California Water Service Group Q2 2023 Earnings Call Transcript

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July 27, 2023

Key Takeaways

  • Q2 net income fell to $9.6 million with EPS of $0.17, down from $19.5 million and $0.36 last year, reflecting delayed 2023 general rate increases and a 10.4% drop in customer usage.
  • Invested a record $95.2 million in capital improvements in Q2 (up 25.1% YoY) and $177.2 million through first half, reinforcing infrastructure growth.
  • Temporary revenue impact from the delayed 2021 general rate case is estimated at $19 million–$29 million in Q2 and $43 million–$63 million year-to-date.
  • Received a cost of capital decision raising authorized ROE to 9.57% and adjusting debt costs to 4.23%, with another trigger expected early 2024.
  • Anticipated PFOS/PFOA treatment investment of ~$200 million by 2026 may be offset by litigation recoveries and potential state/federal grants, though timing and amounts remain uncertain.
AI Generated. May Contain Errors.
Earnings Conference Call
California Water Service Group Q2 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

Thank you for your patience, and welcome everyone to the California Water Service Group Second Quarter 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. Thank you. I would now like to turn the call over to Marty Kropelnicki, Chairman, President and Chief Executive Officer.

Operator

Mr. Kropelnicki, please go ahead. Great. Thank you, Jack. Good morning, everyone.

Operator

Thanks for joining us this morning. Apologies for the technical difficulties. We had some problems with our telecommunication line I'm getting through, so sincere apologies for that. With me today is Dave Healy, our Interim Vice President and Chief Financial Officer and Greg Milliman, Vice President, our statement on forward looking statements. And Dave, why don't you jump into the financial results for the quarter, please?

Operator

Thank you, Marty.

Speaker 1

A replay dial in information for this call can be found in our quarterly results release, which was issued earlier today. The replay will be available until September 25, 2023. 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 and is also available at the company's website atwww.calwatergroup.com. Before looking at this quarter results, We'd like to take a few moments to cover forward looking statements.

Speaker 1

During the course of the call, the company may make certain forward looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially 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. Our presentation starts on Slide 4 with our values and priorities. And moving on to Slide 5, I'll discuss the 2nd quarter results. So during the Q2 of 2020 Net income attributable to group was $9,600,000 and diluted earnings per share was $0.17 as compared to net income attributable to group of $19,500,000 And diluted earnings per share of $0.36 for the quarter ended June 30, 2022.

Speaker 1

As we discussed last quarter, 2nd quarter results primarily reflect the temporary absence The 2023 California general rate increases and regulatory mechanisms included in our 2021 General rate case. As a result of the delay California general rate case, there was a decrease in 2nd quarter 2023 operating revenue as compared to the same period last year. Additionally, operating revenue decreased $13,800,000 due to a 10.4% decrease in customer usage. General rate increases during the quarter Approximately $3,400,000 with most of it in California. Along with the delay to our GRC, The commission authorized a 4% general rate increase for most of our California districts effective May 5, 2023 until the final 2023 GRC general rate case increases are authorized This added approximately $3,000,000 to operating revenue during the 2nd quarter.

Speaker 1

Total operating expenses decreased slightly in the Q2 of 2023 as compared to the same period last year. Net interest expense increased $1,700,000 mostly due to an increase interest rates and $23,000,000 of additional borrowings on our short term lines of credits. We invested $95,200,000 in capital improvements during the Q2 2023, A 25.1 percent increase over the same period last year. This was the 2nd quarter record for our company. In California, the Governor extended the state's arrearage program to help customers struggling to pay monthly water bills.

Speaker 1

The program covers delinquent customer balances 60 days past due or written off during the period from mid June 2021 to December 31, 2022. Our plan is to file our application for these funds with the State Water Resources Control Board at the end of September. One last item. We filed a California advice letter in July to increase annual operating revenues $24,600,000 to offset known increases in California water production costs. Our EPS bridge is on Page 10.

Speaker 1

And now I'll turn it over to Greg Milliman to discuss the temporary absence of 2023 California's general rate case, general rate increases and regulatory mechanisms.

Speaker 2

Thank you, Dave. Consistent looking at Page 7, consistent with the Q1, we are using the Same mechanisms available from the California Public Utilities Commission to track the temporary impact of revenues, Loss revenues from the delayed decision, the 3 primary mechanisms are shown on this slide. Moving to Page 8, we currently estimate that the temporary impact of the delayed Decision on a second quarter 2023 operating revenues could be between $19,000,000 $29,000,000 Based on current positions of parties in the 2021 GRC filing and consumption driven regulatory mechanisms, While I'm on this topic, I'd call your attention to Slide 13, which is the same information except for the year to date activities where the temporary delay in revenues is estimated to be $43,000,000 to $63,000,000 With that, I'll turn it back to you Dave for Slide 9.

Speaker 1

Thank you, Greg. The 2nd quarter earnings bridge is on Slide 10. And moving to Slide 11. For the 6 month period ended June 30, 2023, net loss attributable to group was $12,700,000 or $0.23 loss per diluted common share compared to net income attributable to growth of 20,600,000 or $0.38 earnings per diluted common share for the 6 month period ended June 30, 2022. As Greg discussed, results for the 6 month period ended June 30, 2023, reflected temporary absence The 2023 general rate case of 2023 California general rate increases and regulatory mechanisms included in our 2021 general rate case.

Speaker 1

Operating revenue was $325,100,000 for the 6 month period ended June 30, 2023 compared to $379,200,000 for the same period in 2022. The $54,100,000 or 14 0.3% decrease revenue decrease was due to a $21,800,000 increase In revenue deferral, a $15,200,000 decrease in RAM and NCBA revenue and a $22,900,000 decrease customer usage, which was partially offset by general rate increases of 5,000,000 Total operating expenses for the 6 month period ended June 30, 2023 were $326,700,000 compared to Other operations expenses for the 6 month period ended June 30, 2023 were $42,400,000 compared to 55 $300,000 in 2022, a decrease of 23.2 percent or 12,800,000 The decrease was primarily attributable to the deferral of $17,800,000 and costs related to the revenue deferral. Water production costs decreased $6,600,000 5% to $125,900,000 in 2023 compared to $132,400,000 In 2022, the decrease in water production costs was primarily attributable to a 9.7% decrease These decreases were partially offset by increases in administrative and general expenses of $4,900,000 depreciation and amortization of $2,200,000 and property and other taxes of 1,500,000 During the 1st 6 months of 2023, the company invested 100 and $77,200,000 in infrastructure improvements. This is also a record for the company.

Speaker 1

The company's ATM program increased cash by 112 $700,000 during the 1st 6 months of 2023. We're pleased with the results of our ATM program and we will continue our at the market for ATM program through March of 2025. The year to date EPS bridge is on Slide 15. And now I'll turn it over to Greg Milliman for regulatory update.

Speaker 2

Thank you, Dave. In regards to the cost of capital proceeding, the key point related to this decision is that it is perspective from July 31, 2023 going forward. After implementation with the water cost of capital mechanism, Our ROE will have increased from 9.2 percent to 9.57 percent and our debt will be trued up to our actual lower Cost to borrow of 4.23 percent. Further, if the bond index continues as it is current and following its current trends, We expect the W sorry, the water cost of capital mechanism will be triggered again at the end of or the beginning of October and have an Increased effective January 2024. On Slide 17, it is The California 2021 GRC update shortly after extending the decision on June 29 to The end of the year December 31, 2023, the commission assigned a second judge to our proceeding.

Speaker 2

This judge has had a long career with the commission and he's already started working on our general rate case. Considering that now we have 2 ALJs on our case, We're hopeful that we will have a proposed decision before the end of the year. Moving forward to Slide 18, I will turn it over to Martin.

Operator

Great. Thanks, Greg. Just a quick update on the PFOS, PFOA Events that are happening, I think as we put in the last quarter deck, the draft regulations came out from the EPA for ways to see if those confirmed. Based on those draft regulations, we think it's incremental $200,000,000 approximately of investment needed to treat Approximately 75 wells in the 5 states that we operate, 75,000,000 wells as of right now. Yes, the draft regulation is adopted as it is.

Operator

We'd have to be in compliance by 2026. So that's a bit of a tight timeframe. But having said that, In California, California has the strictest water quality standards in the state. We started working on this back in 2018. So we were well ahead of the curve And continue to move ahead judiciously as we wait to see when those get adopted.

Operator

Also noteworthy and this is a pretty big Pivot for all of us that belong to NAWC, the National Association of Water Companies. We've all gone after the right the polluters. And some of you may have seen in the Wall Street Journal, there has been a number of proposed settlements that have gone before the courts and ready to be finalized. We are personally involved in that litigation for the states that we operate in and any recovery possible that offsets the cost for As we implement treatment necessary to remove Tfil and Tfos from our drinking water. Moving ahead to the next slide, I want to take a moment to talk about business development.

Operator

As in the past, BD has had another Busy quarter, really since we talked last time at the end of Q1. We announced the California Public Utilities Commission approved Closing on the Sky Vanda Mutual, which is in the Bay Area. That is a not a big number of customers, it's 176, But it's a small system that's on both sides of our system. So by acquiring Skyline, it allows us to build an interconnect Between three parts of the Bay, the 2 parts that we own and the one part that's Raylanza and improve reliability and resiliency in the Bay Area. In addition, we closed on the Stroh system in the state of Washington that's adding 900 connections to our Washington Water Service Company in And we got Hawaii Commission approval to close our excuse me, to move ahead with the HOA So, HoH and KSSC are both on the island of Hawaii.

Operator

So, this gets us in our Worth Island is the wastewater system that will add approximately 2,200 wastewater connections. That means we'll be on Maui will be on the big island of Hawaii. We're on Oahu and now we're moving into Hawaii. So overall, it was a busy quarter for our Our business development team and pipeline continues to be full. The team is busy.

Operator

Again, the water space, there's Really, really big acquisitions. There's a pretty few and far between, but certainly there's enough of kind of bolt on things that we're seeing that complement our existing business that are closer Parallel to our existing businesses that we can acquire and bring on to our system and achieve economies of scale to help reduce costs for customers and improve service. Looking ahead on the next slide, the capital investment and depreciation slide. As Dave said, it was a record quarter for us In terms of new capital at $95,200,000 getting that in the ground. Clearly, we're making up some of the ground for a long wet winter out on the West Coast.

Operator

I think the team has done a good job at speeding that up. And also year to date, it was up 22.5%, which was 177 $29,000,000 So we are on track for our targets for 2023. I think more importantly, If you pull back a little bit, give you an idea of why our rate case is probably a little more complex than some of our peers in the State of California. For 2022, 2023 and 2024, that's over $1,000,000,000 of capital that we will have invested in our system. So The rate case that's delayed, it's a $1,000,000,000 rate case.

Operator

So it's a big thing to work through. I'm glad I'm not Greg Norman. He gets to deal with all the details of But it's complicated as we work with the commission and move forward. But the good news is the capital investment is continuing. They continue To stay on track with our investment dollars and the steps we're taking to improve resiliency and sustainability.

Operator

Looking at the next slide, this is just a snapshot of what our regulator rate base looks like for group, Assuming the rate case is adopted as is, this will obviously change when we get a proposed decision and we'll update this slide accordingly. But this will give you a sense of what the earnings growth will look like as the rate base continues to grow. So kind of where are we just taking a step back and looking at Quarter, obviously, we're still in a holding pattern with the delayed general rate case in California. And while that is disappointing, As I mentioned, it is very complicated. I will say we were very happy with the cost of capital decision that came out and was adopted in the 2nd quarter.

Operator

That moved quickly once the proposed decision came out. As Greg mentioned, we're encouraged by the second ALJ being Added to our general rate case, we're very familiar with this judge. We've had other cases before this judge. And I think He's very schedule driven. He's very by the book and I think he's very objective, which is good.

Operator

In terms of adding a new ALJ, I don't think you can want anything more than that. And hopefully, it will help facilitate the process. Obviously, despite the delays, we continue to make significant progress with our business plan, Whether it was the record capital that was put into the ground for the quarter, the continued growth through business development, in this case it was in California, Hawaii and And we also published our 3rd annual ESG report, including what we're doing our Scope 1 and Scope 2 So as we wait, we're going to keep executing the business plan. And as Greg said, we're optimistic that hopefully we'll get a rate case Before the end of the year, once that rate case, a proposed decision comes out, that will allow us to book a number of mechanisms that we can't book right now. And that's why we The numbers that we shared and the ranges are provided to give you a sense of what the high and the low is based on those mechanisms that we're not building right now.

Operator

Lastly, I want to take a moment to talk about a new Board member who joined our Board of Directors. Some of you may have seen that. Charles Patton joined our Board. Some of you may know Charles. He's a 37 year utility veteran with an outstanding background in operations in External and Governmental Affairs and Rates.

Operator

He is an outstanding leader. We're very, very lucky to get him on our Board. And he had his first board meeting with us yesterday. So welcome Charles to the California Water Service Group Board. So Jack, that's the update Our first question comes from the line of Angie Storozynski with Seaport.

Operator

Your line is open.

Speaker 3

Thank you. So I mean there's just so many moving pieces in your earnings power. So just a couple of things. One, you're hoping to actually have a final decision in the GRC this year Just a proposed one. And I'm assuming that you need a final decision to book all of these revenue adjustments Back to retroactively 2onetwenty 3, is that correct?

Speaker 2

Andy, we are hoping to have a With a proposed decision that should provide Enough confidence for the accounting department to go ahead and book the various items that have been deferred.

Speaker 3

Okay. And if I were I mean, you show us all of the revenue adjustments that would have happened for the first half. There's obviously The gain on pension, but is there like a rule of thumb that we can apply just to even have a ballpark Sense of the earnings power like what is the roughly the distribution of earnings? For example, We can infer what the first half earnings would have been based on the adjustments you had showed us. I mean, can I assume a certain Percentage of contribution to the total earnings of 23?

Operator

Yes. Angie, that's why we gave you the ranges what we believe the high and the low are. You'll have to determine kind of what point in that range you think is the best one to look, but we thought the best thing we can do is kind of show the 2 goalposts. And obviously, we'll come out between those two goalposts. Historically, we've done especially the last two rate cases, we've done very well in our rate cases.

Operator

I think that the Cal Water team has really upped their game the last three cycles in terms of putting together a quality rate case and getting to a resolution with the Public Utilities Commission in California. The harder thing is we are officially decoupled from decoupling. So, under the old decoupling rules, we could show you what the consumption curve was that was in the rate case. And obviously our pattern follow that consumption curve. Now that we're really demand driven, It's going to move around a little bit.

Operator

We haven't had to really kind of look at it or think of the business that way in over 12 years. So This year, what we're going through, getting away from decoupling, the earnings will move around, but based on seasonality and based on the weather and Based on consumption. And obviously, we had a very, very wet first quarter. We had a fairly wet 2nd quarter and consumption was down, but now we're hitting this massive heat wave, which is happening all over the U. S.

Operator

And I would expect consumption to jump up Quite a bit in the Q3. So I know that's not a super clear answer, but those are the variables that we deal with internally as we do the accounting Jonathan Reeder with Wells Fargo, your line is open.

Speaker 4

Good morning, Marty and team. Can you hear me?

Operator

Good morning, Jonathan.

Speaker 4

Hey. Yes, no, I know it's very difficult given the moving pieces this year just to maybe kind of Expand on Angie's question there. Can you discuss, I guess, how customer usage is tracking against the usage levels that are included in the GRC's Partial settlement agreement. Obviously, it's weather influenced to some degree in the first half Or not to some degree, it is weather influenced in the first half of the year, but maybe how you expect the full year to come in against those usage levels?

Speaker 2

Jonathan, that's challenging to predict into the future what would happen. But right now, Without decoupling and I believe they reported that we're at about 10%, 90% of consumption that is predicted in the rate case. And because of that, all the mechanisms, but for the One mechanism related to lost revenues from the drought. The other mechanisms are based on actual consumption. And the drought memorandum that the mechanism related to lost revenues from the drought We'll capture the lost consumption revenues associated with the drought for a period of time, But that is uncertain as to how long that mechanism will continue with the governor having removed Mandatory conservation and left in place still left in place is executive orders related to continuing Drought or conservation efforts for the state.

Speaker 4

Right. And when did those mandatory conservation Measures get lifted, was it in like early April?

Speaker 2

It was in April.

Speaker 4

Okay. Okay. So that 90% is against what's actually included in the GRC settlement, partial settlement?

Operator

Correct. That's right.

Speaker 4

Okay. Got you. So I guess with the loss of full decoupling and taking into account those usage trends as well as I guess the cost to supply the water that should be coming in much more favorable to you. Do you expect, I guess, like having the Monterrey ramp this year, is it going to be A headwind or a tailwind to kind of EPS. Is it still a headwind given the loss of decoupling Or these lower supply costs, are they potentially going to help you to a decent amount that's low to the bottom line?

Speaker 1

Hi, Jonathan. I can take that question for you. So, I don't know what the consumption is going to be in the second half of the year. But if it is if we're still at 90%, there will be a small positive value in the Monterey style RAM mechanism.

Speaker 4

Okay. And is that that's netting, I guess, the revenue impact against the supply?

Speaker 1

Yes. It just it tracks the single quantity rate To actual the actual quantity rates filled, and there's a certain level and right now we're at 90%. We're not at 100%. So but It's going to be it's not going to be a big value.

Speaker 4

Okay. Okay. All right. No, I appreciate the help there. Congrats on a good outcome in the cost of capital and good luck Getting the rate case at least proposed decision before your end results.

Speaker 4

Thanks for the time today.

Operator

All right. Thanks, David Sunderland with Baird, your line is open. Hey, good morning guys. This is Deirdre, and don't get too deep into that, except those of course. But in the event that there isn't a proposed decision by the end of the year, how should we think about any changes to CapEx Next year or risk going beyond the end of 2023?

Operator

And then I have one follow-up. Sure. That's a good question because obviously our capital program is included in the 2021 general rate case and The company takes a risk based approach to prioritizing its capital. So the capital spending we're doing now, we feel are necessary improvements that we have to make in order And to do things like wildfire, Harvey and things that we've had to step up our efforts for climate change adaptation. In the event there's a capital project that is not approved of the rate case, it will get picked up in the 2021 rate case, it will get picked up in the next rate case, So any financial exposure is really going to be associated with the depreciation in the interim period is how we pick it up in Got it.

Operator

Thank you. That's helpful. And One other question maybe just about the PFAS legislation. You mentioned going into litigation against some of the parties that may have been responsible are the polluters. Is there any estimates on quantifying some of these benefits or timeline associated with that?

Operator

And then I know you guys called out some potential other sources Funding that could maybe offset a portion of the $200,000,000 CapEx costs. Just any other detail about what those funds may be or when those might be applied? Thanks. Yes. We don't know yet.

Operator

And if you follow the litigation and the paper, These are multi $1,000,000,000 settlements and obviously there's a group of claimants to that Settlement, we're one of those claimants. So we don't know how it's going to kind of work out or how it's going to be distributed. I will tell you though our general counsel is very active and is the class representative in the lawsuit. So we work very closely With the counsel, the group's plaintiff's counsel to understand how those pieces will work. So once the settlements get more clarity and the Judge approves them, then we'll get into the position of working with the reps, the people involved in the litigation Of how those funds will be distributed, then that goes a proposal is made to the judge and the judge has to adopt it and they start distributing those funds.

Operator

I anticipate and this is just a personal opinion, but I anticipate that those settlements are going to be 1,000,000 and 1,000,000 of dollars. And again, the main point about it, it's not going to help from an investor standpoint, because those funds will all go to offset the capital costs associated with the treatment. So it really benefits the customer and that's where it should be. And so then what's left over that doesn't cover the invested capital for PFO and PFOS treatment, that will get rate base So obviously, we want to try to offset as much of that cost because it's incremental to our capital program that $1,000,000,000 that I talked about for '22, 'twenty three and 'twenty four. This $200,000,000 is going to be on top of that.

Operator

And so you run the risk of having rate shocks. We really want to try to minimize the effect of the So settlement funds, I think in 2024, 2025 are very, very likely. In addition to that, we're looking at funding grant funds and other money from the state and federal level, especially for underserved or poor communities. It's one thing to put in PFOS treatment in the Bay Area for Silicon Valley. It's really different when you go to some of the rural areas of California That have the same water quality standards and it's a much lower number of customers, a much lower number of connections and its overall economically not the same environment as affluent area like the Bay Area.

Operator

So, grant funds and proceed dollars from the litigation will all go to offset those costs for customers. That was our final question. I'll now turn the call back over to Mr. Kropelnicki for closing remarks. All right.

Operator

Hey, Jack, first of all, thank you for getting my name right. You're about 1 out of 100 who can get it right. And just for the record, it Everyone, thanks for joining us. Again, all eyes on the general rate case that's a focal point. But while we're doing that, we're not taking our eyes off the business model.

Operator

We're going to execute our business plan to our Full avail that we can. We'll look forward to talking to everyone at the end of Q3 and our earnings call will be on October 20 So, thank you for being with us this morning. Apologies for the technical delays. We had some issues with technology and the lines working correctly. So thanks This concludes today's conference.

Operator

We thank you for your participation. You may now disconnect.

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