Executive Summary / Key Takeaways

• Robust Infrastructure Investment Drives Core Growth: California Water Service Group's primary investment thesis centers on its aggressive and consistent capital expenditure program, projecting an almost 12% compounded annual rate base growth, excluding PFAS-related projects. This reinvestment in aging infrastructure, much of which dates back to post-WWII, is the bedrock of its long-term financial performance and service reliability.
• Strategic Expansion Beyond California: While deeply rooted in California, the company is strategically diversifying its growth engines, notably through greenfield development in the rapidly expanding South Austin/San Antonio mega-region in Texas. This expansion, alongside new wastewater and recycled water projects like Silverwood in California, provides significant customer connection growth and future revenue streams.
• Proactive Regulatory Engagement and Financial Discipline: Management's proactive approach to rate cases, including the ongoing 2024 California GRC, aims to secure timely rate relief and cost recovery. Despite past regulatory lag, the company has demonstrated strong financial discipline, maintaining a robust balance sheet and liquidity, and successfully securing long-term financing to support its capital plans.
• Addressing Emerging Challenges with Innovation: CWT is at the forefront of tackling critical industry challenges such as PFAS contamination and climate change. Its substantial investment in advanced treatment technologies and water reuse systems, coupled with successful litigation to offset costs, underscores its commitment to water quality and sustainability while mitigating financial impact on customers.
• Consistent Shareholder Returns: With a 58-year streak of annual dividend increases and a long-term payout ratio goal of 60% of net income, CWT offers a compelling proposition for income-focused investors, demonstrating a commitment to rewarding shareholders even amidst complex regulatory environments.

A Century of Service: Foundation for Future Growth

California Water Service Group, established in 1926 by three World War I veterans, has built a legacy of essential utility service across California, Washington, New Mexico, Hawaii, and Texas. This foundational commitment to service, customers, and stockholders has shaped its enduring strategy: consistent, disciplined investment in critical water infrastructure. Much of the company's existing network, developed in the post-World War II era, is now reaching the end of its useful life, making replacement and modernization the primary engine for its robust rate base growth. This organic growth strategy is complemented by strategic expansions and a proactive stance on regulatory and environmental challenges, positioning CWT for continued relevance and profitability as it approaches its centennial year.

The water utility sector, characterized by high barriers to entry due to significant capital requirements and stringent regulatory approvals, provides a stable operating environment for CWT. The company's long-standing regulatory licenses in its diverse service territories grant it exclusive rights, translating into pricing power and customer loyalty. This is a crucial competitive advantage against larger, more geographically dispersed players like American Water Works Company (AWK) and Essential Utilities (WTRG), allowing CWT to focus on operational excellence and tailored solutions within its core regions. While AWK and WTRG leverage scale and diversified utility portfolios (including natural gas for WTRG), CWT's specialized focus on water and wastewater allows for deeper regional expertise and potentially more efficient execution in water-specific tasks.

CWT's competitive positioning is further strengthened by its diversified non-regulated services, which include contract operations, infrastructure design, and lease revenue from antenna sites. These offerings provide additional revenue streams and demonstrate an adaptability that contrasts with the more straightforward utility focus of some peers like SJW Group (SJW) and American States Water Company (AWR). While direct quantitative comparisons of market share are challenging to ascertain for all niche competitors, CWT's consistent performance in its established markets suggests a strong, competitive standing. The company's emphasis on community engagement and local partnerships also fosters a strong brand reputation, contributing to customer loyalty that can be a differentiator in a service-oriented industry.

Operational Excellence and Technological Adaptation

CWT's operational strategy is deeply intertwined with its commitment to water quality, reliability, and sustainability, driven by continuous investment in advanced infrastructure and operational technologies. The company's "technological differentiators" are not singular product innovations but rather its integrated approach to water management, treatment, and infrastructure resilience. For instance, the deployment of Advanced Metering Infrastructure (AMI) is a key initiative aimed at enhancing water-use efficiency and supporting conservation efforts. This technology provides granular data on consumption, enabling both the company and its customers to manage water resources more effectively, a critical benefit in water-scarce regions like California.

A significant area of focus is water quality upgrades to address both existing and newly regulated contaminants. The company has proactively invested in treatment systems for substances like Chromium-6, having previously developed and installed treatment at most impacted sources when an MCL was initially set in 2014. This foresight allows CWT to anticipate and meet new regulatory standards, such as the EPA's maximum contaminant level (MCL) for PFOA and PFAS at 4 parts per trillion. While the EPA has proposed extending the compliance deadline for these "forever chemicals" to 2031, CWT remains committed to its original investment timeline, prioritizing customer health and safety. The company estimates a substantial investment of approximately $217 million to $226 million for PFAS treatment between 2025 and 2029. To mitigate the financial impact on customers, CWT has actively pursued litigation against PFAS manufacturers, successfully securing approximately $35 million in net settlement proceeds by Q3 2025, which will directly offset these capital expenditures. This proactive approach to environmental compliance and cost recovery enhances its competitive standing by ensuring high-quality service while managing ratepayer burden.

Furthermore, CWT is integrating resilience technologies into its operations. Investments in equipment such as generators and solar installations are designed to enhance operational reliability during power outages and reduce dependency on the electric grid, thereby lessening the company's environmental footprint. A 20-year power purchase agreement with EDPR NA Distributed Generation LLC for a 2.35-megawatt solar array at its Northeast Bakersfield Treatment Plant is anticipated to reduce grid energy costs by approximately $1.7 million over the term of the agreement. The Silverwood development in San Bernardino County, California, exemplifies CWT's commitment to water reuse, with a new wastewater treatment facility designed to deliver over 3 million gallons per day of tertiary treated wastewater, 100% of which will be reused within the community. This not only addresses local water needs but also positions CWT as a leader in sustainable water management. These technological and operational advancements contribute directly to CWT's competitive moat by ensuring reliable, high-quality, and sustainable water service, which is paramount for customer satisfaction and regulatory approval for rate base growth.

Financial Performance and Strategic Momentum

California Water Service Group delivered a strong financial performance in the first nine months of 2025, particularly notable given that the third year of a rate case cycle in California typically presents the most significant regulatory lag. For the three months ended September 30, 2025, operating revenue increased by $11.60 million (3.9%) to $311.20 million, compared to the same period in 2024. Net income attributable to the Group saw a modest increase of $0.50 million, reaching $61.20 million, or $1.03 per diluted share. This was primarily driven by rate increases, partially offset by higher operating expenses and net interest expense.

On a year-to-date basis through September 30, 2025, operating revenue decreased by $34.40 million (4.2%) to $780.20 million compared to the prior year. However, this GAAP figure is skewed by the retroactive recognition of interim rate relief in 2024 related to the delayed 2021 California General Rate Case (GRC). When adjusting for this non-GAAP impact, year-to-date net income actually increased by $9.8 million, or 9.9%, over non-GAAP 2024 results. This underlying growth was fueled by tariff rate changes, increased customer usage, and the recovery of the Palos Verdes pipeline memorandum account, which added $0.05 per share.

The company's capital investment program remains robust, with $364.70 million invested in water infrastructure during the first nine months of 2025, representing a 10% increase over the same period in 2024. For the full year 2025, utility capital expenditures are estimated to be between $450 million and $550 million. This aggressive investment underpins a projected compounded annual rate base growth of almost 12%, a critical driver for future earnings.

CWT maintains a strong liquidity profile, with $76 million in unrestricted cash, $45.6 million in restricted cash, and $255 million available on its bank lines of credit as of September 30, 2025. In October 2025, the company successfully completed a $370 million long-term financing, issuing $170 million in Senior Unsecured Notes (rated A by S&P) and $200 million in First Mortgage Bonds (rated AA- by S&P). These proceeds are earmarked for refinancing existing debt and general corporate purposes, further strengthening the balance sheet. The company's long-term goal is to achieve a dividend payout ratio of 60% of net income, reflecting its commitment to shareholder returns, evidenced by its 323rd consecutive quarterly dividend declared in October 2025.

Strategic Initiatives and Forward Outlook

CWT's strategic initiatives are designed to capitalize on growth opportunities while proactively addressing regulatory and environmental challenges. The ongoing 2024 California GRC is a cornerstone of its future outlook, proposing over $1.60 billion in infrastructure investments from 2025 to 2027, with $1.30 billion in new capital projects. This includes significant pipeline replacements (46% of proposed new improvements) and a Low-Use Water Equity Program aimed at decoupling revenue from water sales to promote conservation and affordability. While the Administrative Law Judge has indicated a need for additional time for the GRC decision, the California Public Utilities Commission (CPUC) has authorized an interim rate increase tied to CPI and a memorandum account to track lost revenues if the decision extends beyond January 1, 2026, mitigating potential regulatory lag.

Beyond California, CWT is expanding its footprint. In Texas, its BVRT joint venture continues to demonstrate "tremendous growth" in the South Austin/San Antonio mega-region, adding 1,100 new connections year-to-date Q3 2025 and securing commitments for another 15,500 customers. A comprehensive settlement for BVRT's first rate case is pending approval from the Public Utility Commission of Texas, with initial new rates implemented in July 2025. The company is also pursuing a public-private partnership to bring water into this rapidly growing market by 2026. In Hawaii, recent rate case approvals will increase annual revenue by $4.70 million for Waikoloa systems and $1.10 million for Kaanapali. Washington Water Service has also filed for a $4.90 million revenue increase, expected in December 2025.

Sustainability and environmental stewardship are central to CWT's long-term strategy. The company's 2024 sustainability report highlights goals such as reducing Scope 1 and Scope 2 greenhouse gas emissions by 23.5% from its 2021 baseline. Emergency preparedness and wildfire mitigation remain top priorities, with ongoing investments in vegetation management and infrastructure upgrades, alongside community EOC exercises and a Firefighter Grant Program that has provided over $1 million in grants since 2019.

Risks and Challenges

Despite a strong outlook, CWT faces several pertinent risks. The primary concern remains regulatory delays, particularly with the 2024 California GRC. While the CPUC has shown increased transparency and authorized interim measures, a prolonged delay could still impact earnings and cash flow, as experienced with the 2021 GRC. The evolving landscape of PFAS regulations also presents a challenge. While CWT is proactively investing and pursuing litigation for cost recovery, the sheer scale of the estimated $217 million to $226 million investment, coupled with potential shifts in compliance deadlines and state-specific rules, introduces an element of uncertainty.

The "higher for longer" interest rate environment poses a continuous challenge, potentially increasing financing costs for CWT's substantial capital expenditure program. While the company has demonstrated an ability to secure favorable long-term financing, sustained high rates could pressure margins. Furthermore, broader macroeconomic factors, including potential government shutdowns, could impact the regulatory environment and economic stability, affecting customer demand and operational costs. Wildfire risks, particularly in California, necessitate ongoing significant investments in mitigation and emergency response, which, while critical for safety and service, represent substantial and potentially increasing operational expenses.

Conclusion

California Water Service Group stands as a resilient and strategically positioned utility, poised for continued growth as it approaches its centennial. The company's core investment thesis is firmly rooted in its unwavering commitment to infrastructure modernization, which drives consistent rate base expansion and underpins its long-standing dividend growth. This organic growth is intelligently supplemented by targeted greenfield developments in high-growth regions like Texas and innovative wastewater reuse projects in California, diversifying its revenue streams and customer base.

CWT's operational and technological adaptations, particularly in addressing complex water quality challenges like PFAS and enhancing system resilience, are not merely compliance efforts but strategic differentiators that reinforce its competitive moat. The company's proactive engagement with regulatory bodies, coupled with a disciplined financial approach, aims to mitigate the impact of regulatory lag and ensure a stable financial trajectory. While risks such as regulatory delays and a challenging interest rate environment persist, CWT's robust balance sheet, strategic capital allocation, and commitment to both customer service and shareholder returns present a compelling long-term investment narrative. The company's ability to adapt and thrive amidst evolving industry dynamics, maintaining operational excellence and financial prudence, positions it as a cornerstone utility in the Western United States.