California Water Service Group Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 6 speakers on the call.

Operator

Good day, and welcome to the California Water Service Group Q1 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I'd now like to welcome Mr. Tom Scanlon, Corporate Controller to begin the conference.

Operator

Tom, over to you.

Speaker 1

Thank you, April. Good morning and welcome everyone to the 2023 First Quarter Results Call for California Water Service Group. With me today is Martin Kropenicki, our President and CEO and Thomas Smagel, our Vice President and Chief Financial Officer. Replay dial information for this call can be found in our quarterly results release, which was issued earlier today. The replay will be available until June 26, 2023.

Speaker 1

As a reminder, before we begin, The company has a slide deck to accompany the earnings call this quarter. The slide deck was furnished with an 8 ks yesterday afternoon It is also available at the company's website at www.kalwatergroup.com. Before looking at this quarter's results, We'd like to take a few moments to cover forward looking statements. During the course of the call, the company may make certain forward looking statements. Because these statements deal with They are subject to various risks and uncertainties and actual results could differ materially from the company's current expectations.

Speaker 1

Because of this, the company strongly advises all current shareholders as well as interested parties to carefully read and understand the company's disclosures On risks and uncertainties found in our Form 10 ks, Form 10 Q, press releases and other reports filed from time to time with the Securities and Exchange Commission. Now I'm going

Speaker 2

to pass it over to Tom to begin. Thanks, Tom. Good morning, everyone, and thank you for joining us On our Q1 results call, I'm going to start on Slide number 5 of the slide deck, which is just a table of our financial results for the first And what you'll see there is a large drop in revenue, which I'll get to in just a second. We had a decrease And operating revenue of $41,900,000 or 24.2 percent. That lines up with a decrease in operating expenses of $15,300,000 and that's a reduction of 9.3%.

Speaker 2

The effect of those Among the other things that we're on during the quarter was that we had a net loss for the Q1 of 2023 of 22,200,000 Or $0.40 per share and that compares to net income of $1,100,000 or $0.02 per share in the similar quarter last year. I do want to highlight and we'll talk a little bit more later about the increase in capital investments of 19.7% in the quarter and that is certainly good news for company's business plans. Turning to Slide number 6. The big story for the quarter that we describing in this document and in the press release is that we had a combination of severe weather in our main service areas California, very wet and cold weather here in California and really what I would call a gap in our regulatory mechanisms. And this gap is temporary and we'll talk a little bit probably a lot about Where we go from here in terms of those mechanisms.

Speaker 2

So on Slide 6, the big impact to revenue, both billed and unbilled revenue, Again, the extremely wet winter in California, we saw a 12% decrease in our sales. And remember that sales in California are usually Quite low to begin with in the Q1 in the wet months of January, February March. The weather pushed down our unbilled revenue accrual, dollars 5,800,000 as compared to last year. And here's where we get into the regulatory mechanism. So in 2022, during a similar period, we had An offset of $12,100,000 by our RAM and MCBA mechanisms.

Speaker 2

And you'll recall from our past presentations That the RAM and the MCBA are no longer active in 2023 for Cal Water and that's the regulatory decision of the commission. Those mechanisms are being replaced somewhat by other mechanisms. However, those mechanisms are tied up in the delayed California general rate case. And so, we have on the deck here on again in the middle of Slide 6, an estimate What would have been recorded had we had a rate case in 2 accounts that would have been impactful for changes in weather. The first is the DREAMA account, which is the drought response memorandum account.

Speaker 2

That is an account that Trax lost sales during a drought period and we are still in a drought period in California. We estimate that were the rate case Effective during the period that balance would have been from $6,500,000 to $7,000,000 of revenue recovery from the Dream Act account. In addition to that, the monoracile RAM mechanism, that's a price adjustment mechanism, not quite similar To our full decoupling RAM, but a mechanism that would be in place with the rate case, that would have generated $9,500,000 to $11,000,000 revenue. So not yet regarding the potential for a rate increase, you can see where the regulatory mechanisms that are not currently in place Will be in place once the rate case gets adopted would have had a significant positive effect on the quarter. The second item that affected revenue I wanted to highlight here is revenue deferral.

Speaker 2

So in accordance with GAAP, When we are collecting our balancing account balances in California, we have to evaluate, how much of that is going to be recovered within 24 months. And because of the large balances that we have in the RAM and in other balancing accounts, some of the surcharges to customers See that length of time. And so we've had to defer revenue. That deferral of revenue is an increased deferral of $18,800,000 for the quarter. And that was offset by cost deferral of $15,400,000 in the quarter.

Speaker 2

And So again, that doesn't have a lot of impact to net income, but you do see that on the top line on the revenue side. Flipping to Slide 7, just a couple of other notes about the quarter. We did see a gain Increased gain on our non qualified retirement plan assets as compared to 2022. In the same period, dollars 4,600,000 gain there. Our water production costs fell as you'd expect due to lower sales by $6,500,000 Couple of other financial highlights.

Speaker 2

I mentioned $82,000,000 in capital improvements. We had heavy rains in a lot of the quarter in California. Despite that, we were able to get a lot of construction activity done, 19.7% increase from the same period in 2022. As you saw as we filed right at the end of the quarter, we have a new revolving credit agreement, Increased the amount available to the company and to Cal Water from $550,000,000 to $600,000,000 And that is a new 5 year revolving credit agreement. And then just a reminder that beginning in Q2 2 in May here, Cal Water expects to increase most customer rates by 4% on an interim basis Pending the resolution of the GRC and that's been authorized by the administrative law judge in California.

Speaker 2

Moving very quickly to Slide 8, which is our EPS bridge. And this just shows the factors that I discussed. The other two factors that I haven't mentioned, I'll mention here, is A and G and other operation and maintenance expenses Apart from the deferral, that decreased our EPS by $0.07 That's your typical operating expense increases on an annual basis. And then, about the 4th bar over is just what we would call property related expenses. So interest, Depreciation and property tax as a result of having a higher invested capital base for the company.

Speaker 2

One thing that is not on the CPS bridge and if you flip to Slide 9 is any potential for actually a rate increase associated with The California general rate case, I do want to highlight that on Slide 9. And so, the unrecorded regulatory mechanisms we already talked about the last To the MRAM and the DRIMA accounts, we also have an interim rate MRAM account. Remember that the California general rate case It is effective back to the 1st January of 2023. We estimate that had the case been adopted, We would have seen an interim rate memorandum account balance between $8,000,000 $15,000,000 and that represents the 8 represents The position of the reefer advocate, the $15,000,000 represents the position of Cal Water in the case. And so There's a lot of caveats to that.

Speaker 2

Obviously, the judge is independent. The judge can choose to change rates in whatever manner that they feel the evidence warrants, But that gives you a guideline of where the Advocate is and where Cal Water is with respect to the rate increase for the Q1. We would not anticipate booking that amount until after a rate case is decided and that interim rate memorandum account is scheduled for recovery. Finally, the 4th mechanism is the incremental cost balancing account And that is also tied up in the rate case, just in terms of understanding what the adopted quantities are going to be. So we did not book anything for the incremental cost balancing account.

Speaker 2

I will keep going with Slide 10, The California regulatory update, not a lot to report here. First bullet Is that we did see the cost of capital case, get a decision extending the statutory deadline. They now have a deadline of August So 2023 to complete that case, commission could complete the case by that time or they could issue another decision extending their statutory deadline. So we don't really have any information on that. As a reminder, that cost of capital case, one of the issues there Is whether it would be effective at the date of the decision or retroactively as we've identified as we have for the last several quarters The potential impact to the company if that decision is retroactive back to January 1, 2022 when it was Originally expected to be effective.

Speaker 2

And there's no update on the California general rate case during the quarter. So I'll stop for a moment and turn it over to Marty to talk about the drought.

Speaker 3

Okay. It actually seems kind of odd to talk about a drought given what we Gone through with the winter, but certainly we want to get you up to date on kind of what's going on out on the West Coast. As Tom mentioned, it was a record winter for California especially. As of April 24, If you look at the percent of normal for the snowfall, Northern California, which is also the Northern Sierras or Trinity region, they're at 217 percent of normal snowfall. In the Central Sierras, which is around the Lake Tahoe area, they're 2 51% of normal for And in Southern California, as of April 24, they're at 3 22% of normal snowfall.

Speaker 3

The significance of that I'll talk about a little bit later as we start talking about the potential flooding. Accordingly, given the winter results in the number of atmospheric rivers that have hit the West Coast, Governor Newsom in California basically issued an executive order. His emergency declaration are still in place, but he issued another order that would that basically ease some of the drought restrictions that were in place Throughout the state, if you remember in 2022, we're in a fairly severe drought. And we were in stage 2 and moving into stage 3 of a 5 stage plan for the state. And he has eased some of those restrictions as we go into spring.

Speaker 3

The emergency regulation that was adopted by State Water Resources Control Board remains in effect and that has an expiration date of sixten. So June 10, the emergency declaration of the State Water Resources Control Board, if they will extend it, we'll end at that point. So we believe that the DRAMA account, which is the Drought Response Emergency Memorandum account, will So if you look at our Q1 drought expenditures, they were about $300,000 in total. It seems weird to have drought expenditures, but these were programs that were put in place throughout 20 22 and the costs kind of trickle in as you move forward. And in total, in our memo accounts that we have with the California Public Commission, we have a balance of $2,200,000 Going on to Page 11, I want to give you a quick ESG update.

Speaker 3

During 2022, we invested more than $6,100,000 in water conservation that resulted in 180,000,000 gallons Saved of drinking water for our service areas. We completed our fleet study to identify ways Optimize, replace and downsize our vehicles. We continue to clear firebreaks around key facilities to help minimize risk of wildfire and we Continue to install additional backup generators to enable us to operate during power interruptions, which in as you may recall last year we had a few of those in California that were fairly big as the grid in the state got a little tax. We had all of our backup systems running. None of our customers went without water.

Speaker 3

And we developed and we refined our plans to operate our water systems as they are impacted by climate change, including heavy rains, which We just experienced floods, droughts, fires, etcetera. In addition, on the personnel side, we provided unconscious bias training for over 95 of our employees and we increased our discretionary spending with diverse suppliers to exceed 24% during 2022. Our new ESG report is scheduled to be published on May 16, which as you know, the ESG reports contain a lot of information. But this year, during 2022, what's included in the new report is information on our recently completed greenhouse gas inventory and our efforts to Mitigate climate change. So I would encourage you to look at that report when it comes out on May 16 and all the work we're doing in terms of climate change mitigation.

Speaker 3

Moving on to Page 13, on PFOS and PFOA, MCLs that were issued by the EPA, they were issued in March, and that was a draft set of standards that set the maximum contaminant levels For both compounds at 4 parts per trillion. Based on the current information, if it's adopted, we estimate it'd be about a $200,000,000 Capital cost to get our wells that have PFO or PFOS trace elements into compliance. If the draft regulation is adopted as it is currently written, we would have to be in compliance by 2026, which is relatively quick. But this is something we've been working on for the last couple of years in our service areas. I think we have a pretty good handle on it.

Speaker 3

Obviously, there's a big cost associated with it, We have also seen over the last couple of years that there's a lot of government grant money that's out there that may be available to offset some of those costs with our customers. And certainly, we would We'll be looking to get as much as we can to offset our costs. Additionally, I just want to note that our regulators have a strong track record of allowing these costs and rates once The MCL has been set and we look forward to working with them on the final resolution of PFO and PFOS, What the standards are going to be and then getting the treatment in place for our customers. Going to Page 14, since we last met Last month in March, just one kind of update on the business development side is that the Bethel Green Acres Acquisition closed in 2023 that was in Washington. It was an adjacent service area that we were providing some maintenance services for that we acquired I'm now integrated into our service area.

Speaker 3

I'm going to hand it back to Tom to talk about capital investment and depreciation.

Speaker 2

Great. Thanks, Marty. So on Slide 15, just a quick update there. 2 updates to the slide. First of all, the yellow bars still indicate The projected and estimated with the California rate case going on $82,000,000 year to date, and you'll note that this does not include any capital expenditure for There's no changes on slide 16.

Speaker 2

This still works since the projection of the California general rate case, but we'll keep showing you that and Hope to give you an update when we get some more certainty on the rate case.

Speaker 3

I'll turn it back

Speaker 2

to Martin for a summary.

Operator

All right.

Speaker 3

Thanks, Tom. Well, I don't know what to say other than it's been an interesting journey going from a severe drought in 2022 to living through one of the wettest Winter is on record and a record snowfall is on record in the state of California. The winter results coupled with the temporary Since a certain regulatory mechanism is pending our 2021 general rate case, which is as you know is delayed, it has certainly made for an interesting and confusing quarter. We anticipate that the potential of future recognition of these mechanisms once our generate case is finalized and the decision has been And in the meantime, we'll continue to do our best to provide clarity and as much disclosure as possible, so you can see how these pieces fit together. I also want to point out that as long as the GRC is delayed, we anticipate that the quarterly results to be remain volatile pending resolution of these regulatory mechanisms that we And again, the team now will do as much as we can to provide as much clarity as possible while we work with Public Utilities Commission to successfully conclude our 2021 general rate case and then quickly move on to our 2024 general rate case, which is a little over a year away.

Speaker 3

Additionally, as I mentioned, the ESG report will be available on May 16. I highly Recommend people take a look at that and all the work the company has done, especially on the greenhouse gas side, which is a focus for us in 2022. And certainly as we wait to get these regulatory decisions out of the way, the work does not stop. As Tom mentioned, We had almost a 20% increase in capital investment during the quarter, which is pretty remarkable given the wet weather that we had on the West Coast. Additionally, as the snow levels are very, very high and as some of you read maybe the LA Times this week or some of the other newspaper Chronicles in the state, they're talking about the big melt, which obviously with those record snow levels in the Sierras, which I shared earlier, Couple with the fact we rapidly moved into a warm spring.

Speaker 3

So for example, with 82 yesterday in San Jose, There is a big concern of flooding in the central and southern part of the state as the snow starts to melt and the reservoirs are full, it just has to melt and it overflows And flood certain parts of the Central Plains in California. So our teams have been busy working on our now our Flooding continues to be planned for the service areas that we support. And then once we get through this next few months on the flooding and this risk will probably be in the 6 weeks. We'll rapidly move into fire season. And as many of you know, we do a lot of work on fire mitigation plans to make sure we're ready to go into the warm summer months to Be ready for what may come our way.

Speaker 3

So a bit of a confusing quarter. Again, we're at the mercy of the California Public Utilities Commission. We're encouraging them to Be as quickly work as quickly as possible to resolve our general rate case and our cost of capital. And until then, we'll continue to provide the disclosure and we appreciate everyone kind of hanging strong with us as we kind of work through these issues Because it does get a little bit confusing. So, April, with that, we are going to open it up for questions, please.

Operator

Thank you, speakers. Our first question comes from the line of Jonathan Reeder from Wells Fargo. Jonathan, please go ahead.

Speaker 4

Hey, good morning, Marty and Tom.

Speaker 3

How are you guys doing?

Speaker 4

Hi, Jonathan. Hey, just A little bit of clarity on one thing. So I know in the release you said, cumulatively it's $24,000,000 to 34,000,000 This is kind of your estimated adverse revenue impact in Q1 from the delayed GRC. Does that include, I guess the deferred revenue component that you talked about, the $18,800,000 that was offset by, I think it was like $15,400,000 of deferred costs.

Speaker 2

No, that's unrelated. So what we're talking about there, Jonathan, are the DREAMA account of 6.5 to 7, the MRAM account of 9.5 to 11 and then the interim rate account, which is 8 to 15. So just those three accounts is what we're summarizing there.

Speaker 4

Okay. Okay. That's what I thought. I just wanted to make sure. I know this meant a little

Speaker 2

Sorry, Jonathan. And with respect to the deferred revenue, obviously, as time goes by, that becomes undeferred because those surcharges are in place. And so we would expect that, that It would start to accumulate back to the company in future quarters. Obviously, it's not a permanent disallowance or anything like that.

Speaker 4

Right, right. Okay. I know you might not have a whole lot you can say on this matter, but Any sense of what a reasonable timeframe might be for getting a proposed decision in the general rate case? I think the ALJ at least got the PD out in Golden State's water and that's the same L. J.

Speaker 4

That you have for this case, do you think it's something we're going to get by year end or certainly by year end earnings where We can get the true up recorded in 2023.

Speaker 2

Jonathan, I think we're certainly hopeful of that. If you look back to our last case, We had the same judge in our 2018 general rate case and we did have about a year delay there. But as far as the Time that he took was about a year on that from the time that we filed in October to a proposed decision that came out in October. And With the clearance of the case for Golden State, I would certainly hope that that timeline is reasonable, but you never And obviously, just a reminder that the Golden State case was really 3 issues and unrelated to revenue requirement, whereas our case Has really big open issues as far as capital investments and expenses. And so, it's a little bit more for him to decide in our case.

Speaker 2

And so that's the guidance that I can give you is we're hopeful, but We're not sure. Let's put it that way.

Speaker 4

Okay. Did you say it took about 1 year from the point you filed the settlement in the last case to get a PD?

Speaker 2

That's correct.

Speaker 4

Okay. Got you. Okay. And then the black hole that is the cost of capital, Any sense what's going on there? Like are we going to get a decision or You know, if the commission is going to let it ride until the next filing.

Speaker 2

Yes. We're going to hopefully get a decision before we have to file again for cost of capital. But I think that they gave themselves essentially the full extension that they could out to August. And I think we're hopeful that we get a PD well before then and a decision by August, but It all comes down as you know to what it says and we have several issues in there, not just the normal issue of cost of Equity, but the question of retroactivity and the capital structure issue is an issue for Cal Water. So, it's both the timing and what comes out that will matter to us.

Speaker 4

Sure. I mean, has there been signs that like it's actively kind of like being worked on? Like Are there any discussions that you've been aware of and stuff like that? Or is everyone just sitting around And waiting for the proposed decision.

Speaker 2

The only thing that I'll say and we haven't heard anything, John. There's nothing to discuss there. But I will say that 30 days before every commission meeting, which is when they typically publish all of their documents for the meeting, Our blood pressure goes up just a little bit. And I know Greg Milliman, who you've talked to on these calls before, Yes. I usually share a text message at the end of that day saying no PD.

Speaker 2

And I think we're as in the dark as anyone as far as that goes. But you can always look to those meetings, Those meeting dates and calculate back 30 days and say when could news possibly come out of the commission. And certainly, they do issue off cycle Those decisions, but generally they're aggregating all of those on the last possible day that

Speaker 3

they can get on the agenda.

Speaker 4

Okay. And then last question, I guess, or just point of clarity. So regarding the whole Drought emergency regulations that the State Water Resource Control Board has issued. I think you said they expire at the end of June or at least is it that the Board just has Come out with a decision whether to extend or let them expire. How exactly does that work?

Speaker 2

So the regulation expires on June 10th. So they issued the emergency regulation, I think it was probably June 10th the year before, so it's for 12 months. So it expires on June 10 unless they do something else. They could always come back here in May and order it to be expired earlier. They could extend it.

Speaker 2

I think the issues are as you know and as we've talked about in past quarters that there are still certain areas of The states are impacted by water shortage, particularly Southern California with respect to the Colorado River situation. So I understand, we don't address it directly You're with hot water, but I understand the Colorado River Basin has had a good winter as well, but that is an area that's in long term decline and a major source of water For Southern California. And so I think there's a little bit of hesitation regionally on just sort of wiping our hands of the drought because there's still Potential major impact in Los Angeles and Imperial County, etcetera. And so we'll just wait and See on that. I think that we're awash in water in Northern California for sure.

Speaker 2

And so when we look at our wholesalers and those are the Once it really drive whether we have voluntary or mandatory conservation, we see them making their orders contingent on the State Board's order. So for instance, the San Francisco Public Utilities Commission, which is a major wholesaler for us in San Francisco Bay Area, Has made their waiving of drought restrictions contingent on what happens with the State Water Board. And so they're awaiting that as well.

Speaker 4

Okay. And that's what I kind of wanted to get at was just like, I mean, obviously, water has been plentiful As of recent, but yes, from a long term perspective, I mean, is it your view that the groundwater Has been like fully recharged? I know that always takes longer than just the rain and everything. So like, Right. I mean, depending on the long term view, do you still want to keep kind of these restrictions in place to set the state up To be in the best position longer term.

Speaker 3

Yes, John, it's Marty. Look, I think that Some hydrologists have estimated you need 10 winters like we had, back to back to really recharge the basins that have been over pumped. So And even with all this excess water that we've had, it still takes a long time to recharge those basins. So I think my impression is because the governor, eased the drought restrictions, he didn't step it all the way back and cancel it and the State Water Resources Control Board has been kind of silent and we kind of follow the State Water Resources Control Board because They are in charge of managing the water in the state. I think they're evaluating that.

Speaker 3

And my sense is we'll roll back Probably a stage 1 or maybe stage 2 drought, which is kind of voluntary conservation. But your point about long term, This is a long term situation. And if you look at the point I was trying to make on going from an extreme drought in the Q4 of 2022, one of the wettest winters on record. I mean, that's what people say climate change is, right? These are screams and the intensity of the rain and the rain that we had early on And January February filled up the reservoirs in Northern California and then they had to start releasing water because these other storms are coming in because we didn't have enough storage or our Capacity.

Speaker 3

So, we're a long way from where we need to be as a state in terms of adequacy of supply sustainability, The ability to move water transmission wise and store water. So I think there's a reason why those two Declarations are still there. They haven't been fully canceled out yet. And we'll just have to see how the politics of it play out here over the next 6 weeks with the State Water Resources Control Board, but I'm hoping to keep them in place.

Speaker 4

Okay. So you said maybe roll it back to stage 1 or stage 2. What stage

Speaker 2

are you currently at, remind me? We're in stage 2 now. So the talk would be to remove it, move it back to stage 1. Right. And that would include restrictions on the use of water for washing your car, wasting water restrictions that sort of I think Governor Newsom particularly called out that he'd still like to see nonfunctional turf Not be irrigated.

Speaker 2

That's in line with the potential long term regulation in California to try to avoid Ornamental plantings of lawn everywhere. You want your lawn to be used by soccer players and frisbee dogs or whatever, but Not to put it everywhere all around. So that's a long term effort that they've made.

Speaker 4

Okay. And in stage 1, like would you still have the availability of the drima?

Speaker 2

I don't think so at that point because it's really not A voluntary restriction that we're calling our customers on. It's really Stage 2 that's the one that would be qualifying for the 3 month.

Speaker 4

Okay. All right. Thanks for answering my questions. I appreciate it. And Good luck with the weather and with the regulatory front.

Speaker 3

Thanks, John. Thanks, John.

Operator

Our next question comes from the line of Greg Orrill from UBS. Please go ahead.

Speaker 4

Yes. Thanks for taking my question.

Speaker 3

Good morning, Andre.

Speaker 4

Hey. So I know you kind of touched on this, but can you kind of like recast how you thought about the quarter with adding back You know those items, the Dreamer and the Monterey account and if the rate case would have come in on time, How would you have come out really?

Speaker 2

Yes, I think that's a really good question. I would anticipate that we Would have had a profitable quarter with those three items there. And obviously, the rate case is the biggest variable Because we have a wide gap between what Cal Waters' presentation of the facts of the case are and what the ratepayer advocates proposal was. And so, our estimate would be somewhere between breakeven and maybe Single to I'd say $0.09 or $0.10 profit for the quarter. This kind of depends on other things going on, but that's really speculative at this point.

Speaker 2

You can also do the math yourself and add those things in and expect them To get to a number, but it's all things that we'll be booking in the future once we get a rate case. So It's really timing unfortunately at this point.

Speaker 3

Yes. I would just add to that to what Tom said Greg that we always Tell The Street, don't get too excited about Q1 because from a demand perspective, it's always the softest quarter. And then having such a hard winter this year clearly It had an effect on consumption and overall customer demand. So Q1 is just historically a soft quarter. Q1 tends to be an ugly quarter when you have a delayed general rate case because you can't book stuff.

Speaker 3

And I think, again, Tom and the team would try to put the variables in there, so you can see what they look like. But it's really hard for us to speculate too much farther than that until we get the decision and clarification from the

Speaker 4

Okay, thanks.

Speaker 2

Thanks, Greg.

Operator

Next question comes from the line of Davis Sunderland from Baird. Please go ahead.

Speaker 5

Hey, good morning guys. Thanks for taking my question.

Speaker 3

Good morning. Good morning.

Speaker 5

I just wanted to ask, think last time on the call you guys had mentioned in the BD pipeline, there was some strength you were seeing or some potential opportunities in wastewater with Texas And a few other opportunities, but that it was contingent on just kind of where things were going to go this year with inflation and the macro environment. And Just wanted to ask what the current status is there and what you're thinking with the development pipeline?

Speaker 3

Sure. So in Texas, We have partnered with a company called BBRT, and they have continued to grow. And You've had pretty explosive growth in Texas, where we've seen a number of companies and frankly a number Friends and family that live around us in Silicon Valley, they've kind of followed the companies as they migrated to Texas because it's a Pretty positive business environment to operate in. So BBRT continues to do very, very well for us. And these are long It's early kind of early seed capital for us is the way to think about it.

Speaker 3

These are developments that are currently kind of getting underway and being planned. And where we go in and become their wastewater supplier. In addition, as we announced last year, we did the The Guadalupe Basin River Authority project, which is allowing us to partner with water wholesaler To build the pipeline into that South Austin area, which we think will be rapidly developed as well. So generally still very good. I mean, clearly, The overall market has slowed down a little bit as inflation has kind of creeped up.

Speaker 3

But so far, the business environment in Texas has kind of has maintained it has slowed down a little bit, certainly We'll maintain kind of forward momentum as you see a lot of people and businesses move to that state and relocate to that state.

Speaker 5

Thank you. That's helpful. And I guess just a quick follow-up to that. Have any of the delays in general rate case Or any impacts from other parts of the business slowed down the pipeline?

Speaker 3

Too early to tell. I mean, the hardest thing about PD is kind of sellers' expectations and what we're willing to pay and We tend to be kind of a value slanted acquirer. So certainly inflation starts changing those calculations. And when you run net present value calculations or future value calculations, change in interest rate can potentially have an effect. I think the thing that's going to be more interesting to watch frankly is as the stricter regulations come out about PFOA and PFOS Water quality changes and these small systems don't have the adequate operating capital to make the investments to meet those standards, what do they do?

Speaker 3

And that may be a large catalyst to get some of these smaller systems to break off and ultimately get acquired. So I think I would say that it slowed down a little bit, but certainly we're still seeing things come to the pipeline and we got a number of deals that we're closing and integrating. And As those come to fruition, we'll continue to disclose those. On Page 14, we've been put in the deck every quarter just We'll continue to update those as we move forward throughout 2023.

Speaker 2

Davis, let me add one more thing about the nexus between business development and regulatory, which I think is interesting is that, you'll see in In the queue that we're preparing to file, I think have just filed a Washington Water Company general rate case. That is tied into the acquisition that we made a couple of years ago of the Rainier View Water Company. And so a lot of when you initially buy these systems, They need help in terms of new capital as Marty mentioned, improvements in water quality, etcetera. And so we're seeing the second leg of that is being able to go into the rate making process. And we've been treated very fairly by those commissions as far as the rate increases go.

Speaker 2

Most of those are outside of California and so we don't see the

Speaker 3

regulatory lag that we have. But I know we have

Speaker 2

a number of new systems to us, lag that we have, but I know we have a number of new systems to us in Hawaii, that we've acquired over the last 3 or 4 years and we're certainly starting to endeavor to go into the rate making process there, in both Hawaii, Washington, New Mexico, and now even in Texas with the rate making process, We've seen fairly favorable results from those commissions.

Speaker 5

That's very helpful. Thanks guys. I'll pass it on.

Speaker 3

Thank you.

Operator

There are no further questions at this time. I'd Turn the call back over to our presenters.

Speaker 3

Okay. April, thank you. Everyone, thank you for taking time to be here today. As I mentioned, there's a lot of moving parts here. If you have any questions, please feel free to reach out to us and Tom and I will be available to answer any questions that you want to So until then, be safe and we'll look forward to seeing everyone the end of July on our Q2 conference call.

Speaker 3

Thank you very much.

Operator

Today's conference call, you may now

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Earnings Conference Call
California Water Service Group Q1 2023
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