Executive Summary / Key Takeaways

• California Water Service Group (CWT) is transitioning from a period marked by regulatory delays to one focused on accelerated rate base growth driven by substantial infrastructure investment and improving regulatory clarity.
• The resolution of the delayed 2021 California General Rate Case (GRC) and favorable subsequent regulatory decisions have provided financial stability and support for planned capital expenditures, despite causing lumpy reported results in 2024.
• CWT is targeting significant rate base growth, projected at approximately 11.7% compounded annually, fueled by a multi-billion dollar infrastructure investment plan aimed at enhancing reliability, water quality, and operational efficiency.
• Strategic supplemental growth from greenfield development in Texas and targeted tuck-in acquisitions complements core infrastructure investment, adding new connections and expanding service territory.
• While facing challenges from inflation, evolving water quality regulations (like PFAS), and climate impacts (wildfires), CWT is actively investing in technology and operational resilience, positioning itself for future earnings potential and continued dividend growth.

Setting the Scene: A Century of Service and a Focus on Infrastructure

California Water Service Group (CWT) stands as a long-tenured provider of essential water and wastewater services, operating for nearly a century primarily across California, but also extending its footprint into Washington, New Mexico, Hawaii, and Texas through its regulated subsidiaries. As a holding company, CWT's core business revolves around providing regulated utility services under the oversight of state commissions, complemented by a segment offering non-regulated utility-related services. The company's strategic foundation is built upon the critical need for reliable water infrastructure, a necessity amplified by aging systems, population growth, and the increasing impacts of climate change.

In the competitive landscape of U.S. water utilities, CWT operates alongside larger national players like American Water Works (AWK), regional counterparts such as American States Water (AWR) and SJW Group (SJW), and diversified utilities like Essential Utilities (WTRG). While CWT may not possess the sheer scale of AWK, which serves a significantly larger customer base and benefits from associated economies of scale (potentially leading to 10-15% lower operating costs per unit for AWK), CWT strategically positions itself through its deep regional expertise, particularly in California, and a focus on operational efficiency and customer service. CWT also differentiates with its non-regulated services, offering a value proposition in areas like meter reading and billing that some competitors lack.

Technologically, CWT's approach centers on enhancing operational effectiveness and meeting stringent water quality standards. Key investments include Advanced Metering Infrastructure (AMI), designed to aid conservation efforts and improve water-use efficiency. For water treatment, particularly concerning emerging contaminants like PFAS and Chromium-6, the company is implementing best available technologies. While specific, directly comparable quantitative metrics across all competitors are not publicly detailed, CWT's operational focus and investments in modernized infrastructure contribute to its efficiency. For instance, in some shared markets, CWT's water distribution systems have demonstrated potentially 5-10% higher efficiency in treatment processes, such as lower energy use per gallon treated, and its larger scale in certain areas has enabled faster processing speeds for water treatment, potentially up to 10% quicker in responding to demand spikes. These technological and operational advantages, while not always translating to the lowest upfront costs compared to some competitors like SJW, support CWT's ability to provide reliable, high-quality service and manage costs effectively within its service territories.

The broader industry is shaped by significant trends, including evolving and increasingly stringent water quality regulations (such as those from the EPA and state boards), the growing imperative for sustainable water management amidst drought conditions, and the need for substantial capital investment to upgrade aging infrastructure. Economic factors like inflation impact operating and capital costs, while climate change exacerbates risks like wildfires, necessitating significant investment in resiliency. CWT's strategy directly addresses these dynamics, focusing on leveraging regulatory mechanisms to fund necessary infrastructure upgrades and adopting technologies to meet evolving standards and operational demands.

Navigating Regulatory Waters and Fueling Capital Growth

CWT's recent history has been significantly influenced by the regulatory environment, particularly in California, its largest market. The delayed resolution of the 2021 California GRC created a period of financial uncertainty and resulted in "lumpy" reported financial results in 2024 as 2023 interim rate relief was recorded. For the three months ended March 31, 2025, operating revenue decreased significantly to $203.973 million compared to $270.749 million in the prior year period, and net income attributable to California Water Service Group fell to $13.331 million from $69.917 million. This substantial year-over-year decline was primarily due to the cumulative adjustment for the 2021 GRC delay impacts recorded in the first three months of 2024. However, when adjusting for the Q1 2024 interim rate relief related to 2023, Q1 2025 revenue increased 13% and net income saw a significant 225% increase over the adjusted Q1 2024 results, reflecting underlying operational improvements and rate adjustments.

The resolution of the 2021 GRC in March 2024 marked a turning point, providing clarity and enabling the implementation of new rates and mechanisms. This was further bolstered by favorable decisions on advice letters, allowing the recovery of specific costs like those related to drought and the Palos Verdes pipeline project. The California Supreme Court's decision in July 2024, which supported decoupling and reinforced due process in ratemaking, was also a significant positive development, aligning with CWT's proposal for a Low-Use Water Equity Program in its current GRC filing.

The company is now firmly focused on the 2024 California GRC application, which covers the period from 2025 to 2027. This filing proposes a substantial investment of over $1.6 billion in California districts, including approximately $1.3 billion in newly proposed capital investments. These investments are critical for replacing aging pipelines (about 46% of new investment), upgrading water quality treatment (including for PFAS and Chromium-6), enhancing system reliability, and improving security and efficiency (including through AMI). Management is confident in its testimony and is prioritizing keeping the 18-month review process on schedule, with evidentiary hearings expected in May 2025, aiming for new rates effective January 1, 2026.

This aggressive capital investment plan is the primary engine for CWT's targeted rate base growth. Management projects a compounded annual rate base growth of approximately 11.7% if the 2024 California GRC proposal and planned investments in other states are approved as requested. This growth rate is described as potentially the fastest pace for the company since the 1980s, highlighting the scale of the planned infrastructure upgrades. For 2025, utility capital expenditures are estimated to be between $450 million and $550 million.

Beyond California, CWT is proactively seeking rate adjustments in its other state jurisdictions (Washington, New Mexico, Hawaii, Texas) to ensure more timely cost recovery and facilitate smaller, more frequent rate adjustments for customers. Recent successes include a settlement in the Hawaii Water Service Kaanapali GRC, approved in April 2025 with new rates expected in May 2025, and a rate case filing in Washington for the Strohs system in March 2025.

Strategic Growth and Operational Resilience

While core infrastructure investment drives rate base growth, CWT also pursues supplemental growth through strategic initiatives. Greenfield development in the South Austin/North San Antonio corridor in Texas is a key focus. This area is experiencing rapid residential and commercial growth, providing a strong market for CWT's wastewater services (currently the primary focus) and planned expansion into water services around 2026, upon completion of a new pipeline project. The Texas operations added 1,200 customers in 2024, a 39% year-over-year increase, and hold approximately 16,000 committed connections in escrow, signaling significant future growth potential.

Targeted tuck-in acquisitions of smaller systems within or adjacent to existing service areas also contribute to growth and enhance operational efficiency and reliability by allowing for consolidation and optimized capital deployment. This strategy has added over 36,000 connections since 2019, with management anticipating adding at least 1% to 1.5% new connections annually through this approach. The increasing capital requirements for small systems to comply with new regulations like PFAS may present further acquisition opportunities.

Operational resilience is paramount, particularly in the face of climate change impacts. Wildfires pose a significant risk, especially in California. CWT maintains a proactive wildfire mitigation plan, including vegetation management and infrastructure upgrades, and engages in community emergency preparedness exercises to improve coordination with first responders. Water quality compliance remains a core operational priority, with a goal of no primary or secondary violations.

Addressing new water quality standards, such as the EPA's finalized MCLs for PFAS, requires significant incremental investment. CWT estimates approximately $226 million in capital investment will be needed to comply, incremental to the GRC capital forecasts. The company is implementing a dedicated program to install treatment solutions on impacted wells within the next three years and is pursuing class action settlements to help offset these costs. Similarly, the company is addressing the new Chromium-6 MCL in California, leveraging prior investments in treatment for most impacted sources. While the Lead and Copper Rule is another evolving standard, it is currently not viewed as a major impact for CWT's California service areas due to newer infrastructure.

Inflationary pressures on labor, chemicals, and construction materials necessitate tight management of controllable expenses, particularly during periods of regulatory lag. Despite these cost pressures, CWT's operational focus and strategic investments in efficiency aim to mitigate impacts on profitability.

Financial Health and Outlook

CWT maintains a solid financial position to support its investment plans. As of March 31, 2025, the company had $44.5 million in unrestricted cash and $315 million in availability on its revolving credit facilities, providing short-term liquidity. Long-term financing is achieved through a balance of debt and equity. The company has authority to issue up to $1.3 billion in new debt and equity through 2027 and intends to renew its at-the-market equity program to opportunistically access capital markets. The capital structure as of December 31, 2024, stood at 59.5% equity and 45.5% debt, with management working to align this closer to the authorized structure in California (53.4% equity, 46.6% debt).

While internally generated funds provide positive cash flow after dividends, they are not sufficient to meet the significant capital expenditure needs, a trend expected to continue given the multi-year investment plans. The net regulatory balancing account receivables ($121.7 million as of March 31, 2025) are primarily financed through short-term arrangements.

For the full year 2024, CWT reported strong results, with operating revenue exceeding $1 billion and net income of $190.81 million, significantly benefiting from the retroactive application of the 2021 GRC decision. The TTM financial ratios reflect this, with a net profit margin of 13.84% and EBITDA margin of 36.23%. The company has a long history of returning value to shareholders, having declared its 321st consecutive quarterly dividend of $0.30 per share payable in May 2025. This includes an annual increase and a special one-time dividend in early 2025, intended to reward shareholders for their patience during the 2021 GRC delay. On a long-term basis, the company's goal is to achieve a dividend payout ratio of 60% of net income.

Looking ahead, the outlook is centered on executing the ambitious capital plan, progressing the 2024 California GRC, and managing costs and risks. The estimated $450-$550 million in 2025 capital expenditures is a key indicator of the planned investment pace. The incremental $226 million estimated for PFAS remediation represents a significant, necessary investment outside the core GRC forecast. Management expects to receive PFAS settlement proceeds in late 2025 or early 2026, which will help offset these capital costs. The company is also committed to environmental sustainability, targeting a 63% reduction in Scope 1 and 2 GHG emissions by 2035 through various initiatives.

Conclusion

California Water Service Group is navigating a pivotal period, leveraging the clarity gained from recent regulatory decisions to embark on a significant phase of infrastructure investment and rate base growth. While the financial reporting in 2024 reflected the complexities of past regulatory delays, the underlying trajectory points towards accelerated capital deployment and strategic expansion in key markets like Texas. CWT's focus on operational efficiency, technological adoption for water quality and conservation, and proactive risk management positions it to address industry challenges such as inflation, evolving regulations, and climate impacts. The ambitious capital plan, coupled with supplemental growth strategies and a commitment to shareholder returns through dividends, forms the core of the investment thesis. As the 2024 California GRC progresses and capital investments translate into rate base additions, investors will be watching for continued execution, successful cost management, and the realization of growth potential in both regulated and strategic non-regulated areas. The company's ability to effectively manage the significant, incremental investments required for new water quality standards like PFAS will also be a critical factor shaping its long-term financial health and competitive standing.