actions, rate amounts or cost recovery, certain polyfluoroalkyl substances (PFAS) regulations, and associated impacts, such as our expected or estimated revenue, expectations regarding regulatory asset and operating revenue recognition, sources of funding or capital requirements, estimates of, or expectations regarding, capital expenditures, funding needs or other capital requirements, obligations, contingencies or commitments, our expectations regarding water sources, our beliefs regarding adequacy of water supplies, estimates relating to our significant accounting policies, such as deferred revenue or assets or refund of advances, 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 application of funds for identified eligible past due customer balances and 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:

• the outcome and timeliness of regulatory commissions’ actions concerning rate relief and other matters;
• 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 Water Revenue Adjustment Mechanisms (WRAM) (which impacted Cal Water’s most recent general rate case (GRC) filing in July 2021 (2021 GRC);
• 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;
• increased risk of inverse condemnation losses as a result of climate change and drought;
• changes in California State Water Resources Control Board (Water Board) water quality standards;
• changes in environmental compliance and water quality requirements;
• electric power interruptions, especially as a result of Public Safety Power Shutoff programs;
• availability of water supplies;
• housing and customer growth;
• the impact of opposition to rate increases;
• our ability to recover costs;
• our ability to renew leases to operate water systems owned by others on beneficial terms;
• 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, changes in monetary policy, adverse capital markets activity or macroeconomic conditions as a result of geopolitical conflicts, and the prospect of a shutdown of the U.S. federal government;
• 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 impact of evolving legal and regulatory requirements, including emerging environmental, social and governance requirements; 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, 2023.

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 POLICIES AND 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, 2023 (2023 Annual Report on Form 10-K). They include:

• revenue recognition;
• regulated utility accounting;
• income taxes; and
• pension, which includes supplemental executive retirement plan (SERP), and postretirement health care benefits.

For the three months ended March 31, 2024, besides the change noted below there were no other 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.

Pension

As of the first quarter of 2024, we believe it is not probable that future SERP costs will be recovered in future rates for Cal Water at least for the period in which the 2021 GRC is in effect as the 2021 GRC does not allow for SERP expenses to be recovered from customers. As of March 31, 2024, we have reclassified our SERP regulatory asset for Cal Water and recorded accumulated other comprehensive loss in accordance with generally accepted accounting principles.

CALIFORNIA EXTENDED WATER AND WASTEWATER ARREARAGES PAYMENT PROGRAM

The California Water and Wastewater Arrearages Payment Program was created by the California Legislature to be administered by the Water Board in order to provide relief to community water and wastewater systems for unpaid bills (arrearages) related to the COVID-19 pandemic.

In 2023, the California Extended Water and Wastewater Arrearages Payment Program was established and extended the relief period to include arrearages accrued from June 16, 2021 to December 31, 2022. In response to the extended program, Cal Water submitted an application for $82.0 million in eligible customer arrearages and $1.0 million in program administrative costs which was approved by the Water Board. Cal Water received the funds in April of 2024 and intends to apply the funds to identified eligible past due customer balances during the second quarter of 2024.

RESULTS OF OPERATIONS

Overview

Net Income Attributable to California Water Service Group

Net income attributable to California Water Service Group for the three months ended March 31, 2024 was $69.9 million or $1.21 earnings per diluted common share, compared to net loss of $22.2 million or $0.40 loss per diluted common share for the three months ended March 31, 2023. The results for the three months ended March 31, 2024, include a cumulative adjustment for the impacts of the 2021 GRC, retroactive to January 1, 2023 as described below.

The $92.1 million increase in net income was primarily due to an increase in operating revenue of $139.6 million partially offset by an increase in total operating expenses of $44.2 million. The total operating expense increase was primarily due to an increase in water production costs of $9.2 million, increases in other operations expenses of $10.3 million, an increase in income tax expense of $21.2 million, and an increase in depreciation and amortization expenses of $2.9 million.

Operating Revenue

Operating revenue increased $139.6 million, or 106.5%, to $270.7 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, primarily as a result of the adoption of the 2021 GRC decision, which increased revenue $111.8 million, including $87.9 million in interim rate relief attributable to 2023. The sources of the change in operating revenue were:

1. The net change due to rate changes, usage, and other in the above table was primarily driven by rate increases of $12.0 million.

2. Due to the delay in the resolution of the 2021 GRC, the CPUC authorized Cal Water to track in an IRMA the variances between actual customer billings and those that would have been billed assuming the 2021 GRC had been effective January 1, 2023. Such variances are recorded as regulatory balancing account revenue. The 2021 GRC was approved in March of 2024 and final rates for the 2021 GRC were not implemented as of March 31, 2024; as a result, Cal Water recorded IRMA revenue of $80.7 million of which $70.3 million is attributable to 2023.

3. MWRAM revenue is the variance between actual metered sales billed through the tiered volumetric rate and the revenue that would have been received with the same actual metered sales if a uniform rate had been in effect. In March of 2024, Cal Water received approval of the 2021 GRC which authorized the use of the MWRAM effective January 1, 2023; as a result, in the first quarter of 2024, we recorded MWRAM revenue of $31.1 million of which $17.6 million is attributable to 2023.

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. Deferred revenue in 2024 decreased as we expect to apply funds from the California Extended Water and Wastewater Arrearages Payment Program against certain WRAM receivables.

Total Operating Expenses

Total operating expenses increased $44.2 million, or 29.8%, to $192.9 million for the three months ended March 31, 2024, as compared to $148.6 million for the three months ended March 31, 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 33.3% of total operating expenses for the three months ended March 31, 2024 as compared to 37.0% of total operating expenses for the three months ended March 31, 2023. Water production costs increased $9.2 million, or 16.7%, for the three months ended March 31, 2024 as compared to the same period last year primarily due to recording a cumulative adjustment of $9.2 million for the impacts of the 2021 GRC. For the three months ended March 31, 2024, we recorded $7.0 million of water production costs for the Incremental Cost Balancing Accounts (ICBA) attributable to fiscal year 2023.

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:

Other operations expenses increased $10.3 million, or 62.2%, to $26.9 million for the three months ended March 31, 2024, as compared to $16.6 million for the three months ended March 31, 2023. The increase was primarily due to a decrease in deferred costs associated with deferred revenue of $11.4 million (see deferral of revenue above).

Depreciation and amortization expense increased $2.9 million, or 9.8%, to $32.8 million for the three months ended March 31, 2024, as compared to $29.9 million for the three months ended March 31, 2023, primarily due to utility plant placed in service in 2023.

Income tax expense increased $21.1 million to $15.5 million for the three months ended March 31, 2024, as compared to income tax benefit of $5.6 million for the three months ended March 31, 2023. The increase in income tax expense was primarily due to an increase in the pre-tax operating income for the three months ended March 31, 2024 as compared to the same period of 2023 due to higher pre-tax operating income.

Property and other taxes increased $1.0 million to $9.8 million for the three months ended March 31, 2024, as compared to $8.8 million in the same period of 2023, primarily due to an increase in assessed property values.

Interest Expense

Net interest expense increased $3.0 million, or 25.4%, to $15.0 million for the three months ended March 31, 2024, as compared to $12.0 million for the three months ended March 31, 2023. The increase was due primarily to an increase in short-term borrowing rates and higher outstanding line of credit balances.

REGULATORY MATTERS

California Regulatory Activity

2021 GRC

The CPUC approved a decision on March 7, 2024 on the 2021 GRC. The decision marked the end of an extensive review of Cal Water’s water system improvement plans, costs, and rates. The decision as issued adopts a revised version of the alternate proposed decision issued January 24, 2024, and increases adopted revenues, after corrections, for 2023 by approximately $41.5 million retroactive to January 1, 2023. It also potentially increases revenues by up to approximately $30.0 million for 2024 and $30.6 million for 2025, subject to the CPUC’s earnings test and inflationary adjustments.

The decision authorizes Cal Water to invest approximately $1.2 billion from 2021 through 2024 in water system infrastructure projects that we believe are needed to continue providing safe, reliable water service to customers throughout California. This includes approximately $160 million of infrastructure projects that may be submitted for recovery via the CPUC’s advice letter process.

The CPUC’s decision approves a progressive rate design that is intended to provide budget stability while benefiting low-income and low-water-using customers by significantly decreasing the cost of the first six units of water consumed and increasing the percentage of fixed costs that are recovered in the service charge.

On March 15, 2024, Cal Water submitted a request for expedited corrections in the March 7th decision. The decision and its appendices contain certain language, numbers, and calculations that are inconsistent or do not fully reflect the substantive outcomes described in the approved decision. On April 23, 2024, the executive director of the CPUC issued a decision approving the corrections.

On April 1, 2024, Cal Water submitted an advice letter requesting an increase in annual revenue of $42.5 million for all of its rate making areas (besides Grand Oaks) effective May 1, 2024. The advice letter includes the effects of the expense offsets of $4.7 million and cost of capital filing of $11.4 million that were implemented on January 1, 2024 as well as $5.8 million in rate base offsets that will be effective on May 1, 2024. The remaining $20.6 million increase is primarily due to escalations. If the advice letter is approved, Cal Water expects to implement the new rates incorporating all these items on May 31, 2024.

2021 GRC IRMA

The 2021 GRC was approved in March of 2024 and final rates for the 2021 GRC were not implemented as of March 31, 2024; as a result, Cal Water calculated and recorded a regulatory asset of $80.7 million and a corresponding increase to revenue for the difference between final rates and interim rates for all of 2023 and the first three months of 2024. Cal Water also recorded a regulatory liability of $7.0 million and a corresponding increase to regulatory assets for Customer Assistance Program (CAP) and Rate Support Fund (RSF) program credits that would have been given to customers had the rate case been approved on time.

The IRMA will remain open until the new rates from the 2021 GRC decision are implemented.

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 March of 2024, Cal Water submitted a $39.1 million rate base offset advice letter to recover $5.8 million of annual revenue increases in all of its regulated districts. The new rates are expected to be implemented on May 31, 2024 as discussed above.

Polyfluoroalkyl Substances Memorandum Account (PFAS MA)

On April 18, 2024, the CPUC dismissed Cal Water’s application requesting authorization to modify a previously approved PFAS-expense memorandum account to include capital investments related to PFAS compliance for future recovery. The dismissal does not preclude Cal Water from seeking regulatory recovery for the capital investments. Cal Water may seek recovery through a separate application, a GRC application, or a tier 3 advice letter.

Application for Rehearing for the WRAM

The CPUC issued a decision effective August 27, 2020 requiring that Class A companies submitting GRC filings after the effective date be precluded from proposing the use of a full decoupling WRAM in their next GRCs. In September 2020, Cal Water filed an Application for Rehearing at the CPUC seeking to reverse the August 27, 2020 CPUC decision. In September 2021, the CPUC denied the Application for Rehearing. On or about October 27, 2021, Cal Water along with four other Class A California water utilities filed Petitions for a Writ of Review with the California Supreme Court (Court). On May 18, 2022, the Court issued writs granting review and ordered the CPUC and other filing parties to submit additional pleadings to the Court. The final pleadings were submitted on January 13, 2023. On April 18, 2024, the Court set oral argument for May 8, 2024, and it is anticipated that the Court will issue a decision before the end of the year.

LIQUIDITY

Cash Flow from Operating Activities

During the three months ended March 31, 2024, we generated cash flow from operations of $26.5 million compared to $21.0 million for the same period in 2023. Cash generated by operations varies during the year due to customer billings, and timing of collections and contributions to our benefit plans.

During the three months ended March 31, 2024, we did not make any cash contributions to our employee pension plan nor our other postretirement benefit plans. During the three months ended March 31, 2023, we made cash contributions of $2.9 and $0.2 million, respectively, to our pension plans and to our other postretirement benefit plans. The 2024 estimated cash contribution to the pension plans and other postretirement benefits plans are expected to be approximately $0.7 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 bank lines of credit in the event cash is not sufficient to cover operating costs during the winter period. The increase in cash flow during the summer allows for a pay down of short-term borrowings. Customer water usage can be lower than normal in years when more than normal precipitation falls in our service areas or temperatures are lower than normal, especially in the summer months. The reduction in water usage reduces cash flow from operations and increases the need for short-term bank borrowings.

Cash Flow from Investing Activities

During the three months ended March 31, 2024 and 2023, we used $109.8 million and $82.0 million, respectively, of cash for Company-funded and developer-funded utility capital expenditures. Cash used in investing activities fluctuates each year largely due to the availability of construction resources and our ability to obtain construction permits in a timely manner. For 2024, our utility capital expenditures are estimated to be $365.0 million.

Cash Flow from Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2024 was $86.6 million compared to $62.5 million for the same period in 2023. For 2024, this includes our issuance of $0.8 million of Company common stock through our employee stock purchase plan. 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.

During the three months ended March 31, 2024 and 2023, we borrowed $170.0 million and $95.0 million, respectively, on our unsecured revolving credit facilities. We made repayments on our unsecured revolving credit facilities of $70.0 million and $35.0 million during the three months ended March 31, 2024 and 2023, 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.

On March 31, 2023, the Company and Cal Water entered into the Company and Cal Water credit 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’s revolving credit facility (the Company facility). Cal Water may borrow up to $400.0 million under the Cal Water revolving credit facility (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 Modified Cost Balancing Account receivable balances were $57.9 million and $100.3 million as of March 31, 2024 and 2023, respectively. There also was an MWRAM receivable balance of $31.1 million as of March 31, 2024. 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 three months ended March 31, 2024, we utilized cash generated from operations and temporary borrowings on our previous unsecured revolving credit facilities to fund operations and capital investments.

In future periods, management anticipates funding our utility plant needs through a balance of 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, 2024 and December 31, 2023, short-term borrowings of $280.0 million and $180.0 million, respectively, were 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 unrestricted 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 that require 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, 2024, 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 for construction are generally refundable over 40 years. Management believes long-term financing is available to meet our cash flow needs through issuances of 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 punctual payment when due, whether at stated maturity, by acceleration, by notice of prepayment or otherwise, of the principal, 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)

(in thousands)

Dividends

During the three months ended March 31, 2024, our quarterly common stock dividend payments were $0.28 per share compared to $0.26 per share for the three months ended March 31, 2023. For the full year 2023, the payout ratio was 113.8% 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 24, 2024 meeting, the Company’s Board of Directors declared the second quarter dividend of $0.28 per share payable on May 17, 2024, to stockholders of record on May 6, 2024. This was our 317th consecutive quarterly dividend.

2024 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, 2024, the Company’s and Cal Water’s availability on these unsecured revolving lines of credit was $135.0 million and $185.0 million, respectively.

Book Value and Stockholders of Record

Book value per common share was $25.41 at March 31, 2024 compared to $24.72 at December 31, 2023. There were approximately 1,767 stockholders of record for our common stock as of February 12, 2024.

Utility Plant Expenditures

During the three months ended March 31, 2024, utility plant expenditures totaled $109.8 million for Company-funded and developer-funded projects. For 2024, we estimate utility capital expenditures to be $365.0 million.

As of March 31, 2024, construction work in progress was $321.4 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 average annual groundwater extraction from adjudicated groundwater basins approximates 6.7 billion gallons or 13.1% of our total average annual (2022-2023) 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 average annual groundwater extraction from managed groundwater basins approximates 29.7 billion gallons or 57.6% of our total average annual water supply pumped from wells. Our average annual groundwater extraction from unmanaged groundwater basins approximates 15.1 billion gallons or 29.3% of our total average annual water supply pumped from wells. Many managed groundwater basins we extract water from have groundwater recharge facilities for which we financially support the recharge activities by paying well pump taxes. For the three months ended March 31, 2024 and 2023, our well pump taxes were $5.0 million and $3.9 million, respectively. In 2014, the State of California enacted the Sustainable Groundwater Management Act of 2014 (SGMA). The law and its implementing regulations required most basins to create 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 SGMA provisions are fully implemented, all the Company’s California groundwater will be produced from sustainably managed and/or 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 April 9, 2024, the State of California snowpack water content for the 2023-2024 water year was 127% 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 113% and 107%, 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 2024 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 Water 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 of each year, that compares actual urban water use to the targets. Management believes that Cal Water is well positioned to comply with all such regulations.

In April of 2024, the U.S. Environmental Protection Agency (EPA) finalized a National Primary Drinking Water Regulation establishing legally enforceable levels for six PFAS in drinking water. Under the PFAS regulation, water utilities with impacted water systems across the country are required to monitor for these PFAS by 2027 and to comply with the Maximum Contaminant Levels (MCL) by 2029. We estimate a capital investment of approximately $215.0 million will be required to comply with the regulation.

On April 17, 2024, the Water Board adopted a new MCL of 10 parts per billion for Chromium-6 in drinking water. Our water systems in California will be required to comply with the regulation within two to four years. We developed and installed treatment for this contaminant at most of our impacted water sources when the same MCL, which was subsequently vacated for administrative reasons, was originally set in 2014. After the MCL was vacated, we continued to treat our impacted water systems. We anticipate installing treatment for the remaining sites before the regulatory deadline.

CONTRACTUAL OBLIGATIONS

During the three months ended March 31, 2024, there were no material changes in contractual obligations outside the normal course of business.

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. 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.”

(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, 2024 and concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

(b) Changes to Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the first quarter of 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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, 2023 filed with the SEC on February 29, 2024.