CALIFORNIA WATER SERVICE GROUP

CALIFORNIA WATER SERVICE GROUP: 2023 Annual Performance & Outlook

Business Overview California Water Service Group (CWT) delivers a vital service: providing essential water and wastewater to millions. As a regulated water utility, CWT serves residential, commercial, industrial, and governmental customers primarily in California, Hawaii, New Mexico, and Washington. The company acquires, produces, treats, stores, and distributes water, and also collects and treats wastewater in some areas. CWT commits to delivering safe, reliable, and affordable water to over 2 million customers.

Financial Performance California Water Service Group (CWT) showed strong financial performance in 2023, proving resilient despite ongoing regulatory and environmental challenges. CWT generated approximately $1.25 billion in total operating revenues, an 8.5% increase from 2022. This growth stemmed mainly from approved rate increases across its service areas and modest customer expansion. Net income for common shareholders rose to $115 million, or $2.20 per diluted share, up from $98 million and $1.90 per diluted share in the previous year. This improvement reflects effective cost management and favorable regulatory decisions.

Management Discussion (MD&A Highlights) CWT upheld its commitment to water quality and infrastructure reliability, investing approximately $350 million in capital expenditures during 2023. These investments replaced aging pipelines, upgraded treatment facilities, and enhanced water storage capacity, ensuring safe and reliable service. CWT also added approximately 15,000 new service connections, mainly in its California and Hawaii operations.

The regulatory environment significantly impacts CWT's financial health. CWT currently awaits a final decision on its 2024 General Rate Case (GRC) filing in California. This filing proposes a revenue increase to support planned capital investments and operational costs. Regulatory balancing accounts, like the Water Revenue Adjustment Mechanism (WRAM) and Modified Cost Balancing Account (MCBA), continue to stabilize revenue by offsetting fluctuations in water sales and purchased water costs. CWT expects a decision on its California GRC by late 2024, which will significantly influence future revenue and capital recovery.

CWT manages significant employee benefit programs, including a defined benefit pension plan and post-retirement medical plans. By year-end 2023, the pension plan was approximately 90% funded, with its assets primarily invested in a diversified portfolio of equities and fixed income. CWT contributed $15 million to these plans in 2023 and anticipates similar contributions in 2024.

In a notable development, CWT received $25 million in PFAS settlement proceeds in 2023 from litigation against manufacturers of per- and polyfluoroalkyl substances. These funds will offset future costs for PFAS remediation and treatment, reducing potential financial burdens on ratepayers.

Financial Health CWT maintained a robust financial position as of December 31, 2023. Total assets reached $4.5 billion, with long-term debt accounting for approximately $1.8 billion. Its debt portfolio includes senior notes with staggered maturities from 2025 to 2053, carrying a weighted average interest rate of 3.8%, alongside revolving credit facilities that provide liquidity. CWT's debt-to-equity ratio of approximately 0.9x indicates a balanced capital structure. CWT also declared quarterly dividends totaling $1.10 per share for 2023, marking its 57th consecutive year of dividend payments.

Risk Factors CWT faces several key risks:

• Climate change impacts: This includes drought conditions and wildfire threats.
• Regulatory uncertainty: This surrounds rate case approvals and environmental compliance.
• Rising interest rates: These affect borrowing costs for capital projects.
• Continuous infrastructure investment: This is needed to maintain service quality.

CWT actively addresses these risks through proactive water resource management, robust capital planning, and engagement with regulatory bodies. Additional risks include potential changes in environmental regulations, operational disruptions, and challenges in attracting and retaining skilled labor.

Competitive Position As a regulated public utility, California Water Service Group operates primarily as a natural monopoly within its authorized service areas. Competition for water and wastewater services is generally limited because infrastructure requires significant capital investment and regulatory bodies grant exclusive franchise rights. CWT's competitive position largely depends on its ability to secure and maintain these exclusive service areas, effectively manage its regulated rate base, and provide high-quality, reliable service at approved rates. While direct competition for customers within its service areas is minimal, CWT faces indirect competition from alternative water sources (e.g., private wells in some areas) and must compete for capital in financial markets. Its long operating history and established infrastructure create a significant barrier to entry for potential competitors.

Future Outlook CWT projects capital expenditures of approximately $375 million in 2024 and $400 million in 2025, focusing on modernizing and expanding its systems. CWT's strategy centers on providing safe, reliable, and affordable water service, achieving timely recovery of prudent investments through the regulatory process, and enhancing shareholder value through consistent operational performance and dividend growth. Investors should monitor the California GRC outcome and CWT's ability to efficiently manage its extensive capital program.