(1) Amortization of these items is included in other components of net periodic benefit cost in other income and expenses on the unaudited Condensed Consolidated Statements of Operations.
(2) The tax benefit is included within income tax expense on the unaudited Condensed Consolidated Statements of Operations.
Note 12.
million in First Mortgage Bonds (the Bonds) in a private placement. The Bonds, relating to Series 2, bear an interest rate of % per annum payable quarterly, and mature on October 22, 2054. The Bonds will rank equally with all of Cal Water’s other First Mortgage Bonds and are secured by liens on Cal Water’s properties, subject to certain exceptions and permitted liens. Cal Water used the net proceeds from the sale of the Bonds to refinance existing indebtedness and for general corporate purposes. The Bonds were not registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands unless otherwise stated)
FORWARD-LOOKING STATEMENTS
This quarterly report, including all documents incorporated by reference, contains forward-looking statements within the meaning established by the Private Securities Litigation Reform Act of 1995 (the PSLRA). The forward-looking statements are intended to qualify under provisions of the federal securities laws for “safe harbor” treatment established by the PSLRA. Forward-looking statements in this quarterly report are based on currently available information, expectations, estimates, assumptions and projections, and our management’s beliefs, assumptions, judgments and expectations about us, the water utility industry and general economic conditions. These statements are not statements of historical fact. When used in our documents, statements that are not historical in nature, including words like “will,” “would,” “expects,” “intends,” “plans,” “believes,” “may,” “could,” “estimates,” “assumes,” “anticipates,” “projects,” “progress,” “predicts,” “hopes,” “targets,” “forecasts,” “should,” “seeks,” “indicates,” or variations of these words or similar expressions are intended to identify forward-looking statements. Examples of forward-looking statements in this quarterly report include, but are not 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, including California Water Service Company’s (Cal Water) general rate case (GRC) filed on July 8, 2024 (2024 GRC), rate amounts, cost recovery or refunds, certain per- and polyfluoroalkyl substances (PFAS) regulations, and associated impacts, such as our expected or estimated revenue, our intentions regarding recovery billing, our 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 expectations regarding funds received from the Extended Program, our intentions regarding use of net proceeds from any future equity or debt issuances or borrowings or our intentions or anticipations regarding our sources of funding, capital structure or capital allocation plans. The forward-looking statements are not guarantees of future performance. They are based on numerous assumptions that we believe are reasonable, but they are open to a wide range of uncertainties and business risks. Consequently, actual results may vary materially from what is contained in a forward-looking statement.
Factors which may cause actual results to be different than those expected or anticipated include, but are not limited to:
•the outcome and timeliness of regulatory commissions’ actions concerning rate relief and other matters, including with respect to the 2024 GRC;
•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 GRC decision (the 2021 GRC) and its most recent 2024 GRC filing);
•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, drought, and land movement;
•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, the interest rate environment, 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 and 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
•pensions, which include the supplemental executive retirement plan (SERP) and the postretirement health care benefit plan.
For the nine months ended September 30, 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 a result of Cal Water’s 2021 GRC decision that was issued in March of 2024, SERP expenses were disallowed to be recovered from our customers. At this time, we believe it is not probable that SERP costs will be recovered in rates for the three-year period in which the 2021 GRC is in effect. As a result, we have reclassified our SERP regulatory asset, net of associated deferred income taxes, for Cal Water to other comprehensive loss in accordance with generally accepted accounting principles.
CALIFORNIA EXTENDED WATER AND WASTEWATER ARREARAGES PAYMENT PROGRAM (Extended 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 Extended 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 applied $57.5 million of the funds to eligible past due customer balances during the second quarter of 2024. The remaining balance was returned to the Water Board in the third 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 September 30, 2024 was $60.7 million or $1.03 earnings per diluted common share, compared to net income of $34.4 million or $0.60 earnings per diluted common share for the three months ended September 30, 2023. The $26.2 million increase in net income was primarily due to an increase in operating revenue of $44.6 million primarily due to rate increases, new customers and consumption increases. The revenue increase was partially offset by an increase in total operating expenses of $21.3 million. The total operating expense increase was primarily due to an increase in water production costs of $2.7 million, depreciation and amortization expenses of $3.2 million, and income tax expense of $11.5 million. Additionally, net other income increased by $3.8 million.
Net income attributable to California Water Service Group for the nine months ended September 30, 2024 was $171.1 million or $2.93 earnings per diluted common share, compared to net income of $21.8 million or $0.38 earnings per diluted common share for the nine months ended September 30, 2023. The $149.4 million increase in net income was primarily due to an increase in operating revenue of $234.5 million primarily as a result of the cumulative adjustment for the impacts of the 2021 GRC, retroactive to January 1, 2023. The revenue increase was partially offset by an increase in total operating expenses of $83.6 million. The total operating expense increase was primarily due to an increase in water production costs of $18.7 million, increases in other operations expenses of $11.4 million, an increase in income tax expense of $41.1 million, and an increase in depreciation and amortization expenses of $9.3 million. Additionally net other income increased by $3.5 million while net interest expense increased by $5.2 million.
Operating Revenue
For the three months ended September 30, 2024, operating revenue increased $44.6 million, or 17.5%, to $299.6 million as compared to the three months ended September 30, 2023.
For the nine months ended September 30, 2024, operating revenue increased $234.5 million, or 40.4%, to $814.6 million as compared to the nine months ended September 30, 2023.
The sources of the change in operating revenue were:
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 vs. 2023 | | 2024 vs. 2023 |
| Net change due to rate changes, usage, and other (1) | $ | 54,401 | | | $ | 100,477 | |
| Interim Rates Memorandum Account (IRMA) revenue (2) | — | | | 88,600 | |
| Monterey-Style Water Revenue Adjustment Mechanism (MWRAM) revenue (3) | (9,441) | | | 29,830 | |
| Deferred revenue (4) | (373) | | | 15,584 | |
| Net operating revenue increase | $ | 44,587 | | | $ | 234,491 | |
1.The net change due to rate changes, usage, and other for the three months ended September 30, 2024 was primarily due to rate increases of $42.2 million and an increase in consumption and new customers of $9.6 million. For the nine months ended September 30, 2024, the net change due to rate changes, usage, and other was primarily driven by rate increases of $74.1 million, an increase in consumption and new customers of $14.1 million, and an increase in accrued and unbilled revenue of $6.7 million due to increases in rates and unbilled days.
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 implemented on May 31, 2024. Cal Water recorded IRMA revenue of $88.6 million for the nine months ended September 30, 2024, of which $67.6 million is attributable to 2023, including $25.2 million and $53.7 million that was attributable to the three and nine months ended September 30, 2023, respectively.
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, Cal Water recorded a reduction to MWRAM revenue of $9.4 million for the three months ended September 30, 2024. For the nine months ended September 30, 2024, Cal Water recorded MWRAM revenue of $29.8 million of which $17.4 million is attributable to 2023, including a $6.1 million reduction to MWRAM revenue and a $11.7 million increase to MWRAM revenue that was attributable to the three and nine months ended September 30, 2023, respectively.
4.Deferred revenue consists of amounts that are expected to be collected from customers beyond 24 months following the end of the accounting period in which the sales transaction has already occurred. Deferred revenue for the nine months ended September 30, 2024 decreased as we applied $46.0 million from the Extended Program against certain eligible WRAM receivables during the first nine months of 2024.
Total Operating Expenses
For the three months ended September 30, 2024, total operating expenses increased $21.3 million, or 10.1%, to $232.8 million, as compared to $211.5 million for the three months ended September 30, 2023. The increase was primarily due to increases in water production costs, depreciation and amortization, and income tax expense.
For the nine months ended September 30, 2024, total operating expenses increased $83.6 million, or 15.5%, to $621.8 million, as compared to $538.2 million for the nine months ended September 30, 2023. The increase was primarily due to increases in water production costs, other operations, depreciation and amortization, and income tax expense.
Sources of Supply
Sources of water as a percent of total water production are listed in the following table:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2024 | | 2023 | | 2024 | | 2023 |
| Well production | 50 | % | | 50 | % | | 51 | % | | 49 | % |
| Purchased | 46 | % | | 45 | % | | 45 | % | | 47 | % |
| Surface | 4 | % | | 5 | % | | 4 | % | | 4 | % |
| Total | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Water Production Costs
Water production costs increased $2.7 million, or 3.0%, for the three months ended September 30, 2024 as compared to the same period last year primarily due to an increase in wholesale rates and higher customer usage.
Water production costs increased $18.7 million, or 8.6%, for the nine months ended September 30, 2024 as compared to the same period last year primarily due to increases in wholesale rates and customer usage. For the nine months ended September 30, 2024, we recorded $6.5 million of water production costs for the Incremental Cost Balancing Accounts (ICBA) attributable to fiscal year 2023, including $0.5 million and $3.4 million, respectively, attributable to water production costs during the three and nine months ended September 30, 2023.
The components of water production costs are shown in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2024 | | 2023 | | Change | | 2024 | | 2023 | | Change |
| Purchased water | $ | 76,767 | | | $ | 71,552 | | | $ | 5,215 | | | $ | 176,934 | | | $ | 170,220 | | | $ | 6,714 | |
| Purchased power | 17,468 | | | 15,729 | | | 1,739 | | | 40,313 | | | 34,950 | | | 5,363 | |
| Pump taxes | 6,025 | | | 5,066 | | | 959 | | | 16,372 | | | 13,052 | | | 3,320 | |
| ICBA | (5,169) | | | — | | | (5,169) | | | 3,301 | | | — | | | 3,301 | |
| Total | $ | 95,091 | | | $ | 92,347 | | | $ | 2,744 | | | $ | 236,920 | | | $ | 218,222 | | | $ | 18,698 | |
Other Operations
Other operations expenses increased $11.4 million, or 15.3%, for the nine months ended September 30, 2024 as compared to the same period in 2023. The increase was primarily due to the recognition of $13.1 million of costs associated with recognized deferred WRAM revenue, which was partially offset by a $3.2 million decrease in bad debt expense as a result of applying arrearage funds to eligible, previously written-off accounts.
Depreciation and Amortization
Depreciation and amortization expense increased $3.2 million and $9.3 million for the three and nine months ended September 30, 2024, respectively, as compared to the same periods in 2023. The increases were primarily due to utility plant placed in service in 2023.
Income Tax Expense
Income tax expense increased $11.5 million and $41.1 million for the three and nine months ended September 30, 2024, respectively, as compared to the same periods in 2023. The increases in income tax expense were primarily due to an increase in pre-tax operating income for the three and nine months ended September 30, 2024 compared to the same periods in 2023 attributable to the recognition of income related to the 2021 GRC decision in 2024.
Other Income and Expenses
Net other income increased $3.8 million and $3.5 million for the three and nine months ended September 30, 2024, respectively, as compared to the same periods in 2023. The increases were primarily due to a $5.0 million and $4.2 million increase in unrealized gains on non-qualified benefit plan investments for the three and nine months ended September 30, 2024, respectively
Interest Expense
Net interest expense increased $5.2 million, or 13.8%, for the nine months ended September 30, 2024, as compared to the same period in 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
2024 GRC Application
On July 8, 2024, Cal Water submitted Infrastructure Improvement Plans (the Plans) for its California districts from 2025-2027 in its 2024 GRC application with the CPUC. The application also proposes a Low-Use Water Equity Program, that would, if approved as filed, decouple revenue from water sales, to assist low-water-using, lower-income customers.
The required, triennial filing begins an approximately 18-month review process by the CPUC, which will analyze the Plans, operating budget proposals, and the Low-Use Water Equity Program to establish water rates for 2026-2028 that reflect the actual cost of providing safe, reliable water service. Associated rates set by the CPUC would become effective no sooner than January 2026. Cal Water has concluded an initial pre-hearing conference and an administrative law judge and Commissioner have been assigned to the case.
In the Plans, Cal Water proposes to invest more than $1.6 billion in its districts from 2025 to 2027, including approximately $1.3 billion of newly proposed capital investments. About 46% of the proposed new infrastructure improvements are to replace aging water pipelines. Such improvements are designed to enhance water supply reliability to support customers’ and firefighters’ everyday and emergency needs. The Plans also include, among other projects:
•Water quality upgrades to treat for existing and newly regulated contaminants.
•Infrastructure replacements to help ensure reliable delivery of water service.
•Equipment such as generators to help withstand power outages and shutoffs, and solar installation projects to help reduce Cal Water’s dependency on the electric power grid and lessen our environmental footprint.
•Physical and cyber security and safety enhancements to help protect facilities, customers, and employees.
•Water supply initiatives to help safeguard long-term reliability and sustainability of water sources.
•Advanced Metering Infrastructure to aid conservation efforts and enhance water-use efficiency.
Cal Water’s proposed Low-Use Water Equity Program would, if approved as filed, decouple revenue from water sales across its regulated service areas. The program is designed to work in conjunction with Cal Water’s proposed four-tier rate design and sales forecast proposals to enhance affordability—particularly for low-use and low-income customers—plus reinforce conservation goals, while providing the utility an opportunity to recover its authorized revenue requirement in a timely manner.
To support these investments, Cal Water has proposed to change 2024 rates to increase 2026 total revenue by $140.6 million, or 17.1%. Cal Water also proposes rate increases of $74.2 million, or 7.7%, in 2027; and $83.6 million, or 8.1%, in 2028.
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 adopted 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 also 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 contained certain language, numbers, and calculations that were inconsistent or did 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 was approved and included 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 were effective on May 1, 2024. The remaining $20.6 million increase was primarily due to 2024 escalations. Cal Water implemented 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 implemented on May 31, 2024; as a result, Cal Water calculated and recorded an IRMA regulatory asset of $88.6 million and a corresponding increase to revenue for the difference between final rates and interim rates for all of 2023 and the first five months of 2024. The IRMA regulatory asset was reduced by $2.5 million for Rate Support Fund (RSF) Credits that would have been given to customers had the rate case been approved on time with an associated increase to regulatory assets for the RSF program. Cal Water also recorded an IRMA regulatory liability of $5.6 million with a corresponding increase to regulatory assets for Customer Assistance Program (CAP) credits that would have been given to customers had the rate case been approved on time. Finally, Cal Water recorded an IRMA regulatory asset of $0.4 million with a corresponding decrease to regulatory asset for the CAP and RSF for surcharges that would have been billed to fire protection customers had the rate case been approved on time. During the third quarter of 2024, Cal Water was approved to recover and refund the recorded IRMA
regulatory assets and liabilities in the form of either 12-month, 24-month, or longer surcharges or 12-month surcredits. The new rates were implemented on October 1, 2024.
MWRAM Filing
In September of 2024, Cal Water submitted an advice letter requesting surcharges to bill for the MWRAM-related undercollections for 2023 for its regulated districts with tiered rates. The MWRAM tracks the difference between quantity revenues collected under each residential rate tier and the quantity revenues that would have been collected under a single quantity rate at the equivalent level of sales. The advice letter was approved and $17.4 million is being recovered from customers in the form of 12- and 24-month surcharges. The new rates were implemented on October 1, 2024.
ICBA Filing
In September of 2024, Cal Water submitted an advice letter to true-up the 2023 annual ICBAs of its regulated districts. The ICBAs track the difference between actual cost for water production inputs (purchased water, purchased power, and pump taxes) and adopted costs reflected in rates. The advice letter was approved and $7.1 million is being refunded to customers in the form of either one time or 12-month surcredits. Additionally, $0.6 million is being recovered from customers in the form of 12-month surcharges. The new rates were implemented on October 1, 2024.
2023 Financing Application for California
On August 2, 2024, the CPUC granted Cal Water the authority to issue up to $1.3 billion of new equity and debt securities, in addition to previously-authorized amounts, to finance water system infrastructure investments from 2023 to 2027. Cal Water was also granted a waiver that authorizes each Cal Water borrowing under its revolving credit arrangements to be payable at periods up to twenty-four months from the date of the applicable borrowing, rather than the twelve-month period currently permitted for short-term borrowings.
Rate Base Offset Requests
For construction projects authorized in the 2021 GRC 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 were implemented on May 31, 2024, as discussed above.
Per- and Polyfluoroalkyl Substances Memorandum Account (PFAS MA)
On April 18, 2024, the CPUC dismissed, without prejudice, 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 its capital investments. Cal Water may seek recovery through a separate application or a GRC application. Cal Water expects to refile its application by the end of 2024.
California Supreme Court Decision on WRAM
The CPUC issued a decision effective August 27, 2020 requiring that Class A water utilities 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. Oral arguments were held on May 8, 2024 and, on July 8, 2024, the Court issued a unanimous decision voiding the WRAM provisions in the August 27, 2020 CPUC decision. As a result, Cal Water and other Class A water utilities submitting GRC filings are no longer precluded from proposing the use of a full decoupling WRAM in their GRCs, as reflected in the 2024 GRC filing.
2025 Water Cost of Capital Mechanism (WCCM)
The WCCM provides an automatic adjustment, up or down, to the adopted return on equity beyond the first year of the cost of capital cycle. The adjustment applies only if a positive or negative difference of more than 100 basis points (bps) between the then current 12-month (October 1 through September 30) average Moody’s Aa utility bond rates and as compared to same period from the previous year. This index rate was 5.31% during the period from October 1, 2022, through September 30, 2023. For the same period ended September 30, 2024, this index rate was 5.51%. Since the difference is 20 bps, the WCCM does not trigger and there will be no change to Cal Water’s 10.27% return on equity for 2025.
Regulatory Activity - Other States
Financing Application for Hawaii
On October 3, 2024, the Public Utilities Commission of the State of Hawaii granted Hawaii Water the authority to issue up to $20.8 million of new equity and debt securities, in addition to previously-authorized amounts, to fund on-going and planned capital improvement projects related to water and wastewater utility services within Hawaii Water’s service territories.
LIQUIDITY
Cash Flow from Operating Activities
During the nine months ended September 30, 2024, we generated cash flow from operations of $222.8 million compared to $143.5 million for the same period in 2023. The increase in the first nine months of 2024 as compared to the same period in 2023 is primarily due to the net receipt of $57.9 million from the Extended Program, as discussed above. Cash generated by operations varies during the year due to customer billings, and timing of collections and contributions to our benefit plans.
The increase in net income for the nine months ended September 30, 2024 as compared to the same period from prior year was primarily due to the recording of $118.4 million of operating revenue for the MWRAM and IRMA during the first nine months of 2024 due to the resolution of the 2021 GRC. There was an associated increase to regulatory assets related to MWRAM and IRMA operating revenue. The Company has started billing for the recovery of these regulatory assets in the fourth quarter of 2024.
During the nine months ended September 30, 2024, we made cash contributions of $0.4 million to our employee pension plan and did not make any cash contribution to our other postretirement benefit plans. During the nine months ended September 30, 2023, we made cash contributions of $2.9 million 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 our 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 nine months ended September 30, 2024 and 2023, we used $332.2 million and $274.1 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, which excludes an estimated $20.0 million of developer-funded capital expenditures.
Cash Flow from Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2024 was $132.3 million compared to $120.1 million for the same period in 2023. For 2024, this includes issuance of $86.5 million of Company common stock through our at-the-market equity program and $1.9 million through our employee stock purchase plan. For 2023, this
includes issuance of $112.7 million of Company common stock through our at-the-market equity program and $1.8 million through our employee stock purchase plan.
During the nine months ended September 30, 2024 and 2023, we borrowed $370.0 million and $165.0 million, respectively, on our unsecured revolving credit facilities. We made repayments on our unsecured revolving credit facilities of $290.0 million and $120.0 million during the nine months ended September 30, 2024 and 2023, respectively. During the nine months ended September 30, 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 IRMA, MWRAM, WRAM and Modified Cost Balancing Account receivable balances were $116.7 million and $75.2 million as of September 30, 2024 and 2023, respectively. The receivable balances were primarily financed by Cal Water using short-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-term financing rates.
Short-term and Long-term Financing
During the nine months ended September 30, 2024, we utilized cash generated from operations and temporary borrowings on our 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 24 months as authorized by the CPUC. The proceeds from the Company and Cal Water facilities may be used for working capital purposes.
As of September 30, 2024 and December 31, 2023, short-term borrowings of $260.0 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 September 30, 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.
On October 22, 2024, Cal Water completed the sale and issuance of $125.0 million in First Mortgage Bonds (the Bonds) in a private placement. The Bonds, relating to Series 2, bear an interest rate of 5.22% per annum payable quarterly, and mature on October 22, 2054. The Bonds will rank equally with all of Cal Water’s other First Mortgage Bonds and are secured by liens on Cal Water’s properties, subject to certain exceptions and permitted liens. Cal Water used the net proceeds from the sale of the Bonds to refinance existing indebtedness and for general corporate purposes. The Bonds were not registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
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.
| | | | | | | | | | | | | | | | | | | | | | | |
| Summarized Statement of Operations | | | | | | | |
| (in thousands) | Nine Months Ended September 30, 2024 | | Twelve Months Ended December 31, 2023 |
| | Issuer | | Guarantor | | Issuer | | Guarantor |
| Net sales | $ | 752,902 | | | $ | — | | | $ | 720,577 | | | $ | — | |
| Gross profit | $ | 529,132 | | | $ | — | | | $ | 449,221 | | | $ | — | |
| Income from operations | $ | 194,991 | | | $ | 304 | | | $ | 82,157 | | | $ | 590 | |
| Equity in earnings of guarantor | $ | — | | | $ | 157,054 | | | $ | — | | | $ | 49,998 | |
| Net income | $ | 173,538 | | | $ | 159,558 | | | $ | 57,168 | | | $ | 51,376 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Summarized Balance Sheet Information | | | | | | | |
| (in thousands) | As of September 30, 2024 | | As of December 31, 2023 |
| | Issuer | | Guarantor | | Issuer | | Guarantor |
| Current assets | $ | 276,340 | | | $ | 6,436 | | | $ | 213,469 | | | $ | 10,126 | |
| Intercompany receivable from Non-guarantors | 3,568 | | | 85,041 | | | 3,664 | | | 44,882 | |
| Other assets | 564,705 | | | 1,334,033 | | | 479,642 | | | 1,190,076 | |
| Long-term intercompany receivable from Non-issuers | — | | | 80,685 | | | — | | | 82,610 | |
| Net utility plant | 3,719,845 | | | — | | | 3,487,788 | | | — | |
| Total assets | $ | 4,564,458 | | | $ | 1,506,195 | | | $ | 4,184,563 | | | $ | 1,327,694 | |
| | | | | | | |
| Current liabilities | $ | 501,353 | | | $ | 35,928 | | | $ | 351,964 | | | $ | 53,069 | |
| Intercompany payable to Non-guarantors and Guarantor | 11,767 | | | 2,398 | | | — | | | — | |
| Long-term debt | 1,051,468 | | | — | | | 1,052,350 | | | — | |
| Other liabilities | 1,669,540 | | | 3,250 | | | 1,595,852 | | | 3,068 | |
Total liabilities | $ | 3,234,128 | | | $ | 41,576 | | | $ | 3,000,166 | | | $ | 56,137 | |
Dividends
During the nine months ended September 30, 2024, our quarterly common stock dividend payments were $0.84 per share compared to $0.78 per share for the nine months ended September 30, 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 October 30, 2024 meeting, the Company’s Board of Directors declared the fourth quarter dividend of $0.28 per share payable on November 22, 2024, to stockholders of record on November 12, 2024. This was our 319th 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 September 30, 2024, the Company’s and Cal Water’s availability on these unsecured revolving lines of credit was $165.0 million and $175.0 million, respectively.
Book Value and Stockholders of Record
Book value per common share was $27.38 at September 30, 2024 compared to $24.72 at December 31, 2023. There were approximately 1,716 stockholders of record for our common stock as of August 12, 2024.
Utility Plant Expenditures
During the nine months ended September 30, 2024, utility plant expenditures totaled $332.2 million for Company-funded and developer-funded projects. For 2024, we estimate utility capital expenditures to be $365.0 million, which excludes an estimated $20.0 million of developer-funded capital expenditures.
As of September 30, 2024, construction work in progress was $389.9 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 nine months ended September 30, 2024 and 2023, our well pump taxes were $16.4 million and $13.1 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 October 1, 2024, the State of California snowpack water content for the 2023-2024 water year was 91% 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 83% and 80%, 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 or by installing the best available technologies.
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, has adopted long-term water use standards for indoor residential use, outdoor residential use, water losses, and other uses. Cal Water is also required to calculate and report on urban water use targets 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, known as maximum contaminant levels (MCLs), for six PFAS in drinking water. Under the PFAS regulation, water utilities across the country are required to complete initial PFAS monitoring by 2027 and to implement treatment for sources exceeding the MCL by 2029. We estimate a capital investment of approximately $226.0 million will be required to comply with the regulation.
On April 17, 2024, the Water Board adopted an 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 was originally set in 2014, which was subsequently vacated for administrative reasons. After the MCL was vacated, we continued to treat our impacted water systems. We anticipate installing treatment for the remaining impacted sources before the regulatory deadline.
CONTRACTUAL OBLIGATIONS
During the nine months ended September 30, 2024, there were no material changes in contractual obligations outside the normal course of business.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not hold, trade in or issue derivative financial instruments and therefore are not exposed to risks these instruments present. Our market risk to interest rate exposure is limited because the cost of long-term financing and short-term bank borrowings, including interest costs, is covered in consumer water rates as approved by the Commissions. We do not have foreign operations; therefore, we do not have a foreign currency exchange risk. Our business is sensitive to commodity prices and is most affected by changes in purchased water and purchased power costs.
Historically, the CPUC’s balancing account or offsettable expense procedures allowed for increases in purchased water, pump tax, and purchased power costs to be flowed through to consumers. 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.”
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management, including the Chief Executive Officer and Chief Financial Officer, recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Accordingly, our disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 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 third quarter of 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in various disputes and litigation matters that arise in the ordinary course of business. The status of each significant matter is reviewed and assessed for potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount of the range of loss can be reasonably estimated, a liability is accrued for the estimated loss in accordance with the accounting standards for contingencies. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. While the outcome of these disputes and litigation matters cannot be predicted with any certainty, management does not believe when taking into account existing reserves the ultimate resolution of these matters will materially affect the Company’s financial position, results of operations, or cash flows. In the future, we may be involved in disputes and litigation related to a wide range of matters, including employment, construction, environmental issues and operations. Litigation can be time-consuming and expensive and could divert management’s time and attention from our business. In addition, if we are subject to new lawsuits or disputes, we might incur significant legal costs and it is uncertain whether we would be able to recover the legal costs from customers or other third parties. Please refer to Note 9, “Commitments and Contingencies” for more information.
Item 1A. RISK FACTORS
There have been no material changes to the Company’s risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year-ended December 31, 2023 filed with the SEC on February 29, 2024.
Item 5. OTHER INFORMATION
(c) Trading Plans
During the last fiscal quarter, no director or Section 16 officer of the Company or any Rule 10b5-1 or non-Rule 10b5-1 trading arrangement (as defined under SEC rules).
Item 6. EXHIBITS
| | | | | | | | | | | |
| Exhibit Number | | Description | |
| 3.1 | | | |
| | | |
| 3.2 | | | |
| | | |
| 3.3 | | | |
| | | |
| 3.4 | | | |
| | | |
| 3.5 | | | |
| | | |
| 4.0 | | The Company agrees to furnish upon request to the Securities and Exchange Commission a copy of each instrument defining the rights of holders of long-term debt of the Company. | |
| | | |
| 31.1 | | | |
| | | |
| 31.2 | | | |
| | | |
| 32 | | | |
| | | |
| 101 | | The following materials from this Quarterly Report on Form 10-Q formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Cash Flows, (v) the Notes to the Condensed Consolidated Financial Statements, and (vi) Part II, Item 5(c). | |
| | | |
| 104 | | The cover page from this Quarterly Report on Form 10-Q formatted in iXBRL (included as Exhibit 101) | |
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | CALIFORNIA WATER SERVICE GROUP |
| | Registrant |
| | |
| October 31, 2024 | By: | /s/ James P. Lynch |
| | | James P. Lynch |
| | | Senior Vice President, Chief Financial Officer and Treasurer |
| | | (Principal Financial Officer) |
| | |
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