Infrastructure Investments: Impact on the Water Utility Sector

Scale and Scope of Current Investments

Water utility companies are making significant investments, with CWT planning capital expenditures to grow its rate base to $2.47 billion by 2025, AWR committing $170-$200 million this year, SJW projecting $1.6 billion over five years, and AWK securing authorization for investments across multiple states.

"This was an increase of 15.4% over 2022. Further, based on our current planned capital expenditures and subject to regulatory approval, we estimate that rate base will grow to $2.36 billion by the end of 2024 and $2.47 billion by the end of 2025." --- (CWT, earning call, 2024/Q1)

"We are committed to the goal of spending $170 million to $200 million on capital expenditures this year at our regulated utilities. I’m also pleased to report that last week, our Board approved another sizable dividend increase, by increasing the company’s third quarter cash dividend to $0.46551 per share from $0.43 per share. The annualized dividend rate after this increase is $1.86 per share, which represents an 8.3% increase from the current annualized dividend rate of $1.72 per share." --- (AWR, earning call, 2024/Q2)

"We maintain our five year capital investment outlook of $1.6 billion, which includes approximately $230 million in estimated PFAs remediation based on the maximum contaminant levels in the previously proposed regulation. The factors underlying our 2024 guidance include a" --- (SJW, earning call, 2024/Q1)

"We have completed four cases already in 2024 in Indiana, West Virginia, Kentucky, and Pennsylvania, all of which authorized 100% of the capital investments we have made or will make in each state. We also have several other general rate cases and timely infrastructure recovery mechanisms currently in front of regulators that I'm confident will be reasonably decided." --- (AWK, earning call, 2024/Q2)

"Group capital investments during the 3- and 6-month periods ended June 30, 2024, and totaled $104.6 million and $214.4 million, respectively, which is an increase of 9.8% and 21%, respectively, over the same period last year. As of June 30, 2024, we've completed 56% of our annual capital budget of $385 million." --- (CWT, earning call, 2024/Q2)

Regulatory and Policy Influences

Water utility companies navigate complex regulatory landscapes by engaging with stakeholders, ensuring customer affordability, and addressing policy constraints. Regulatory decisions, policy changes, and specific mechanisms like decoupling and cost balancing significantly influence their strategies and operations.

"As Eric shared earlier, this case demonstrated the value of meaningfully engaging with our local stakeholders and approaching the filing and hearings with transparency, responsiveness and a desire for constructive collaboration. We believe our approach resulted in significant improvements between the preliminary and final decisions issued by the Public Utility Regulatory Authority." --- (SJW, earning call, 2024/Q2)

"We're focused on that issue in every aspect of our regulatory planning and the efforts we continue to drive to ensure customer affordability, from cost management and driving efficiencies, to innovative tariff approaches, to a direct customer assistance." --- (AWK, earning call, 2024/Q2)

"Factors that may cause actual results to be different than those expected or anticipated include, but are not limited to: governmental and regulatory commissions' decisions; consequences of eminent domain actions relating to our water systems; changes in regulatory commissions' policies and procedures; our ability to invest or apply the proceeds from the issuance of common stock in an accretive manner; increased risk of inverse condemnation losses as a result of climate change and drought; the outcome and timeliness of regulatory" --- (CWT, press release, 2024/07/09)

"In addition, there were four regulatory mechanisms that Golden State Water requested and are being litigated. First, a full sales and revenue decoupling mechanism and full cost balancing account for water supply." --- (AWR, earning call, 2024/Q2)

"All but two policy issues have been agreed upon and we are hopeful the CPUC will approve the settlement later this year. In Connecticut, we worked within the constraints of a formidable regulatory environment to complete our general rate case." --- (SJW, earning call, 2024/Q2)

Technological Advancements and Environmental Sustainability

Water utility companies are leveraging technological advancements like solar generation, energy storage, and advanced leak detection to enhance environmental sustainability, reducing greenhouse gas emissions and chemical use while promoting climate resiliency and high-quality water service.

""As we reflect on our progress in 2023 and focus on achieving further progress in the years to come, this report affirms that our commitment to sustainability yields benefits for all of our important stakeholders."" --- (AWK, press release, 2024/07/29)

"Treating PFAS in drinking water; Reducing greenhouse gas emissions through solar generation, energy storage systems, continued electrification of our vehicle fleet, and expansion of our advanced leak detection program; and Advancing the CPUC's Environmental and Social Justice Action Plan by improving access to high-quality water service, climate resiliency, and economic and workforce development." --- (SJW, press release, 2024/07/24)

"Additionally, these conservation measures enabled the utility to realize environmental benefits, such as lower chemical use from less treatment required along with reduced energy consumption and subsequent greenhouse gas emissions." --- (CWT, press release, 2024/07/29)

""We are pleased to announce the recipients of this grant which allows organizations across the state to promote environmental sustainability through education, watershed protection and volunteerism," said Rich Svindland President of Missouri American Water." --- (AWK, press release, 2024/05/03)

"American Water has been included in the top 10% of America's Most JUST Companies by JUST Capital and CNBC, is ranked number one in the utilities industry for the 2024 Forbes America's Best Large Employers, has been recognized on the 2023 Bloomberg Gender-Equality Index for the fifth consecutive year, is the highest-ranked water and wastewater utility on Barron's 100 Most Sustainable U.S. Companies 2024 List, and has earned the U.S. Department of Homeland Security SAFETY Act designation and U.S. Environmental Protection Agency's WaterSense® Excellence Award, among additional state, local and national recognitions." --- (AWK, press release, 2024/04/15)

Financial Performance Amid Increased Investments

Increased investments in the water utility sector have led to higher net borrowings and repayments, management fee revenue, and deferred WRAM revenue, while also impacting depreciation and amortization expenses. These financial activities reflect the sector's strategic focus on enhancing infrastructure and managing associated costs.

"Cash Flow from Financing Activities Net cash provided by financing activities for the six months ended June 30, 2024 increased by approximately $2,400 from the same period in the prior year, primarily as a result of (1) an increase in net borrowings and repayments on our lines of credit of $121,400, offset by (2) a decrease in net borrowings and repayments on long-term debt of $84,900, and (3) a decrease in net proceeds from our common stock equity offerings of $31,500." --- (SJW, sec filing, 2024/Q2)

"The increase was largely due to an increase in management fee revenue from annual economic price adjustments and the commencement of operations at the new bases, partially offset by lower overall construction activity resulting from timing differences of when construction work was performed in 2024 as compared to the same period of 2023." --- (AWR, sec filing, 2024/Q2)

"The increase was primarily due to the recognition of $13.6 million of costs associated with recognized deferred WRAM revenue, which was partially offset by a $4.2 million decrease in bad debt expense as a result of applying arrearage funds to eligible, previously written-off accounts." --- (CWT, sec filing, 2024/Q2)

"Cash Flow from Financing Activities Net cash provided by financing activities for the three months ended March 31, 2024 increased by approximately $2,500 from the same period in the prior year, primarily as a result of (1) an increase in net borrowings and repayments on our lines of credit of $125,500, offset by (2) a decrease in net borrowings and repayments on long-term debt of $85,000, and (3) a decrease in net proceeds from our common stock equity offerings of $34,000." --- (SJW, sec filing, 2024/Q1)

"The overall decrease in depreciation and amortization expenses is primarily due to the retroactive impact for the full year of 2022 of $576,000 recorded in first quarter of 2023 as a result of receiving a proposed decision in the water general rate case as well as asset retirements and fully depreciated assets at the water segment, partially offset by an increase to depreciation and amortization expense attributed to additions to utility plant and other fixed assets at both regulated utilities." --- (AWR, sec filing, 2024/Q1)

Stakeholder Perspectives on Investments

Stakeholders in the water utility sector emphasize the importance of infrastructure investments. American Water's leadership engages in discussions to understand stakeholder perspectives, while SJW Group highlights their substantial investments and initiatives aimed at improving water supply and infrastructure, reflecting a commitment to meeting stakeholder expectations and achieving sustainable operational efficiencies.

"Lynda DiMenna, Vice President, Chief Environmental Officer, American Water, will join moderator Robert Powelson, President and Chief Executive Officer, National Association of Water Companies, for a discussion titled, Stakeholder Perspectives: Utilities." --- (AWK, press release, 2024/04/09)

""In the first quarter, we secured approval of a general rate case in Maine and an infrastructure charge in Texas; invested $69 million in maintaining and improving our water supply and infrastructure across our national footprint, putting us on track to meet our 2024 capital expenditures goals; and implemented capital initiatives to drive sustainable operating efficiencies that benefit customers." --- (SJW, press release, 2024/04/25)

Future Outlook and Potential Challenges

SJW anticipates recovering infrastructure investments in future rate cases to address pressing water quality and infrastructure issues. However, risks and uncertainties may impact actual results, highlighting potential challenges in achieving desired outcomes.

"were excluded because of timing. We expect to recover these investments in future rate cases.To build on what Eric said earlier, we need more from this final decision and we are going to continue to need more going forward to address several of the pressing water quality and infrastructure issues facing Connecticut.In approaching our most recent rate case, we went to school on the cases that came before us and we learned a lot through the process and from our own rate case." --- (SJW, earning call, 2024/Q2)

"The risks, uncertainties and other factors may cause the actual results, performance or achievements of SJW Group to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements." --- (SJW, press release, 2024/04/16)