California Water Service Group — 2023 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2023, and was filed February 29, 2024. The company provides regulated water and wastewater services and other water-related services across five states, serving approximately 556,400 customer connections. California accounted for 90.6% of consolidated operating revenue. The filing does not provide clear standalone fourth-quarter results; comparisons below are full-year 2023 versus 2022.
Financial performance and position
| Metric | 2023 | 2022 | Change / context |
|---|---|---|---|
| Operating revenue | $794.6 million | $846.4 million | Down 6.1% |
| Net income attributable to California Water Service Group | $51.9 million | $96.0 million | Down 46.0% |
| Diluted earnings per share | $0.91 | $1.77 | Down 48.6% |
| Net operating income | $77.1 million | $127.7 million | Operating margin was 9.7%, versus 15.1% |
| Operating cash flow | $217.8 million | $243.8 million | Down $26.0 million |
| Utility plant expenditures | $383.7 million | $327.8 million | Increased $55.9 million |
| Long-term debt, net | $1,052.8 million | $1,052.5 million | Nearly unchanged |
| Short-term borrowings | $180.0 million | $70.0 million | Increased $110.0 million |
| Cash and cash equivalents | $39.6 million | $62.1 million | Restricted cash was an additional $45.4 million |
Net margin attributable to the parent was approximately 6.5%, versus 11.3% in 2022. Water production costs totaled $288.5 million, up 1.1%; purchased water was $223.8 million, purchased power $45.7 million, and pump taxes $19.0 million. Net interest expense increased 12.4% to $49.8 million, mainly reflecting higher short-term rates and borrowings. The company issued $115.1 million of common stock during 2023.
The company reported $1.43 billion of total equity and $2.48 billion of total capitalization at year-end. Its consolidated total capitalization ratio was 46.4%, and it reported compliance with credit-facility covenants. Revolving credit facilities total up to $600 million; $180 million was drawn at year-end. The 2023 dividend was $1.04 per share; the board subsequently declared a quarterly dividend of $0.28 per share, an indicated annual rate of $1.12.
Material changes versus 2022
- Revenue fell by $51.8 million, primarily because the California Water Revenue Adjustment Mechanism (WRAM) ended after 2022 and the delayed California general rate case (GRC) decision prevented recognition of expected rate relief and related mechanisms. The company recorded no WRAM revenue in 2023, compared with $74.3 million in 2022.
- Customer usage in California declined 3.4%, which management attributed mainly to higher winter precipitation and conservation; rate increases partly offset the volume effect.
- Net income declined $44.1 million. The delayed GRC was the principal factor; higher administrative costs, depreciation, and interest expense also weighed on results. A $12.1 million increase in unrealized gains on non-qualified benefit-plan investments partly supported other income.
- Operating cash flow decreased, while capital expenditures increased. Cash generation did not cover capital expenditures and dividends, contributing to reliance on financing.
- Customer connections increased to 556,400 from 553,000. In December 2023, Hawaii Water acquired wastewater system assets serving 1,800 customers.
Outlook, regulation, risks, and unusual items
- California GRC uncertainty: The CPUC had not issued a final decision on Cal Water’s 2021 GRC when the filing was made. Two competing proposed decisions were issued in January 2024, and the company said it could not estimate the resulting 2023 revenue and expense impact. Any final cumulative adjustment, including interest, is expected to be retroactive to January 1, 2023. Cal Water had requested annual revenue increases of $80.5 million for 2023, $43.6 million for 2024, and $43.2 million for 2025; these are requests, not approved outcomes.
- Rate mechanisms and cost recovery: Cal Water expects the proposed MWRAM and ICBA to apply retroactively from January 1, 2023 once approved, but recorded no associated regulatory asset or liability for 2023. Recovery timing and amounts remain dependent on regulatory decisions. A 2023 net WRAM/MCBA receivable of $64.2 million remained on the balance sheet.
- 2024 outlook: Management believes available groundwater and wholesale supplies will meet demand in 2024 and beyond. It expects annual capital expenditures to increase over the next five years as infrastructure needs grow, but the filing gives no clear company-wide 2024 capital-expenditure forecast. The company estimates a roughly $10 million 2024 annual revenue benefit from a change in California’s authorized return, subject to the unresolved GRC.
- PFAS exposure: If proposed federal PFAS standards are adopted in their current form, the company estimates approximately $215 million of capital investment would be needed, with an expected three-year compliance period after final regulations. Cost recovery is subject to regulatory approval.
- Water and operating risks: Key exposures include drought and climate-related events, water quality requirements, wholesale water-price increases, power interruptions, aging infrastructure, cybersecurity, and California inverse-condemnation litigation. Management reported California snowpack at 99% of long-term average in the northern Sierra as of February 22, 2024 and stated that supplies should be adequate; future rationing remains possible.
- Contingencies and accounting: The company reported a $6.0 million liability for known legal matters and said existing litigation was not expected to materially affect results, while noting outcomes are uncertain. A prior-year presentation adjustment reclassified $414.1 million of cost-of-removal obligations to regulatory liabilities; management said it was immaterial and did not affect net income, equity, or cash flows. The previously disclosed internal-control material weakness concerning regulatory-accounting filings was reported as remediated; management and the auditor concluded controls were effective at year-end 2023.
Most important facts for investors to verify
- The CPUC’s final 2021 GRC decision, including approved rates, regulatory mechanisms, and the retroactive adjustment to 2023 results.
- Whether and when the $83.0 million application for California customer arrearages and administrative costs is approved and collected.
- The timing and regulatory recoverability of the estimated $215 million PFAS compliance investment.
- Capital expenditure funding needs, short-term borrowing levels, and the effects of higher financing costs on cash flow and dividends.
- Actual water supply conditions, wholesale purchase costs, and the company’s ability to recover higher costs through customer rates.
- Progress on internal controls after remediation and the company’s continuing exposure to regulatory, litigation, infrastructure, and cybersecurity risks.