# CALIFORNIA WATER SERVICE GROUP (CWT) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CALIFORNIA WATER SERVICE GROUP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1035201/000103520124000004/cwt-20231231.htm
Accession: 0001035201-24-000004
Filing date: 2024-02-29
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CWT/
All MD&A years: /company/CWT/mda/
Previous year: /company/CWT/mda/fy2022/ (FY 2022)
Next year: /company/CWT/mda/fy2024/ (FY 2024)

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following sections include a discussion of results for fiscal 2023 compared to fiscal 2022 as well as certain 2021 results. The comparative results for fiscal 2022 with fiscal 2021 generally have not been included in this Form 10-K, but may be found in “Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Overview

Net Income Attributable to California Water Service Group

In 2023 and 2022, net income attributable to California Water Service Group was $51.9 million and $96.0 million, respectively. Earnings per diluted common share decreased $0.86 from $1.77 to $0.91 or 48.6% in 2023.

The $44.1 million decrease in net income was primarily due to the delayed final decision from the CPUC on Cal Water's pending 2021 GRC to set new revenue, rates, and regulatory mechanisms. The 2021 GRC was originally scheduled to be completed on December 31, 2022 with new revenue, rates, and regulatory mechanisms effective on January 1, 2023. On January 24, 2024, the assigned CPUC ALJs issued a PD on the litigated 2021 GRC, and concurrently, the assigned CPUC Commissioner issued an APD opposing and modifying certain decisions made by the ALJs. The PD issued by the ALJs was closer aligned to Cal Water’s requested revenue requirement whereas the APD issued by the assigned Commissioner was closer aligned to the Public Advocates’ requested revenue requirement. On February 13, 2024, Cal Water filed a request to change several elements in the PD and APD, including correction of possible 2021 GRC technical issues. We are unable to determine which of the two proposed decisions will be adopted by the CPUC, or if a second alternate proposed decision will be issued by the CPUC. As a result of the uncertainty of the decision that will ultimately be made by the CPUC, we are unable to reasonably estimate the impact on 2023 operating revenue and expenses. The 2021 GRC cumulative adjustment plus interest which is retroactive to January 1, 2023, will be recorded when the final decision is issued by the CPUC.

IRMA, MWRAM, AND 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, plus any additional revenue changes approved since July 1, 2021 (final rates). We expect to recognize the regulatory asset and corresponding operating revenue once the 2021 GRC is approved by the CPUC.

The MWRAM tracks the difference between the revenue received for actual metered sales through tiered volumetric rates and the revenue that would have been received with the same actual metered sales if a uniform rate had been in effect. The MWRAM will be effective retroactive to January 1, 2023. We expect to recognize the regulatory asset and corresponding operating revenue once the 2021 GRC is approved by the CPUC.

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 in 2023 when our regulated service territories in California are under voluntary and mandatory usage reductions. The final value of the DREMA will depend on the resolution of the 2021 GRC. We expect to recognize the regulatory asset and corresponding operating revenue once the 2021 GRC is approved by the CPUC and an advice letter for recovery is approved by the CPUC.

Operating revenue for 2023 does not include any benefit of proposed revenue rate relief that will be tracked in the IRMA or regulatory mechanisms (MWRAM and DREMA) due to the delay in approval of our 2021 GRC.

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 State Water Resources Control Board (Water Board) in order to provide relief to community water and wastewater systems for unpaid bills (arrearages) related to the COVID-19 pandemic. The Legislature allocated $985 million in American Rescue Plan Act of 2021 funds to pay down residential and commercial arrearages accrued between March 4, 2020 and June 15, 2021. In response to the Water Board’s survey, Cal Water reported $20.8 million in eligible customer arrearages and program administrative costs. Cal Water received 100% of the requested amount from the program in January 2022. Cal Water applied $17.2 million of these funds to identified past due customer balances during the first quarter of 2022 and returned the remaining balance.

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 $83.0 million in eligible customer arrearages and program administrative costs that was subsequently accepted by the Water Board. Cal Water expects approval of the request in the first quarter of 2024.

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Critical Accounting Policies and Estimates

We maintain our accounting records in accordance with accounting principles generally accepted in the United States of America and as directed by the Commissions to which our operations are subject. The process of preparing financial statements 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. A summary of our significant accounting policies is listed in Note 2 of the Notes to Consolidated Financial Statements. The following sections describe those policies where the level of subjectivity, judgment, and variability of estimates could have a material impact on the financial condition, operating performance, and cash flows of the business.

Revenue Recognition

Revenue from contracts with customers

The Company principally generates operating revenue from contracts with customers by providing regulated water and wastewater services at tariff-rates authorized by the Commissions in the states in which they operate and non-regulated water and wastewater services at rates authorized by contracts with government agencies. Revenue from contracts with customers reflects amounts billed for the volume of consumption at authorized per unit rates, for a service charge, and for other authorized charges.

The Company satisfies its performance obligation to provide water and wastewater services over time as services are rendered. The Company applies the invoice practical expedient and recognizes revenue from contracts with customers in the amount for which the Company has a right to invoice. The Company has a right to invoice for the volume of consumption, for the service charge, and for other authorized charges. The measurement of sales to customers is generally based on the reading of their meters, which occurs on a systematic basis throughout the month.

Contract terms are generally short-term and at will by customers and, as a result, no separate financing component is recognized for the Company's collections from customers, which generally require payment within 30 days of billing. The Company applies judgment, based principally on historical payment experience, in estimating its customers’ ability to pay.

Certain customers are not billed for volumetric consumption, but are instead billed a flat rate at the beginning of each monthly service period. The amount billed is initially deferred and subsequently recognized over the monthly service period, as the performance obligation is satisfied. The deferred revenue balance or contract liability, which is included in "other accrued liabilities" on the consolidated balance sheets, is inconsequential.

Regulatory balancing account revenue

Regulatory balancing account revenue is revenue related to revenue mechanisms authorized in California by the CPUC, which the Company recognizes as revenue when it is objectively determinable, probable of recovery and expected to be collected within 24 months following the end of the accounting period. Regulatory balancing account revenues are not considered contracts with customers. To the extent that revenue is estimated to be collectible beyond 24 months, recognition is deferred. Due to a delay in resolution of the 2021 GRC, the Company did not recognize a benefit from regulatory revenue mechanisms in 2023. For 2022, the Company's authorized regulatory revenue mechanisms included the WRAM.

The WRAM decoupled revenue from the volume of the sales and allowed the Company to recognize the adopted level of volumetric revenues. The variance between adopted volumetric revenues and actual billed volumetric revenues for metered accounts was recorded as regulatory balancing account revenue. The WRAM concluded on December 31, 2022.

Regulatory balancing accounts also include revenue that is recognized for balancing accounts when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process. These mechanisms, such as the Modified Cost Balancing Account (MCBA), Conservation Expense Balancing Account (CEBA), Pension Cost Balancing Account (PCBA), and Health Cost Balancing Account (HCBA), generally provide for recovery of the adopted levels of expenses for purchased water, purchased power, pump taxes, water conservation program costs, pension, and health care. Variances between adopted and actual costs were recorded as regulatory balancing account revenue in 2022. In 2023, in connection with the CPUC's decision to discontinue the use of the WRAM, the variances for CEBA, HCBA, and PCBA are recorded against the originating expense. The MCBA concluded on December 31, 2022.

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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 for ICBAs to replace the MCBA. The MWRAM tracks the difference between the revenue received for actual metered sales 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. The ICBA tracks differences between the authorized per-unit prices of water production costs and actual per-unit prices of water production costs. Cal Water complied with this decision in its 2021 GRC and the MWRAM and ICBAs are expected to be effective retroactive to January 1, 2023 once approved. The Company did not record a regulatory asset or regulatory liability for the MWRAM or ICBAs for 2023.

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. Cal Water anticipates that the Court will schedule an oral argument before it begins deliberations and issues its decision.

Regulated Utility Accounting

Because we operate almost exclusively in a regulated business, we are subject to the accounting standards for regulated utilities. The Commissions in the states in which we operate establish rates that are designed to permit the recovery of the cost of service and a return on investment. We capitalize and record regulatory assets for costs that would otherwise be charged to expense if it is probable that the incurred costs will be recovered in future rates. Regulatory assets are amortized over the future periods that the costs are expected to be recovered. If costs expected to be incurred in the future are currently being recovered through rates, we record those expected future costs as regulatory liabilities. In addition, we record regulatory liabilities when it is probable the Commissions will require a refund to be made to our customers over future periods.

Determining probability requires significant judgment by management and includes, but is not limited to, consideration of testimony presented in regulatory hearings, proposed regulatory decisions, final regulatory orders, and the strength or status of applications for rehearing or state court appeals.

If we determine that a portion of our assets used in utility operations is not recoverable in customer rates, we would be required to recognize the loss of the disallowed assets.

Income Taxes

We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We measure deferred tax assets and liabilities at enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect on the deferred tax assets and liabilities of a change in tax rate in the period that includes the enactment date. We also assess the likelihood that deferred tax assets will be recovered in future taxable income and, to the extent recovery is not probable, a valuation allowance would be recorded.

We anticipate that future rate actions by the regulatory commissions will reflect revenue requirements for the tax effects of temporary differences recognized, which have previously been passed through to customers. The regulatory commissions have granted the Company permission to reflect the normalization of the tax benefits of the federal accelerated methods and available Investment Tax Credits (ITCs) for all assets placed in service after 1980. ITCs are deferred and amortized over the lives of the related properties for book purposes. The CPUC requires flow through accounting for state deferred taxes.

On December 22, 2017, the U.S. government enacted expansive tax legislation commonly referred to as the TCJA. Among other provisions, the TCJA reduced the federal income tax rate from 35 percent to 21 percent beginning on January 1, 2018 and eliminated bonus depreciation for utilities. The TCJA required the Company to re-measure all existing deferred income tax assets and liabilities to reflect the federal tax rate reduction.

As of December 31, 2023, the TCJA refund liability was $92.5 million. We continue working with other state regulators to finalize the refund to confirm compliance with federal normalization rules.

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Pension and Postretirement Benefits Other Than Pensions (PBOP)

We incur costs associated with our pension and PBOP plans. To measure the expense of these benefits, our management must estimate compensation increases, mortality rates, future health cost increases and discount rates used to value related liabilities and to determine appropriate funding. Different estimates used by our management could result in significant variances in the cost recognized for pension and PBOP plans. The estimates used are based on historical experience, current facts, future expectations, and recommendations from independent advisors and actuaries. We use an investment advisor to provide advice in managing the plan's investments. We anticipate any increases in funding for the pension benefits plans will be recovered in future rate filings, thereby mitigating the financial impact. We believe it is probable that future costs will be recovered in future rates and therefore have recorded a regulatory asset in accordance with generally accepted accounting principles. Changes to the pension benefits actuarial assumptions can significantly affect pension costs, regulatory assets, and liabilities.

The following table reflects the sensitivity of pension amounts reported for the year ended December 31, 2023, to changes in actuarial assumptions:

[[GREPCENT_TABLE]]
[["","Increase/(Decrease) in Pension Benefits Actuarial Assumption","","Increase/(Decrease) in 2023 Net Periodic Benefit Cost","","Increase/(Decrease) in Projected Benefit Obligation as of December 31, 2023"],["","","","Dollars in thousands"],["Discount rate","(0.5)","%","","$","3,494","","","$","59,334"],["Long-term rate of return on plan assets","(0.5)","%","","3,502","","","\u2014"],["Rate of compensation increases","(0.5)","%","","(3,218)","","","(15,000)"],["Cost of living adjustment (1)","(0.23)","%","","(2,561)","","","(15,387)"],["Discount rate","0.5","%","","(6,084)","","","(52,558)"],["Long-term rate of return on plan assets","0.5","%","","(3,502)","","","\u2014"],["Rate of compensation increases","0.5","%","","3,017","","","15,884"],["Cost of living adjustment","0.5","%","","4,658","","","40,412"]]
[[/GREPCENT_TABLE]]
______________________________________________________________________________

1.The cost of living adjustment was assumed at 2.23% and has a floor of 2.0%.

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Results of Operations

Operating Revenue

Operating revenue in 2023 was $794.6 million, a decrease of $51.8 million, or 6.1%, over 2022. Operating revenue in 2022 was $846.4 million, an increase of $55.5 million, or 7.0%, over 2021. The sources of change in operating revenue were:

[[GREPCENT_TABLE]]
[["","2023","","2022"],["","Dollars in millions"],["Net change due to rate changes, usage, and other (1)","$","17.9","","","$","6.2"],["WRAM revenue (2)","(74.3)","","","42.7"],["MCBA revenue (3)","7.4","","","(11.2)"],["Other balancing account revenue (4)","4.9","","","1.3"],["Deferral of revenue (5)","(7.7)","","","16.5"],["Net change","$","(51.8)","","","$","55.5"]]
[[/GREPCENT_TABLE]]

_______________________________________________________________________________

(1)In 2023, the net change due to rate changes, usage, and other in the above table was primarily driven by rate increases in California of $30.7 million, which was partially offset by a 3.4% decrease in customer usage, which we believe is primarily due to higher winter precipitation in our California service territories and water conservation compared to 2022.

(2)WRAM revenue is the variance between adopted volumetric revenues and actual billed volumetric revenues for metered accounts. In 2023, the WRAM revenue decrease is due to the mechanism concluding as of December 31, 2022; as a result, no WRAM revenue was recorded for 2023. For 2022, we recognized $74.3 million of WRAM revenue as actual billed volumetric revenue was lower than adopted volumetric revenue.

(3)MCBA revenue is the variance between adopted water production costs and actual water production costs. In 2023, the MCBA revenue increase is due to the mechanism concluding as of December 31, 2022; as a result, no MCBA revenue was recorded for 2023. For 2022, we recorded a decrease to MCBA revenue of $7.4 million as actual water production costs were lower 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 for 2022.

(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 2023, the adjustments for these balancing accounts were recorded as an increase to the originating expense accounts of $12.4 million rather than as an operating revenue decrease. In 2022, actual pension and health care costs were below the adopted costs and a decrease to revenue of $5.9 million was recognized for the difference. This was partially offset by an increase to revenue of $1.2 million recorded for the conservation balancing account as actual expenses were above adopted.

(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. Deferred revenue in 2023 remained flat, while the deferred revenue in 2022 decreased $7.7 million primarily due to the recognition of deferred balancing account revenue in 2022.

Water Production Expenses

Water production expenses, which consist of purchased water, purchased power, and pump taxes, comprise the largest segment of total operating expenses. Water production costs accounted for 40.2% and 39.7%, of total operating costs in 2023 and 2022, respectively. The rates charged for wholesale water supplies, electricity, and pump taxes are established by various public agencies. As such, these rates are beyond our control.

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The table below provides the change in water production expenses during the past 2 years:

[[GREPCENT_TABLE]]
[["","2023","","2022"],["","Amount","","Change","","% Change","","Amount","","Change","","% Change"],["","Dollars in millions"],["Purchased water","$","223.8","","","$","(0.7)","","","(0.3)","%","","$","224.5","","","$","(0.5)","","","(0.2)","%"],["Purchased power","45.7","","","1.1","","","2.5","%","","44.6","","","7.5","","","20.2","%"],["Pump taxes","19.0","","","2.8","","","17.3","%","","16.2","","","0.9","","","5.9","%"],["Total water production expenses","$","288.5","","","$","3.2","","","1.1","%","","$","285.3","","","$","7.9","","","2.8","%"]]
[[/GREPCENT_TABLE]]

The principal factors affecting water production expenses are the quantity, price, and source of the water. Generally, water pumped from wells costs less than water purchased from wholesale suppliers.

The table below provides the amounts, percentage change, and source mix for the respective years:

[[GREPCENT_TABLE]]
[["","2023","","2022"],["","MG","","% of Total","","% change from prior year","","MG","","% of Total","","% change from prior year"],["","Millions of gallons (MG)"],["Source:"],["Wells","50,363","","","48.6","%","","(4.1)","%","","52,534","","","49.1","%","","\u2014"],["Purchased","47,865","","","46.3","%","","(5.2)","%","","50,473","","","47.2","%","","(5.9)","%"],["Surface","5,256","","","5.1","%","","33.5","%","","3,938","","","3.7","%","","(10.1)","%"],["Total","103,484","","","100.0","%","","(3.2)","%","","106,945","","","100.0","%","","(3.2)","%"]]
[[/GREPCENT_TABLE]]

Purchased water expenses are affected by changes in quantities purchased, supplier prices, and cost differences between wholesale suppliers. The ICBA mechanism is designed to recover all changes in supplier prices for purchased water expenses and will be in effect for Cal Water once the 2021 GRC is resolved.

For 2023, the $0.7 million decrease in purchased water expenses is mostly due to a 5.2% decrease in purchased quantities offset by a blended purchased water wholesaler rate increase of 5.1%.

For 2023, the $2.8 million increase in pump taxes is primarily due to increases in pump tax rates.

Purchased power expenses are affected by the quantity of water pumped from wells and moved through the distribution system, rates charged by electric utility companies, and rate structures applied to usage during peak and non-peak times of the day or season. In 2023, purchased power expenses increased $1.1 million mainly due to an increase in rates from our power providers.

Changes in climate change regulations could increase the cost of power that in turn would result in an increase in the rates our power suppliers charge us. Any change in pricing of our purchased power expenses in California would be recovered from our customers through the ICBA mechanism once the 2021 GRC is resolved. Any change in power costs in other states would be requested to be recovered by the customers in those states. The impact of such regulations is dependent upon the enacted date, the factors that affect our suppliers' cost structure, and their ability to pass the costs to us in their approved tariffs. These items are not known at this time.

Administrative and General Expenses

Administrative and general expenses include payroll related to administrative and general functions, all employee benefits charged to expense accounts, insurance expenses, legal fees, expenses associated with being a public company, and general corporate expenses.

For 2023, administrative and general expenses increased $9.5 million, or 7.2%, compared to 2022. The increase was mainly due to an increase of $9.0 million in employee wages primarily driven by annual increases in employee wage rates and an increase in the number of employees.

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Other Operations Expenses

The components of other operations expenses include payroll, material and supplies, and contract service costs of operating the regulated water systems, including the costs associated with water transmission and distribution, pumping, water quality, meter reading, billing, operations of district offices, and water conservation programs.

For 2023, other operations expense decreased $3.7 million, or 3.2%, compared to 2022. The decrease was primarily due to an increase in deferred costs associated with deferred revenue of $6.3 million (see deferral of revenue above), a decrease in conservation expenses of $2.2 million, and a decrease in bad debt costs of $1.7 million, which was partially offset by an increase in employee labor costs of $3.6 million and an increase in water quality testing costs of $1.4 million.

Maintenance

For 2023, maintenance expenses increased $0.3 million, or 0.8%, compared to 2022 due to increases in reservoir, tank, well, and pumping equipment repairs.

Depreciation and Amortization

For 2023, depreciation and amortization increased $6.6 million, or 5.8%, compared to 2022 primarily due to utility plant placed in service in 2022.

Income Taxes

For 2023, income tax benefit increased $18.5 million, or 565.6%, to $15.2 million compared to 2022. The increase in 2023 was primarily due to a decrease in pre-tax operating income from the impact of the delayed final decision by the CPUC on Cal Water's pending 2021 GRC. The Company’s effective combined income tax rate for 2023 was (15.2%) as compared to 6.2% for 2022.

Property and Other Taxes

For 2023, property and other taxes increased $1.2 million, or 3.4%, compared to 2022. The increase was mostly due to an increase in our assessed property values for utility plant placed in service during the year.

Other Income and Expenses

For 2023, net other income and expenses increased $12.1 million, or 101.4% compared to 2022. The increase was due primarily to a $12.1 million increase in the unrealized gains from certain non-qualified benefit plan investments due to market conditions, $5.7 million increase in other components of net periodic benefit credit, and a $1.4 million increase in allowance for equity funds used during construction, which was partially offset by a $2.8 million decrease in non-regulated revenue and a $5.3 million increase in income tax expense.

Net Interest Expense

For 2023, net interest expense increased $5.5 million, or 12.4%, compared to 2022. The increase was primarily due to higher short-term borrowing rates and higher outstanding borrowings on our short-term credit facilities.

Rates and Regulation

The following is a summary of 2023 rate filings. A description of the "Type of Filing" can be found in the "Item 1 - Rates and Regulation" section above. California decisions and resolutions may be found on the CPUC website at www.cpuc.ca.gov.

[[GREPCENT_TABLE]]
[["Type of Filing","Decision/Resolution","","Effective Date","","Increase (Decrease) Annual Revenue","","CA District/ Subsidiary"],["GRC and Offset Filings"],["2023 Expense Offset","AL 2465-A","","Jan 2023","","$5.1 million","","5 Districts"],["2021 GRC Interim Rates","AL 2475","","May 2023","","4% or 1.5%","","18 Districts"],["2023 Expense Offset","AL 2488","","July 2023","","$24.6 million","","11 Districts"],["Cost of Capital","AL 2491","","July 2023","","($7 million)","","21 Districts"]]
[[/GREPCENT_TABLE]]

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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.

California's normal weather pattern yields little precipitation between mid-spring and mid-fall. The Washington Water service areas receive precipitation in all seasons, with the heaviest amounts during the winter. New Mexico Water's rainfall is heaviest in the summer monsoon season. Hawaii Water receives precipitation throughout the year, with the largest amounts in the winter months. Water usage in all service areas is highest during the warm and dry summers and declines in the cool winter months. Rain and snow during the winter months replenish underground water aquifers and fill reservoirs, providing the water supply for subsequent delivery to customers. Management believes that supply pumped from underground aquifers and purchased from wholesale suppliers will be adequate to meet customer demand during 2024 and thereafter. However, water rationing may be required in future periods, if declared by the state or local jurisdictions. 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 current treatment processes.

Liquidity and Capital Resources

Cash flow from Operations

During 2023, we generated cash flow from operations of $217.8 million, compared to $243.8 million during 2022. The decrease in 2023 was primarily due to a decrease in net income that was primarily due to the delayed final decision from the CPUC on Cal Water's pending 2021 GRC and the net receipt of $17.2 million from the Water Arrearages Payment Program in 2022.

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 the 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. Aged accounts receivable past due more than 60 days decreased from $17.6 million as of December 31, 2022 to $15.5 million as of December 31, 2023 mostly due to the resumption of the customer account write off process and offering of a payment plan option for residential customers in California who have past-due balances larger than $50 dollars.

Investing Activities

During 2023 and 2022, we used $383.7 million and $327.8 million, respectively, of cash for capital expenditures, both Company-funded and developer-funded. 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.

Financing Activities

During 2023, we borrowed $227.8 million, and paid down $120.0 million on our unsecured revolving credit facilities for general corporate purposes. We also received $21.2 million of advances and contributions in aid of construction, which was reduced by refunds to developers of $9.4 million. We paid $1.8 million for matured First Mortgage Bonds and other long-term debt obligations. In addition, we issued $115.1 million of Company common stock through our at-the-market equity plan and our employee stock purchase plan.

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.

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The under-collected net WRAM and MCBA receivable balances were $64.2 million and $104.7 million as of December 31, 2023 and 2022, respectively. The decrease of $40.5 million from December 31, 2022 to December 31, 2023 was primarily due to customer billings during 2023. The under-collected net WRAM and MCBA receivable balances were primarily financed by Cal Water with short-term and long-term financing arrangements to meet operational cash requirements. Interest on the under-collected net WRAM and MCBA receivable balances, the interest recoverable from customers, is limited to the current 90-day commercial paper rate, which is significantly lower than Cal Water's short and long-term financing rates.

At the January 2024 meeting, the Board declared the quarterly dividend, increasing it for the 57th consecutive year. The quarterly dividend was raised from $0.26 to $0.28 per common share. This represents an indicated annual rate of $1.12 per common share. Dividends have been paid for 78 consecutive years. The annual dividends paid per common share in 2023, 2022, and 2021 were $1.04, $1.00 and $0.92, respectively. Earnings not paid as dividends are reinvested in the business for the benefit of stockholders. The dividend payout ratio was 113.8% in 2023, 56.5% in 2022, and 46.9% in 2021 for an average of 72.4% over the 3-year period. Our long-term targeted dividend payout ratio is 60%.

Short-Term Financing

Short-term liquidity is provided by the bank lines of credit described above and by internally generated funds. As of December 31, 2023, there were borrowings of $180.0 million outstanding on our unsecured revolving lines of credit, compared to $70.0 million outstanding on our unsecured revolving lines of credit as of December 31, 2022.

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 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.

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 (each as defined in the respective credit agreements). As of December 31, 2023, our consolidated total capitalization ratio was 46.4% and the interest coverage ratio was greater than four. In summary, as of such date, 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

Long-term financing is accomplished using both debt and equity. Cal Water was authorized to issue $700.0 million of debt and common stock to finance capital projects and operations by a CPUC decision dated November 5, 2020. In addition, the decision retained approximately $94.0 million of prior financing authority and determined that refinancing long-term debt did not count against the authorization. The CPUC requires that any loans from Cal Water to the Company be at arm’s length. This restriction did not materially affect the Company's ability to meet its cash obligations in 2023. Management does not expect this restriction to have a material impact on the Company's ability to meet its cash obligations in 2024 and beyond.

Long-term financing, which includes First Mortgage Bonds, senior notes, other debt securities, and common stock, has typically been used to replace short-term borrowings and fund capital 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 capital expenditure requirements. Management expects this trend to continue given our capital expenditures plan for the next five years. Some capital 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 refundable. Management believes long-term financing is available to meet our cash flow needs through issuances in both debt and equity instruments.

Additional information regarding the bank borrowings and long-term debt is presented in Notes 7 and 8 in the Notes to Consolidated Financial Statements.

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Equity Issuance

On April 29, 2022, we entered into an equity distribution agreement to sell shares of our common stock having an aggregate gross sales price of up to $350.0 million from time to time depending on market conditions through an at-the-market equity program over the next three years. We intend to use the net proceeds from these sales, after deducting commissions on such sales and offering expenses, for general corporate purposes, which may include working capital, construction and acquisition expenditures, investments and repurchases, and redemptions of securities. Additional information regarding this program is presented in Note 6 of the Notes to Consolidated Financial Statements.

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-issuers, including earnings from and investments in these entities.

[[GREPCENT_TABLE]]
[["Summarized Statement of Operations"],["(in thousands)","2023","","2022"],["","Issuer","","Guarantor","","Issuer","","Guarantor"],["Net sales","$","720,577","","","$","\u2014","","","$","775,382","","","$","\u2014"],["Gross profit","$","449,221","","","$","\u2014","","","$","506,890","","","$","\u2014"],["Income from operations","$","82,157","","","$","590","","","$","124,464","","","$","363"],["Equity in earnings of guarantor","","","$","49,998","","","$","\u2014","","","$","94,339"],["Net income","$","57,168","","","$","51,376","","","$","92,769","","","$","95,263"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Summarized Balance Sheet Information"],["(in thousands)","As of December 31, 2023","","As of December 31, 2022"],["","Issuer","","Guarantor","","Issuer","","Guarantor"],["Current assets","$","213,469","","","$","10,126","","","$","208,962","","","$","31,913"],["Intercompany receivable from guarantor & non-issuer subsidiaries","3,664","","","44,882","","","3,339","","","34,100"],["Other assets","479,642","","","1,190,076","","","450,668","","","1,080,720"],["Long-term intercompany receivable from non-issuer subsidiaries","\u2014","","","82,610","","","\u2014","","","37,869"],["Net utility plant","3,487,788","","","\u2014","","","2,805,242","","","\u2014"],["Total assets","$","4,184,563","","","$","1,327,694","","","$","3,468,211","","","$","1,184,602"],["Current liabilities","$","351,964","","","$","53,069","","","$","242,538","","","$","35,260"],["Intercompany payable to non-issuer subsidiaries","\u2014","","","\u2014","","","562","","","\u2014"],["Long-term debt","1,052,350","","","\u2014","","","1,051,994","","","\u2014"],["Other liabilities","1,595,852","","","3,068","","","1,098,378","","","2,485"],["Total Liabilities","$","3,000,166","","","$","56,137","","","$","2,393,472","","","$","37,745"]]
[[/GREPCENT_TABLE]]

Off-Balance Sheet Arrangements

We do not have commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements, or capital resources even when the arrangement results in no obligation being reported in our consolidated balance sheets.

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Contractual Obligations

The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments. Changes in our business needs, cancellation provisions and changes in interest rates, as well as action by third parties and other factors, may cause these estimates to change. Therefore, our actual payments in future periods may vary from those presented in the table below.

The following table summarizes our contractual obligations as of December 31, 2023. We generally expect to satisfy these commitments with cash on hand and cash provided by operating activities.

[[GREPCENT_TABLE]]
[["","","Total","","Less than 1 Year","","1-3 Years","","3-5 Years","","After 5 Years"],["Long-term debt (a)","","$","1,054,396","","","$","377","","","$","70,711","","","$","20,652","","","$","962,656"],["Interest payments","","942,402","","","44,124","","","85,116","","","81,983","","","731,179"],["Advances for construction","","199,448","","","10,800","","","19,662","","","18,382","","","150,604"],["Pension and postretirement benefits (b)","","387,158","","","27,599","","","61,926","","","71,892","","","225,741"],["Finance lease obligations (c)","","4,244","","","1,034","","","3,210","","","\u2014","","","\u2014"],["Operating lease obligations","","15,691","","","2,244","","","3,696","","","3,007","","","6,744"],["Water supply contracts (d)","","599,722","","","33,362","","","65,420","","","65,422","","","435,518"],["Total contractual obligations","","$","3,203,061","","","$","119,540","","","$","309,741","","","$","261,338","","","$","2,512,442"]]
[[/GREPCENT_TABLE]]

_______________________________________________________________________________

a.Long-term debt payments include annual sinking fund payments on First Mortgage Bonds, maturities of long-term debt, and annual payments on other long-term obligations, exclusive of unamortized debt issuance costs of $4.9 million.

b.Pension and postretirement benefits include $2.8 million of short-term pension obligations.

c.Finance lease obligations represent total cash payments to be made in the future and includes interest expense of $0.3 million.

d.Estimated annual contractual obligations are based on the same payment levels as 2023.

For pension and postretirement benefits other than pensions obligations, see Note 11 of the Notes to the Consolidated Financial Statements.

Advances for construction represent annual contract refunds to developers for the cost of water systems paid for by the developers. The contracts are non-interest bearing, and refunds are generally on a straight-line basis over a 40-year period. System and facility leases include obligations associated with leasing water systems and rents for office space.

For finance and operating lease obligations, see Note 14 of the Notes to the Consolidated Financial Statements.

Cal Water has water supply contracts with wholesale suppliers in 13 of its operating districts and for the two leased systems in Hawthorne and Commerce. For each contract, the cost of water is established by the wholesale supplier and is generally beyond our control. The amount paid annually to the wholesale suppliers is charged to purchased water expense on our statements of operations. Most contracts do not require minimum annual payments and vary with the volume of water purchased. For more details related to water supply contracts, see Note 14 of the Notes to the Consolidated Financial Statements.

Capital Requirements

Capital requirements consist primarily of new construction expenditures for expanding and replacing utility plant facilities and the acquisition of water systems. They also include refunds of advances for construction.

Company-funded and developer-funded utility plant expenditures were $383.7 million and $327.8 million in 2023 and 2022, respectively. A majority of capital expenditures was associated with mains and water treatment equipment.

For 2024, our capital program is dependent in part on the timing and nature of regulatory approvals in connection with Cal Water's 2021 GRC. Capital expenditures in California for 2023, excluding developer-funded expenditures, were $326.5 million. Cal Water 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. We expect our annual capital expenditure to continue to increase during the next five years due to increasing needs to replace and maintain infrastructure.

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Management expects there will be developer-funded expenditures in 2024 and expects that these expenditures will be financed by developers through refundable advances for construction and non-refundable contributions in aid of construction. Developers are required to deposit the cost of a water construction project with us prior to our commencing construction work, or the developers may construct the facilities themselves and deed the completed facilities to us. Funds are generally received in advance of incurring costs for these projects. Advances are normally refunded over a 40-year period without interest. Future payments for advances received are listed under contractual obligations above. Because non-Company-funded construction activity is solely at the discretion of developers, we cannot predict the level of future activity. The cash flow impact is expected to be minor due to the structure of the arrangements.

Capital Structure

Total equity was $1,430.3 million at December 31, 2023, compared to $1,322.4 million at December 31, 2022. The Company sold 2,025,891 and 1,802,063 shares of its common stock in 2023 and 2022, respectively through its at-the-market equity program.

Total capitalization, including the current portion of long-term debt, was $2,483.8 million at December 31, 2023 and $2,378.2 million at December 31, 2022. Cal Water repaid $1.8 million of other long-term debt obligations in 2023 and $5.4 million 2022 for matured First Mortgage Bonds and other long-term debt obligations. In future periods, the Company intends to issue common stock and long-term debt to finance our operations. The capitalization ratios will vary depending upon the method we choose to finance our operations.

At December 31, capitalization ratios were:

[[GREPCENT_TABLE]]
[["","2023","","2022"],["Equity","57.6","%","","55.6","%"],["Long-term debt","42.4","%","","44.4","%"]]
[[/GREPCENT_TABLE]]

The return (from both regulated and non-regulated operations) on average equity was 3.8% in 2023 compared to 7.7% in 2022. Cal Water does not include construction work in progress in its regulated rate base; instead, Cal Water was authorized to record allowance for funds used during construction (or AFUDC) on construction work in progress, effective January 1, 2017. Construction work in progress for Cal Water was $253.9 million at December 31, 2023 and $219.2 million at December 31, 2022.

Acquisitions

There were no significant acquisitions in 2023 or 2022.

Real Estate Program

We own real estate. From time to time, certain parcels are deemed no longer used or useful for water utility operations. Most surplus properties have a low-cost basis. We developed a program to realize the value of certain surplus properties through sale or lease of those properties. The program will be ongoing for a period of several years. There were no significant sales in 2023 and 2022. As sales are dependent on real estate market conditions, future sales, if any, may or may not be at prior year levels.

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