California Water Service Group (CWT) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the 2026 Second Quarter California Water Service Group Earnings Call. [Operator Instructions]. It is now my pleasure to turn the call over to Mr. James Lynch, Senior Vice President and Chief Financial Officer. You may begin.

Thank you, Jeanine. Welcome, everyone, to the Second Quarter 2026 Results Call for California Water Service Group. With me today is Marty Kropelnicki, our Chairman and CEO. Replay dial-in information for the call can be found in our quarterly results earnings release, which was issued earlier today. The call replay will be available until September 28, 2026. As a reminder, before we begin, the company has a slide deck to accompany today's earnings call. The slide deck was furnished with an 8-K and is also available on the company's website at www.calwatergroup.com. Before looking at our second quarter '26 results, I'd like to cover some forward-looking statements. During the call, we may make certain forward-looking statements. And because these statements deal with future events, they are subject to various risks and uncertainties. Our actual results could differ materially from the company's current expectations. As a result, we strongly advise all current shareholders and interested parties to carefully read the company's disclosures on risks and uncertainties found in our Form 10-K, Form 10-Qs, press releases and the other reports we filed with the Securities and Exchange Commission. And now I'll turn the call over to Marty to provide a brief overview.

Thanks, Jim. Good morning, everyone. Consistent with our past earnings call, I'm going to give you a quick overview of the agenda, and then Jim and I are going to jump into some of the details for the quarter. There's really kind of 6 items on the agenda today that we want to go through. Starting obviously, in the second quarter, the end of April, we received a decision on our California general rate case. As part of that decision, during the quarter, we recognized our IRMA, which is the balancing account that takes the retroactive portion of the rate case back to January 1. So this rate case was close to being on time, which is very good news. It was approximately 90 to 100 days delayed, but we are made all that to the original date of January 1. That was recognized in the quarter as well as other items that Jim will be talking about. In addition, during the quarter, we reached this full settlement in our rate case up in Washington. I'll provide some more details about that when we get to that slide. During the second quarter, we had record capital. We invested a record $276 million in new plant for the first 6 months of the year. That continues to move ahead, especially as we start to invest in our PFAS treatment programs throughout our service territory. And to partially offset that growth, we did raise about $88 million through our ATM or at-the-market stock program and the company declared its 326 quarterly consecutive dividend of $0.3350 shares. In addition to the quarter, we continue to work on our Nexus integration plans. Nexus has been great to work with and things are progressing there. We'll give you some more details on that. And then lastly, for those of you that like to look at some of the numbers on sustainability and some of our ESG numbers, we did publish our water quality and sustainability reports as well as received a number of awards during the quarter. And later on towards the end, I'll introduce the 2 new officers. As some of you may know, Greg Milleman is not here. As you remember at the last call, that was his last call with us, and he retired, officially retired from the company, and I'll be talking a little bit about his replacement as well as one of the promotion, key promotion we had during the quarter. So that's the agenda for today. Jim, why don't I turn it over to you, and we'll go through the numbers.

Thanks, Marty. So as Marty mentioned, the Q2 results reflect the decision that we received in our 2024 California GRC and also the retroactive application of the decision through the IRMA to the beginning of 2026. The net income for the quarter was $56.5 million or $0.93 per diluted share. That compares to Q2 2025 net income of $0.42 or $42.2 million or $0.71 per diluted share. Our revenue for the quarter was $308.6 million compared to $265 million in the second quarter of 2025. The primary earnings drivers included $15.3 million of IRMA revenue related to the delayed 2024 California GRC and of which about $9.2 million of that was related to the first quarter. So that was the look-back portion that was recognized in Q2. We also had $15 million that was due to rate changes and changes in regulatory mechanisms and $9.3 million of remaining deferred WRAM revenue that's now expected to be collected over the next 2 years. If you remember, when we stopped decoupling, we still had some residual WRAM balances that were deferred until we reached the proper accounting guidance that would allow us to report the revenue. So we've now reached that place. And at this point, we have recognized the remaining deferred balances. These increases were partially offset by $6.3 million in higher per unit water supply costs, about $7.9 million in costs related to the deferred WRAM revenue and $7 million in higher income taxes that was due primarily to higher income and an increase in our effective tax rate. If we move on to Slide 6, you can see the impact of the activity of our second quarter on our diluted earnings per share. The primary drivers were customer rate changes, the IRMA, the deferred WRAM revenue, each of which contributed $0.20, $0.15 and $0.11 per diluted share, respectively. And these increases were partially offset by the water production costs and deferred WRAM-related expenses of $0.08 and $0.10 per diluted share, respectively. If we turn to Slide 7, on a year-to-date basis, net income through the end of the quarter was $60.5 million or $1.01 per diluted share, and that compared to year-to-date net income in the prior year of $55.5 million or $0.93 per diluted share. Revenue was $523.2 million compared to $468.9 million year-to-date in 2025. The primary earnings drivers were largely the same as those we experienced for the quarter. And so turning to Slide 8, you can see the impact on the year-to-date drivers with regards to our diluted earnings per share. Customer rate changes, the IRMA and deferred WRAM revenue contributed $0.30, $0.20 and $0.11 per diluted share, respectively, and these were partially offset by higher water production costs and the deferred WRAM-related expenses of $0.19 and $0.10 per diluted share. So that's kind of a summary of the financial performance. And so now I'll turn the call back over to Marty to walk us through some capital -- some of our capital activities.

Great. Thanks, Jim. I'm on Slide 9 for everyone on the call. So looking at our infrastructure investment through the second quarter. For the quarter, CapEx was $147 million. That was up from $119.4 million in the prior year. That's about a 23% increase year-over-year. Our 10-year compound annual growth rate, increasing capital, our growth capital is hovering right around 11% right now. As a reminder, the capital estimates for 2026 and going out now until they complete the projects include an estimated net $155 million that's been budgeted for PFAS. And I say net because we have approximately $60 million of recovery from polluters that's being used. So the sum of the 2 numbers will get you back close to the original essence that we provided about 1.5 years ago, 2 years ago when we started looking at that PFAS. I will say the PFAS numbers will still tend to move around a little bit as our legal team has continued to do an outstanding job at getting recoveries to offset the cost of the PFAS treatment on behalf of our customers from the polluters. So they continue to get more dollars coming in as well as some grant dollars are coming in. But kind of the main theme is being consistent with what we've had in the last 20 years, which is our compound annual growth rate on the capital investment or our growth capital is holding in a little north of 10%. And our internal target that we try to strive for is 10%. So it's up a little bit driven by the PFAS investment. I think as everyone knows, when you go to the next slide, when you are increasing your rate base at 10% plus a year, your CapEx -- excuse me, you're growing your rate base. And right now, we have a compound annual growth rate of almost 12% on our rate base growth. The slides that you see here today have all been trued up for the California decision based on the numbers that were in that decision. So we anticipate having approximately $3.5 billion in rate base by the end of 2028, assuming we can get all the capital in the ground on time. So obviously, the company remains very capital focused. So obviously, CapEx continues to be strong. The company continues to execute the capital plans well. We're able to get that capital built into rates in California. It's preapproved. So I think it's a little bit easier in California for rate -- for earnings modeling because it is a prospective state. The other states we have are all historical. But overall, we're very happy kind of with the CapEx growth and the rate base growth that we have as we move through this next rate cycle on the West Coast. So Jim, why don't I turn it back to you to cover liquidity and some of our capital plans for the second half of '26.

Great. Thanks, Marty. So we do continue to maintain a really strong liquidity profile to execute the capital plan and also as we continue to pursue tuck-in M&A and look to integrate Nevada, Oregon and the BVRT acquisitions. As of June 30, 2026, we had $43.4 million in unrestricted cash and about $45.7 million in restricted cash, along with approximately $395 million available on our bank lines of credit. Just as a reminder, that restricted cash is really earmarked for a project we have in Texas with a water agency there, GBRA and building a pipeline into one of the new areas that we hope to be delivering potable water here in the near term in Texas. So it's our first potable water system in Texas, and we're really looking forward to that initiative. In addition, we maintain credit facilities totaling $600 million. Those credit facilities are expandable up to $800 million, and they have maturities that extend into March of 2028. So we're really well positioned with regards to our existing credit facilities. We also renewed our ATM stock program in May of 2025 with $350 million on the shelf registration. During the second quarter, we did raise $88 million in proceeds from stock sales under the ATM program. We believe the balance sheet is in pretty good shape and that additional -- any additional financing we raised in the second half of 2026 will be primarily tied to growth, and that growth is really earmarked for constructing the remaining of our 2026 capital program and closing of Nevada and Oregon in terms of those acquisitions. And we also will look to pay down our line of credit in California as we head towards the end of the year and begin to prepare for our activities in 2027. Importantly, both Group and Cal Water maintained a strong credit rating of A+/Stable from S&P Global. And I think that really just serves to underscore the strength of our balance sheet. And finally, yesterday, we did declare our 326th consecutive quarterly dividend of $0.3350 per share, and that represents about a 7.6% CAGR growth in our 5-year dividend. So really pleased and happy with our ability to deliver that to the shareholders. Marty?

Thanks, Jim. I'm now on Slide 12, and I want to talk a little bit of what's happening on the regulatory front. Again, just to recap the major components of the approved 2024 general rate case in the state of California. The approved rate case requires significant infrastructure investment from 2024 to 2027. I know that's a little confusing, but it's '24, '25, '26 and '27, you have to include kind of a stubs year of the year that you file your general rate case. So in total, in California, it's a prospective year, so the capital gets approved in advance. We got about $1.45 billion of preapproved capital. In addition, the commission approved approximately $229 million of advice letter projects, and that gets us to just shy of $1.7 billion over that 4-year period. In addition, in the rate case, the commission also affirmed the Monterey-style WRAM. We have continued to have in the past and continued for this next cycle, a pension balancing account, health care balanced account, a conservation expense balanced account and an incremental cost balanced account for water production costs. In addition, what's new in the settlement that was authorized is we have a sales adjustment mechanism, which I think really is a big deal since we did not get full decoupling, but we got the Monterey-style WRAM. The sales adjustment mechanism allows us to adjust our sales forecast the following year if the sales numbers are out of a certain percent from what the forecast was. So previously, when we decoupled, we didn't have that option. And that tended to set up growing balances, uncollected balances from customers as the decoupling mechanism would bounce from month-to-month, quarter-to-quarter. So having a sales assessment mechanism, I think, is a big deal that will help smooth out the revenue forecast and actual revenue in the second and third year of the rate case. In addition, a new thing that we got this year that we asked for was a liability balance account. And I think we're well into the wildfire season for all of you that have studied trying to procure insurance as a homeowner or as a consumer out on the West Coast. I think it's harder even as a company. So the commission did authorize us to have an insurance balancing account for the state of California, which I think is a good thing. So overall, it's nice to have the '24 rate case wrapped up. We started recognizing the revenue from that rate case in the actual billings on July 1. So it is live, and now we're moving on to fully implementing that capital. In addition, during the quarter, we reached a settlement on the Washington Water general rate case. Now keep in mind, Washington is a historic pasture for capital purposes. We filed our rate case on September 25, 2025. We asked for just under $4.3 million, $4.29 million was the actual filing number. And it was for increases across 2 of our largest Washington systems, and we have requested a 10.2% ROE. And the final settlement that we reached with the commission, we reached a full all party settlement of $4.12 million as well as an ROE of 10.18%. So overall, pretty close to the ask. So very happy with the outcome. With the all-party settlement, it's been filed and it has not been approved yet by the commission, but we expect it to get approved here sometime in the third quarter, and we'll start recognizing that revenue from Washington in the third quarter. So overall, good news on the rate case front. Going to the next slide, talking about our strategic initiatives. The other big thing the company is working on in addition to the capital is really acquiring the Nexus assets in Oregon and Washington. Change applications have been filed, integration planning with Nexus and Cal Water has been moving very, very well. Nexus is an excellent partner to work with. We're very happy with the level of support we're getting from them. And we're continuing to move forward for a close through -- for year-end, excuse me. I anticipate with Nevada, we will likely get their decision first to have a statutory time line to approve the merger, and we've been in discussions with them and answering their questions. Oregon does not have a statutory time line, but we are in the process of answering their questions and working with them as well. So our goal would be to try to close this acquisition before the end of the year and moving forward. In addition, with the BVRT joint venture, as you may recall, we have submitted an application to buy out the rest of that partnership the sole owner of BVRT. That change of control application was deemed -- it was reviewed by the commission. They go through a review process. It was deemed "complete" meaning it goes to the commission for approval. So we're waiting to hear back from them. In addition, we also have a consolidated rate case that was settled, and we're waiting for final commission in Texas. So Texas has been very busy between the rate case settlement as well as the application. In addition, during the quarter, the team connected an additional 200 new connections to our wastewater systems in that South Austin market. So that market kind of continues to go -- grow excuse me. Looking at Slide 14, looking at some of our other highlights for the quarter. Obviously, we have been celebrating the company's 100 years of service essentially, and we set up a number of regional events. So we're halfway through that process. Those have been well received by our employees and a lot of the government officials in the areas that we serve. So we're trying to make it a highly visible, well-branded, we're in your community, here's what we do type of event. So that process continues to go very, very well. The company has a lot of pride in the fact that we've been around for 100 years and the fact that we were started by 3 World War I veterans back in 1926. In addition, we're seeing a lot of customer engagement. We've had tens of thousands of customers visit our website that's been dedicated to our 100-year anniversary. And likewise, I encourage you to look at that if you want to see some of the history of the company and how we've grown from 3 small districts in Northern California to now being the largest investor on water utility in the state of California as well as in Hawaii and Washington. During the quarter, we won a number of awards, which is great recognition. We tend not to talk about that a lot, but it is something the company takes a lot of pride in. We recently won the Alliance for Water Efficiency Award. We've been named a Top Workplace by USA TODAY, and we've been noted by TIME as being one of the World's Most Impactful Companies for our continued work on sustainability and renewability. So all really good stuff, all happening around our 100-year anniversary, and we will be ringing the bell on the NYSE on November 30 with our Board and a number of employees to celebrate our 100 years of service as we like to say. As you may recall, at the end of the last conference call, we did a little tribute to Greg Milleman. For those of you who work with Greg, he's a big personality. And before the call, Jim and I were joking around about it's kind of hard not having Greg in the room with us because he's a fun person to work with. So Greg has officially retired. He is consulting on some of our great projects for us and still available to help us. But I think he's actually in the Caribbean this week, which really -- as Jim and I worked a lot of hours in the last couple of weeks. I wish we were Greg actually and we razz him up a little bit. Having said that, we had a great internal candidate ready to replace Greg. And it's Greg another Greg. So the last name changes first name doesn't. Greg Shimansky was named Vice President of Rates by our Board of Directors. And Greg has a long history in the rate and regulatory world, starting way back working with San Diego Gas & Electric. He worked for American Water for a number of years and joined us a few years ago, very, very well qualified as a grad from UCLA and economics as well as an MBA in finance from Purdue University. So Greg has officially taken over leading our Rates team, and he's certainly well qualified to do so. In addition, given the growth of the company, we added a VP of Operations who just runs the California entity. We've had a Senior Vice President of Operations who's run all of our operations in all 5 of our states. And given the growth that we've been experiencing, we thought it was time to have a Vice President of Operations just for California, who reports to the Senior VP of Operations. So very, very happy to announce the promotion of Tammy Johnson. Tammy is no stranger to the water business. She has 40 years of experience. Tammy started as a field worker in the union back in the '80s. And I say that because she started in the field at a time when there wasn't a lot of female utility workers in the field, and she started in Bakersfield which I think was a great place to start, but I would imagine it was a pretty rough group to break into being a female. And she's just done a fabulous job. She continued to move up through the union ranks. She was a union officer. She has all our certification. She's actually at B-5. So she is the highest level operating license you can have in the state of California. She went back to school after she had kids and completed her bachelor's degree and then went on to complete her MBA as well and just knows operations very, very well. And for those of you that know me, I'm very big about having someone who's been an actual operator operating our system. So we're very happy that we have both Tammy Johnson and Greg Shimansky joining the officer team here effective July 1. So with that, looking ahead into the second half of 2026, the agenda is really simple, right? We got to continue to get the capital in the ground, including our PFAS program. Year-to-date, we spent about $30 million on that program, and we'll give you an update every quarter on where the spending is on that program. We have a couple of new officers. We have a lot of rate case going on. And of course, our goal is to get the Nexus deal closed before the end of the year. So we have plenty to do, a lot of capital to get into the ground and the company remains very, very focused on executing on those tasks. So with that, Jeanine, we will take a pause and why don't we open it up for questions, please.

[Operator Instructions] We have a question from Davis Sunderland from Baird.

Maybe if I could start off, Marty, would just be curious to get your thoughts on affordability. And I know there's been a lot of rhetoric around utility models, pushback in rate increases, just some different things happening in different parts of the country. And just would love to hear if any of this has changed your guys' strategy or how you guys think about this?

Yes. Well, and Davis, you've been following us for a while, and we've been out on a number of non-deal roadshows with Baird. And so affordability has always been on the forefront for us. There are 2 broad measures that you use for affordability. One is the EPA generally looks at water bills and the average household budget. And as long as you're below 2%, you're considered affordable. We're below 2% in all of our districts. And then in the state of California, before we can actually file a rate case, we have to do this affordability test and file it review with the commission. And in the '24 rate case, we passed the affordability test really in all of our districts, but one, but in that one district was a very small district that had a lot of capital needs. And in California, we have a couple of tools. We have a rate support fund, and we have a low-income rate assistance fund. And so we work with the commission through the rate case process to apply some of those things to make sure the rates are affordable for this one small district. So we haven't had any big issues with that. As you may recall, prior to filing a large rate case, we always meet with our customers. We hire a third-party firm. We do a number of focus groups and interview literally thousands of customers to get their ideas, their thoughts, their perceptions on things. And part of that discussion of those focus groups is really affordability. So for us, we haven't had really any major issues with affordability. And even when you look at things I think what you're seeing in back East is you're seeing a lot of government agencies, not just the commissions, but governors, et cetera, push back on rates, especially electrical rates because they've been raising so high and then the fear with data centers are rising those costs and passing those costs on to customers as they build out new infrastructure. We haven't had any of those problems. And we have a 10.27% ROE in California. We just got through a rate case. The rate case was approved. We didn't have really any major interveners in California. Rate case up in Washington that's pending approval, that's a 10.18% ROE that's in that settlement. And so we're not seeing any signs. We're not getting any feedback from the commission that we have affordability issues as of right now. But again, there's a lot of care and nurturing that goes in when we prepare the rate case to make sure we're not tripping some of those trip wires. And I think the rates team and our government affairs team and our community affairs team have done an outstanding job at navigating the headwaters on that. And I think we're going to continue to keep doing what we're doing and trying to balance affordability with the needs of the capital investment. And the best thing I can say to you or any of the analysts covering our stock is go back and look at our 20-year history. We've been able to do this 10% kind of growth rate on CapEx, which is growing rate base. and we've been able to do it and be successful at getting rate recovery and again, not trip these affordability things that are popping up. So am I concerned about it? I am. I'm concerned about it because you have things like the Democratic Socialist Americans popping up, and it's an agenda item for them. We've certainly seen our electric rates increase. California has the second highest electric rate increase electric rates in the U.S. So that affects our cost of production. But we are not driving the affordability prices in America. It is not water. It's driven by the rate side. And so continuing to differentiate ourselves on that front, I think, is part of the process when we meet with regulators and lawmakers in the state at the federal government level. So watching it, concerned about it. Obviously, I think we've been navigating the waters around affordability quite well.