管理層發言
Ladies and gentlemen, until that time, your lines again will be placed on music hold. Thank you for your patience. Thank you for standing by. And welcome to the 2026 Second Quarter California Water Service Group earnings call. All lines have been placed on mute to prevent any background noise. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press *1 on your touch tone phone. And to withdraw your question, please press *1 again. It is now my pleasure to turn the call over to Mr. James Patrick Lynch, Senior Vice President and Chief Financial Officer. You may begin.
Thank you, Janine. Welcome, everyone, to the second quarter 2026 results call for California Water Service Group. With me today is Martin A. Kropelnicki, our Chairman and CEO. Replay dial-in information for the call can be found in our quarterly results earnings release which was issued earlier today. The call replay will be available until September 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 second quarter 2026 results, I would like to cover some forward-looking statements. During the call, we may make certain forward-looking statements. And because these statements deal with future events, they are subject to various risks and uncertainties. Our 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 the other reports we file with the Securities and Exchange Commission. And now, I will turn the call over to Martin to provide a brief overview.
Thanks, Jim. Good morning, everyone. Consistent with our past earnings calls, I am going to give you a quick overview of the agenda and then Jim and I are going to jump into some of the details for the quarter. There are six items on the agenda today that we want to go through. Starting in the second quarter, at the end of April, we received a decision on our 2024 California general rate case. As part of that decision, during the quarter, we recognized our IRMA, which is the balancing account that takes the retroactive portion of the rate case back to January 1. So this rate case was approximately 90 to 100 days delayed, but we were made whole back to the original date of January 1. That was recognized in the quarter, as well as other items that we will be talking about. In addition, during the quarter, we reached a full settlement in our rate case in Washington. I will provide more details about that when we get to that slide.
During the second quarter, we had record capital. We invested a record $270 million in new plant for the first six months of the year. That continues to move ahead, especially as we start to invest in our PFAS treatment programs throughout our service territory. To partially offset that growth, we raised about $88.8 million through our ATM stock program, and the company declared its 326th consecutive quarterly dividend of $0.335 per share. In addition to the quarter, we continue to work on our Nexus integration plans. Nexus has been great to work with and things are progressing there. We will give you some more details on that. Lastly, for those of you who like to look at some of the numbers on sustainability, we published our water quality and sustainability reports and received a number of awards during the quarter. Later on, toward the end, I will introduce two new officers. As some of you may know, Greg Milleman officially retired from the company.
I will talk a little bit about his replacement as well as one other promotion that occurred during the quarter. So that is the agenda for today. Jim, why don't I turn it over to you? We will go through the numbers.
Thanks, Martin. As Martin mentioned, the Q2 results reflect the decision we received in our 2024 California general rate case and also the retroactive application of the decision through the IRMA to the beginning of 2026. The net income for the quarter was $56.5 million or $0.93 per diluted share. That compares to Q2 2025 net income of $42.2 million or $0.71 per diluted share. Revenue for the quarter was $309 million compared to $265 million in the second quarter of 2025. The primary earnings drivers included $15.3 million of IRMA revenue related to the delayed 2024 California GRC, of which about $9.2 million of that was related to the first quarter. So that was the look-back portion that was recognized in Q2. We also had $15 million that was due to rate changes and changes in regulatory mechanisms, and $9.3 million of remaining deferred RAM revenue that is now expected to be collected over the next two years.
If you remember when we stopped decoupling, we still had some residual RAM balances that were deferred until we reached the proper accounting guidance that would allow us to report the revenue. We have now reached that place and have recognized the remaining deferred balances. These increases were partially offset by $6.3 million in higher per-unit water supply costs, about $7.9 million in costs related to the deferred RAM revenue, and $7 million in higher income taxes that were due primarily to higher income and an increase in our effective tax rate. If we move on to slide 6, you can see the impact of the activity of our second quarter on our diluted earnings per share. The primary drivers were customer rate changes, the IRMA and the deferred RAM revenue, each of which contributed $0.20, $0.15, and $0.11 per diluted share, respectively. These increases were partially offset by the water production cost and deferred RAM-related expenses of $0.08 and $0.10 per diluted share, respectively.
If we turn to slide 7, on a year-to-date basis, net income through the end of the quarter was $60.5 million or $1.00 per diluted share and that compared to year-to-date net income in the prior year of $55.5 million or $0.93 per diluted share. Revenue was $523 million compared to $469 million year-to-date in 2025. The primary earnings drivers were largely the same as those we experienced for the quarter. Turning to slide 8, you can see the impact on the year-to-date drivers with regards to our diluted earnings per share. Customer rate changes, the IRMA and deferred RAM revenue contributed $0.30, $0.20, and $0.11 per diluted share, respectively, and these were partially offset by higher water production costs and the deferred RAM-related expenses of $0.19 and $0.10 per diluted share. So that is a summary of the financial performance. Now I will turn the call back over to Martin to walk us through some of our capital activities.
Great. Thanks, Jim. I am on slide 9 for everyone on the call. Looking at our infrastructure investment through the second quarter, for the quarter, CapEx was $147 million. That was up from $119 million the prior year, which is about a 23.1% increase year over year. Our 10-year compound annual growth rate in growth capital is hovering around 11.4% right now. As a reminder, the capital estimates for 2026 and going out until the projects are complete include an estimated net $155 million that has been budgeted for PFAS. I note that we have approximately $60 million of recovery from polluters that is being used, so the sum of those numbers will get you back close to the original estimates we provided about a year and a half to two years ago when we started looking at PFAS. The PFAS numbers will still tend to move around as our legal team continues to do an outstanding job getting recoveries to offset the cost of PFAS treatment on behalf of our customers from polluters.
They continue to secure more dollars as well as some grant dollars. The main theme is consistency with what we have had the last 20 years: our compound growth rate on capital investment is holding a little north of 10%. Our internal target that we try to strive for is 10%. The PFAS assessment moves that a bit. As everyone knows, when you are increasing your rate base at 10%+ a year, your rate base grows. Right now, we have a compound annual growth rate of almost 12% on our rate base growth. The slides you see today have all been trued up for the California decision based on the numbers in that decision. We anticipate having approximately $3.5 billion in rate base by the end of 2028, assuming we can get all the capital in the ground on time. The company remains very capital-focused. CapEx continues to be strong. We are able to get that capital built into rates in California; it is preapproved.
So I think it is a little easier in California for earnings modeling because it is a prospective state. The other states we have are all historical. But overall, we are very happy with the CapEx growth and the rate base growth as we move through this next rate cycle on the West Coast. Jim, why don't I turn it back to you to cover liquidity and some of our capital plans for the second half of 2026?
Great. Thanks, Martin. We continue to maintain a strong liquidity profile to execute the capital plan and also as we pursue tuck-in M&A and look to integrate Nevada, Oregon, and the BVRT acquisitions. As of June 30, 2026, we had $43.4 million in unrestricted cash and about $45.7 million in restricted cash, along with approximately $395 million available on our bank line of credit. As a reminder, that restricted cash is earmarked for a project we have in Texas with a water agency, GVRA, to build a pipeline into one of the new areas where we hope to be delivering potable water in the near term. This is our first potable water system in Texas and we are looking forward to that initiative. We also maintain credit facilities totaling $600 million, expandable up to $800 million, with maturities that extend into March 2028. We are well positioned with regard to our existing credit facilities. We renewed our ATM stock program in May 2025, with a $350 million shelf registration.
During the second quarter, we raised $88 million in proceeds from stock sales under the ATM program. We believe the balance sheet is in good shape and that any additional financing we raise in the second half of 2026 will be primarily tied to growth, earmarked for constructing the remainder of our 2026 capital program and closing Nevada and Oregon acquisitions. We also will look to pay down our line of credit in California as we head toward the end of the year and prepare for 2027. Importantly, both California Water Service Group and Cal Water maintain a strong credit rating of A+ stable from S&P Global. That underscores the strength of our balance sheet. Finally, yesterday we declared our 326th consecutive quarterly dividend of $0.335 per share, which represents about a 7.6% compound annual growth rate in our five-year dividend. We are pleased with our ability to deliver that to shareholders.
Thanks, Jim. I am now on slide 12 and I want to talk about what is happening on the regulatory front. To recap the major components of the approved 2024 general rate case in California: the approved rate case will drive significant infrastructure investment from 2024 through 2027. You have to include a stub year in the year you file your general rate case. In total, in California prospective years, the capital gets approved in advance. We received about $1.45 billion of preapproved capital. In addition, the commission approved approximately $229 million of advice letter projects, bringing us to just shy of $1.7 billion over that four-year period. The commission also affirmed the Monterey-style RAM that we have used in the past and it has continued through this next cycle, along with a pension balancing account, a healthcare balancing account, a conservation expense balancing account, and an incremental cost balancing account for water production cost.
New in the settlement that was authorized is a sales adjustment mechanism. Since we did not get full decoupling but did get the Monterey-style RAM, the sales adjustment mechanism allows us to adjust our sales forecast the following year if sales are a certain percentage off from the forecast. Previously, when we decoupled, we did not have that option, and that tended to create growing uncollected balances from customers. Having a sales adjustment mechanism will help smooth out the revenue forecast and actual revenue in the second and third years of the rate case. Another new item we requested and received is a liability balancing account. We are well into wildfire season and procuring insurance has become more difficult and expensive. The commission authorized an insurance balancing account for California, which is important. Overall, it is good to have the 2024 rate case wrapped up. We started recognizing the revenue from that rate case in billings on July 1, so it is live, and now we are moving on to implement that capital.
During the quarter, we reached a settlement on the Washington water general rate case. Keep in mind Washington is a historical test year for capital purposes. We filed our rate case on September 25, 2025 and asked for just under $4.3 million; the filing number was $4.29 million. It was for increases across two of our largest Washington systems and we requested a 10.2% ROE. The final settlement we reached was an all-party settlement of $4.12 million and an ROE of 10.18%, which is very close to our ask. With the all-party settlement filed, it has not been approved yet by the commission, but we expect approval sometime in the third quarter and will start recognizing that revenue for Washington in the third quarter. Overall, good news on the rate case front. Moving to the next slide on strategic initiatives: in addition to capital, we are focused on acquiring the Nexus assets in Oregon and Washington.
Change of control applications have been filed. Integration planning with Nexus and Cal Water has been moving very well. Nexus is a great partner and we are pleased with the level of support. We continue to move forward for a close this year. I anticipate Nevada will likely get its decision first since they have a statutory timeline to approve the merger; we have been in discussions and answering their questions. Oregon does not have a statutory timeline, but we are answering questions and working with them as well. Our goal is to close the acquisitions before the end of the year. Regarding the BVRT joint venture, we submitted an application to buy out the rest of that partnership to become sole owner of BVRT. That change of control application was reviewed and deemed complete, meaning it goes to the commission for approval; we are waiting to hear back from them. We also have a consolidator rate case that was settled and we are waiting for final commission approval in Texas.
Texas has been busy between the rate case settlement and the application. During the quarter, the team connected an additional 200 new connections to our wastewater systems in the South Austin market, so that market continues to grow. Looking at slide 14 and other highlights for the quarter: we have been celebrating the company's 100-year anniversary and set up a number of regional events that are halfway through the process. They have been well received by employees and many government officials in the areas we serve. We are trying to make it a highly visible, well-branded 'we are in your community' type of event. The company takes pride in being around for 100 years, having been started by three World War I veterans in 191... that history is meaningful to us. We are also seeing a lot of customer engagement; tens of thousands of customers visited the website dedicated to our 100-year anniversary.
I encourage you to look at that to see the company's history and how we grew from three small districts in Northern California to being the largest investor-owned water utility in California, as well as presence in Hawaii and Washington. During the quarter, we won a number of awards, which the company takes pride in: the Alliance for Water Efficiency Award, named a top workplace by USA Today, and noted by Time as one of the world's most impactful companies for our work on sustainability and renewability. All of this is positive as we celebrate our 100-year anniversary, and we will be ringing the bell on the NYSE on November 30 with our board and employees to celebrate our 100 years of service. As you may recall, at the end of the last conference call, we did a tribute to Greg Milleman. Greg has officially retired. He is consulting on some of our rate projects and still available to help, but he is enjoying time away.
We had a great internal candidate to replace Greg. His name is Greg Shemansky, who was named Vice President of Rates by our board of directors. Greg Shemansky has a long history in the rate and regulatory world, including time with San Diego Gas and Electric and American Water, and he joined us a few years ago. He holds an undergraduate degree in economics from UCLA and an MBA in finance from Purdue University. Greg has officially taken over leading our rates team and is well qualified. Given the company's growth, we added a Vice President of Operations who runs the California entity. Previously, a Senior Vice President of Operations ran all operations across our five states. With growth, we felt it was time to have a Vice President of Operations for California reporting to the Senior Vice President of Operations. We promoted Tammy Johnson to this role effective July 1. Tammy has 40 years of experience, starting as a field worker in the union in the eighties.
She has moved up through union ranks, served as a union officer, and holds the highest level operating license in California, a D5. She returned to school after having children and completed her bachelor's degree and then an MBA. Tammy knows operations very well, and having someone who has been an operator running our system is important to me. We are very happy to have both Tammy Johnson and Greg Shemansky join the officer team effective July 1. Looking ahead to the second half of 2026, the agenda is simple: continue to get the capital in the ground, including our PFAS program. Year-to-date, we spent about $30 million on that program and we will update you every quarter on that spending. We have two new officers, a lot of rate case work, and our goal is to close the Nexus deal before the end of the year. We have plenty to do, a lot of capital to place into service, and the company remains focused on executing these tasks. With that, Janine, we will take a pause and open up for questions, please?
分析師問答
Thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press *1 on your touch tone phone. And to withdraw your question, please press *1 again. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please. We have a question from Davis Sunderland from Baird. Please go ahead.
Hi, good morning, guys. Maybe if I could start off, Martin, I'd be curious to get your thoughts on affordability. I know there has been a lot of rhetoric around utility bills and pushback against rate increases in different parts of the country. Has any of this changed your strategy or how you think about affordability?
Davis, thanks for the question. Affordability has always been at the forefront for us. There are two broad measures you use for affordability. One is the EPA guideline that looks at water bills as a percentage of average household budget; as long as you are below 2%, you are considered affordable. We are below 2% in all our districts. In California, before we can file a rate case, we must perform an affordability test and review it with the commission. In the 2024 rate case, we passed the affordability test in all our districts but one; that one district is very small but had significant capital needs. In California, we have tools such as a rate support fund and a low-income rate assistance fund, and we worked with the commission through the rate case process to make rates affordable for that small district. Prior to filing a large rate case, we always meet with customers, hire third-party firms, conduct focus groups, and interview thousands of customers to get their thoughts and perceptions.
Affordability is a key part of those discussions. We have not experienced major issues with affordability. What you are seeing in other regions, particularly on electric rates, is different—there has been significant upward pressure on electric rates, sometimes driven by data center demand, which is affecting affordability in those markets. We have not had those problems. In California, we have a 10.27% ROE, and the rate case was approved without major interveners. The Washington rate case settlement includes a 10.18% ROE. We are not seeing signals from regulators that affordability is an immediate problem for our service territories. That said, I am concerned about broader political and policy pressures. You have advocacy groups raising rate issues, and we are monitoring that. Our rates team, government affairs, and community affairs teams put a lot of care into preparing rate cases to avoid tripping affordability concerns.
The best evidence is our 20-year track record: we have been able to sustain roughly 10% growth on CapEx, get rate recovery, and avoid major affordability pushback. So am I concerned? I am watching it closely, especially given rising electric rates and other macro factors, but to date we have been navigating this well and will continue to balance affordability with capital needs.
Awesome, thanks for that, Martin. Maybe a second quick one. Lots of forecasts call for a higher interest rate environment looking forward, maybe as soon as a couple months from now. Any impact this might have on willingness to pursue other M&A, liquidity outlook, or other facets of the business that might be impacted?
You asked an important question. This is a subject of significant discussion with our board. We spend a lot of time talking about the economic landscape and the instability of some macroeconomic indicators. Inflation has continued to trend down, and the numbers that came out this morning are another positive sign and give the Fed more breathing room. At the same time, increased government spending related to geopolitical events, including military spending, can create economic momentum while also increasing deficits, which affects interest rates. I should note that in California we have a cost-of-capital adjustment mechanism, which is a two-way mechanism and beneficial for both stockholders and ratepayers. If the Moody's AA utility bond index swings by more than 50 basis points up or down, we can apply to adjust our ROE with that mechanism. That mechanism has supported higher ROEs during this cycle.
Interest rates may tick up in the near term depending on inflation and other factors, but I do not think this mechanism gets a lot of attention even though it is important for utility investors. From a capital and M&A perspective, our primary growth engine is replacement capital and internal investment; strategic M&A is secondary. We have plenty of internal growth. So we will remain opportunistic on acquisitions, as with the Nexus transaction, but we are not under pressure to buy at high multiples simply to grow rate base. We will watch interest rate trends closely and use our mechanisms and balance sheet to manage through changing market conditions.
Davis, one other point: we are on our third extension on our cost of capital proceeding in California. The cost-of-capital proceeding is separate from the general rate case proceeding. If we are unsuccessful in getting another extension, we would need to file in May for new rates to begin January 1, 2028. That proceeding provides an opportunity not only to revisit ROE but also to recast our average cost of debt. Any debt we raise that is higher than our current average cost of debt recovery will be represented in that calculation when we go through the proceeding.
I would add one thing. In the western U.S., commissions have not pushed back on the need to invest in infrastructure. Given climate change, wildfires, and the potential for a strong El Niño, readiness of infrastructure is a major focus. As we go through rate cases, commissions have been focused on the need to replace and invest in infrastructure. Based on our rate case results, the commissions understand and support that need. Regarding M&A, our replacement capital provides ample growth, so we will continue to be opportunistic. The Nexus acquisition made strategic sense to get presence in Oregon and Nevada at a valuation we considered fair. We will not go on a buying spree at high multiples just to grow rate base—we have internal growth and are focused on executing that.
Maybe one more quick housekeeping question for you, Jim. We noticed a big step up in other operating expenses and a step-down in depreciation and amortization. Is this IRMA-related or can you give any color on the dynamics there?
Yes. The big increase in other operating expenses is related to the deferred RAM revenue that we recorded. Rather than presenting those items net, we had to show the change in the revenue line item, but there were also associated costs with that revenue. Net recognition of the deferred RAM revenue was about $1.2 million to $1.3 million, but on a line-item basis it appears as about $7.9 million in costs and about $9.2 million to $9.3 million in revenue.
Great. Thanks, guys.
Thanks, Davis.
Thank you. And, again, should you have a question, please press *1. There are no further questions at this time. This concludes our question and answer session. I will now turn the call over to management.
Great. Thanks, Janine. Thanks, everyone, for joining us. It is nice to have the 2024 general rate case done in California. We are nearly done with the general rate case in Washington. The second half of the year will be busy with a lot of capital investment and, obviously, closing on the Nexus transaction, as well as celebrating our 100-year anniversary. Thank you all for joining us today and for your support. We will look forward to updating everyone on these major programs at the end of the third quarter 2026. Thank you very much, and everyone have a great day. Bye.
Thank you for participating in today's call. You may now disconnect.