CALIFORNIA WATER SERVICE GROUP

The Commissions have plenary powers setting both rates and operating standards. As such, the Commissions’ decisions significantly impact the Company’s revenues, earnings, and cash flows. The amounts discussed herein are generally annual amounts, unless otherwise stated, and the financial impact to recorded revenue is expected to occur over a 12-month period from the effective date of the decision. In California, water utilities are required to make several different types of filings. Certain filings, such as GRC filings, escalation rate increase filings, and offset filings, may result in rate changes that generally remain in place until the next GRC. As explained below, surcharges and surcredits to recover balancing and memorandum accounts as well as GRC interim rate relief are temporary rate changes, having specific time frames for recovery.

The CPUC follows a rate case plan which requires Cal Water to file a GRC for each of its regulated operating districts (except Grand Oaks, which is filed as needed) every three years. In a GRC proceeding, the CPUC not only considers the utility’s rate setting requests, but may also consider other issues that affect the utility’s rates and operations. The CPUC is generally required to issue its GRC decision prior to the first day of the test year or authorize interim rates and an Interim Rates Memorandum Account (IRMA). In accordance with the rate case plan, Cal Water filed its most recent GRC filing in July of 2024 (2024 GRC) requesting rate changes effective January 1, 2026. For additional information on our 2024 GRC, see “California Regulatory Activity”.

Between GRC filings, Cal Water may file escalation rate increases, which allow Cal Water to recover cost increases, primarily from inflation and incremental investments, generally during the second and third years of the rate case cycle. However, escalation rate increases are district specific and subject to an earnings test. The CPUC may reduce a district’s escalation rate increase if, in the most recent 13-month period, the earnings test reflects earnings in excess of what was authorized for that district.

In addition, California water utilities are entitled to make offset requests via an advice letter. Offsets may be requested to adjust revenues for construction projects authorized in GRCs or recycled water projects when those capital projects go into service (these filings are referred to as “rate base offsets”), or for rate changes charged to Cal Water for purchased water, purchased power, and pump taxes (which are referred to as “expense offsets”). Rate changes approved in offset requests remain in effect until the next GRC is approved.

California Regulatory Activity

2024 GRC Application

On July 8, 2024, Cal Water submitted Infrastructure Improvement Plans (the Plans) for its California districts from 2025 to 2027 in its 2024 GRC application with the CPUC. The application also proposes a Low-Use Water Equity Program, that would, if approved as filed, decouple revenue from water sales, to assist low-water-using, lower-income customers.

The required, triennial filing begins an approximately 18-month review process by the CPUC, which will analyze the Plans, operating budget proposals, and the Low-Use Water Equity Program to establish water rates for 2026 to 2028 that reflect the cost of providing safe, reliable water service. Associated rates set by the CPUC would become effective no sooner than January 2026. Cal Water has concluded an initial pre-hearing conference and an administrative law judge and Commissioner have been assigned to the case. The Commissioner issued the Scoping Memo and Ruling in November 2024 identifying the issues to be addressed and setting the schedule for the proceeding. Subsequent to year end, public participation hearings were conducted and Cal Water received California Public Advocate’s (CalPA) report providing comments on the 2024 GRC application. Cal Water will provide a response to the CalPA report during the first quarter of 2025.

In the Plans, Cal Water proposes to invest more than $1.6 billion in its districts from 2025 to 2027, including approximately $1.3 billion of newly proposed capital investments. About 46% of the proposed new infrastructure improvements are to replace aging water pipelines. Such improvements are designed to enhance water supply reliability to support customers’ and firefighters’ everyday and emergency needs. The Plans also include, among other projects:

•Water quality upgrades to treat for existing and newly regulated contaminants.

•Infrastructure replacements to help ensure reliable delivery of water service.

•Equipment such as generators to help withstand power outages and shutoffs, and solar installation projects to help reduce Cal Water’s dependency on the electric power grid and lessen our environmental footprint.

•Physical and cyber security and safety enhancements to help protect facilities, customers, and employees.

•Water supply initiatives to help safeguard long-term reliability and sustainability of water sources.

•Advanced Metering Infrastructure to aid conservation efforts and enhance water-use efficiency.

Cal Water’s proposed Low-Use Water Equity Program would, if approved as filed, decouple revenue from water sales across its regulated service areas. The program is designed to work in conjunction with Cal Water’s proposed four-tier rate design and sales forecast proposals to enhance affordability—particularly for low-use and low-income customers—plus reinforce conservation goals, while providing the utility an opportunity to recover its authorized revenue requirement in a timely manner.

To support these investments, Cal Water has proposed to change 2024 rates to increase 2026 total revenue by $140.6 million, or 17.1%. Cal Water also proposes rate increases of $74.2 million, or 7.7%, in 2027; and $83.6 million, or 8.1%, in 2028.

2021 GRC

The CPUC approved a decision on March 7, 2024 on the 2021 GRC. The decision marked the end of an extensive review of Cal Water’s water system improvement plans, costs, and rates. The decision adopted a revised version of the alternate proposed decision issued on January 24, 2024, and increases adopted revenues, after corrections, for 2023 by approximately $41.5 million retroactive to January 1, 2023. It also potentially increases revenues by up to approximately $30.0 million for 2024 and $30.6 million for 2025, subject to the CPUC’s earnings test and inflationary adjustments.

The decision authorized Cal Water to invest approximately $1.2 billion from 2021 through 2024 in water system infrastructure projects that we believe were needed to continue providing safe, reliable water service to customers throughout California. This also includes approximately $160 million of infrastructure projects that may be submitted for recovery via the CPUC’s advice letter process.

The CPUC’s decision approves a progressive rate design that is intended to provide budget stability while benefiting low-income and low-water-using customers by significantly decreasing the cost of the first six units of water consumed and increasing the percentage of fixed costs that are recovered in the service charge.

On March 15, 2024, Cal Water submitted a request for expedited corrections in the March 7th decision. The decision and its appendices contained certain language, numbers, and calculations that were inconsistent or did not fully reflect the substantive outcomes described in the approved decision. On April 23, 2024, the executive director of the CPUC issued a decision approving the corrections.

On April 1, 2024, Cal Water submitted an advice letter requesting an increase in annual revenue of $42.5 million for all of its rate making areas (besides Grand Oaks) effective May 1, 2024. The advice letter was approved and included the effects of the expense offsets of $4.7 million and cost of capital filing of $11.4 million that were implemented on January 1, 2024, as well as $5.8 million in rate base offsets that were effective on May 1, 2024. The remaining $20.6 million increase was primarily due to 2024 escalations. Cal Water implemented the new rates incorporating all these items on May 31, 2024.

2021 GRC IRMA

The 2021 GRC was approved in March of 2024 and final rates for the 2021 GRC were implemented on May 31, 2024; as a result, Cal Water calculated and recorded an IRMA regulatory asset of $88.6 million and a corresponding increase to revenue for the difference between final rates and interim rates for all of 2023 and the first five months of 2024. The IRMA regulatory asset was reduced by $2.5 million for Rate Support Fund (RSF) credits that would have been given to customers had the rate case been approved on time with an associated increase to regulatory assets for the RSF program. Cal Water also recorded an IRMA regulatory liability of $5.6 million with a corresponding increase to regulatory assets for Customer Assistance Program (CAP) credits that would have been given to customers had the rate case been approved on time. Finally, Cal Water recorded an IRMA regulatory asset of $0.4 million with a corresponding decrease to regulatory asset for the CAP and RSF for surcharges that would have been billed to fire protection customers had the rate case been approved on time. During the third quarter of 2024, Cal Water was approved to recover and refund the recorded IRMA regulatory assets and liabilities in the form of either 12-month, 24-month, or longer surcharges or 12-month surcredits. The surcharges and surcredits were implemented on October 1, 2024.

Escalation Increase Requests

As a part of the decision on the 2021 GRC, Cal Water was authorized to request annual escalation rate increases for 2024 and 2025 for those districts that passed the CPUC’s earnings test. In April of 2024, Cal Water requested 2024 escalation rate increases for 17 of its regulated districts. The increase in annual adopted gross revenue associated with the April 2024 filing was $20.6 million. The new rates were approved and subsequently implemented on May 31, 2024, as discussed above.

In November of 2024, Cal Water requested 2025 escalation rate increases for 18 of its regulated districts. The increase in annual adopted gross revenue associated with the November 2024 filing was $27.2 million. The new rates were approved and subsequently implemented on January 1, 2025.

Rate Base Offset Requests

For construction projects authorized in the 2021 GRC as advice letter projects, Cal Water is allowed to request rate base offsets to increase revenues after the project goes into service. In March of 2024, Cal Water submitted a $39.1 million rate base offset advice letter to recover $5.8 million of annual revenue increases in all of its regulated districts. The new rates were approved and subsequently implemented on May 31, 2024, as discussed above.

In October of 2024, Cal Water submitted a $5.7 million rate base offset advice letter to recover $0.9 million of annual revenue increases in 9 of its regulated districts. The new rates were approved and subsequently implemented on January 1, 2025.

Expense Offset Requests

Expense offsets are dollar-for-dollar increases in revenue to match increased expenses, and therefore do not affect net operating income. In November of 2023, Cal Water submitted an advice letter to request offsets for increases in purchased water costs and pump taxes in six of its regulated districts totaling $5.1 million. The new rates were approved and subsequently implemented on January 1, 2024. In April of 2024, Cal Water submitted an advice letter to update these rates based on the approved 2021 GRC. The annual increase was updated from an increase of $5.1 million to an increase of $4.7 million and the new updated rates were approved and subsequently implemented on May 31, 2024, as discussed above.

In October of 2024, Cal Water submitted an advice letter to request offsets for increases in purchased water costs and pump taxes in eight of its regulated districts totaling $17.1 million. The new rates were implemented on January 1, 2025.

Monterey-Style Water Revenue Adjustment Mechanism (MWRAM) Filing

In September of 2024, Cal Water submitted an advice letter requesting surcharges to bill for the MWRAM-related undercollections for 2023 for its regulated districts with tiered rates. The MWRAM tracks the difference between quantity revenues collected under each residential rate tier and the quantity revenues that would have been collected under a single quantity rate at the equivalent level of sales. The advice letter was approved and $17.4 million is being recovered from customers in the form of 12- and 24-month surcharges. The new rates were approved and subsequently implemented on October 1, 2024.

Incremental Cost Balancing Account (ICBA) Filing

In September of 2024, Cal Water submitted an advice letter to true-up the 2023 annual ICBAs of its regulated districts. The ICBAs track the difference between actual cost for water production inputs (purchased water, purchased power, and pump taxes) and adopted costs reflected in rates. The advice letter was approved and $7.1 million is being refunded to customers in the form of either one time or 12-month surcredits. Additionally, $0.6 million is being recovered from customers in the form of 12-month surcharges. The new rates were approved and subsequently implemented on October 1, 2024.

Cost of Capital Application

The CPUC issued and adopted a proposed decision for the Cal Water 2021 Cost of Capital Application in the second quarter of 2023. Cal Water was authorized a return on equity of 9.05%, a cost of debt of 4.23%, a capital structure of 53.4% equity and 46.6% debt, and an authorized rate of return of 6.80% for 2023 and 2024. The CPUC also reauthorized the Water Cost of Capital Mechanism (WCCM), which automatically adjusts the rate of return when the Moody’s Utilities Bond Index (Index) fluctuates between cost of capital applications. Because the Index changed in 2022, the WCCM triggered for 2023. At the time that WCCM triggered and before new rates were implemented Cal Water’s rate of return was 7.48%. Cal Water implemented new rates based on an authorized 9.57% return on equity, with a 4.23% cost of debt, and an authorized rate of return of 7.08% on July 31, 2023. The 40 basis-point reduction from Cal Water’s prior rate of return of 7.48% lowered adopted annual operating revenue as of July 31, 2023 by $7.0 million.

In October of 2023, Cal Water evaluated the WCCM for 2024 and determined that it was triggered due to a change in the Index in 2023. Cal Water filed an advice letter to implement new rates based on an authorized 10.27% return on equity, with a 4.23% cost of debt, and an authorized rate of return of 7.46% effective January 1, 2024. These new rates were approved and subsequently implemented on January 1, 2024. The 38 basis-point increase from Cal Water’s rate of return for the period July 31, 2023 to December 31, 2023 of 7.08% positively impacted adopted annual operating revenue for 2024 by approximately $10.0 million. In April of 2024, Cal Water submitted an advice letter to update these rates based on the approved 2021 GRC. The annual increase was updated to $11.4 million and the new updated rates were approved and subsequently implemented on May 31, 2024, as discussed above.

On February 2, 2024, Cal Water received a letter from the CPUC addressed jointly to Cal Water and three other Class A water companies granting their request for a one-year extension in their next cost of capital filing with the CPUC to May 1,

2025. The WCCM will remain in effect during the one-year extension. As a result, Cal Water’s authorized return on equity in 2025 is expected to be 10.27% plus or minus any changes from the WCCM.

In October of 2024, Cal Water evaluated the WCCM for 2025 and determined that it was not triggered. Since the WCCM was not triggered, there will be no change to Cal Water’s 10.27% return on equity for 2025 as a result of the WCCM. The next measurement date for the WCCM is September 30, 2025.

On January 14, 2025, Cal Water received a letter from the CPUC addressed jointly to Cal Water and three other Class A water companies granting their request for an additional one-year extension in their cost of capital filing with the CPUC to May 1, 2026. The WCCM will remain in effect during the one-year extension. As a result, Cal Water’s authorized return on equity in 2026 is expected to be 10.27% plus or minus any changes from the WCCM.

2023 Financing Application for California

On August 2, 2024, the CPUC granted Cal Water the authority to issue up to $1.3 billion of new equity and debt securities, in addition to previously-authorized amounts, to finance water system infrastructure investments from 2023 to 2027. Cal Water was also granted a waiver that authorizes each Cal Water borrowing under its revolving credit arrangements to be payable at periods up to twenty-four months from the date of the applicable borrowing, rather than the twelve-month period currently permitted for short-term borrowings.

Per- and Polyfluoroalkyl Substances Memorandum Account (PFAS MA)

Public water systems have been ordered by the Water Board to detect, monitor, and report perfluorooctanoic and perfluorooctanesulfonic acid in drinking water. In the third quarter of 2020, the CPUC approved the PFAS MA which allows Cal Water to track incremental expenses related to compliance with the order. The tracking of capital costs was excluded due to the lack of a MCL at that time.

In March of 2023, the EPA issued proposed MCLs for six per- and polyfluoroalkyl substances (PFAS). In September of 2023, Cal Water filed an application with the CPUC to modify the PFAS MA to track capital related costs associated with activities necessary to comply with the proposed PFAS drinking water regulations. Cal Water also proposed to submit Tier 2 advice letters requesting authority to add completed PFAS-related capital projects to authorized rate base. On April 18, 2024, the CPUC dismissed, without prejudice, Cal Water’s application requesting authorization to modify a previously approved PFAS-expense memorandum account to include capital investments related to PFAS compliance for future recovery. The dismissal does not preclude Cal Water from seeking regulatory recovery for its capital investments. Cal Water may seek recovery through a separate application or a GRC application. Cal Water expects to refile its application in the first half of 2025.

California Supreme Court Decision on Decoupling

The CPUC issued a decision effective August 27, 2020 requiring that Class A water utilities submitting GRC filings after the effective date be precluded from proposing the use of a full decoupling Water Revenue Adjustment Mechanisms (WRAM) in their next GRCs. In September 2020, Cal Water filed an Application for Rehearing at the CPUC seeking to reverse the August 27, 2020 CPUC decision. In September 2021, the CPUC denied the Application for Rehearing. On or about October 27, 2021, Cal Water along with four other Class A California water utilities filed Petitions for a Writ of Review with the California Supreme Court (Court). On May 18, 2022, the Court issued writs granting review and ordered the CPUC and other filing parties to submit additional pleadings to the Court. The final pleadings were submitted on January 13, 2023. Oral arguments were held on May 8, 2024 and, on July 8, 2024, the Court issued a unanimous decision voiding the WRAM provisions in the August 27, 2020 CPUC decision. As a result, Cal Water and other Class A water utilities submitting GRC filings are no longer precluded from proposing the use of a full decoupling WRAM in their GRCs, as reflected in the 2024 GRC filing.

Palos Verdes Peninsula Water Reliability Project (PV Project)

In 2002, Cal Water commissioned a Water System Master Plan (Master Plan) for the Palos Verdes water system. The Master Plan identified the high-priority need to augment the existing potable water system with new transmission mains and a new pump station to improve the capacity and reliability of the water system. This resulted in the development of a capital project known as the PV Project. Before the PV Project, a single pipeline that was over 60 years old delivered potable water to approximately 90 percent of the Peninsula, and a second pipeline of the same age delivered water to the remaining 10 percent. Both of these pipelines were approaching the end of their useful lives.

The CPUC authorized Cal Water to recover revenue associated with costs up to a cap of $96.1 million after the PV Project was placed in service, subject to the CPUC’s reasonableness review. In 2020, the PV Project was completed and Advice Letter 2387 was filed asking for authority to increase rates reflecting the PV Project costs up to the cap, with an effective date of

August 27, 2020. The advice letter was approved on January 29, 2021. New rates were implemented on February 1, 2021, with the revenue requirement being effective as of August 27, 2020.

Due to the complexity of the PV Project, total project costs exceeded the advice letter cap of $96.1 million. Total project costs incurred were $117.2 million. Amongst other things, the 2021 GRC approved an additional $6.4 million of capital costs to be included in base rates plus authority to open a memorandum account allowing Cal Water to track incremental capital-related costs associated with this project.

In July of 2024, Cal Water submitted a Tier 3 advice letter to recover the remaining $14.7 million of capital costs not in base rates. Cal Water requested an increased revenue requirement for Palos Verdes customers of $1.8 million which is obtained by adding $14.2 million to rate base for the additional capital costs of the PV Project (which equals the $14.7 million above less two years of depreciation). Cal Water also requested to recover $3.8 million of revenue tracked in the memorandum account through a temporary surcharge of $0.2832 per ccf for 24 months. This includes $3.6 million of the revenue requirement for 2023 and 2024 from the increase in total capital costs above what was already included in base rates and $0.2 million of interest.

On January 30, 2025, a final decision was issued that approved Cal Water’s request to include $14.2 million of incremental costs in rate base and for a temporary surcharge to recover $3.8 million of carrying costs tracked in the memo account. New base rates were implemented on February 1, 2025 and new surcharges are expected to be implemented on April 1, 2025.

California Drought Memorandum Account (DRMA)

In June 2021, Cal Water submitted advice letters to request a DRMA to track the incremental operational and administrative costs incurred to further implement updated Rule 14.1 for voluntary conservation measures and Schedule 14.1 for implementation of our Water Shortage Contingency Plan (WSCP), including activities related to enhanced conservation efforts, staffing, and capital expenditures to provide a safe, reliable water supply. The DRMA would also track monies paid by customers for fines, penalties, or other compliance measures associated with water use violations and penalties paid by Cal Water to its water wholesalers. The DRMA was approved by the CPUC with an effective date of June 14, 2021.

California’s Governor issued a drought declaration for all California counties through a series of State of Emergency Proclamations with the most recent in March 2022. Given these drought proclamations and then-existing water usage levels in all of its service areas, in 2022 Cal Water activated Stage 2 of the “Water Use Restrictions of its WSCP” of Schedule 14.1 in all of its service areas; as a result, Cal Water saw an increase in DRMA related costs in 2022 and 2023.

In Stage 1, irrigating ornamental landscape with potable water is prohibited during the hours of 8:00 a.m. and 6:00 p.m. In Stage 2, irrigating ornamental landscapes with potable water is limited to no more than three days per week as well as prohibited during the hours of 8:00 a.m. and 6:00 p.m. In addition, this stage states that new connections may not install single-pass cooling systems for air conditioning or other cooling system applications unless required for health or safety reasons.

On March 24, 2023, the Governor issued an Executive Order (EO) that, among other things, ended the voluntary 15% water conservation target and ended the requirement that local water agencies implement Stage 2 of their drought contingency plans. This EO maintained the ban on wasteful water uses and retained the State of Emergency for all 58 California counties to allow for drought response and recovery efforts to continue.

On May 8, 2023, Cal Water deactivated Stage 2 and moved to Stage 1 of Cal Water’s Schedule 14.1 of the WSCP in all regulated service areas.

On July 28, 2023, Cal Water submitted a Tier 3 advice letter requesting authority to amortize $1.4 million of incremental expenses incurred from June 14, 2021 to December 31, 2022 tracked in the DRMA.

On January 30, 2025, a final decision was issued that approved Cal Water’s request to recover $1.4 million of incremental costs tracked in the DRMA. New surcharges are expected to be implemented on April 1, 2025.

Regulatory Activity - Other States

Financing Application for Hawaii

On October 3, 2024, the HPUC granted Hawaii Water the authority to issue up to $20.8 million of new equity and debt securities, in addition to previously-authorized amounts, to fund on-going and planned capital improvement projects related to water and wastewater utility services within Hawaii Water’s service territories.

Kukui’ula South Shore Community Services

In April of 2022, Hawaii Water signed an agreement to acquire the assets of Kukui’ula South Shore Community Services, LLC (KSSCS). Located in the Kukui’ula Resort region of southeast Kauai, KSSCS is a collection-only wastewater utility regulated by the HPUC. Hawaii Water received HPUC approval for the acquisition in September of 2024. On December 4, 2024, the transaction closed and Hawaii Water took control over the system. The total cash purchase price was $1.6 million.

As part of the acquisition, Hawaii Water will own and manage the utility, which currently serves approximately 440 residential, commercial, and resort customers, but is expected to be able to serve up to 1,500 connections upon the completion of a planned resort buildout.