Q2 2023 California Water Service Group Earnings Call

Thank you for holding 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. If you'd like to ask a question. During this time simply press star followed by the number why don't you tell us.

Won't keep that if you'd like to withdraw your question again press star one thank.

Thank you I will now turn the call over to <unk>.

Marty probably chair.

Chairman, President and Chief Executive Officer, Mr. Coupled Nicky. Please go ahead.

Mr. Crumpled Mcgee. Please go ahead.

Ladies and gentlemen, please standby.

The conference will resume momentarily.

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Thank you for your patience and welcome everyone, Judy, 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. If you'd like to ask a question. During this time simply press star.

Followed by the number one on your telephone keypad, if you'd like to withdraw your question again.

I want thank you.

I would now like to turn the call over to Marty Troublemaking, Chairman, President and Chief Executive Officer, Mr. Koppell Mcgee. Please go ahead.

Great. Thank you Jack good morning, everyone. Thanks for joining us this morning apologies for the technical difficulties, we had some problems with our telecommunication lines.

So apologies for that.

My name is Dave Healey, our interim Vice President and Chief Financial Officer, and Craig Millman, Vice President of rates and regulatory affairs.

Prior to getting into the results for the quarter I'm going to trial the data you'll need to go through our statement on forward looking statements and Dave why don't you jump into the financial results for the quarter. Please thank you Marty.

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 20.

2023, as a reminder, before we begin the company has a slide deck to accompany the earnings call this quarter.

Slide deck was furnished with an 8-K yesterday afternoon and is also available at the company's website at Www Dot our water group Scott.

Before looking at this quarter results.

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 future events. They are subject to various risks and uncertainties.

Actual results could differ materially from the company's current expectations.

As 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-K Form 10-Q press releases and other reports filed from time to time with the securities.

And exchange admission our presentation starts on slide four with our values and priorities.

Moving on to slide five.

Discuss the second quarter results during the second quarter of 2023 net income attributable to group was $9 6 million and diluted earnings per share was.

<unk> 17 cents as compared to net income attributable to group of $19 5 million and diluted earnings per share or 36 cents for the quarter ended June 32022.

As we discussed last quarter second quarter.

<unk>, primarily black temporary apps.

2023, California General rate case.

Rate increases in regulatory mechanisms included in our 2021 general rate case.

As a result of the delay, California General rate case, there was a decrease in second quarter 2023 operating revenue as compared to the same periods last year. Additionally, operating revenue decreased 13.8 million due to the 10 points worth.

Percent decrease in customer usage general rate increases during the quarter were approximately $3 4 billion with most of it in California.

Along with the delay to our G. R. C. The commission authorized a 4% general rate increase for most of our California districts effective may five two.

2023 until the final 2023 G. R. C General rate case increases are authorized by the commission. This added approximately $3 million to operating revenue during the second quarter.

Total operating expenses decreased slightly in the second quarter of 2023.

As compared to the same period last year net interest expense increased 1.7 million, mostly due to an increase in interest rates and $23 million of additional borrowings on our short term lines of credits.

We invested $95 2 million in capital improvements during the second quarter 2023, and 25, 1% increase over the same period last year.

This was a second quarter record for our company.

In California, the Governor extended the state's Arrearage program to help customers struggling to pay monthly water bills. The program covers delinquent customer balances 60 days past due were written off during the period from mid June 2021 to.

At 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 in California advice letter in July to increase annual operating driving used $24 6 million to offset known.

Increases in California water production costs.

Our EPS bridge.

On page 10.

And now I'll turn it over to Greg element to discuss the temporary absence of 2023, California General rate case.

General rate increases and regulatory mechanisms.

Thanks.

Looking at page seven consistent with the first quarter. We are using the same mechanisms available from the California public utility Commission to track the temporary impact of revenues lost revenues from the delayed decision.

Three primary mechanisms are shown on this slide.

Moving to page eight.

We currently estimate that the temporary impact of the delayed decision on our second quarter 2023 operating revenues to be between 19 and $29 million based on current positions at parties from the 2021, Trc filing and consumption driven regulatory mechanisms.

While I'm on this topic.

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% to $63 million.

With that I'll turn it back to you Dave for slide nine Thank you Greg.

Yeah.

This is the second quarter earnings branches on slide 10, and moving to slide 11.

For the six months period ended June 32023, net loss attributable to group was $12 7 billion or 23 cents loss per diluted common share compared to net income attributable to group was 26 million or 30.

Eight cents earnings per diluted common share for the six months period ended June 32022.

As Greg discussed results for the six month period ended June 32023 reflects the temporary absence of 2023 general rate case.

2023, California general rate increases and regulatory mechanisms included in our 2021 general rate case.

Operating revenue was $325 1 million for the six month period ended June 30th two.

<unk> 23 compared to <unk>.

$379 2 million for the same periods in 2022 to $54 1 billion or 14.3% decrease revenue decrease was due to a 21.8 million increase in revenue deferral at <unk>.

<unk> <unk> 2 million decrease in Ram and M. CPA revenue and a 22.9 million decrease in customer usage, which was partially offset by general rate increases of $5 million.

Total operating expenses for the six month period ended June 32023 three.

$326 7 billion compared to $342 8 million in 2022, a decrease of 16 million or $4 7 million.

Other operation expenses for the six month period ended June 30 of 2023 were $42 4 million compared to $55 3 million in 2022, a decrease of 23, 2% or $12 8 million.

Decrease was primarily attributable to the deferral of 17 8 million in costs related to the revenue deferral what.

Water production costs decreased 656 million or 5% to $125 9 million in 2023 compared to $132 4 million in 2022. The decrease in water production costs was primarily attributable to a nine.

<unk> clients and 7% decrease in customer usage.

These decreases were partially offset by increases in administrative and general expenses of $4 9 million depreciation and amortization of two 2 million and property and other taxes of $1.5 million.

During the first six months of 2023, the company invested 177.2 million and infrastructure improvements.

This is also a record for the company.

The company's ATM program increased cash.

By 112.7 million during the first six months of 2023.

We were pleased with the results of our ATM program.

And we will continue our aftermarket or ATM program through March of 'twenty 'twenty five the.

The year to date EPS Bridge is on slide 15, and now I'll turn it over to Greg element for a regulatory update.

Thank you Dave.

In regards to the cost of capital proceeding a key point related to this decision as it is perspective from July 31, 2023 going forward.

After implementation with the water cost of capital mechanism. Our ROE will have increased from nine 2% to 957% and our debt will be through that to our actual lower cost to borrow at four 3%.

Further if the bond index continues as it is current and following its current trend 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.

Is.

The California 2021 Trc.

Yes.

Shortly after our extending the decision by the June 29 to the end of the year December 31, 2023, the commercial side. The second judge two are proceeding. 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 <unk>.

A L. James on our case, we're hopeful that we will have a proposed decision before the end of the year.

Moving forward to slide Slide 18, I will turn it over to Mark.

Great. Thanks, Greg just a quick update on the <unk> peak.

I've asked that are happening.

As we put it in the last quarter Jack The draft regulations came out from the EPA for ways that CSS firm based on those draft regulations, we think it's incremental $200 million approximately.

What needed to treat.

Approximately 75 wells in the five states that we operate 75 wells as of as of right now.

Yeah.

Get the draft regulation is adopted as is would have to be in compliance by 2026.

That's a bit of a tight timeframe, but having said that in California, and California has the strictest water quality standards in the states. We started working on this back in 2018. So we were well ahead of the curve here.

And continue to move ahead judiciously as we wait to see when those adopted also noteworthy and this is a pretty big pivot for.

All of us that belonged in AWP, The National Association of water companies, we have.

All gone after the rate that the polluters and some of you may have seen in the Wall Street Journal, there's been a number of proposed settlements that have gone before the courts and waiting to be finalized.

We are personally involved in that litigation for the states that we operate in and any recovery costs will go to offset the cost for our customers as we implement treatment necessary to remove T cell antigen loss from our drinking water.

Moving ahead to the next slide I want to take a moment to talk about business development.

As in the past few years has had another busy quarter really since we talked last time at the end of Q1.

We announced.

The California Commission approved us closing on the Sky Linda <unk>.

Neutral, which is in the bay area that is a not a big number of customers. It's 176, but its a small system. That's on both sides of our systems. So by acquiring skyline allows us allows us to build an interconnect between three parts of the Bay two parts that we honor the one part that scale on that.

And recruit improve reliability and resiliency in the Bay area.

In addition, we closed on the stroke system in the state of Washington, That's adding 900 connections to our Washington Water Service company in the Pacific Northwest and we got the Hawaii Commission approval to close or excuse me. Another added with the HOA utility, so H O H and K.

C are both on the island of Hawaii. So this gets us in our fourth island at the wastewater system that will add approximately 2200 wastewater connections about that means we'll be on Maui will be on the big Island of Hawaii, where on Oahu and now we're moving into Hawaii.

So overall it was a busy quarter for our business development team and pipeline continues to be full the teams busy.

Again, the water space Theres, not really really big acquisitions, there they are pretty few and far between but certainly there is enough of kind of bolt on things that we're seeing that complement our existing business are that are closer parallel to our existing businesses that we can acquire and bring onto our system and achieve economies of scale to help reduce costs for customers and <unk>.

<unk> service.

Looking ahead on the next slide on the capital investment and depreciation slide as Dave said it was a record quarter for us for in terms of new capital and $95 2 million in getting out of the ground earlier, we're making up some of the ground for a long wet winter out on the West Coast I think the team's done a good job at speeding it up and also.

Year to date.

It was up 22, 5%, which consisted of $177 2 million. So we are on track.

Our targets for 2000, 22023, I think more importantly, if you pulled back a little bit.

I'll give you an idea of why our rate cases, probably a little more complex than some of our peers in the state of California.

For 2022, and 2023 and 2024, it's over a $1 billion of capitals that.

We will have invested in our system. So the rate case, that's delayed it's a $1 billion rate case. So it's a big things you have to work through I'm glad I'm not Greg Miller when he gets to deal with all the details of that but it is 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.

Looking at the next slide and this is just a snapshot of what our regulated rate base looks like.

Group Assembly in our rate cases adopted as is this will obviously change when we get a proposed decision we'll update this slide accordingly, but that's looking at <unk>.

What's 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 the quarter. Obviously, we're still in a holding pattern with the delayed general rate case in California, and while that has disappointed 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 second quarter.

That move quickly once the proposed decision came out as Brad mentioned, we're encouraged by the second ALJ being added to our general rate case, we're very familiar with this judge we've got other cases.

For this judge and I think he is very scheduled driven very by the book and I think he's very objective, which is set in terms of adding new ALJ I don't think you can want anything more than that.

And hopefully that will help facilitate the process.

Obviously, despite the delays we continue to make some significant progress with our business plan, whether it was the record capital that was put into the ground for the quarter.

Continued growth through business development in this case it was in California, Hawaii and the state of Washington.

And we also published our third annual ESG report.

Including what we're viewing our scope, one and scope two emissions and what we're doing to do our part to combat climate change on behalf of our customers and improve the sustainability and reliability.

So as we wait we are executing the business plan and as Greg said, we're optimistic that hopefully we will get a rate case before the end of the year. Once that rate case 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've shared the numbers that we shared with the ranges are provided to <unk>.

Give me a sense of what the high and the lowest based on those mechanisms that we're not building right now.

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.

<unk> patent joined our board.

Some of you may know trials as a 37 year utilities veteran with an outstanding background in operations and external and governmental affairs and rates.

Outstanding leader, we're very very lucky to get him on our board and he had his first for meeting with US yesterday. So welcome Charles to the California Water Service Group Board.

Jack that's the update for now why don't we open it up for questions. Please.

Certainly at this time, if you'd like to ask a question. Please press star one on your telephone keypad again, Please press star one on your telephone keypad.

We'll pause for a moment to compile the Q&A roster.

Our first question.

Comes from the line of Angie storage Henske with Seaport. Your line is open.

Thank you.

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 and the tier seed this year.

Oh, just a proposed one ends.

I'm, assuming that you need a final decision to book all of these.

You know revenue adjustment.

Back to retroactively to one 123 is that correct.

Andy we are hoping to have a proposed decision by the end of the year.

The proposed decision that should provide.

Enough confidence for the accounting Department to go ahead and book the various items that have been deferred.

Okay, and if I were I mean, you show US all of the revenue adjustment that would have happened for the first half is obviously that 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 that.

Roughly down the distribution of earnings for example.

We can 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.

Yes, that's why we gave you the range is what we believe the high and the low or.

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 two goalposts and obviously, we will 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, I think the Cal water teams.

Really upped our game the last three cycles in terms of putting together a quality rate case and getting to a successful resolution with the public utilities Commission in California.

The harder thing as we are officially decoupled from decoupling so.

Under the old decoupling roles, we could show you what the consumption curve was that was.

The rate case, and obviously our pattern followed that consumption curve now that were really demand driven.

It's got a move around a little bit and 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, while we're going through getting away from decoupling. The earnings will move around based on seasonality and based on the weather and based on consumption and obviously.

We had a very very wet first quarter, we got a fairly wet second quarter.

And consumption was down but now we're hitting this massive heatwave, which is happening all over the U S and I would expect consumption to jump up quite a bit in the third quarter. So I know thats not a super clear answer, but those are the variables that we deal with internally as we as we do the accounting and work on our rate cases.

Okay I understand thank you.

Thank you Angie.

Jonathan Reeder with Wells Fargo. Your line is open.

Good morning, Marty and team can you hear me.

Hi, Jonathan.

Hey, Yeah, nine and no it is very difficult.

Given the moving pieces. This year, just maybe kind of expand on Andy's question. There can you discuss I guess, how customer usage is tracking against the usage levels that are included in the <unk>.

Partial settlement agreement.

Obviously, it's weather influence to some degree.

In the first half or not to some degree it is weather influence in the first half of the year, but maybe how you expect the full year to come in against.

Those usage levels.

Jonathan that's challenging to predict into the future what would happen, but right now without decoupling and I believe Dave reported that worried 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 memoranda mechanism related to lost revenues from the drought will capture the loss 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.

Mr Bashan and left in place still left in place as executive orders related to continuing.

Route or conservation efforts for the states.

Alright, and Windows mandatory conservation.

Measures get lifted and like early April .

It was in April .

Okay.

Okay, so that 90%.

As against what's actually included in the <unk> settlement partial settlement.

Correct.

Got you.

So I guess with the loss of.

With decoupling and taken into account those usage trends as well as I guess the cost to supply.

The water.

Should be coming in much more favorable to you do you expect I guess by having the Monterey Ram. This year is it going to be a headwind or tailwind to two kind of EPS is it still.

Headwind given given the loss of decoupling or these lower supply costs are they potentially going to help you.

Decent amount to flow to the bottom line.

Hi, Jonathan I can take that question for you so.

Don't know what the consumption is going to be in the second half of the year benefit as if we're still at 90%.

There will be a small positive value.

And the Monterey style Ram mechanism.

Okay and is that that's netting I guess.

Revenue impact against the supply.

Yes, it just attracts the single quantity.

The single quantity right.

Two.

To actual the actual quantity rates failed.

And there's a certain.

Level and right now we're at 90%, we're not at a 100%.

So but it's.

It's going to be.

It's not going to be a big value.

Okay.

Okay Alright.

Alright.

I appreciate the help there congrats on a good outcome in the cost of capital and good luck to.

Getting.

The rate case at least proposed decision here.

Year end results. Thanks for the time today.

Alright, Thanks, Jonathan.

Again, if you'd like to ask a question. Please press star one on your telephone keypad, David <unk> with Baird. Your line is open.

Right.

Hey, good morning, guys. Good luck David.

You bet.

So you've got the.

<unk> proposal.

Okay.

This year.

To deepen at circles 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 deployment next year for risk going beyond the end of 2023, 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 base.

Approach to prioritizing its capital so that capital spending we're doing now we feel are necessary improvements that we have to make in order to maintain the system.

And to do things like wildfire hardening things that we've had to step up.

Our efforts for climate change adaptation.

Any of that Theres, a capital project that it is not approved at the rate case and it will get picked up in the 'twenty one rate case, they will get picked up in the next rate case of 'twenty four rate case, so far.

Financial exposure is really going to be associated with the depreciation in the interim period until we pick it up in the next rate cycle.

Got it. Thank you that's helpful and one other question maybe you can split the P fast legislation.

You mentioned going into litigation against some of the parties that may have been responsible are the polluters is there any.

Quantifying some of these benefits or timeline associated with that.

You guys called out some potential other sources of funding that could maybe offset a portion of the $200 million in capex costs.

Any other detail about what those funds may be or when those might be applied.

Yes, we don't know yet and if you've if you've followed the litigation and the paper. These are these are multibillion dollar settlements and obviously there is.

A group of claimants to that settlement and we're one of those climate. So we don't know how it's going to kind of work out or how it is going to be distributed.

I will tell you, though our general counsel is very active and as the class representative.

And the lawsuits we work very closely with our with the council the group's plaintiffs' counsel.

To understand how those pieces work. So once the settlement is get more clarity on the judge approves Zone, 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 and that goes a proposals made to the judge and the judge has to adopt it and they start to study and thus funds.

I anticipate and this is just a personal opinion, but I anticipate that those settlements are going to be millions and millions of dollars.

And again the main point about it.

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 that's where it should be.

And so then what's leftover that doesn't cover.

The invested capital for people happy phosphate that'll get rate base treatment, but obviously, we want to try to offset as much of that cost because it's incremental to our capital program that $1 billion I talked about for 'twenty, two 'twenty three and 'twenty. Four this 200 million is going to be on top of that and so you run the risk of having rate shocks, we really wanted to.

To minimize the effects of the customers. So settlement funds I think in 2020 for 2025 are very very likely in addition to that we're looking at trying to get grant funds and other money from the state and federal level, especially for underserved for our communities.

One thing to put into <unk> phosphate back in on the Bay area for Silicon Valley, It's really different when you go to some of the rural areas in 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.

Area like the Bay area.

Grant funds and proceeds from the litigation will all go to offset those costs for customers.

That's very helpful. Thank you guys I appreciate the time.

Thanks, David.

That was our final question I'll now turn the call back over to Mr. <unk> for closing remarks.

Hey, Jack first of all thank you for taking my name right.

One out of 100, you can get it right and just for the record. It took me told about the age of 12 before I could spell understand my name right.

Thank you for having my name correctly.

Everyone. Thanks for joining US again, all eyes on the general rate case that that's a focal point, but while we're doing that we're not taking our eyes off the business model and we are in executing our business plan to our full.

We'll avail that we can.

We'll look forward to talking to everyone at the end of Q3 in our earnings call will be October 26th so thank.

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 for bearing with US and we'll talk to everyone. Later, thank you and have a good day.

This concludes today's conference we thank you for your participation you may now disconnect.

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