California Water Service Group CWT gains from the company’s organic and inorganic initiatives and planned capital investment to strengthen and expand its water infrastructure. The company is efficiently managing its debt levels and has enough financial strength to meet CWT’s near-term interest obligations.

Depending on a single state for the majority of its earnings and changes in regulations are major concerns for this water utility.

Factors Acting as Tailwind for CWT Stock

California Water Service’s primary focus is to expand operations in the western United States through acquisitions and continue to explore new opportunities to expand regulated and non-regulated water and wastewater activities.

On the back of improving economic conditions, completed acquisitions and other organic efforts, the company’s customer base is likely to continue witnessing this uptrend in the coming years.

The estimated capital expenditure for 2024 is $380 million. Management expects to increase capital expenditures in non-California utilities due to recent acquisitions and expansions, and all these expenditures are expected to boost the company’s earnings.

Other water utilities like American Water Works AWK aim to invest $3.1 billion in 2024 with a major portion utilized for infrastructure improvements in regulated businesses. Essential Utilities WTRG plans to invest $1.3-$1.4 billion in 2024 and Middlesex Water MSEX plans to invest $237 million in 2024-2026 to strengthen its water and wastewater infrastructure to service the company’s customers in a safe, reliable and efficient manner.

CWT’s total debt to capital is 45.61% compared with its industry average of 54.62%. This indicates that CWT manages its business more efficiently than its peers. Its times interest earned ratio was 3.7 at the end of the second quarter of 2024. The ratio, being greater than one, indicates that the company has enough financial strength to meet its near-term interest obligations. The decline in interest rates is a positive development for this water utility.

Headwinds for California Water Service

While the company has operations in various states, more than 93.8% of it is concentrated in California. This lack of diversification causes its operations to be subjected to weather, political, water supply, labor, energy cost, regulatory and economic risks of a single state.

The utility operates in a highly regulated environment. Any changes in existing laws and conditions could increase the operating costs and there can be no assurance that the commission would approve rate increases to enable the recovery of these additional compliance costs, thereby having an adverse impact on the business of the company.