California Water Service Group Q2 FY2026 earnings call

• Regulatory Updates

  • A final decision for the 2024 California General Rate Case (GRC) was received in late April 2026, ~90-100 days delayed; the company was made whole for the delay via retroactive rate application to January 1, 2026, with related revenue recognized in Q2 2026. New rates went into effect for customer billings July 1, 2026.
  • The California GRC approved approximately $1.7 billion in total pre-approved capital investment for 2024-2027, including $1.45 billion in base capital and $229 million in advice letter projects. It maintained existing regulatory balancing accounts (for pension, healthcare, conservation, and water production incremental costs) and authorized two new mechanisms: a sales adjustment mechanism to smooth revenue forecast variances, and an insurance balancing account to address rising wildfire insurance costs.
  • A full all-party settlement was reached for the Washington general rate case, with a requested $4.29 million rate increase settled at $4.12 million and a requested 10.2% ROE settled at 10.18%. The settlement is pending commission approval, expected in Q3 2026, with revenue recognition to begin the same quarter.
  • The application to acquire full ownership of the BVRT joint venture has been deemed complete by regulators and is awaiting final approval; a consolidated rate case settlement in Texas is also awaiting final commission approval.

• Capital Investment and Liquidity

  • The company has a 10-year compound annual growth rate of ~11% for growth capital, holding slightly above the internal 10% target due to PFAS treatment investment. Total 2026 net budget for PFAS treatment is $155 million, offset by $60 million in expected recoveries from polluters and grant funding; $30 million has been spent year-to-date through Q2.
  • The company projects compound annual rate base growth of nearly 12% and expects to reach ~$3.5 billion in total rate base by the end of 2028 if capital projects are completed on schedule.
  • As of June 30, 2026, the company held $43.4 million in unrestricted cash, $45.7 million in restricted cash, and had $395 million available on $600 million total credit facilities (expandable to $800 million, maturing March 2028). It maintains an A+ stable credit rating from S&P Global.
  • $88 million in proceeds was raised via the at-the-market (ATM) stock program in Q2 2026 to partially offset capital growth. Any additional 2026 H2 financing will fund remaining 2026 capital projects, the Nexus acquisition closing, and line of credit paydown ahead of 2027.

• Strategic Initiatives

  • Integration planning for the acquisition of Nexus assets in Oregon and Washington is progressing well, with all regulatory applications filed. The company targets closing the transaction before the end of 2026.
  • In the South Austin, Texas market, the company connected 200 new wastewater system connections during Q2, continuing market growth.

• ESG, Milestones, and Leadership

  • The company published its annual water quality and sustainability report during the quarter, and received multiple industry awards including the Alliance for Water Efficiency Award, USA Today Top Workplace, and recognition from Time as one of the world's most impactful companies for sustainability work.
  • 2026 marks the company's 100th anniversary, with regional customer and community events ongoing; the company will ring the NYSE bell on November 30 to celebrate the milestone.
  • Two leadership changes were announced: Greg Szymanski was named Vice President of Rates to replace the retired Greg Milleman, and Tammy Johnson was promoted to Vice President of California Operations, effective July 1, 2026.

• Dividend

  • The company declared its 326th consecutive quarterly dividend of 33.5 cents per share, representing a 7.6% 5-year compound annual dividend growth rate.

California Water Service Group does not break out financial performance by separate product segments in this earnings call. Aggregate consolidated results are as follows: Q2 2026 net income was $56.5 million ($0.93 per diluted share), compared to $42.2 million ($0.71 per diluted share) in Q2 2025. Q2 2026 revenue was $308.6 million, up from $265 million in Q2 2025. Year-to-date through Q2 2026, net income was $60.5 million ($1.01 per diluted share), compared to $55.5 million ($0.93 per diluted share) year-to-date in 2025. Year-to-date 2026 revenue was $523.2 million, up from $468.9 million year-to-date in 2025. Q2 2026 capital expenditure was $147 million, up 23% from $119.4 million in Q2 2025, with $276 million total CapEx invested in the first half of 2026.

• Management maintains its long-standing target of ~10% annual growth capital growth, with current growth holding slightly above this target due to one-time PFAS investment.
• Management confirms the projected 12% compound annual rate base growth and target of ~$3.5 billion total rate base by the end of 2028, assuming on-schedule completion of capital projects.
• No downward or upward revisions to long-term capital or growth guidance were provided in this call.

• Rising interest rates driven by persistent deficit spending and geopolitical conflict create uncertainty for capital financing costs, though the company has mitigants for this risk.
• Affordability concerns around utility rate increases, driven largely by steep electric rate hikes in California, create potential regulatory risk even though water rates remain within accepted affordability thresholds. Political groups focused on rate caps also represent a long-term risk.
• Wildfire insurance costs are rising on the West Coast, creating potential upward pressure on operating expenses, though the company has secured regulatory approval to pass these costs through via a new balancing account.
• PFAS treatment cost estimates may shift over time as projects progress, though the company continues to secure additional recoveries from polluters and grant funding to offset customer costs.
• The Washington rate case settlement is still pending regulatory approval, though management expects approval in Q3 2026 with no expected major changes to the agreed terms.

Q: How has rising national discourse around utility rate affordability changed the company's strategy, and are you facing affordability pushback from regulators?

A: The company remains below the 2% of household income affordability threshold set by the EPA in all service districts, and passed California's mandatory affordability testing for the recent GRC. Only one small district needed adjustments via existing state low-income assistance programs, with no major issues. Management proactively engages with customers via focus groups and community outreach before filing rate cases to address affordability concerns early. They have not seen the same level of pushback seen for electric rates in other regions, and have secured consistent ROE approvals (10.27% in California, 10.18% in Washington) with no major interveners opposing recent rate cases. The company will continue balancing necessary capital investment with affordable rates, consistent with its 20-year track record of 10% capital growth and successful rate recovery.

Q: What impact could a sustained higher interest rate environment have on the company's M&A activity and liquidity?

A: In California, the company has a two-way cost of capital adjustment mechanism that triggers ROE adjustments if the utility bond index moves more than 50 basis points, which protects shareholders from rapid interest rate increases and allows pass-through of higher debt costs to customers. Any higher cost of new debt will also be incorporated into the next general rate case proceeding for 2028. While management monitors macroeconomic uncertainty and interest rate volatility, organic capital replacement (running at ~10% annual growth) is the company's primary growth engine, so there is no pressure to pursue acquisitions for growth. M&A will remain opportunistic, like the current Nexus acquisition, and the company will not pursue overvalued assets just to increase growth. The company's strong liquidity position means it is well positioned to handle near-term interest rate shifts.

Q: Can you explain the recent increase in other operating expenses and corresponding change in deferred revenue?

A: The step up in other operating expenses is directly tied to the recognition of previously deferred RAM (Revenue Adjustment Mechanism) revenue. Accounting rules require gross presentation of the revenue and its associated costs, rather than net presentation. Total deferred RAM revenue recognized in the quarter was $9.3 million, with $7.9 million in associated costs, leading to a net impact of ~$1.2-1.3 million to the bottom line. This matches the earnings dynamics disclosed in the quarter's financial results.