CWT Q3 2026 earnings call transcript, October 29, 2026

Ladies and gentlemen, welcome to the California Water Service Group Q3-2026 earnings call. All lines have been placed on mute to prevent any background noise.

And after the speaker's remarks, we will conduct a question and answer session. If you would like to ask a question at that time, please press star, then the number one on your telephone keypad to raise your hand and enter the queue. If you would like to withdraw your question at any time, simply press star one again. I'll now talk to you again. I'll turn the call over to Jim Lynch. You may begin.

Thank you, Colby. Welcome, everyone, to the third quarter 2026 results call for the California Water Service Group. With me today is Marty Kropelnicki, our chairman and CEO. Replay and dial information for this call can be found in our quarterly results earnings release, which was issued earlier today. The call replay will be available until December 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 8K and is also available on the company's website at www.calwatergroup.com. Before looking at our third quarter 2026 result, I'd like to cover forward-looking statements. During our call, we may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties, and 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 other reports filed with the Securities and Exchange Commission. And now, I'll turn to the call over to Marty. Thanks, Jim. Good morning, everyone, and thank you for joining us today. We are pleased with our continued execution of our 2026 business plan as we are currently three quarters into the year with one quarter to go. There are five major areas that we want to talk about today to provide an update on. First, Jim will give you an update on the financials for the quarter, which include the results of our 2024 general rate case, which rates took effect.

This year in 2026. Second, we want to talk about our record infrastructure investment. That brings us up to just under $425 million year to date. Will we continue to balance system needs with affordability? Three, we want to talk about our progress on closing our announced acquisition of the Oregon and Nevada assets that we are acquiring from Nexus Water Service Company. Yesterday, the Board of Directors declared our 327 consecutive quarterly dividend, which puts our anticipated dividend for the year at $1.34, which is up 8.1% year over year. And finally, I want to take a few moments to talk about emergency preparedness, emergency response. I think as we know, the Super El Nino has gotten a lot of press time and we'll talk about some of the efforts we have underway to prepare for the winter that's coming ahead. So prior to going through some of the other topic items I just outlined, I'm going to turn it over to Jim to talk about the financials.

Thanks Marty. So our third quarter net income was $65.4 million or $1.05 per diluted share. And that compares to $61.2 million or $1.03 per diluted share in the third quarter of 2025. Revenue increased $21 million or 6.7% to $332.2 million compared to $311.2 million last year. The primary revenue drive is included $22.1 million from rate changes and new customers and $3.9 million from changes in the drought response memorandum account for the DREMO. These increases were partially offset by a $4.4 million reduction related to lower customer water usage. Operating expenses increased $8.9 million or 3.7% to $249.5 million. Water production costs for the third quarter were largely unchanged as wholesale water costs were partially offset by lower customer usage. Other operations expenses increased $4.1 million, primarily driven by a $2.8 million increase in water conservation program expenditures. Income taxes on operating income increased $7.1 million, and that reflects higher pre-tax income and a scheduled reduction in the tax cuts. And Jobs Act refund, or the TCJA refund. We also experienced a $3.9 million decline in gains on our non-qualified benefit plan investment assets. On slide six, you can see the impact of this activity on our change in Q3 diluted earnings per share. Of note, the diluted earnings per share impacts include the issuance of new shares during the quarter through our ATM program to partially fund our ongoing capital investment.

our planned acquisition activities, and to pay down balances on our bank lines of credit. I'll discuss this funding in more detail later in the call. Turning to slide 7, year-to-date net income through the end of the third quarter was $125.9 million for $2.07 per diluted share. This compares to net income of $116.7 million or $1.96 per diluted share for the same period in 2025. Revenue was $855.3 million, which is an increase of $75.1 million or 9.6% compared to $780.2 million year-to-date in 2025. The primary revenue drivers included rate increases and new customers, which added $51.9 million. Interim rates memorandum account revenue, which is associated with the California 2024 GRC, which added $15.7 million. Recognition of the remaining deferred water revenue adjustment mechanism, or RAM revenue, which added $9.9 million, and DREMA revenue, which contributed $3.9 million. Operating expenses increased $48.2 million to $683.6 million, or 7.63%. Compared to $635 million in 2025. Key contributors to the change included water production costs that increased 14.1% due to higher wholesale water costs, which were partially offset by a lower customer usage. And other operations expense increased $19.9 million, and that increase was primarily due to the recognition of $8.1 million in deferred water. RAM costs, and higher water conservation program expenses of $5.5 million. In addition, income tax has increased $13.1 million due to higher pre-tax operating income and the scheduled reduction of the TCJA refunds.

We also experienced a $3 million decline in gains on our non-qualified benefit plan investment assets year-over-year, and an increase in business acquisition expenses related to the two acquisitions of mortgage. This referred to a $4.1 million. On slide eight, you can see the impact of this activity on our change in Q3 year-to-date diluted earnings per share. Looking at our infrastructure investments on slide nine, third quarter CapEx spend was $148 million, and year-to-date, we have invested $425 million. Our 10-year compounded annual growth rate of growth capital is hovering right around 11%. Yeah, Jim, it's probably noteworthy, too. As some of you that know California regulation, we have the ability to earn what's called a step increase in the outbound years of the rate case. So year one of the rate case, you have new rates. That's 2026. In 2027 and 2028, we have the ability to earn what's called a step increase, but it's subject to an earnings test, and that earnings test is based on our ability. to get the capital that was pre-approved in the rate case into the ground. Given the success of our 2026 capital program, this sets us up very well to capture a big chunk of the $49 million step increase that's available. Obviously, we're closing the quarter now, and on around November 15th, we will be filing for that step increase, but I anticipate that we're going to do very, very well on that step increase for 2027.

Thanks, Marty. And then you can see, in addition to the step rate increase on slide 10, the impact that the growth in our capital investment program is having on our rate base. We're projecting a compounded annual rate-based growth of nearly 12%, reaching approximately $3.5 billion by the end of 2028, assuming we complete our planned capital investments on schedule. Overall, we're really pleased with the progress. We're making in our capital program and on our future rate-based growth opportunity. Moving to slide 11, at quarter end, we had $45.1 million in cash and cash equivalents and $45.8 million in restricted cash. We also had $200 million of available short-term borrowing capacity at GRU and $225 million at CalWater. Now, that borrowing capacity is subject to our credit line borrowing conditions. Regarding our financing activities during the quarter, we raised $49.8 million for our at-the-market equity program. We also entered into forward sales agreements that we can settle up to 12 months from the agreement dates that will generate an additional $77.8 million in net proceeds. At quarter end, we also signed agreements for $125 million in unsecured debt at GRU and $150 million in mortgage bonds at CalWater. Maturities that range from 2031 to 2056. With the long-term debt agreements and equity forward agreements in place, our retained earnings, and the equity issuances that we did in Q3, we believe we have the resources necessary now to pay down our existing short-term debt balances and to finance our ongoing initiatives into the first half of 2027, including the acquisitions of the Oregon and Nevada systems.

Lastly, recall that CalWater's current cost of capital decision includes an adjustment mechanism tied to movement in the Moody's Utility Bond Index. The adjustment mechanism was not triggered during the most recent measurement period, and as a result, our current authorized 10.27 return on equity at CalWater will remain in effect through 2027. In addition, the authorized return on rate base will remain at 7.46 percent. And the authorized capital structure at 53.4 percent equity and 46.6 percent debt. With that, I'll turn the call back over to Marty.

Thanks, Jim. I'm on slide 12 of the deck, and I want to provide everyone an update on recent regulatory approvals that support our continued investment in safe, reliable, and affordable water service. There's really three things that happen in the quarter that are noteworthy. First, the Washington UTC. approved a $4.1 million revenue increase, effective October 1st, for our subsidiary company in Washington. In addition, the Hawaii Public Service Commission approved a $1.94 million increase for our Kapalua systems in Hawaii. Additionally, during the quarter, the state of California, the California Public Service Commission authorized an advice letter process to seek approximately $113 million dollars. Capital costs associated with our PFAS program that was driven by the application that would file for PFAS recovery and an additional $2.5 million in expenses for certain PFAS projects. Going on to slide 13, we continue to advance our PFAS compliance program with approximately $228 million of planned investment. That's a gross planned investment number. I'll come back to that in just a minute. The investments will be made in California, New Mexico, and Washington. This includes anticipated treatment and new well construction as well. Through the third quarter, we invested $23.3 million in treatment and well replacement with a total program investment to date totaling $47.5 million. We currently have 65 projects planned, including 18 California sites currently under construction. In addition,

I think as many of you know, we've been a very active participant representing the water industry on recovery of costs from the polluters that helped put PFAS and PFO into the water systems. To date, we have recovered a net $59.4 million in litigation proceeds, and that amount will be used to offset the $228 million. So as of right now, if you take the $228 minus the $59.4 million, where you get about $169 million of net rate-based addition for the PFAS project. Moving on to slide 14, and I think this is a real important slide, is kind of the company's always had a keen eye on affordability, and we've been able to maintain a 10% compound annual growth rate on our capital investment line while keeping rates affordable. and affordability given inflation. and what's happening in the U.S. today, as well as it's a pretty hot political topic. We like to show this slide because it shows the company's actually done a really good job at balancing affordability with our maintained 10% compound annual growth rate on our capital investment line. What this slide really shows is that the median CalWater bill represents about 0.88% of the median household income. So the EPA, Environmental Protection Agency, publishes some guidelines on rate affordability. And water rates that are generally below 2% of an average household income is considered affordable. So here on this slide, we show from 21, 22, 23, 24, and 25, how we've been able to keep that, you know, rate right around 1% while we continue to grow our asset and rate base. And we think that's a very important point and a key portion of our strategy as we balance affordability.

with the needs of the system. A number of ways we do the balance of affordability, you know, obviously the litigation with the PFAS project is a good example of that. We actively pursue grants. We do invest heavily in conservation programs. And then we try to do a number of things for our customers, including we have a rate support fund. We have a great online tool that if a customer can't afford to clear the bill, they can spread it out over multiple months and do it through. The portal itself. And so all these things kind of work together in terms of helping us balance affordability with the needs of maintaining safe and reliable water service. Moving on to slide 15. Many of you have seen this slide before. I think it best represents our commitment to our shareholders as it reflects our 59 years of consecutive dividend increases. Obviously, 2027 will be a new year. And as we move into the new year, Jim. I will start our dialogue with our board of directors and looking at what should our dividend be for 2027. Yesterday, our board of directors declared a 327th quarterly dividend at 34 cents a share. And that sets up our indicated dividend for 2026 at $1.34 a share, which is an increase of 8.1% over 2025. Moving on to slide 16, I want to give everyone... I want to update on our strategic initiatives. We continue to advance the Oregon and Nevada acquisitions from Nexus Water. The integration planning remains on schedule and within budget. Yesterday, we received approval for our change of control applications from the Oregon Public Utilities Commission. And this is on top of the approval we received from the Nevada Commission in August. So this sets us up to close these acquisitions before the end of the...

the year. Integration planning and cooperation among the two companies has gone very, very well. In fact, I don't think we could ask for a better partner to work on an acquisition within what we have with Nexus Water. And we estimate our total integration costs. These will be one-time costs that we incur as we move the assets over and bring them onto our platform to be between seven and nine million dollars. Part of that will be incurred this year as we're doing... all the integration planning and set up work now. And part of it will be incurred next year as we actually bring them onto our platform and bring them live onto our systems. So it's looking very good as Jim indicated. You know, we got the financing lined up and we will be working hard to close this out before the end of the year. At BBRT, the consolidated rate case has been returned to the commission for approval with interim rates that still remain in effect. One of the nice things about Texas... is you get interim rates while you're waiting for regulatory approval. In addition, the change in control application has been reviewed and is deemed complete, quote-unquote complete, and sent back to the commission for final approval that we are expected to get sometime soon. It's not on the docket yet. Texas is a little different than the other states. It can take a little longer to get through the approval process, but the application itself was deemed complete.

And now we're just waiting for a final approval. In addition, BBRT continues to grow at a very healthy rate. This year, year-to-date, we've increased 12% new customers during the third quarter. So we are continuing to see the growth that we're seeing in that Texas corridor, and we expect that it will continue well into the new year. Looking at some other highlights during the third quarter, we continue to celebrate and recognize the Century of Service. On October 14th was our actual 100-year anniversary. October 14th, 2026, our founders acquired the water system in Chico, followed by acquiring the water systems in Visalia and Bakersfield on October 15th. All three of these systems are still owned and operated by California Water Service Group and still growing, which I think is fantastic. So we had a number of customer and community outreach events to help celebrate our 100-year anniversary. It's been very well received and it's been a fun year reflecting on our 100 years of service to our customers. During the quarter, we also started providing water service to approximately 400 students at Indianola Elementary School, which is outside our service territory in Selma. They were having a lot of water quality problems, so we built the connection from our system to their school. And I think this is a good example of project. We do in the community where we can help a disadvantaged community that does not have access to clean, reliable water by connecting them to our existing system.

So it helps lower the marginal cost for all the participants, but that helps expand the service territory to places where they may not have good quality drinking water. And then lastly, I want to take a moment to talk about emergency preparedness and response in light of it being forecast at Super El Nino year. For many of you. that know us, Cal Water does spend a lot of time on emergency preparedness and emergency planning. Over the years, we have developed a set of standing operating procedures that we use and work off of as we prepare for and respond to certain disasters, whether it's a wildfire, whether it's a hurricane, whether it's a flood, whether it's red flag conditions that you'll get down in Southern California with the Santa Ana winds, which you've probably read about the last couple weeks. There's a whole set of policies and procedures that we follow as we deal with these events. And it's really about the preparation behind the event. And then it's about the methodology responding to the event. So, for example, we have had three hurricanes in Hawaii, one of which was a direct hit on the island of Hawaii in the area of Hoipu, which we serve. And I'm very happy to report that, yes, it was a direct hit. Yes, we had probably a couple million dollars worth of damage. We had no service outages because the team did a good job preparing and responding to the event. And so, obviously, going into an El Nino year, we've spent a lot of time with our field operations, which is led by Mike Mares, and he's done a great job making sure everyone's ready, all of our systems are in place, all of our backup generators are working, and we have the extra equipment and tools needed to respond to things that may happen as we go into what is anticipated to be.

a pretty strong winter for the West Coast. Looking ahead and what to watch for in the fourth quarter, obviously the step increase that I mentioned, you know, there's kind of $49 million, an estimated $49 million in the bucket that's available, depending on how well we did our capital program. I'm feeling very comfortable about that. And we will file for that around November 15th. We anticipate the planning of the transit. action with Nexus Water before the end of the year. And as Jim said, financially, things are lined up. The teams are working very well together. And I anticipate that closing before the end of the year. And of course, we have a lot of capital to get in the ground during the fourth quarter. And with the anticipated rains that might come with El Nino, we want to try to accelerate as much capital as we can in the fourth quarter, because in the event of heavy rains, it'll certainly slow down the capital program as we move into Q1. And of course, all the emergency preparedness, emergency response things that we are doing. So with that, Colby, that ends the formal part of our presentation. And let's go ahead and open it up for Q&A, please.

Thank you. We will now begin the question and answer session. Again, if you'd like to ask the question, please press star, then the number one on your telephone keypad to raise your hand and enter the queue. If you would like to withdraw your question at any time, simply press star one again. We'll pause just for a moment to compile the Q&A roster. Hey, Colby, while we're waiting for that roster to come in, we just got some news that just came in from the Texas Commission that our rate case decision is on the agenda for approval on November 5th. So that literally just came in across the wire. So we want to share that information as well. Okay, thank you. And our first question is going to come from Davis. Underland from Baird. Your line is open. Good morning, guys. That's got to be a real-time update. I think I've ever heard on a conference call. Congrats on that. That's great news. Maybe two questions for me today, and I appreciate the time. Obviously, the pushback against utility rate cases and just kind of this general environment we're in of inflation and heightened focus on affordability has been well covered. I guess on the flip side of that, I wonder if you're going to be able to do that. focus a bit more on inflation just impacting expenses for you guys and specifically, if you could just talk about what you're seeing on the OpEx and CapEx front, if there's been any material changes in supply chain or other expense items. I guess I'll leave it there for my first question.

Yeah, so on the supply chain side, obviously, you know, we're not immune to inflationary increases. And one of the things I pointed out to our board yesterday when Jim and I were updating them on the. financials. You know, we're paying, you know, essentially 20 to 30 percent more for fuel year over year. And we have, you know, almost a thousand vehicles that we roll on a daily basis. So we've been able to absorb the inflationary increases in our operating budgets. And so it's there. It's real. That step increase that we have in California is really important. One of the nice things about California is they do approve the capital in advance, which means. It's in the tariff rates. And that's why it's subject to an earnings test. And with California being our largest subsidiary, that's why that pot of money is so big, that $49 million. And so, you know, obviously getting that step increase and getting a big piece of that $49 million will go a long way to offset a lot of the inflation that we're seeing in California. So I would say we haven't seen anything that's a line item buster when you look at the operating budgets and the line item. But certainly, you know, fuel costs are up. Material costs are up. I don't think, you know, from an economist perspective, you've seen the full oil shock effect or the diesel shock effect of what's going to happen to inflation here in the rest of the fourth quarter. If you saw the producer price index, you know, it's had its largest increase that it's had since 2022, which that increase in 22 was driven by really the COVID.

And the excess, you know, government spending on the COVID response. So I don't think we're through the worst of it yet, but I will say from a company perspective, we've been able to manage it and work through the budget lines. And generally speaking, the management team at Cal Water does a very good job at hitting their budget targets. And so we're just pivoting and turning and saving where we can, realizing we've got to spend more in other areas like fuel. Yeah, I think the other part of your question, Davis, with regards to supplies, we did a really good job during COVID to kind of strengthen our supply chain and to advance purchase certain inventory that was hard to get. And, you know, we've kept a pretty keen eye on that since. So I think we're pretty well positioned relative to our supply chain. It's really a cost issue that Marty was talking about. That's great perspective. Thank you. Thank you guys very much. And then maybe I guess I'll direct the second one to you, Jim, but also, of course, Marty, if you have any thoughts, just wondering how you guys are thinking about equity and debt needs for 2027 or starting to do the planning process for next year. Obviously, inflation is one thing, but we've also got a higher interest rate environment. And I guess it's linked to one another there. But just wondering how you guys are thinking about the outlook for next year or any other financing considerations. And thank you very much.

Yeah, I think I think we're pretty. Well, set going into the first half of next year. We did, you know, the debt offering that we did. We've not taken yet possession of the proceeds, if you will. And it's not reflected yet in our in our results. And so it's not included in Q3. But it was a really successful offering. We were oversubscribed, you know, six, seven times, eight times, depending upon where in the structure you're looking at. But we got really good spreads on it, with the understanding that T-bills, which the debt is tied to, you know, is higher now than it was this time last year. But but we I think did a good job in terms of raising the amount that we're going to need into the first half of 2027, maybe into the into the first three quarters of 2027. And then from an equity perspective, you know, we have 12 months to draw down. On the the equity that we raised through the forwards and we were already reflecting the equity that was raised during the Q3 through our results and that will continue. So I think I think we're looking pretty good into into Q3 of next year. And then we'll we'll as we go into 27 and start to put together our capital budgets, we'll we'll assess when we think we might need to be back in the market. But I'm pretty confident that that going into the first half of the year, we're we're pretty well situated and we're not going to be looking to raise much going forward.

During that period. Great stuff. Appreciate it, guys. Thank you very much.

Hi, David. Thank you. Our next question comes from the line of Matt V. Gay with Frieden Broker. Your line is open.

Now, there's a very important proposition in California that's on the ballot called Prop 45, which is the Affordable California Act. CalWater has been a leading company involved in that with the State Chamber of Commerce. And if that bill passes, it will essentially expedite the permitting process, which is one of the biggest bottlenecks that we face. And believe it or not, we, you know, Southern California, which is a very water-constrained, you know, area, we've had cases where it's taken us up to almost 10 years just to get permits. And so if Prop 45 passes, it essentially starts a shot clock when you file for your application. And the government agency... whether it's a city or local, county, or state, have to issue their permit within a certain timeline. And so watch Prop 45 because that will be a nice benefit for any utility that does construction in the state of California. Okay, great. Thank you so much. Yeah, thank you. Thank you. Thank you. Have a good day.

And again, if you'd like to ask a question, please press star. Then the number one on your telephone keypad to raise your hand and enter the queue.

Our next question comes from Angie Strozi from Seaport. Your line is open.

Yeah. But I'm just wondering if there is some sort of a targeted payout ratio, at least a cap on it. Like, I'm just looking at the estimates. I mean, you would be approaching 60% in the payout over the next couple of years, and I'm just wondering what's the comfort zone? Yeah. Good question, Angie. Jim and I have started saying this publicly, and this is something really we started doing, I think, over the last 12 months. We've kind of set the four for the dividend growth at 7%, and so if you set that as kind of a target that we kind of drive for, and then look at, we try to have between a 50% and 60% kind of payout ratio, you know, recognizing, again, over a rate case cycle, like in California, it's three years. You know, that'll shift around a little bit depending on where you are on the rate case cycle, but, you know, a 50% to 60% payout ratio with a 7% kind of. A growth target is what we plan off of. Awesome. Thank you. Thank you.

Hey, Jim, it's probably noteworthy too, because Angie asked a very good question about where those integration costs are going. It's kind of going below the, yeah, it's in the non-regulated line, below the utility line. We were very happy with both approvals we got from Nevada and Oregon with not a whole lot of issues other than. The integration costs, you know, we have to bear those by the company. You can't pass those on to customers. So there's no stay out provisions in Oregon and Washington are some of the things that you've seen in other states, excuse me. They're very clean kind of rules that were, approvals that were passed. So we're really happy with how those came out with both Oregon and Washington. Absolutely. And there are no further. Other questions in queue. So at this time, I'd like to turn the conference back over to Martin Kropelnicki. Great. Thanks, Colby. Thanks, everyone, for joining us today. Jim and I are around today. If you have any further questions, feel free to reach out to us. And thank you for your continued interest in the company. And we'll look forward to finishing the year strong and being back in touch about the earnings test, as well as when we close the Nexus deal here before the end of the year. So thank you. Everyone have a great day. This concludes today's earnings call. You may now disconnect.