CALIFORNIA WATER SERVICE GROUP

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:

(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.

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

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:

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.

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.

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.