California Water Service Group (CWT) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the California Water Service Group Annual Stockholder Meeting. I will now turn things over to the Chairman of the Board, Mr. Peter Nelson.

Thank you, Britney. And good morning, everyone, and welcome to the virtual webcast of California Water Service Group's 2020, which is our 93rd Annual Meeting of Stockholders. You've seen our normal disclosure on forward-looking statements. I am Pete Nelson, Chairman of the Board, and with me today is Marty Kropelnicki, our President and CEO. In light of the current COVID-19 pandemic, we carefully considered the public health and safety concerns of our shareholders, our employees and directors and chose to hold this meeting virtually. We do not expect any technical difficulties today. However, in the event we do lose the audio or webcast connection, please wait for up to an hour for us to solve the problem, and please refer to the company's Investor tab on our website for an update. But again, we don't expect any problems today. Here is the agenda for today's meeting. First, I will introduce your Board of Directors then move to the formal part of the meeting to vote on 3 matters before us. Then we'll receive the preliminary results from the inspector of elections. Then Marty and I will make some comments, and then we'll take your questions and answer them. Although we hold all questions for answering until the end of Marty's comments, we invite you to submit your questions at any time throughout today's meeting. Maintaining a culture of safety is important to Cal Water, so we begin every meeting with a safety moment. In place of that today, I would like to begin by recognizing the brave health care professionals, first responders, public servants and others on the front line fighting the COVID-19 pandemic and helping to ensure the health and well-being of our communities. Among those heroes on the front line are 1,300 of our Cal Water employees, working to support our customers and communities by providing an uninterrupted supply of safe water. Thank you for all the good work you're doing on our behalf. Next, I will introduce the directors of the company who are attending virtually. This, as you well know, is simply an outstanding Board that serves the stockholders and the company very well. I will introduce each by name and you can read their biographies in the proxy statement. They are: Greg Aliff, Terry Bayer, Shelly Esque, Marty Kropelnicki, Tom Krummel, Rick Magnuson, Scott Morris, Carol Pottenger, Lester Snow and Patti Wagner. Also joining us today virtually is our executive management team. And that concludes my introductions, and now I officially call the meeting to order. Our polls are open. You may vote your shares online at any time during the meeting before the polls close. If you have already voted, but do not need -- you do not need to take any action unless you wish to change your vote. This meeting is being held as required by the bylaws of the corporation, and I appoint our corporate Secretary, Michelle Mortensen, as Secretary of the meeting. Our attorney, Doug Smith, from the law firm Gibson Dunn; and our inspector of elections, Kathy Blackwell from Broadridge Financial Services are also attending. Links to the agenda and the rules of conduct for this meeting are available on the meeting website screen. Please review these rules as they contain important information, including how this meeting may be adjourned if we experience technical difficulties. To conduct an orderly meeting, we ask that participants abide by the rules of conduct. If you wish to submit a question, you may do so at any time before the meeting adjourns by following the instructions on the meeting website. Today, we have 3 matters on the agenda. First, we will vote on the election of directors. The Board nominated the 11 individuals listed in the proxy statement. Second is our annual advisory vote to approve executive compensation. And third is the ratification of Deloitte & Touche LLP as our independent public accounting firm. Scott Smith, Vice Chairman and Partner; and Tim Gillam, Audit Partner, are both with us today. Notice of this meeting was mailed on April 15 to stockholders of record on March 31. Michelle has copies of the notice of meeting, proxy form and proxy statement, along with an affidavit of mailing from Broadridge. These documents will be made part of the minutes of this meeting. Michelle, based on the list of stockholders of record on March 31, 2020, how many shares are entitled to vote at this meeting?

On the record date for this meeting, March 31, 2020, there were 48,713,549 shares of common stock outstanding. Each share will have 1 vote.

Thank you, Michelle. Kathy, please report on the number of shares represented at this meeting.

There are 42,445,373 shares of common stock present or represented by proxy at the meeting, which is 87.13% of the total outstanding shares entitled to vote. Marty Kropelnicki and Michelle Mortensen are proxy holders representing the shares present by proxy.

Thank you. Please prepare our written report with the final account of shares present or represented by proxy and provide it to Michelle who will then file the report and the proxies in the records of the company. Kathy's report indicates that more than a majority of the voting shares are present or represented by proxy, which means we have a quorum to conduct the business of the meeting. [Voting]

Everyone has had the opportunity to vote. I now close the polls and begin the vote count. We will now hear the preliminary report of the inspector of elections. Kathy, please report on the vote on the 3 proposals.

On the first proposal, the election of the Board's nominees, the total number of votes cast shows a substantial majority for the individuals nominated as directors. On the second proposal, the advisory vote to approve executive compensation, the total number of votes cast shows a substantial majority for the approval of the proposal. On the third proposal, ratification of the appointment of Deloitte & Touche as our independent registered public accounting firm, the total number of votes cast shows a substantial majority for the ratification of Deloitte & Touche.

Thank you, Kathy. Based on these results, the 11 nominees have been elected, the advisory vote on executive compensation has been approved and the selection of Deloitte & Touche has been ratified. Next, Marty and I would like to share some thoughts with you. Since we last met, we were fortunate enough to recruit 2 outstanding new directors, both outside directors, Scott Morris and Patti Wagner. If I was forced into a sports analogy on these 2 individuals, I'd say we were just awarded the first 2 picks in the first round of the nationwide directors draft. Scott recently retired as a CEO, and now he's Executive Chairman of Avista Corporation headquartered in Spokane. Avista, for those of you who have followed the industry for a few years, is the greatly expanded Washington Water Power Company, now serving electric and gas in 4 states in the Northwest, including Alaska. Patti also recently retired as Group President, U.S. Utilities at Sempra Energy in San Diego. There, she ran the San Diego Gas & Electric Company and SoCalGas, which is the largest gas distribution company in the United States. So what we've done here is added to our Board 2 top leaders from 2 of the most respected regulated utilities in the state, California; and out of state, Washington. Fortune truly shined on us in this director search this year. Another transition last year was sad, the untimely passing last June of Director Ed Guiles. Ed was a good friend, colleague and director and a good man, and we do miss him quite a bit. At this point, I'll turn the meeting over to Marty for his comments.

Thank you, Pete, and good morning, everyone. On behalf of the management team, it's my honor to welcome you to the 93rd Annual Stockholders Meeting. If I could just take a moment to introduce the topic, focus on what matters. And if we would have had a crystal ball last year around this time as we started to think about what should be the annual report theme, knowing that we would be going into a worldwide pandemic, we probably would have picked the topic focus on what matters. So I want to take the first part of my presentation today to talk about what we've been focused on in terms of our response to the coronavirus and the COVID-19, in particular, what we've been doing to take care of our customers, our employees and the communities that we are honored to serve. First, let me start off by saying, now more than ever, we understand the critical role that we play in helping our customers and communities stay safe by providing uninterrupted supply of water. In addition to that, we understand how bad the current economic conditions have been as we've had skyrocketing unemployment, and as a result, we were one of the first utilities on the West Coast to suspend all collection activities and shut-offs for nonpayments for all customers. In addition, and historically, we've always offered extension payments, but we've extended those extension payments to work with our customers to allow them more time to pay their water bills. And we also have a customer hardship grant program that allows customers to apply for grant money that's funded by the stockholders to pay for their water bill. In addition, and a few weeks ago, we requested and the California Public Utilities Commission approved for our largest subsidiary in California postponing any rate or tariff changes until 2021 to lessen the financial blow on our customers. Moving on to employees. I've always said that while we are a company of pipes and pumps, our most valuable assets are our employees, and keeping our employees safe is absolutely critical. As part of our enterprise risk management model, we have an officer threat assessment team that is responsible for tracking and learning about potentially evolving threats that could have an impact on our business. Early in January, this threat assessment team identified the coronavirus, also now known as COVID-19, as a potential threat and pandemic and quickly updated our pandemic training. And during the end of the last week in January and the first week in February, we prepared and rolled out to all employees, all 1,300 employees in all 4 states, updated pandemic prevention training. In addition, we've quickly closed our customer centers to minimize personal contact from people outside the company exposing people inside the company. We modified our work environment to allow for social distancing, modified work schedules, et cetera. And we issued personal protective equipment for all of our employees. In addition, we retained outside experts, including a behavioral psychologist, to talk to our employees and their significant others about how to handle their families while they have to shelter in place and mom and dad have to go to work because they work for a water company. And also, we retained a nationally recognized infectious diseases expert who reviewed our policies, procedures and processes to ensure that we have a best-in-class approach, and we're taking the appropriate measures to protect all of our assets, our employees during the pandemic. Let me move on to talk about the communities that we are fortunate enough to serve. Clearly, the pandemic has had a major blow to most of the communities that we operate in. Having said that, we also noted that some communities were better prepared for the pandemic than others. As a result, we have shared our PP&E (sic) [ PPE ] stock, and that's personal protective equipment, with cities and counties that were less prepared. In addition, we've made numerous contributions to local food banks, community foundations and charities that help support the various communities that we're fortunate enough to serve. We also initiated and rolled out an employee contribution matching campaign where employees can pick a local charity and the company would match their dollars, essentially doubling that donation to that local community. And we rolled out our small business assistance program. One of the most important things we've done, economically speaking, is while most of America was sheltering in place, we continue to work 24 hours a day, 7 days a week. And behind us, there are hundreds and hundreds of small and local vendors that help provide goods and services that enable us to operate on a daily basis in fulfilling our promise of providing quality service and value to our customers. We quickly notified our key suppliers and worked with them to keep them open so they can continue to supply us the goods and services needed so we can keep doing what we do best serving our customers. In addition, as I think we all know, during a national disaster, it's important that you overcommunicate. And during this process, we have had extensive outreach at the city, at the county, at the state and at the federal levels to all of our elected officials to let them know that the water is safe to drink and everything that we're doing to protect and to continue to supply uninterrupted supplies of water for our customers. Next, I want to take a moment to introduce the officer team that's making this all happen: Shannon Dean, Vice President, Corporate Communications and Community and Governmental affairs; David Healey, Vice President, Corporate Controller; Rob Kuta, Vice President, Engineering and Chief Water Quality and Environmental Compliance Officer; Michael Luu, Chief Information Officer and Vice President, Customer Service; Mike Mares, Vice President of Operations; Lynne P. McGhee, Vice President, General Counsel; Greg Milleman, Vice President, Regulatory Affairs for California; Elissa Ouyang, Chief Procurement Officer and Lead Continuous Improvement Officer; Gerald Simon, Vice President, Chief Safety, Security and Emergency Preparedness Officer; Tom Smegal, Vice President and Chief Financial Officer; Paul Townsley, Vice President, Corporate Development and Chief Regulatory Affairs Officer; and Ron Webb, Vice President, Human Resources. In addition, effective January 1 this year, we added a new officer position to the officer ranks. And I'm very happy to introduce you to Todd Peters. Todd Peters joined Cal Water in 1993 in our engineering department. He is a professional engineer. Todd plays a critical role in planning and executing our business plans that help us maintain and improve our infrastructure to provide life's essential services, water. Under Todd's leadership as Chief Engineer between 2005 and 2019, our annual infrastructure investment grew from just under $91 million to $274 million a year. Our net utility plant grew from under $900 million a year to over $2.2 billion a year. So I'm very pleased that Todd has accepted this position. Todd, welcome to the officer team. You have a lot of work to do with, my friend. So let's get hopping. A lot of investment to make. Next, I want to give you a quick highlight on the financial results for 2019. And let me start by saying 2019 was the third year of the general rate case in the state of California, our largest subsidiary, which represents approximately 93% of our revenue. We always tell people in the third year of the rate case, we tend not to get too excited because it's the time in the cycle, the 3-year rate cycle, that we see the greatest amount of regulatory lag. And having said that, 2019 actually turned out to be a fairly good year. One of the reasons being is that we got $15.7 million or achieved 96% of our inflationary step increase. This is an amount that we're allowed to apply for in the interim -- in the off years of the rate cycle to allow for inflationary offsets. And it's subject to an earnings test, and the earnings test is based on getting capital in the ground. So 96% achievement was the best we've ever done on a step increase, and that certainly led the way to our net income of $63.1 million or earnings per share of $1.31 per share. In addition, we set a new record. We invested $274 million of capital, that's a new record for us to invest in a single year. And we increased our dividend 5.3% from $0.75 a share to $0.79 a share, which marks our 52nd annual consecutive dividend increase. And we achieved all this while remaining focused on long-term growth. What does our long-term growth look like? If you look at our 20-year total return chart and compare us to the S&P 500, or said a different way, if you bought $100 of Cal Water stock on January 1, 1999, and $100 worth of the S&P 500 and go out 20 years, your investment in the S&P 500 would be worth $326, which would be a 20-year total return of 226%. At the same time, your achieved results holding Cal Water stock was a 693% value at the end of 2019 for a 593% total return. Sustained focus on the long-term objectives of the company is key as we lay out our business plans and we move into the future. So what does that entail? There's 2 ways to grow the business. First is the capital investment program to maintain our existing infrastructure, and as I said, in 2019, we had a record year of $274 million. The other thing that's really noteworthy here is that we're investing 3x the amount that we're depreciating on an annual basis. So as you invest in an asset, that investment depreciates over time. So when you look at that, last year, we depreciated $90 million and we invested $274 million. So what exactly does that mean? That means we are growing our regulated rate base. The box that you see in the center of the chart shows the range of outcomes from the pending 2018 general rate case, which has been delayed by the California Public Utilities Commission. So in order to be transparent, we've put the various elements here and the various likelihoods that we think are likely with the rate case. And as you'll note, in 2014, we had under $1 billion of regulated rate base. And by the end of 2022, we will be breaking the $2 billion point of our regulated rate base. That means we're growing earnings and that also means that we have the ability to grow our dividend. The company's payout ratio policy is to maintain a payout ratio between 55% and 65%. And since 2014, we have increased the dividend 31% or we have an average compound annual growth rate of 3.8%. It's noteworthy to point out, in 2017, 2018, 2019 and now 2020, we've had a dividend increase that's higher than our 5-year compound annual growth rate. The second way we grow our business is looking for new opportunities that allow us to complement our existing business. So I want to take a moment to talk about what's been happening on the business development side of things as 2019 was certainly a busy year for us. First, we have filed with the California Public Utilities Commission the right to acquire the Preserve at Millerton. This is what we call a greenfield opportunity. It's a to-be-built master plan community in Madera County, and it's planned for 1,100 water and wastewater units in the Central Valley. This continues our growth in the Central Valley area, in particular, in Madera County. Second is the Kalaeloa Water Company, which is on the island of Oahu. I mentioned that last year. This is the old Barbers Point air base. We have filed with the Hawaii Commission to acquire those assets. The nice thing about the Kalaeloa Water Company is it gets us on the island of Oahu. That's our third island. We're on the island of Hawaii, the island of Maui and now on the island of Oahu. And this will end up being a developed community that's right on the seafront of Oahu that will be built out at a later date. In addition, just in time for Christmas, on December 23, we announced the Kapalua Water Company and Wastewater Company acquisition, and that will provide an additional 500 water and wastewater connections for us in Maui, about 5 miles north of our Ka'anapali service area, including a number of hotels, resorts and golf courses. The big news for us, on November 6, 2019, we announced the acquisition of Rainier View Water. Rainier View Water serves about 35,000 to 37,000 customers via 18,500 connections. They're headquartered into Puyallup, Washington. And on March 30, 2020, the Washington Utilities and Transportation Commission approved our application to acquire the assets of Rainier View. As you can see by the map, Rainier View butts up next to our service -- existing service territory with Olympia, Gig Harbor and will allow us to expand and become the largest rate-regulated water utility in the state of Washington. And we anticipate closing this deal before the end of the second quarter. Transitioning, I want to take a moment to talk about what we've been working on with the Board on the governance side, in particular, risk management and ESG. First and foremost, we formed the Enterprise Risk Management, Safety, and Security Committee of the Board of Directors, also known as the ESOC. The goal of the ESOC to assist the Board and management reviewing our enterprise risk management, safety and security programs, including cyber and our physical security programs. In addition, we incorporated social responsibility, ESG and sustainability responsibilities to the Nominating Corporate Governance Committee for their oversight. In 2019, we became fully compliant with the California Consumer Privacy Act on schedule. That was a major act in California that allows customers the right to choose how we use their data and what we do with it. In addition, we published our Corporate Responsibility Report, including, for the first time, carbon footprint reduction initiatives and we improved our Form 10-K disclosures. Currently, we're working on one of our goals for 2020 in conducting a materiality assessment to enable us to prioritize and execute and measure on ESG efforts and determine the most appropriate reporting framework. As many of you probably know, there are 5 or 6 different frameworks that you can follow, that there's not a standardized approach of conducting the materiality assessment and looking at our key initiatives to line them up to the best reporting framework is what our big step is to -- in 2020. And I look forward to reporting more on that in 2021 as we do our best to improve our ESG behaviors of the company. So looking at our 2020 priorities. Let me just remind everyone that Cal Water has always taken and will continue to take a customer-first approach. And we'll continue to provide excellent service during the pandemic while taking steps to keep all of our employees safe. This includes adopting the workplace environment to any new requirements from the CDC, OSHA or the Department of Health. In addition, we'll be advocating for a favorable decision on the delayed 2018 general rate case for our California subsidiary, and as I mentioned earlier, targeting the close of Rainier View Water by the end of the second quarter and start the integration with Washington Water on the group platform. In wrapping up, and looking ahead, let me say that these are challenging times that we operate in with a profound effect on how we operate, but it has not changed our mission or our purpose. While we're concentrated on the current emergency, we'll continue to focus on maintaining safety as a priority, serving our customers, continue with our capital investment program, preparing for wildfires and continuing on our quest for business development. And let me close by saying, consistent with Pete, I want to thank our 1,300 employees who have come to work every day to keep the water flowing for the 2 million-plus customers that we serve in our 4 states. Without them, none of this would be possible. And I know on behalf of all of our customers, they greatly appreciate what we do every day. Mr. Chairman, I will hand it back to you.

Okay. Thank you, Marty. At this point, I will adjourn the meeting and move on to questions from stockholders. If you have a question and have not submitted it yet, please do so now. I've asked Michelle to read us the questions and then either Marty or I will answer them. Michelle, if you're ready, we're ready.

Sure. Thank you, Pete. At this time, we have no stockholder questions in the queue.

Okay. Well, let's -- I'm going to allow a little more time. [Operator Instructions]

And at this time, we still do not have any questions.

Okay. That being the case, this concludes our meeting today. Thank you all for attending, and we hope to see you again next year. We're adjourned.

Ladies and gentlemen, this concludes your call. You may now disconnect.