California Water Service 2026 Q3 Earnings Call

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 of 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 8-K and is also available on the company's website at www.calwatergroup.com. Before looking at our third quarter 2026 result, I would 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. Now I will turn 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, while 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 327th consecutive quarterly dividend, which puts our anticipated dividend for the year at $1.34, which is up 8.1% year-over-year. Finally, I want to take a few moments to talk about emergency preparedness, emergency response. I think as we know, the super El Niño 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. 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 for the quarter.

Jim? Thanks, Marty. Our third quarter net income was $65.4 million, or $1.05 per diluted share.

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 drivers included $22.1 million from rate changes and new customers and $3.9 million from changes in the Drought Response Memorandum Account or the DREMA. 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 6, 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, or $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 WRAM revenue, which added $9.9 million and DREMA revenue, which contributed $3.9 million. Operating expenses increased $48.2 million or 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. Other operations expense increased $19.9 million, and that increase was primarily due to the recognition of $8.1 million in deferred WRAM costs and higher water conservation program expenses of $5.5 million. In addition, income taxes 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 Marty just referred to of $4.1 million. On slide 8, 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 9, 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%.

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 your new rates and 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 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 around November 15, we will be filing for that step increase.

I anticipate that we're going to do very well on that step increase for 2027 rates.