California Water Service (CWT) 10-Q2023 Q2 Quarterly report

Due to the seasonal nature of the water business, the results for interim periods are not indicative of the results for a 12-month period. Revenue and income are generally higher in the warm, dry summer months when water usage and sales are greater. Revenue and income are generally lower in the winter months when cooler temperatures and rainfall curtail water usage and sales.

Noncontrolling interests in the Company’s condensed consolidated financial statements represents a 5.6% interest not owned by Texas Water in a consolidated subsidiary. Since the Company controls this subsidiary, its financial statements are consolidated with those of the Company, and the noncontrolling owner’s 5.6% share of the subsidiary’s net assets and results of operations is deducted and reported as noncontrolling interests on the condensed consolidated balance sheet and as net loss attributable to noncontrolling interests in the condensed consolidated statement of operations. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. The Company’s net income (loss) attributable to California Water Service Group excludes the net loss attributable to the noncontrolling interests.

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. At the end of each month, the Company estimates consumption since the date of the last meter reading and the corresponding unbilled revenue is recognized. The estimate is based upon the number of unbilled days that month and the average daily customer billing rate from the previous month (which fluctuates based upon customer usage).

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 "accrued expenses and other liabilities" on the unaudited condensed consolidated balance sheets, is inconsequential.

In the following tables, revenue from contracts with customers is disaggregated by class of customers for the three and six months ended June 30, 2023 and 2022:

Regulatory balancing account revenue is revenue related to revenue mechanisms authorized in California by the California Public Utilities Commission (CPUC), which allow the Company to recognize revenue when it is objectively determinable, probable of recovery and expected to be collected within 24 months following the end of the accounting period, and 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 most recent Cal Water General Rate Case (GRC) filing (2021 GRC Filing), the Company did not benefit from any regulatory revenue mechanisms in the first six months of 2023. For 2022, the Company's authorized regulatory revenue mechanisms included the Water Revenue Adjustment Mechanism (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. No WRAM was recorded in 2023 as the revenue mechanism concluded on December 31, 2022.

Regulatory balancing account revenue also includes 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 disallowance of the use of the WRAM, the variances for CEBA, HCBA, and PCBA are recorded against the originating expense. The MCBA was not recorded in 2023 as the mechanism concluded on December 31, 2022.

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 Monterey-Style Water Revenue Adjustment Mechanisms (MWRAM). In addition, the CPUC's decision allowed for Incremental Cost Balancing Accounts (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 Filing and expects the MWRAM to be approved and effective retroactive to January 1, 2023. For the first six months of 2023, the Company did not record a regulatory asset or regulatory liability for the MWRAM or ICBAs.

The following tables disaggregate the Company’s non-regulated revenue by source for the three and six months ended June 30, 2023 and 2022:

Other non-regulated revenue primarily relates to services for the design and installation of water mains and other water infrastructure for customers outside the regulated service areas and insurance program administration.

Lease revenue is not considered revenue from contracts with customers and is recognized following operating lease standards. The Company is the lessor in operating lease agreements with telecommunications companies under which cellular phone antennas are placed on the Company's property.

The Company measures expected credit losses for Customer Receivables, Other Receivables, and Unbilled Revenue on an aggregated level. These receivables are generally trade receivables due in one year or less or expected to be billed and collected in one year or less. The expected credit losses for Other Receivables and Unbilled Revenue are inconsequential. Customer receivables include receivables for water and wastewater services provided to residential customers, business, industrial, public authorities, and other customers. The expected credit losses for business, industrial, public authorities, and other customers are inconsequential. The overall risks related to the Company’s receivables are low as water and wastewater services are seen as essential services. The estimate for the allowance for credit losses is based on a historical loss ratio, in conjunction with a qualitative assessment of elements that impact the collectability of receivables to determine if the allowance for credit losses should be further adjusted in accordance with the accounting guidance for credit losses. Management contemplates available current information such as changes in economic factors, regulatory matters, industry trends, payment options and programs available to customers, and the methods that the Company is able to utilize to ensure payment.

The Company reviews its allowance for credit losses utilizing a quantitative assessment, which includes a trend analysis of customer billing and collection, aging by customer class, and unemployment rates. The Company also utilizes a qualitative assessment, which considers the future collectability on customer outstanding balances, management's estimate of the cash recovery, and a general assessment of the economic conditions of the locations the Company serves. Based on these assessments, the Company adjusted its allowance for credit losses accordingly.

The following table presents the activity in the allowance for credit losses for the 6-month period ended June 30, 2023 and 12-month period ended December 31, 2022:

The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown on the Condensed Consolidated Statements of Cash Flows (see Note 10 for further details on restricted cash):

The Company's equity incentive plan was approved and amended by stockholders on April 27, 2005 and May 20, 2014, respectively. The Company is authorized to issue awards up to 2,000,000 shares of common stock.

During the first six months of 2023, the Company granted Restricted Stock Awards (RSAs) to Officers and members of the Board of Directors. An RSA share represents the right to receive a restricted share of the Company's common stock and is valued based on the fair market value of the Company's common stock at the date of grant. RSAs granted to Officers vest over 36 months with the first year cliff vesting. In general, RSAs granted to Board members vest at the end of 12 months. The RSAs are recognized as expense evenly over 36 months for the shares granted to Officers and 12 months for the shares granted to Board members. As of June 30, 2023, there was approximately $3.2 million of total unrecognized compensation cost related to RSAs. The cost is expected to be recognized over a weighted average period of 1.8 years.

A summary of the status of the outstanding RSAs as of June 30, 2023 is presented below:

A summary of the status of the outstanding RSUs as of June 30, 2023 is presented below:

On April 29, 2022, the Company entered into an equity distribution agreement to sell shares of its 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. The Company intends 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. The Company sold 1,699,849 shares of common stock through its at-the-market equity program and raised proceeds of $94.5 million, net of $1.0 million in commissions paid under the equity distribution agreement, during the three months ended June 30, 2023. During the three months ended June 30, 2022, the Company sold 574,634 shares of common stock through its at-the-market equity program and raised proceeds of $30.2 million net of $0.3 million in commissions paid under the equity distribution agreement.

The Company sold 2,025,891 shares of common stock through its at-the-market equity program and raised proceeds of $112.7 million net of $1.1 million in commissions paid under the equity distribution agreement during the six months ended June 30, 2023. During the six months ended June 30, 2022, the Company sold 574,634 shares of common stock through its at-the-market equity program and raised proceeds of $30.2 million net of $0.3 million in commissions paid under the equity distribution agreement.

As approved by the Company's stockholders at the 2022 Annual Meeting, effective July 26, 2022, the aggregate number of shares of common stock which the Company shall have authority to issue was increased from 68.0 million shares to 136.0 million shares. All of said 136.0 million shares shall be of one and the same series, namely shares with par value of $0.01 per share.

The Company’s changes in total equity for the six months ended June 30, 2023 and 2022 were as follows:

The following tables list components of net periodic benefit costs for the pension plans and other postretirement benefits. The data listed under “pension plan” includes the qualified pension plan and the non-qualified supplemental executive retirement plan. The data listed under “other benefits” is for all other postretirement benefits.

On March 31, 2023, the Company and Cal Water entered into syndicated credit agreements, 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 its 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. At the Company’s or Cal Water's option, as applicable, borrowings under the Company and Cal Water facilities, as applicable, will bear interest annually at a rate equal to (i) the base rate, plus an applicable margin of 0.00% to 0.250%, depending on the Company and its subsidiaries' consolidated total capitalization ratio, or (ii) Term SOFR, plus an applicable margin of 0.800% to 1.250%, depending on the Company and its subsidiaries' consolidated total capitalization ratio.

The outstanding borrowings on the Company facility as of each of June 30, 2023 and December 31, 2022 were $35.0 million. Outstanding borrowings on the Cal Water facility as of June 30, 2023 and December 31, 2022 were $95.0 million and $35.0 million, respectively. The average borrowing rate for borrowings on the Company and Cal Water facilities during the six months ended June 30, 2023 was 5.78% compared to 1.35% for the same period last year.

The Company adjusts its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company also records the tax effect of unusual or infrequently occurring discrete items.

The provision for income taxes is shown in the tables below:

Income tax benefit increased $3.0 million to $2.1 million for the first six months of 2023 as compared to $0.9 million income tax expense for the first six months of 2022, primarily due to an increase in the pre-tax loss in the first six months of 2023 as compared to 2022.

The Company’s effective tax rate was 14.9% before discrete items as of June 30, 2023 and 11.5% as of June 30, 2022. The increase in the effective tax rate was primarily due to a decrease in the refunds of excess deferred federal income taxes.

The Company had unrecognized tax benefits of approximately $14.4 million and $16.5 million as of June 30, 2023 and 2022, respectively. Included in the balance of unrecognized tax benefits as of June 30, 2023 and 2022, is $4.6 million and $4.2 million, respectively, of tax benefits that, if recognized, would result in an adjustment to the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly within the next 12 months.

Regulatory assets and liabilities were comprised of the following as of June 30, 2023 and December 31, 2022:

The short-term regulatory assets were $61.3 million as of June 30, 2023 and $66.8 million as of December 31, 2022. The short-term regulatory assets as of June 30, 2023 primarily consist of net WRAM and MCBA and PCBA receivables. As of December 31, 2022, the short-term regulatory assets primarily consist of net WRAM and MCBA, IRMA, and PCBA receivables.

The short-term portions of regulatory liabilities were $29.3 million as of June 30, 2023 and $12.2 million as of December 31, 2022. The short-term regulatory liabilities as of June 30, 2023 primarily consist of TCJA, HCBA and CEBA liabilities. As of December 31, 2022, the short-term regulatory liabilities primarily consist of TCJA liabilities.

The Company has significant commitments to purchase water from water wholesalers. The Company also has operating and finance leases for water systems, offices, land easements, licenses, equipment, and other facilities. These commitments and leases are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. 

On August 16, 2022, BVRT Utility Holding Company (BVRT), a majority owned subsidiary of Texas Water, entered into a long-term water supply agreement with the Guadalupe Blanco River Authority (GBRA) through its wholly owned subsidiary, Camino Real Utility (Camino Real). The Company has provided a limited guarantee to GBRA for the agreed upon obligations. GBRA is a water conservation and reclamation district established by the Texas Legislature that oversees water resources for 10 counties. Under the terms of the agreement with GBRA, Camino Real is contracted to receive up to 2,419 acre-feet of potable water annually. The GBRA agreement involves four off-takers, including Camino Real, and GBRA plans to extend a potable water pipeline from the City of Lockhart to the City of Mustang Ridge and surrounding areas. Camino Real is contracted to be the utility service provider in this area of the Austin metropolitan region and to provide potable water, recycled water, and wastewater services to portions of the City of Mustang Ridge and surrounding areas. In 2022, Camino Real committed $21.5 million for its share of the cost of the pipeline project and committed an additional $11.1 million for its share of the cost of the pipeline project in January of 2023. As of June 30, 2023, this committed cash has not been transferred to GBRA and is classified as part of restricted cash on the Condensed Consolidated Balance Sheets. The Company currently expects this committed cash to be transferred to GBRA in the latter half of 2023.

The Company has undertaken litigation against third parties to recover past and anticipated costs related to groundwater contamination in our service areas. The cost of litigation is expensed as incurred and any settlement is first offset against such costs. The CPUC’s general policy requires all proceeds from groundwater contamination litigation to be used first to pay transactional expenses, then to make customers whole for water treatment costs to comply with the CPUC’s water quality standards. The CPUC allows for a risk-based consideration of contamination proceeds which exceed the costs of the remediation described above and may result in some sharing of proceeds with shareholders, determined on a case by case basis. The CPUC has authorized various memorandum accounts that allow the Company to track significant litigation costs and to request recovery of these costs in future filings.

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 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. As of June 30, 2023 and December 31, 2022, the Company recognized a liability of $5.1 million and $5.3 million, respectively, prior to insurance recoveries, for known legal matters primarily due to potable water leaks and other work-related legal matters. The cost of litigation is expensed as incurred and any settlement is first offset against such costs. Any settlement in excess of the cost to litigate is accounted for on a case by case basis, dependent on the nature of the settlement.

If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.

Subsequent to the issuance of the Company's Consolidated Financial Statements for the year ended December 31, 2021, during the fourth quarter of 2022, the Company identified an immaterial error for a regulatory liability and corresponding decreases to operating revenue and deferred income taxes that were not recorded in 2019 associated with customer refunds. The error does not impact customer billings or cash refunded to customers.

The Company corrected the error in the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, through a restatement of the opening retained earnings balance for the year ended December 31, 2020. The Company believes the error is immaterial to the previously issued Financial Statements for prior periods.

The corrections to the Company’s retained earnings and total equity as of June 30, 2022 and March 31, 2022, reported in note 4, were as follows:

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 be 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, decisions, approvals, authorizations, requirements or other actions, including with respect to the 2021 GRC Filing, our cost of capital application, rate amounts or cost recovery mechanics, certain PFAS regulations, and associated impacts, such as our estimated revenue benefit or capital requirements, our intentions and plans to remediate the material weakness in our internal control over financial reporting, estimates of, or expectations regarding, capital expenditures, funding needs or other capital requirements, obligations, contingencies or commitments, our beliefs regarding adequacy of water supplies, our expectations regarding stock-based compensation and estimated contributions to our pension plans and other postretirement benefit plans, our estimated annual effective tax rate and expectations regarding tax benefits, our intentions regarding 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:

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.

For the six months ended June 30, 2023, there were no 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.

On July 2, 2021, Cal Water filed its 2021 GRC requesting water infrastructure improvements of $1.0 billion in accordance with the rate case plan for all of its regulated operating districts (except Grand Oaks) for the years 2022, 2023, and 2024. A partial settlement with the California Public Advocates Office primarily addressing non-revenue matters was submitted on September 2, 2022. The CPUC continues to evaluate the proposal along with proposals of other parties. A final decision on the case was previously expected to be issued in late 2022 in accordance with the CPUC's rate case plan, with new rates going into effect on January 1, 2023; however, due to unspecified delays at the CPUC, the timing of a final decision is uncertain. In June of 2023, the CPUC issued a decision extending its statutory deadline to issue a final decision until December 31, 2023. Normally, the CPUC is subject to a requirement to process applications within 18 months of filing. In our experience, it is the CPUC's practice to extend its statutory deadline, in some cases multiple times, as needed. On July 13, 2023, the CPUC co-assigned a second Administrative Law Judge (ALJ) to the Cal Water GRC to facilitate the process.

As part of the 2021 GRC Filing, Cal Water has proposed the use of a MWRAM and ICBA as 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 ICBAs to replace the MCBA. We expect the MWRAM to be implemented in 2023 and effective retroactive back to January 1, 2023. For the first six months of 2023, we did not record a regulatory asset or regulatory liability for the MWRAM and ICBA mechanisms. In addition, we did not record WRAM or MCBA adjustments in the first six months of 2023, as the mechanisms concluded on December 31, 2022.

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 Filing plus any additional revenue changes approved since July 1, 2021 (final rates).

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 Filing.

Operating revenue for the first six months of 2023 does not include any benefit of new revenue mechanisms (MWRAM and DREMA) or rate relief (tracked in the IRMA) due to the delay in the approval of our 2021 GRC Filing. We currently estimate the adverse impact of the delayed decision on six months ended June 30, 2023 operating revenue to be between approximately $43.0 million and $63.0 million. For the second quarter of 2023, we estimate the adverse impact of the delayed decision on operating revenue to be between approximately $19.0 million and $29.0 million. These estimates are based on the current positions of the parties to the 2021 GRC Filing and consumption driven regulatory mechanisms.

Net income attributable to California Water Service Group for the second quarter of 2023 was $9.6 million or $0.17 earnings per diluted common share, compared to net income of $19.5 million or $0.36 earnings per diluted common share for the second quarter of 2022.

The change in unrealized gains on non-qualified benefit plan investments was caused by favorable market conditions, which is a factor outside our immediate control. Our net income and net other income in future periods are expected to continue to be similarly affected, potentially significantly, by increases or decreases in unrealized gains or losses on non-qualified benefit plan investments, particularly during periods of significant market volatility or significantly favorable or unfavorable market conditions.

Operating revenue decreased $12.2 million, or 5.9%, to $194.0 million in the second quarter of 2023 as compared to the second quarter of 2022, with such change attributed to the following:

Administrative and general expense increased $2.3 million, or 7.0%, to $35.0 million in the second quarter of 2023, as compared to $32.7 million in the second quarter of 2022. The increase was primarily due to $1.9 million in higher employee labor costs primarily driven by annual increases in employee wages.

Other operations expenses decreased $3.6 million, or 12.2%, to $25.8 million in the second quarter of 2023, as compared to $29.4 million in the second quarter of 2022. The decrease was primarily due to an increase in deferred costs associated with deferred revenue of $2.5 million (see deferral of revenue above) and a $1.7 million decrease in bad debt costs.

Maintenance expense decreased $0.4 million, or 5.9%, to $7.2 million in the second quarter of 2023, as compared to $7.6 million in the second quarter of 2022, due to a decline in repairs of mains and services.

Depreciation and amortization expense increased $1.0 million, or 3.6%, to $29.8 million in the second quarter of 2023, as compared to $28.8 million in the second quarter of 2022, mostly due to utility plant placed in service in 2022.

Property and other taxes increased $1.0 million to $9.1 million in the second quarter of 2023, as compared to $8.1 million in the same period of 2022, mostly due to an increase in assessed property values for utility plant in service.

Net loss attributable to California Water Service Group for the first six months of 2023 was $12.7 million or $0.23 loss per diluted common share, compared to net income of $20.6 million or $0.38 earnings per diluted common share for the first six months of 2022.

The $33.3 million decrease in net income was primarily due to a decrease in operating revenue of $54.1 million partially offset by a decrease in total operating expenses of $16.1 million. The total operating expense decrease was primarily due to a decrease in water production costs of $6.6 million, a decrease in other operations expenses of $12.9 million, and an increase in income tax benefit of $5.4 million. These decreases were partially offset by increases in administrative and general expense of $4.9 million, depreciation and amortization expenses of $2.2 million, and property and other taxes of $1.5 million. Additionally, there was an increase of $7.8 million in net other income, primarily due to a $2.6 million unrealized gain on non-qualified benefit plan investments during the first six months 2023 compared to a $7.2 million

unrealized loss on certain non-qualified benefit plan investments in the first six months of 2022, which was partially offset by a $2.7 million decrease related to a gain on company owned life insurance recorded in 2022.

The change in unrealized gains on non-qualified benefit plan investments was caused by favorable market conditions, which is a factor outside our immediate control. Our net income and net other income in future periods are expected to continue to be similarly affected, potentially significantly, by increases or decreases in unrealized gains or losses on non-qualified benefit plan investments, particularly during periods of significant market volatility or significantly favorable or unfavorable market conditions.

Operating revenue decreased $54.1 million, or 14.3%, to $325.1 million for the first six months of 2023 as compared to the first six months of 2022, with such change attributed to the following:

Total operating expenses decreased $16.1 million, or 4.7%, to $326.7 million for the first six months of 2023, as compared to $342.8 million for the first six months of 2022.

Water production costs consists of purchased water, purchased power, and pump taxes. It represents the largest component of total operating expenses, accounting for approximately 38.5% of total operating expenses in the first six months of 2023 as compared to 38.6% of total operating expenses in the first six months of 2022. Water production costs decreased 5.0% in the first six months of 2023 as compared to the same period last year primarily due to a 9.7% decrease in customer usage, which we believe is primarily due to higher winter precipitation in our California service territories and water conservation compared to the same period in 2022.

Sources of water as a percent of total water production are listed in the following table:

Depreciation and amortization expense increased $2.2 million, or 3.8%, to $59.7 million in the first six months of 2023, as compared to $57.5 million in the first six months of 2022, mostly due to utility plant placed in service in 2022.

Income tax benefit increased $5.4 million to $5.3 million in the first six months of 2023, as compared to income tax expense of $37.0 thousand in the first six months of 2022. The increase in income tax benefit was primarily due to an increase in the pre-tax operating loss in the first six months of 2023 as compared to the same period of 2022.

Property and other taxes increased $1.5 million to $17.9 million in the first six months of 2023, as compared to $16.4 million in the same period of 2022, mostly due to an increase in assessed property values.

Net other income increased $7.8 million to $13.4 million in the first six months of 2023, as compared to net other income of $5.6 million in the first six months of 2022, due primarily to a $9.8 million increase in unrealized gains on non-qualified benefit plan investments, which was partially offset by a $2.7 million gain on company owned life insurance in the first six months of 2022.

In June of 2022, Cal Water filed a motion requesting authority for the establishment of an IRMA in the event the CPUC did not issue a final decision for the 2021 GRC Filing in time for new rates to be implemented on January 1, 2023. In November of 2022, the ALJ granted Cal Water’s request for the IRMA. Accordingly, on December 27, 2022, Cal Water requested that the IRMA, which was approved by the CPUC, track the difference between interim rates and final rates. After the CPUC's decision is issued and final rates are implemented, then Cal Water expects to file for recovery of the IRMA. Once approved, customer bills are expected to be adjusted to account for the difference between interim rates and final rates back to January 1, 2023.

In January of 2023, Cal Water filed a motion requesting a modification to the November 2022 ruling to apply an inflationary rate increase to interim rates. In the motion, Cal Water requested inflationary rate increases of 1.5% in Marysville and 4% for all other ratemaking areas except Selma, Travis Air Force Base, and Visalia for whom a rate increase was not requested. In February of 2023, the ALJ granted Cal Water's request. Cal Water implemented the increased interim inflation rates on May 5, 2023.

On May 3, 2021, after an approved extension from a 2020 due date, Cal Water filed its required application with the CPUC to review its cost of capital for 2022 through 2024. At the time of filing, Cal Water had an approved return on equity of 9.2%, a cost of debt of 5.51%, and a capital structure of 53.4% equity and 46.6% debt. Cal Water requested a return on equity of 10.35%, a cost of debt of 4.23%, and a capital structure of 53.4% equity and 46.6% debt. The California Public Advocates Office recommended a return on equity of 7.81%, a cost of debt of 4.23%, and a capital structure of 49.4% equity and 50.6% debt. Evidentiary hearings were held in May 2022 and the case was submitted to the CPUC at the end of the second quarter of 2022. In the second quarter of 2023, the CPUC issued and adopted a proposed decision for the 2021 Cost of Capital Application. Cal Water was authorized a return on equity of 9.05%, a cost of debt of 4.23%, a capital structure of 53.4% equity and 46.6% debt, and an authorized rate of return of 6.80% for 2023 and 2024. The CPUC also reauthorized the Water Cost of Capital Mechanism (WCCM) which automatically adjusts the rate of return when the Moody’s Utilities Bond Index (Index) fluctuates between cost of capital applications. Because the Index changed in 2022, the WCCM triggered for 2023. Cal Water filed an advice letter to implement new rates based on an authorized 9.57% return on equity, with a 4.23% cost of debt and an authorized rate of return of 7.08% effective July 31, 2023. We currently expect that the 40 basis-point reduction from Cal Water’s current rate of return of 7.48% will negatively impact annual operating revenue by approximately $7.0 million. This estimate is subject to change based on finalization of the 2021 GRC Filing. The WCCM for 2024 will be evaluated in the fourth quarter of 2023 and any resulting change to the California ROE would be effective January 1, 2024.

In June 2021, Cal Water submitted advice letters to request a DRMA to track the incremental operational and administrative costs incurred to further implement updated Rule 14.1 for voluntary conservation measures and Schedule 14.1 for implementation of our Water Shortage Contingency Plan, including activities related to enhanced conservation efforts, staffing, and capital expenditures to ensure a safe, reliable supply of water. The DRMA would also track monies paid by customers for fines, penalties, or other compliance measures associated with water use violations; and penalties paid by Cal Water to its water wholesalers. The DRMA was approved by the CPUC with an effective date of June 14, 2021. As of June 30, 2023, Cal Water has incurred $2.0 million of cumulative DRMA related costs, of which $0.6 million was incurred in the first six months of 2023.

California's Governor issued a drought declaration for all California counties through a series of State of Emergency Proclamations. Given these drought proclamations and then-existing water usage levels in all of its service areas, in 2022 Cal Water activated Stage 2 of the “Water Use Restrictions of its Water Shortage Contingency Plan (WSCP)” of Schedule 14.1 in all of its service areas; as a result, Cal Water saw an increase in DRMA related costs in 2022 and the first six months of 2023.

In Stage 1, irrigating ornamental landscape with potable water is prohibited during the hours of 8:00 a.m. and 6:00 p.m. For Stage 2, irrigating ornamental landscapes with potable water is limited to no more than three days per week as well as prohibited during the hours of 8:00 a.m. and 6:00 p.m. In addition, this stage states that new connections may not install single-pass cooling systems for air conditioning or other cooling system applications unless required for health or safety reasons.

On March 24, 2023, the Governor issued an Executive Order (EO) that, among other things, ended the voluntary 15% water conservation target and ended the requirement that local water agencies implement Stage 2 of their drought contingency plans. This EO maintained the ban on wasteful water uses and retained the State of Emergency for all 58 California counties to allow for drought response and recovery efforts to continue.

On May 8, 2023, Cal Water deactivated Stage 2 and moved to Stage 1 of Cal Water’s Schedule 14.1 in all regulated service areas.

Expense offsets are dollar-for-dollar increases in revenue to match increased expenses, and therefore do not affect net operating income.

In December of 2022, Cal Water submitted an advice letter to request offsets for increases in purchased water costs and pump taxes in five of its regulated districts totaling $5.1 million. The new rates were implemented on January 1, 2023.

In July of 2023, Cal Water submitted an advice letter to request offsets for increases in purchased water costs, pump taxes, and purchased power costs in 11 of its regulated districts totaling $24.6 million. The new rates are expected to be implemented on July 31, 2023.

In April and July of 2023, Cal Water submitted advice letters to true up the revenue under-collections for the 2022 annual WRAMs/MCBAs of its regulated districts. A net under-collection of $76.6 million is being recovered from customers in the form of 12, 18, and greater-than-18-month surcharges. The new surcharges incorporate net WRAM/MCBA balances that were previously approved for recovery and were implemented on May 5, 2023, except for Kern River Valley’s surcharge, which is expected to be implemented on January 15, 2024. The balance also includes $1.5 million of settlement proceeds from a settled lawsuit with the Stockton East Water District related to purchased water in Stockton. Cal Water will pass the benefit to its Stockton customers through a reduction of its net WRAM receivable.

In March of 2023, Cal Water submitted an advice letter to amortize the CEBA from the 2018 GRC that tracked the difference between adopted and actual costs for the period of 2020-2022. $6.2 million is being refunded to customers in some districts in the form of one-time or 12-month surcredits as actual conservation program costs during 2020-2022 were lower than the adopted conservation program costs. The new surcredits were implemented on May 5, 2023.

In June of 2023, Cal Water submitted an advice letter to amortize the HCBA and PCBA from the 2018 GRC that tracked the difference between adopted and actual costs for the period of 2020-2022. For the HCBA, $14.0 million is expected to be refunded to customers in the form of one-time or 12-month surcredits as actual employee and retiree medical costs during 2020-2022 were lower than the adopted employee and retiree medical costs. For the PCBA, $17.4 million is expected to be recovered from customers in the form of one-time or 12-month surcharges as actual costs for employee pension benefits during 2020-2022 were higher than the adopted employee pension benefits. The new rates are expected to be implemented on July 31, 2023.

In June of 2023, the City of Hawthorne approved Cal Water's water rate increase proposal for 2023-2026. Cal Water was approved to increase total revenue by $0.9 million incrementally over 4 years. Revenue will increase by 1.5% in 2023, 1.9% in 2024, 1.6% in 2025 and 2.3% in 2026. The 2023 increase was implemented on July 1, 2023. Cal Water was also approved to establish a Full Cost Balancing Account to track differences between adopted and actual water production costs.

Cash flow from operations for the first six months of 2023 was $37.5 million compared to $89.9 million for the same period in 2022. The decrease in the first six months of 2023 as compared to 2022 was primarily due to decrease in net income of $33.0 million for the first six months of 2023 as compared to the same period last year and the net receipt of $20.8 million from the Water Arrearages Payment Program in 2022. Cash generated by operations varies during the year due to customer billings and timing of collections and contributions to our benefit plans.

During the first six months of 2023, we made contributions of $2.9 million to our employee pension plan compared to contributions of $8.8 million during the first six months of 2022. During the first six months of 2023, we made contributions of $0.2 million to the other postretirement benefit plans compared to contributions of $0.3 million during the first six months of 2022. The full-year 2023 estimated cash contribution to the pension plans and other postretirement benefits plans are expected to be approximately $2.9 million and $0.2 million, respectively.

The water business is seasonal. Billed revenue is lower in the cool, wet winter months when less water is used compared to the warm, dry summer months when water use is highest. This seasonality results in the possible need for short-term borrowings under the Company and Cal Water facilities in the event cash is not available to cover operating costs during the winter period. The increase in cash flows during the summer allows short-term borrowings to be paid down. Customer water usage can be lower than normal in drought years and when greater-than-normal precipitation falls in our service areas or temperatures are lower than normal, especially in the summer months.

On July 10, 2023, California Governor Gavin Newsom signed Senate Bill 122, which included several revisions to the California Water and Wastewater Arrearages Payment Program (Program). Most notably, Senate Bill 122 extends the time period covered by the Program to December 31, 2022, as opposed to June 15, 2021. As part of the initial program which covered the period from March 4, 2020 through June 15, 2021, the Company secured $17.1 million to assist customers with past-due bills. The Company expects to seek additional relief for its customers with past-due bills when the application period for the revised program opens later this year.

During the first six months of 2023 and 2022, we used $177.2 million and $144.6 million, respectively, of cash for Company-funded and developer-funded utility plant expenditures. Annual expenditures fluctuate each year due to the availability of construction resources and our ability to obtain construction permits in a timely manner. For 2023, the Company's capital program will be dependent in part on the timing and nature of regulatory approvals in connection with Cal Water's 2021 GRC Filing. The Company 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 Filing and may change as the case moves forward.

Net cash provided by financing activities was $144.4 million during the first six months of 2023 compared to $44.6 million of net cash provided by financing activities for the same period in 2022. For 2023, this includes our issuance of $112.7 million of Company common stock through our at-the-market equity program and $1.2 million through our employee stock purchase plan. For 2022, this includes our issuance of $30.2 million of Company common stock through our at-the-market equity program and $1.1 million through our employee stock purchase plan.

During the first six months of 2023 and 2022, we borrowed $150.0 million and $55.0 million, respectively, on our previous unsecured revolving credit facilities. We made a repayment on our previous unsecured revolving credit facilities of $90.0 million and $20.0 million during the first six months of 2023 and 2022, respectively. During the first six months of 2023, we also paid $1.6 million in issuance costs for the Company and Cal Water facilities entered into on March 31, 2023, as described below.

On March 31, 2023, the Company and Cal Water entered into the Company and Cal Water 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 facility. Cal Water may

borrow up to $400.0 million under the Cal Water facility. Additionally, the credit facilities may be increased by up to an incremental $150.0 million under the Cal Water facility and $50.0 million under the Company facility, subject in each case to certain conditions.

The net WRAM and MCBA receivable balances were $91.6 million and $77.4 million as of June 30, 2023 and 2022, respectively. The receivable balances were primarily financed by Cal Water using short-term and long-term financing arrangements to meet operational cash requirements. Interest on the receivable balances, which represents the interest recoverable from customers, is limited to the then-current 90-day commercial paper rates, which typically are significantly lower than Cal Water’s short and long-term financing rates.

During the first six months of 2023, we utilized cash generated from operations, temporary borrowings on our previous unsecured revolving credit facilities, and cash received from the sale of Company common stock through our at-the-market equity program to fund operations and capital investments.

In future periods, management anticipates funding our utility plant needs through a relatively balanced approach between long term debt and equity.

Short-term liquidity is provided by the Company and Cal Water facilities and internally generated funds. Long-term financing is accomplished through the use of both debt and equity. The Company and subsidiaries that it designates may borrow up to $200.0 million under the Company facility. Cal Water may borrow up to $400.0 million under the Cal Water facility; however, all borrowings must be repaid within 12 months unless a different period is required or authorized by the CPUC. The proceeds from the Company and Cal Water facilities may be used for working capital purposes.

As of June 30, 2023 and December 31, 2022, short-term borrowings of $130.0 million and $70.0 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 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 governing 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 June 30, 2023, we are in compliance with all of the covenant requirements and are eligible to use the full amount of the undrawn portion of the Company and Cal Water facilities.

Long-term financing, which includes First Mortgage Bonds, other debt securities, and common stock, has typically been used to replace short-term borrowings and fund utility plant expenditures. Internally generated funds, after making dividend payments, provide positive cash flow, but have not been at a level to meet the needs of our utility plant expenditure requirements. Management expects this trend to continue given our planned utility plant expenditures for the next five years. Some utility plant expenditures are funded by payments received from developers for contributions in aid of construction or advances for construction. Funds received for contributions in aid of construction are non-refundable, whereas funds classified as advances in construction are generally refundable over 40 years. Management believes long-term financing is available to meet our cash flow needs through issuances in both debt and equity instruments.

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

During the first six months of 2023, our quarterly common stock dividend payments were $0.52 per share compared to $0.50 per share during the first six months of 2022. For the full year 2022, the payout ratio was 56.5% of net income. On a long-term basis, our goal is to achieve a dividend payout ratio of 60% of net income.

At the July 26, 2023 meeting, the Company's Board of Directors declared the third quarter dividend of $0.26 per share payable on August 18, 2023, to stockholders of record on August 7, 2023. This was our 314th consecutive quarterly dividend.

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 June 30, 2023, the Company’s and Cal Water’s availability on these unsecured revolving lines of credit was $165.0 million and $305.0 million, respectively.

During the first six months of 2023, utility plant expenditures totaled $177.2 million for Company-funded and developer-funded projects. For 2023, the Company's capital program will be dependent in part on the timing and nature of regulatory approvals in connection with Cal Water's 2021 GRC filing. The Company 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.

As of June 30, 2023, construction work in progress was $311.7 million. Construction work in progress includes projects that are under construction but not yet complete and placed in service.

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 annual groundwater extraction from adjudicated groundwater basins approximates 5.7 billion gallons or 10.8% of our total annual 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 annual groundwater extraction from managed groundwater basins approximates 31.5 billion gallons or 59.9% of our total annual water supply pumped from wells. Our annual groundwater extraction from unmanaged groundwater basins approximates 15.4 billion gallons or 29.3% of our total annual water supply pumped from wells. Most of the managed groundwater basins we extract water from have groundwater recharge facilities. We are required to financially support these groundwater recharge facilities by paying well pump taxes. Our well pump taxes were $4.1 million and $3.8 million for the three months ended June 30, 2023 and 2022, respectively. For the six months ended June 30, 2023 and 2022, our well pump taxes were $8.0 million and $8.2 million, respectively. In 2014, the State of California enacted the Sustainable Groundwater Management Act of 2014 (SGM Act). The law and its implementing regulations required most basins to select 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 SGM Act's provisions are fully implemented, substantially all the Company's California groundwater will be produced from sustainably managed and 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 June 30, 2023, the State of California snowpack water content during the 2023-2024 water year was 500% 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 378% and 378%, 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 2023 and thereafter. Long-term water supply plans are developed for each of our districts to help assure an adequate water supply under various operating and supply conditions. Some districts have unique challenges in meeting water quality standards, but management believes that supplies will meet current standards using currently available treatment processes.

On May 31, 2018, California's Governor signed two bills (Assembly Bill 1668 and Senate Bill 606) into law that were intended to establish long-term standards for water use efficiency. The bills revise and expand the existing urban water management plan requirements to include five-year drought risk assessments, water shortage contingency plans, and annual water supply/demand assessments. The California State Water Resources Control Board, in conjunction with the California Department of Water Resources, is expected to establish long-term water use standards for indoor residential use, outdoor residential use, water losses, and other uses. Cal Water will also be required to calculate and report on urban water use

targets by November 1, 2023, and each November 1 thereafter, that compare actual urban water use to the targets. Management believes that Cal Water is well positioned to comply with all such regulations.

In March of 2023, the United States Environmental Protection Agency issued proposed maximum contaminant levels for six per- and polyfluoroalkyl substances (PFAS). Based on current information, if the regulation is adopted in its current form, we expect that we would have three years to comply with the final PFAS regulations and we estimate that capital investments of approximately $200.0 million would be required to comply.

During the six months ended June 30, 2023, there were no material changes in contractual obligations outside the normal course of business.

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.

There have been no changes in our internal control over financial reporting during the second quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except that to remediate the material weakness in our internal control over financial reporting as of December 31, 2022 disclosed in Item 9A of our 2022 Annual Report on Form 10-K, management implemented the following controls during the second quarter of 2023:

The material weakness cannot be considered remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are designed and operating effectively. The Company will monitor the effectiveness of its remediation plan and will make changes management determines to be appropriate.

Management is committed to continuous improvement of the Company’s financial reporting controls and will continue to diligently review the Company’s internal controls over financial reporting. As management continues to evaluate and work to improve internal controls over financial reporting, the Company may determine to take additional measures to address the material weakness or determine to modify certain of the remediation measures described above.

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 additional 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. For more information refer to Note 10.

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, 2022 filed with the SEC on March 1, 2023.

During the last fiscal quarter, our directors and officers entered into or terminated the following trading arrangement: