California Water Service Group (CWT) is a leading water utility company that provides water and wastewater services to over 2 million people across California, Washington, New Mexico, Hawaii, and Texas. With a strong focus on operational excellence, infrastructure investment, and customer service, CWT has established itself as a reliable and trusted provider of essential water services.
Financials
In the fiscal year 2023, CWT reported annual revenue of $794.6 million, a testament to the company's ability to consistently generate solid top-line performance. The company's net income for the year reached $51.9 million, showcasing its proficiency in managing costs and delivering value to shareholders. CWT's annual operating cash flow stood at $217.8 million, providing ample liquidity to fund its ongoing capital expenditure program, while its free cash flow was -$165.9 million, reflecting the company's significant investments in its infrastructure.
Quarterly Performance
For the first quarter of 2024, CWT reported a 106.5% increase in operating revenue to $270.7 million, compared to $131.1 million in the same period of the prior year. This significant jump was primarily driven by the implementation of two regulatory mechanisms authorized by the company's 2021 General Rate Case (GRC) decision, which added $80.7 million in Interim Rate Memorandum Account (IRMA) revenue and $31.7 million in Monterey-Style Water Revenue Mechanism (M-WRAM) revenue. The company also recognized $13.9 million in deferred Water Revenue Adjustment Mechanism (WRAM) revenue during the quarter.
Operating expenses for the first quarter of 2024 increased by $44.2 million, or 29.8%, to $192.9 million, primarily due to higher water production costs, increased other operations expenses, and a $21.2 million rise in income taxes related to the higher pre-tax earnings. Net income for the quarter was $69.9 million, a significant improvement compared to the $22.2 million loss reported in the same period of the prior year.
Regulatory Matters
The highlight of the quarter was the resolution of CWT's 2021 GRC, which was approved by the California Public Utilities Commission (CPUC) in March 2024. The decision increased adopted revenues for 2023 by approximately $41.5 million, retroactive to January 1, 2023, and potentially increases revenues by up to $30.0 million for 2024 and $30.6 million for 2025, subject to the CPUC's earnings test and inflationary adjustments.
The 2021 GRC decision also authorizes CWT to invest approximately $1.2 billion from 2021 through 2024 in water system infrastructure projects, including $160 million of projects that may be submitted for recovery via the CPUC's advice letter process. Additionally, the decision approves a progressive rate design that is intended to provide budget stability while benefiting low-income and low-water-using customers.
Water Supply and Infrastructure Investment
CWT's service areas are well-positioned in terms of water supply, with the company's California operations benefiting from two consecutive years of above-average snowpack in the Sierra Nevada mountains. The company's other service areas, including Washington, New Mexico, Hawaii, and Texas, have also reported adequate water supplies to meet customer demand.
To ensure the continued delivery of safe and reliable water service, CWT plans to invest approximately $380 million in capital improvements during 2024, including an estimated $20 million in developer-funded projects. The company's rate base is expected to grow to $2.36 billion by the end of 2024 and $2.47 billion by the end of 2025, subject to regulatory approval.
PFAS Compliance and Emissions Reduction
CWT is proactively addressing the emerging issue of per- and polyfluoroalkyl substances (PFAS) contamination, commonly known as "forever chemicals," in its water systems. The company estimates that it will need to invest approximately $215 million to comply with the new PFAS regulations recently issued by the U.S. Environmental Protection Agency (EPA). CWT plans to expedite the implementation of PFAS treatment, with an expected spend of $12 million to $20 million in 2024 and a ramp-up in the following years.
In addition to its water infrastructure investments, CWT has also made a commitment to reduce its absolute Scope 1 and Scope 2 greenhouse gas emissions by 63% by 2023, compared to a 2021 baseline. The company's decarbonization strategy includes the electrification of its fleet, water conservation efforts, on-site solar installations, and the procurement of renewable electricity.
Dividend and Liquidity
CWT has a long history of providing consistent dividend payments to its shareholders, with the company recently increasing its annual dividend by 7.7% to $1.12 per share. This marks the company's 57th consecutive annual dividend increase, underscoring its commitment to delivering value to its investors.
As of March 31, 2024, CWT maintained a strong liquidity position, with $88.3 million in cash and cash equivalents, of which $45.4 million was classified as restricted. The company also had additional short-term borrowing capacity of $320 million on its lines of credit, providing ample financial flexibility to fund its ongoing operations and capital investment program.
Outlook
CWT's management remains optimistic about the company's future, with the resolution of the 2021 GRC and the continued investment in its water infrastructure. However, the company faces several risks, including the potential for regulatory delays, the impact of rising interest rates on its financing costs, and the ongoing challenges posed by climate change and drought conditions.
Additionally, the company's ability to recover the costs associated with PFAS compliance through the regulatory process remains a key concern, as the CPUC's recent decision to dismiss CWT's application to modify its PFAS expense balancing account was a setback. The company plans to pursue alternative avenues, such as a separate application or inclusion in the 2024 GRC, to secure the necessary regulatory approvals for its PFAS-related investments.
Conclusion
California Water Service Group's strong operational performance, prudent financial management, and commitment to infrastructure investment and sustainability position the company well to continue delivering reliable water services and creating value for its shareholders. As the company navigates the evolving regulatory landscape and addresses emerging challenges, such as PFAS compliance and climate change, investors can take comfort in CWT's track record of resilience and its focus on long-term growth and sustainability.