California Water Service Group (NYSE:CWT) Q2 2023 Earnings Call Transcript July 27, 2023
California Water Service Group misses on earnings expectations. Reported EPS is $0.36 EPS, expectations were $0.56.
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. [Operator Instructions.] Thank you. I would now like to turn the call over to Marty Kropelnicki, Chairman, President and Chief Executive Officer. Mr. Kropelnicki, please go ahead.
Marty Kropelnicki: 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 line getting through. So, sincere apologies for that. With me today is Dave Healey, our Interim Vice President and Chief Financial Officer; and Greg Milleman, Vice President, Rates and Regulatory Affairs. Prior to getting into the results for the quarter, I’m going to turn it to Dave Healy to go through our statement on forward-looking statements. And Dave, why don’t you jump into the financial results for the quarter, please.
Dave Healey: 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 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-K yesterday afternoon and is also available at the company’s website at www.calwatergroup.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 future events, they are subject to various risks and uncertainties, and actual results could differ materially from the company’s current expectations.
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-K, 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 their values and priorities. And moving on to Slide 5, I’ll discuss the second quarter results. So, during the second quarter of 2023, net income attributable to group was $9.6 million and diluted earnings per share was $0.17 as compared to net income attributable to group of $19.5 million and diluted earnings per share of $0.36 for the quarter ended June 30, 2022. As we discussed last quarter, second quarter results primarily reflect the temporary absence of 2023 California general rate increases and regulatory mechanisms included in our 2021 general rate case.
As a result of the delayed California general rate case, there was a decrease in second quarter 2023 operating revenue as compared to the same period last year. Additionally, operating revenue decreased $13.8 million due to a 10.4% decrease in customer usage. General rate increases during the quarter were approximately $3.4 million, 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 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 of 2023, a 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 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 the California advice letter in July to increase annual operating revenues, $24.6 million to offset known increases in California water production costs.
Our EPS bridge is on Page 10. And now I’ll turn it over to Greg Milliman to discuss the temporary absence of 2023 California General Rate Case, general rate increases and regulatory mechanisms.
Greg Milleman: Thank you, Dave. Looking at Page 7, 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 whilst revenues from the delayed decision. The three primary mechanisms are shown on this slide. Moving to Page 8. We currently estimate that a temporary impact of the delayed decision on second quarter 2023 operating revenues to be between $19 million and $29 million based on current positions of parties in the 2021 GRC filings 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 million to $63 million. With that, I’ll turn it back to you, Dave, for Slide 9.
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Dave Healey: Thank you, Greg. The second quarter earnings bridge is on Slide 10 and moving to Slide 11. For the six-month period ended June 30, 2023, net loss attributable to group was $12.7 million or $0.23 loss per diluted common share compared to net income attributable to group of $20.6 million or $0.38 earnings per diluted common share for the six-month period ended June 30, 2022. As Greg discussed, results for the six-month period ended June 30, 2023, reflect the temporary absence of 2023 general rate case, the 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 30, 2023, compared to $379.2 million for the same period in 2022.
The $54.1 million or 14.3% decrease — revenue decrease was due to a $21.8 million increase in revenue deferral, a $15.2 million decrease in RAM and MCBA 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 30, 2023, were $326.7 million compared to $342.8 million in 2022, a decrease of $16 million or $4.7 million. Other operations expenses for the six-month period ended June 30, 2023, were $42.4 million compared to $55.3 million in 2022, a decrease of 23.2% or $12.8 million. The decrease was primarily attributable to the deferral of $17.8 million in costs related to the revenue deferral. Water production costs decreased $6.6 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 9.7% decrease in customer usage. These decreases were partially offset by increases in administrative and general expenses of $4.9 million, depreciation and amortization of $2.2 million and property and other taxes of $1.5 million. During the first six months of 2023, the company invested $177.2 million in 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 are pleased with the results of our ATM program, and we will continue our at the market, or 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 a regulatory update.
Greg Milleman: 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% to 9.57%, and our debt will be trued up to our actual lower comps to borrow of 4.23%. Further, if the bond index continues as it is current and following its current trends, we expect the water cost of capital mechanism will be triggered again at the end of — or the beginning of October and have an increase 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.
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 two 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 Marty.
Marty Kropelnicki: Great. Thanks, Greg. Just a quick update on the PFOS, PFO events that are happening. I think as we put in the last quarter deck, the draft regulations came out from the EPA [four ways] it was confirmed. Based on those draft regulations, we think it’s incremental $200 million approximately of investment needed to treat approximately 75 wells in the five states that we operate, 75 million wells as of right now. Yet the draft regulation is adopted as it is, we’d have to be in compliance by 2026. That’s a bit of a tight time frame. 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 are well ahead of the curve here and continue to move ahead judiciously as we wait to see when those get adopted.
Also noteworthy, and this is a treaty big pivot for all of us that belong to NAWC, the National Association of Water Companies. We’ve all gone after the rate — 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 costs will go to offset the cost for customers as we implement treatment necessary to remove PFOA and PFOS 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, [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 us closing on the Skylonda Mutual, which is in the Bay Area.
That is 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 Skylonda it allows us to build an interconnect between three parts of the Bay, the two parts that we own and the one part that Skylonda 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 the Pacific Northwest. And we got the Hawaii Commission approval to close our — excuse me, to move ahead with the HOH Utility. So, HOH and KSSC are both on the Island of Hawaii. So, this gets us in our fourth island, it’s a wastewater system that will add approximately 2,200 wastewater connections.
That means we’ll be on Maui, we’ll 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 business development team and pipeline continues to be full. The team is busy. Again, in the water space, there’s not really, really big acquisitions. They’re 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 close or 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, on the capital investment and depreciation slide. As Dave said, it was a record quarter for us in terms of new capital and $95.2 million getting out of the ground.
Clearly, we’re making up some of the ground for a long wet winter out on the West Coast. 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] million. 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 billion of capital that we will have invested in our system. So, the rate pay sets delayed, it’s a $1 billion rate case. So, it’s a big thing to work through. I’m glad I’m not Greg Milliman, he gets to deal with all the details of that, but it’s complicated as we work with the commission and move forward.
But the good news is the capital investment is continuing. We 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, this is just a snapshot of what our regulated 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 the 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 second quarter 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 in terms of adding new ALJ. I don’t think you can want anything more than that. And hopefully, it will help kind of 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 the State of Washington. And we also published our third annual ESG report, including what we’re doing in our Scope 1 and Scope 2 emissions and what we’re doing to do our part to combat climate change on behalf of our customers and improve sustainability and reliability. So, as we wait, we’re going to keep executing the business plan. And as Greg said, we’re optimistic that hopefully 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 share 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.
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 who may know, Charles, he’s a 37-year utility veteran with an outstanding background in operations in external and governmental affairs and rates. 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 for now. Why don’t we open it up for questions, please?
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