California Water Service(CWT) - 2024 Q4 - Annual Report

Part I Business The company is a regulated water utility holding company serving two million people, with a growth strategy focused on acquisitions in the western U.S Forward-Looking Statements Forward-looking statements are subject to numerous risks and uncertainties, including regulatory decisions, environmental compliance, climate impacts, and economic conditions - Forward-looking statements are based on current information and management's beliefs and are not guarantees of future performance[14] - Key risks include the outcome of the 2024 General Rate Case (GRC), changes in water quality standards like PFAS regulation, climate change, water supply availability, and economic conditions[15][17] Overview The company operates as a holding company with seven subsidiaries, providing regulated water and wastewater utility services to approximately two million people - The company operates through seven subsidiaries, including regulated utilities like Cal Water, Washington Water, New Mexico Water, and Hawaii Water[18] - The primary business is providing water utility services to approximately two million people, including production, distribution, and sale of water, as well as wastewater and non-regulated services[20] Regulated Business The company's regulated business, primarily Cal Water, accounts for 92.3% of 2024 revenue, with rates set by state commissions to ensure a fair return on investment 2024 Regulated Operations Overview | Subsidiary | Customer Connections (approx.) | % of Total Connections | % of 2024 Consolidated Revenue | | :--- | :--- | :--- | :--- | | Cal Water | 499,400 | 89.2% | 92.3% | | Washington Water | 38,300 | 6.8% | 2.3% | | New Mexico Water | 11,500 | 2.1% | 0.7% | | Hawaii Water | 6,700 | 1.2% | 4.3% | | Texas Water | 4,200 | 0.7% | 0.4% | - The company operates the City of Hawthorne and City of Commerce water systems under lease agreements, with revenues of $12.7 million and $4.1 million respectively in 2024[25][28] Non-Regulated Activities Non-regulated activities include operating water systems for other entities, with revenues subject to sharing agreements with regulated customers in California - Non-regulated activities include operating water systems for others, leasing antenna sites, and billing services, subject to revenue sharing with regulated customers in California[35][36] - Cal Water's annual revenue sharing with regulated customers was $2.8 million in 2024, compared to $2.7 million in both 2023 and 2022[37] Operating Segment The company operates as a single reportable segment focused on water supply, distribution, and related utility services - The company operates in one reportable segment, which is the supply and distribution of water and related utility services[38] Growth The company's growth strategy focuses on expanding its regulated and non-regulated water and wastewater activities through acquisitions and service agreements in the western U.S - The company plans to grow by expanding its regulated and non-regulated water and wastewater activities through acquisitions, lease arrangements, and other service agreements in the western U.S[38] Geographical Service Areas and Number of Customer Connections at Year-end Total customer connections increased from 556,400 in 2023 to 560,100 in 2024 across all service areas Total Customer Connections | Year | Total Company Connections | | :--- | :--- | | 2024 | 560,100 | | 2023 | 556,400 | Rates and Regulation State regulatory commissions significantly impact revenues and operations through rate-setting mechanisms like the General Rate Case (GRC) California Regulatory Activity Key 2024 activities included filing the 2024 GRC, receiving the final 2021 GRC decision, and managing various rate offset and escalation requests - On July 8, 2024, Cal Water filed its 2024 GRC, proposing a $1.6 billion investment from 2025-2027 and requesting a revenue increase of $140.6 million (17.1%) for 2026[45][47][49] - The CPUC approved the 2021 GRC in March 2024, increasing adopted revenues for 2023 by approximately $41.5 million, retroactive to January 1, 2023[50] - Due to the 2021 GRC delay, Cal Water recorded an $88.6 million IRMA regulatory asset, representing the revenue difference between interim and final rates[55] - The California Supreme Court voided a 2020 CPUC decision, allowing Cal Water to again propose a full decoupling Water Revenue Adjustment Mechanism (WRAM) in its GRC filings[72] - The next Cost of Capital filing was extended to May 1, 2026, with the authorized ROE remaining 10.27% for 2025[67][68] Regulatory Activity - Other States Hawaii Water received authority to issue new securities for capital projects and completed a wastewater utility acquisition - Hawaii Water received authority to issue up to $20.8 million in new equity and debt securities to fund capital improvements[85] - Hawaii Water acquired Kukui'ula South Shore Community Services for $1.6 million, adding approximately 440 wastewater connections[86][87] Water Supply The company sources water from wells and wholesale suppliers, actively managing groundwater basins and addressing new water quality regulations for PFAS - Approximately half of the annual water supply is pumped from wells, with the remainder purchased or from surface sources, managed in compliance with California's SGMA[89] - The company estimates a capital investment of approximately $226.0 million will be required to comply with the EPA's new PFAS drinking water regulation[92] - As of January 9, 2025, the snowpack water content in California's northern Sierra region was 139% of the long-term average, supporting an adequate water supply outlook for 2025[90] 2024 Purchased Water Wholesaler Rate Increases | District | Effective Month | 2024 Unit Cost | Percent Change | | :--- | :--- | :--- | :--- | | Antelope | July | $790.00 /af | 5.1% | | Bakersfield (1) | July | $213.00 /af | 9.2% | | Bear Gulch | July | $5.67 /ccf | 8.8% | | South Bay Region (2) | July | $1,708.00 /af | 6.4% | | Los Altos | July | $2,344.00 /af | 12.2% | | Stockton | October | $1,170,637 /mo | 25.8% | | Westlake | January | $1,730.00 /af | 6.0% | Seasonal Fluctuations The water business is seasonal, with higher summer demand affecting cash flows, though regulatory mechanisms in California help moderate the financial impact - Water demand is seasonal, increasing in warm, dry summers and decreasing in cool, wet winters, which significantly impacts cash flows and short-term borrowing[104] - In California, the financial impact of seasonal fluctuations is moderated by regulatory mechanisms like the Monterey-Style Water Revenue Adjustment Mechanism (MWRAM) and the Incremental Cost Balancing Account (ICBA)[102] Utility Plant Construction Facility construction and replacement are financed through a combination of operational funds, long-term financing, and developer contributions - Financing for utility plant construction comes from operations, long-term financing, and developer funding through advances and contributions[105] Energy Reliability The company ensures service continuity during power outages using backup generators, with increased power costs expected to be recovered through regulatory accounts - The company uses backup power systems and leased emergency generators to maintain service during power interruptions, including PSPS events[107][108] Security at Company Facilities The company has enhanced facility security and complies with federal regulations requiring vulnerability assessments and emergency response plans - The company has complied with federal legislation requiring vulnerability assessments and conducts additional risk and resilience assessments under the 2018 America's Water Infrastructure Act[109][110] Competition and Condemnation Direct competition is minimal due to state law, but public agencies can acquire utility properties through eminent domain with just compensation - Direct competition is limited by state law, but public agencies can acquire company systems via eminent domain, which would require just compensation[112][113] Government Regulations Operations are subject to extensive federal, state, and local regulations covering environmental protection, health, safety, and drinking water standards Environmental Matters The company adheres to various environmental regulations and anticipates that stricter rules will increase future operating costs - Operations are subject to environmental regulation by various governmental authorities, and the company expects these regulations to become stricter, leading to higher future operating costs[115][116] Quality of Water Supply The company produces potable water in compliance with federal and state standards, operating a state-certified water quality laboratory in California - Water is treated and tested to comply with SDWA and state standards, and the company operates its own state-certified water quality lab in California[117] Impact of Climate Change Legislation and Regulation Potential climate change legislation could increase operating costs for power, fleets, and capital projects, with recovery expected through the regulatory process - Potential climate change regulations could increase costs for power, vehicle fleets, and capital projects (due to CEQA), with the company anticipating recovery via GRC filings[119][121][122] Human Capital Resources The company employed 1,278 people as of year-end 2024, with a significant portion of its California workforce represented by unions under long-term contracts - As of December 31, 2024, the company had 1,278 employees, with 771 union members in California under contracts that expire in February 2027[129][130][221] - The company has separate six-year agreements with the Utility Workers Union of America (UWUA) and the International Federation of Professional and Technical Engineers (IFPTE), both running through February 28, 2027[130] Executive Officers of the Registrant This section lists the company's executive officers, their positions, ages, and professional backgrounds - A table lists the executive officers, their positions, ages, and career histories, with Martin A. Kropelnicki serving as Chairman, President, and CEO[132] Risk Factors The company faces material risks related to the regulatory environment, business operations, and general factors such as macroeconomic conditions Risks Related to Our Regulatory Environment Financial viability is heavily dependent on regulators, with risks including failure to recover costs, rate case delays, and the impact of stringent environmental rules - The business is heavily regulated, and financial viability depends on the ability to recover costs through rates approved by state commissions; delays or insufficient approvals can adversely affect earnings[136][139] - New and more stringent water quality regulations, such as the EPA's final MCLs for six PFAS compounds, are expected to increase operating costs and capital expenditures, with an estimated $226.0 million investment for PFAS compliance[152][154] - Changes in regulatory policies, such as the CPUC's 2020 decision to preclude full decoupling WRAMs, can create uncertainty and impact financial results[143] Risks Related to Our Business Operations Operational risks include potential litigation, natural disasters, infrastructure failure, cybersecurity attacks, and water supply interruptions - The company faces strict liability risk from inverse condemnation, where it could be held responsible for property damage caused by its facilities, even without fault[159] - Operations are vulnerable to natural disasters like wildfires and landslides, which can damage assets and disrupt service[160][161] - Disruption of IT and OT systems from cyber-attacks poses a significant risk, potentially affecting billing, customer service, and operational management[172] - Water supply adequacy is subject to factors beyond control, including rainfall, climate change, and regulations, which could lead to shortages and rationing[175][183] - The business is capital-intensive and requires significant expenditures to replace aging infrastructure; inability to secure funding at reasonable rates could negatively impact operations[199] General Risk Factors Broader risks include a high concentration of operations in California, macroeconomic pressures like inflation, and challenges related to ESG initiatives - Operations are geographically concentrated in California, which generated 92.3% of total consolidated operating revenue in 2024, exposing the company to state-specific risks[223] - High inflation and adverse macroeconomic conditions can increase the company's cost structure and negatively impact financial performance[225] - Failure to achieve announced Environmental, Social, and Governance (ESG) goals could lead to reputational harm, increased costs, and legal or regulatory proceedings[234][236] Unresolved Staff Comments The company reports no unresolved staff comments - None[239] Cybersecurity Cybersecurity governance is overseen by the Board and managed based on the NIST framework, with no material incidents identified in the last fiscal year Governance The Board and Audit Committee oversee cybersecurity risks, with management led by the SVP & Chief Risk Officer who reports directly to the CEO - The Board and Audit Committee are responsible for overseeing cybersecurity risks, receiving reports from management at least quarterly[241][243] - The cybersecurity program is led by the SVP & CRO, who reports to the CEO and has over 25 years of relevant experience[242] Risk Management and Strategy The cybersecurity strategy aligns with frameworks like NIST and includes an incident response plan, third-party testing, 24/7 monitoring, and employee training - The cybersecurity approach is informed by multiple standards, including the NIST Cybersecurity Framework and Payment Card Industry Data Security Standard[245] - Key risk management practices include an incident response plan, annual third-party penetration testing, 24/7 monitoring by a Security Operations Center (SOC), and regular employee training[245][248] Properties The company's physical properties include offices, wells, storage tanks, and distribution mains, with Cal Water's assets subject to a lien securing its bonds Utility Property Summary (as of Dec 31, 2024) | Subsidiary | Wells (Owned/Managed) | Storage Tanks (Owned) | Storage Capacity (Million Gallons) | Supply & Distribution Mains (Miles) | | :--- | :--- | :--- | :--- | :--- | | Cal Water | 587 owned, 10 leased | 417 | 291 | 6,775 | | Hawaii Water | 29 owned, 8 managed | 38 | 35.8 | 246 | | Washington Water | 468 owned, 5 managed | 194 | 20.3 | 773 | | New Mexico Water | 28 owned | 29 | 11.0 | 210 | - Cal Water's properties are subject to a lien securing $1,175.0 million in outstanding First Mortgage Bonds as of December 31, 2024[251] Legal Proceedings Information regarding legal proceedings is incorporated by reference from the Notes to Consolidated Financial Statements - Details on legal proceedings can be found in Note 15, "Contingencies and Commitments," of the Notes to Consolidated Financial Statements[258] Mine Safety Disclosures This item is not applicable to the company - Not applicable[259] Part II Market for Registrant's Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE under 'CWT', and 2025 marks the 58th consecutive year of increasing the annual dividend - The company's common stock is traded on the NYSE under the symbol CWT[261] Annual Dividend Per Common Share | Year | Dividend per Share | | :--- | :--- | | 2024 | $1.12 | | 2023 | $1.04 | - On January 29, 2025, the Board declared a quarterly dividend of $0.30 per share and a one-time special dividend of $0.04 per share, marking the 58th consecutive year of increasing the annual dividend[262] [Reserved] This item is not applicable - Not applicable[268] Management's Discussion and Analysis of Financial Condition and Results of Operations Net income increased significantly in 2024 due to a retroactive GRC decision, with continued strong liquidity and capital investment planned Overview Net income rose to $190.8 million in 2024 from $51.9 million in 2023, driven by a $242.2 million revenue increase from the 2021 GRC decision 2024 vs. 2023 Financial Highlights | Metric | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Net Income Attributable to CWT | $190.8 million | $51.9 million | +$138.9 million | | Diluted EPS | $3.25 | $0.91 | +$2.34 (257.1%) | - The increase in net income was primarily due to a $242.2 million increase in operating revenue, mainly from the retroactive impact of the 2021 GRC decision[272] - The net income benefit from the 2021 GRC's 2023 interim rate relief, recognized in 2024, was approximately $64.0 million[273] Critical Accounting Policies and Estimates Key policies requiring significant judgment include regulated utility accounting, income taxes, and pension benefits, which rely on estimates and assumptions - Key critical accounting policies involve significant management judgment and include Regulated Utility Accounting, Income Taxes, and Pensions/Postretirement Benefits[276] - Determining the probability of recovering regulatory assets or refunding regulatory liabilities requires significant judgment based on regulatory proceedings and orders[278] - As a result of the 2021 GRC decision, SERP expenses were disallowed for recovery, leading to a reclassification of the SERP regulatory asset to other comprehensive loss[285] Results of Operations Operating revenue increased 30.5% in 2024 due to the 2021 GRC decision, while water production costs rose 7.7% from higher purchased water prices Sources of Change in Operating Revenue (2024 vs 2023) | Item | Change (in millions) | | :--- | :--- | | Net change due to rate changes, usage, and other | $122.1 | | IRMA revenue | $88.6 | | MWRAM revenue | $35.3 | | Deferral of revenue | ($3.8) | | Net Change | $242.2 | Water Production Costs (2024 vs 2023) | Cost Component | 2024 Amount (millions) | Change (millions) | % Change | | :--- | :--- | :--- | :--- | | Purchased water | $241.2 | $17.4 | 7.8% | | Purchased power | $47.7 | $2.0 | 4.4% | | Pump taxes | $21.8 | $2.8 | 14.7% | | Total | $310.7 | $22.2 | 7.7% | Rates and Regulation Multiple rate filings in 2024, including the 2021 GRC decision and various offsets, significantly impacted the company's annual revenue requirement 2024 Rate Filings Impacting Revenue | Type of Filing | Effective Date | Increase in Annual Revenue | | :--- | :--- | :--- | | 2024 Expense Offset | Jan. 2024 | $5.1 million | | Cost of Capital | Jan. 2024 | $10.0 million | | 2024 Rate Base Offset | May 2024 | $5.8 million | | 2021 GRC and 2024 Escalations | May 2024 | $42.5 million | Liquidity and Capital Resources Liquidity is supported by strong operating cash flow and credit facilities, funding significant capital expenditures while maintaining a strong capital structure - Cash flow from operations increased to $290.9 million in 2024 from $217.8 million in 2023, largely due to the 2021 GRC resolution[306] - Capital expenditures were $470.8 million in 2024, with an estimate for 2025 between $450.0 million and $550.0 million[309][339] - In October 2024, Cal Water issued $125.0 million of 5.22% First Mortgage Bonds due 2054[311] - The dividend payout ratio was 34.3% in 2024, compared to a long-term target of 60%[314] Capitalization Ratios | | 2024 | 2023 | | :--- | :--- | :--- | | Equity | 59.7 % | 57.6 % | | Long-term debt | 40.3 % | 42.4 % | Quantitative and Qualitative Disclosures About Market Risk The company is subject to interest rate risk, which is mitigated by the regulated nature of the business allowing for potential cost recovery - The company is subject to interest rate risk on short-term variable-rate borrowings and new financing, which is lessened by the potential to recover higher costs in future rates[346] - The company does not use financial instruments like forward contracts or swaps for hedging purposes[345] Financial Statements and Supplementary Data This section contains the audited consolidated financial statements, supplementary data, and the independent auditor's report Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the financial statements and internal controls, identifying regulatory accounting as a Critical Audit Matter - The independent auditor, Deloitte & Touche LLP, issued an unqualified (clean) opinion on the financial statements and the effectiveness of internal controls[349] - The audit identified 'Regulatory Assets and Liabilities' as a Critical Audit Matter due to significant management judgments regarding future cost recovery or refunds[356][359] Consolidated Financial Statements The financial statements show total assets grew to $5.18 billion, with 2024 net income of $190.8 million on $1.04 billion in revenue Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Assets | $5,180,283 | $4,595,533 | | Total Liabilities | $3,541,997 | $3,165,221 | | Total Equity | $1,638,286 | $1,430,312 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Operating Revenue | $1,036,806 | $794,632 | $846,431 | | Net Operating Income | $225,054 | $77,135 | $127,660 | | Net Income Attributable to CWT | $190,807 | $51,911 | $96,011 | Consolidated Statement of Cash Flows Highlights (in thousands) | Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $290,867 | $217,817 | | Net Cash used in Investing Activities | ($474,870) | ($389,419) | | Net Cash from Financing Activities | $194,724 | $171,543 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, regulatory accounts, debt, taxes, and employee benefits, which are essential for a full understanding Disaggregated Operating Revenue (in thousands) | Revenue Source | 2024 | 2023 | | :--- | :--- | :--- | | Revenue from contracts with customers | $905,623 | $790,334 | | Regulatory balancing account revenue | $131,183 | $4,298 | | Total operating revenue | $1,036,806 | $794,632 | Regulatory Assets and Liabilities (in thousands) | Account | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Regulatory Assets | $357,406 | $257,621 | | Total Regulatory Liabilities | $814,551 | $683,717 | - The company's pension plan was overfunded, with a fair value of assets of $750.0 million exceeding benefit obligations of $524.0 million as of Dec 31, 2024[489] - In 2024, the company sold 1,638,977 shares through its at-the-market equity program, raising net proceeds of $86.5 million[464] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[567] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of year-end 2024 - Management concluded that disclosure controls and procedures were effective as of December 31, 2024[570] - Management concluded that internal control over financial reporting was effective as of December 31, 2024, based on the COSO framework[571] Other Information No director or Section 16 officer adopted or terminated a Rule 10b5-1 trading arrangement during the last fiscal quarter - No director or Section 16 officer adopted or terminated a Rule 10b5-1 trading plan in the last fiscal quarter[573] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[574] Part III Directors, Executive Officers and Corporate Governance Information regarding directors and corporate governance is incorporated by reference from the 2025 Proxy Statement - Information regarding directors and corporate governance is incorporated by reference from the 2025 Proxy Statement[576] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2025 Proxy Statement - Information regarding executive compensation is incorporated by reference from the 2025 Proxy Statement[579] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2025 Proxy Statement, with details on equity compensation plans provided Equity Compensation Plan Information | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 133,666 | $52.75 | 2,861,972 | Certain Relationships and Related Transactions and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2025 Proxy Statement - Information regarding related party transactions and director independence is incorporated by reference from the 2025 Proxy Statement[581] Principal Accountant Fees and Services Information regarding principal accountant fees is incorporated by reference from the 2025 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the 2025 Proxy Statement[582] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Form 10-K - This section provides an index of all exhibits filed with or incorporated by reference into the Form 10-K[586][587] Form 10-K Summary The company reports that there is no Form 10-K summary - None[592]