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

Good morning, everyone, and welcome to the virtual webcast of California Water Service Group's 2021, which is our 94th Annual Meeting of Stockholders. You have seen our normal disclosure on forward-looking statements. I'm Pete Nelson, Chairman of the Board, and with me today is Marty Kropelnicki, our President and CEO. In line of the current COVID-19 pandemic, we carefully considered the public health and safety concerns of our shareholders. Our employees and directors chose to hold our meeting virtually again. 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. Please refer to the company's Investor tab on our website for updates. Here's 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 the 3 matters before us. During the vote tally, first I and then Marty will make some comments. Then we will receive the preliminary results from the inspector of elections and close the meeting. Finally, Marty and I will take and answer questions. Although we will hold all questions for answering until after Marty's comments, we invite you to submit your questions at any time throughout the meeting. And just a reminder, we're allowing 2 questions for our shareholder to give everyone a chance to ask a question today. 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 will 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 Cal Water employees, working to support our customers and communities by providing an uninterrupted supply of safe water. Unlike other companies, Cal Water employees have been on the job 24 hours a day, 7 days a week without exception. Thank you for all the good work that you're doing on our behalf. Next, I'll introduce the Board of Directors who are attending virtually today. 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. We're pleased to welcome Dr. Bonnie Maldonado to our slate of Directors this year, both nationally and internationally known for her knowledge, research and expertise in infectious disease control and international health. Bonnie brings a diversity of thought, skills, background and experience to maintain a balanced and effective Board. There is no question that Dr. Maldonado will serve our customers, community, employees and stockholders very well. This concludes my introductions, and I will now 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, you do not need to take any additional action unless you wish to change your vote. This meeting is held as required by the bylaws of the corporation, and I appoint our Vice President, Corporate Secretary, Michelle Mortensen as secretary of the meeting. Our attorney, Stewart McDowell 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 webcast screen. Please review these rules as they contain important information, including how this meeting may be adjourned if we experience technical issues. To conduct an orderly meeting, we ask the 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 12 individuals listed in the proxy statement. Second is our annual advisory vote on 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 on this virtual meeting. Notice of this meeting was mailed on April 14 to stockholders of record on March 30. 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 30, 2021, how many shares are entitled to vote at this meeting?

On the record date for this meeting, March 30, 2021, there were 48,713,549 shares of common stock outstanding. Each share will have one vote.

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

Thank you. There are 44,673,421 shares of common stock present or represented by proxy at the meeting, which is 87.89% of the total outstanding shares entitled to vote. Marty Kropelnicki and Michelle Mortensen are the proxy holders representing the shares present by proxy.

Thank you, Kathy. 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 there are more than the majority of the voting shares 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 will now close the polls and ask Kathy to begin the vote count. Next, Marty and I will share some thoughts with you while the vote is being tallied. Doing the right thing. Marty likes to use the term for good reason. What we are about to hear from him and his team is the extraordinary year of doing the right thing. Despite unheard of obstacles, the pandemic being top of the list, they came through to do exactly that, the right thing. For Cal Water employees, he has strengthened the one team culture. And again, in fact, for the ninth year running, the Bay Area News Group has named Cal Water a Top Bay Area Workplace. And we also received a Great Place to Work distinction by the Great Place to Work Institute for a fifth consecutive year. For customers, they continue to see exceptional service levels, water quality and infrastructure investment. For stockholders, both large and small, who trust their investment with us, they saw a very attractive returns on that investment. And for the communities we serve it, they saw Cal Water's employees and donations improving their quality of life. As annual report affirms, Cal Water truly is a light in the dark. At this point, I'll turn the meeting over to our President and CEO, Marty Kropelnicki.

Thank you, Pete. Good morning, everyone. It's an honor to be here today, especially as we start to evolve or come out of the pandemic. When you think about our 95-year history, Cal Water was incorporated on December 20, 1926. So we'll have our 95th anniversary this year. Our company has seen a lot of amazing things, the Great Stock Market Crash, The Depression, World War II, The Cold War. And when we think about the pandemic and what's evolved over the last 12 to 16 months, this may be one of the most challenging times we faced as a company. Having said that, the concept of a light in the dark really stems from our mission statement to serve our customers 24 hours a day, 7 days a week, 365 days a year, despite pandemics, fires, floods, disasters, et cetera. We're on the job doing what we do and what we do best. What I wanted to do today is take a moment to briefly introduce the officer lineup for 2021. Take a moment, pause and talk about the pandemic. What do we do to protect our employees because we had to keep them on the job site? What do we do to help our customers? And what do we do to go above and beyond in terms of community support, help our communities get through these difficult times? After that, I will discuss and give an update on more of the traditional financial and operating metrics that we use during the annual meeting, and I'll close by talking about our goals for 2021. Starting off, looking at the officer lineup for 2021. Ms. Shannon Dean is Vice President, Customer Service and Chief Citizenship Officer; Dave Healey is Vice President and Corporate Controller and Assistant Treasurer; Rob Kuta, Vice President, Engineering and Chief Water Quality and Environmental Compliance Officer; Michael Luu is Vice President, Information Technology and Chief Risk Officer; Mike Mares, Vice President of Operations; Lynne McGhee, Vice President and General Counsel; Greg Milleman, Vice President of California Rates; Michelle Mortensen, Vice President and Corporate Secretary; Elissa Ouyang, Chief Procurement Officer; Todd Peters, Chief Engineering Officer; Gerald Simon, Chief Safety, Security and Emergency Preparedness Officer; Tom Smegal, Vice President and Chief Financial Officer and Treasurer; Paul Townsley, Vice President, Corporate Development and Chief Regulatory Officer; and Ron Webb is Vice President of Human Resources. These 14 individuals have done an outstanding job helping the company and its employees manage through the pandemic, and I know they will continue to do an outstanding job as we roll through 2021 and the challenges that lie ahead. I want to start off talking about our unmatched employee support during the COVID-19 pandemic. As many of you have heard me say that while we are a company of pipes, pumps and distributed utility assets, our real assets are our people, the men and women of Cal Water that show up in the utility vehicles every day to deal with water quality, to deal with broken mains, help customers deal with water issues and to make sure that our more than 6,000 miles of main work flawlessly day in and day out. Early on in the pandemic, it became very clear that we had to do a number of things to protect our employees from the virus as we anticipated the spread happening. We are a very early adopter of personal protective equipment, PPE, and other safety measures, including temperature screening, social distancing, contract tracing and testing. Additionally, we awarded employees a special code for time off for COVID time. This basically told our employees in the event that you get sick with COVID, we have you covered. You have your time off to quarantine and get better. Additionally, that time could be used for immediate family member who became ill or to deal with childcare as schools started to close around the service area. Following that, we rolled out a very robust flow of information and emotional support for our employees. This included a daily emergency operation call for all managers in all 4 states and a weekly all-hands call for all employees when we brought in outside medical experts, well-known first responders, behavioral psychologists, and some of these calls were not just for our employees, but also for their spouses to talk about how do you manage the pandemic with your child? How do you talk about it? How do you keep your family safe? And while today, I will share a lot of statistics with you about the operations. The statistic I'm most proud of is the fact that we have evolved from this pandemic with no employee losses or fatalities due to the pandemic. And to me, that is the most important statistic to share with stockholders here today. Looking at our extraordinary help for our customers. As everyone knows, that pandemic had a profound economic effect throughout our service territories, and it became clear to us early on that water was absolutely critical to help fight the pandemic and the virus. So early on in the process, we suspended shutoffs for nonpayments, recognizing that we needed to help keep our customers with clean, fresh, reliable sources of drinking water. We've granted more than $400,000 of bill forgiveness to our customers who lost their jobs and who were unable to pay their water bills. And then we developed innovative programs like our innovative landscape program where customers could call up and inform us of a leaky water main, perhaps on their lawn or in their garden and that we would arrange for a customer or a contractor to go out on-site and help make that repair. Not only did it stop the water from being wasted, but to also avoid their bill from running up. And looking at our exceptional community support, there are 3 major areas I want to talk about. First and foremost, while most companies were cutting back, we were doubling down. In 2020, we donated a record $1.7 million in charitable contributions, mostly directed to local food banks, programs such as meals on wheels, our meals for senior citizens and other programs that help the most vulnerable, affected by the pandemic. Additionally, we rolled out our first-ever campaign to match employee contributions. This allowed employees to make a contribution to a local charity in their service area, and it was matched by the company. Additionally, we donated tens of thousands of units of PPE to first responders in communities not as well prepared for the pandemic as we were. If you recall early on the pandemic, there was a lot of scarcity of appropriate supplies, and we share our supplies with the communities that needed it the most. On this slide, there's 2 awards that I'm very proud of. The first one on your far left is the Silver Stevie Award that we won for our comprehensive effort to keep employees safe and informed during the pandemic. We were awarded this in the spring of 2020. The award you see on the right is the Silver Stevie Award that we received 2 months ago for most valuable corporate response for our support of our communities that we are honored to serve. And we're very honored to share both of these awards with you here today. Now with the pandemic, it was the first time in our 95-year history where we had to challenge ourselves and look in how we serve our customers. It was a very disruptive event. And that meant we had to think about different ways and change the way we interact with customers. We've seen customers migrate over the last 5 to 10 years to being more online type of payments, more bill pay -- payments being made through our portal, but then you add to pandemic, and it became the great disruptor and caused us to think about how we service our customers. So our response to that was really quite simple. We aggregated our customer service skills, and we opened up 4 regional call centers. So keeping the customer service teams within the regions that they live in, by allowing them to aggregate service and establish regional professional customer service teams that allowed us to extend our service hours, our service channels and offer more services overall to our customers. We are able to accomplish this and avoid voluntary layoffs of any customer service staff. And we believe this model going forward will better serve our customers by enabling us to aggregate those services in those regions and add more services based on customer demands as things progress. And turning to some of the more traditional metrics we look at when we're at our annual meeting, I want to start off talking about water quality, environmental management. I'm very happy to report that during 2020, we had 0 primary water quality violations, 0 secondary water quality violations in the 4 states that we operate in. Additionally, we had 0 environmental fines for air quality issues or any type of discharges that could have taken place in our service area. Our award-winning conservation program helped our customers save over 43 million gallons of water during 2020 are enough water to fill 65 Olympic swimming pools. During the year, despite the many, many operating challenges, we had remarkable reliability. We had 0 service interruptions as a result of the historic wildfires or PSPS events. And if you recall, PSPS stands for public safety power shutdown. When the wind starts to blow and it gets to a certain speed, they shut off the power on the grid. So that meant we had to be on our game. It also meant that the 90-plus percent of our employees who are on-site working during the pandemic worked diligently ahead of these events to ensure that when the power went out, our backup generators were in place, our booster pumps were in place and we move resources up and down the state to accommodate these events, which also includes the worst fire -- it was the worst year on record for fire in the state of California. Additionally, one of the things we started during 2020 was our Phase 1 of our climate change monitoring and adaptation plan. The last study we did was in 2016. So we're in the process of updating that plan. Looking at climate change and what are the adaptation plans at the local level that will enable us to identify things we can do to better prepare for climate change and things that could potentially disrupt service for our customers. On the business development side, despite the pandemic, we had significant growth. We doubled the size of Washington Water with our acquisition of Rainier View that closed right on schedule, adding 18,500 service connections in Washington. We closed a couple of acquisitions in New Mexico, adding approximately 2,000 new customers to New Mexico, and we added about 1,600 new customers in Hawaii. In total, we added over 4% of new customer connections to our existing customer base during 2020, which is a job well done, considering the slowdown and the effects of the pandemic. Additionally, as some of you may have seen, earlier this month, we announced that we have moved into our fifth state, the great state of Texas, through our partnership with BVRT. And I'm very happy to say we are up on the ground and operate in the great state of Texas that has a lot of growth going on. We're very excited to be there. So overall, business development had an outstanding year in 2020. In addition, to the normal business stuff we work on, we made important progress on Environmental, Social and Governance reporting, also known as ESG. We completed our foundational materiality assessment to identify relevant topics of how we interact with our environment and things we can do better. We developed and released our first-ever ESG report that aligns with the Sustainability Accounting Standards Board, better known as SASB, and referencing the Global Reporting Initiative, GRI, and we made the content easily accessible on our website. If you go to www.calwatergroup.com, at the top of the page, you'll see a big ESG button. You can click on that button and see what we're doing to protect the planet, prepare for climate change, enhance the quality of life of the communities we serve while operating our business in a more transparent and a more sustainable manner. Looking at the financial results for the year. It was records broken across the board. We had a record revenue of $794.3 million, which was up 11.2%. We had record net income of $96.8 million, which was up 53.4%. And earnings per share were a record $1.97, up 50.4% from the previous year. In addition, in January of this year, we had our 54th consecutive dividend increase, and we increased the dividend 8.2% or $0.07 a share. So overall strong financial results across the board. One of the things that helps drive the strong financial results is our continued growth of capital investment are growing, what we'd say, growing rate base. And during 2020, despite the pandemic, we invested nearly $300 million worth of infrastructure, which was up 9%. We installed and replaced a record 169,000 feet of new water main as part of our main replacement program, and we completed the Palos Verdes Peninsula Water Reliability Project, which is the largest project in the company's history. When you look at the Cal Water 20-year total return, so this assumes if you bought a share of Cal Water stock on January 1, 2001, and you reinvested the dividends, so you got the capital appreciation of the stock plus the dividend and go out 20 years, you would have a 656% total return. At the same period, if you time -- if you would have bought the Standard & Poor's 500 with the same concept of looking at total returns, so the capital appreciation plus dividend growth, you would have returned 332%. So overall, we're very pleased with the Cal Water's total return to stockholders over the 20-year period. And as you can see in the last 5 years, we've had a nice acceleration of that growth in our total return. One of the challenges in terms of operating a utility in today's environment is balancing the needs of affordability with capital replacement needs and new capital needed to meet new water quality standards. Overall, the company has done a good job at keeping that balanced while keeping rates affordable. And as we know, when we're growing infrastructure capital investment to better serve our customers, we're also growing rate base and growing earnings. Very pleased to report that we have continued on our track of investing 3x depreciation rate. That means for every $1 of depreciation, we're investing $3 of new capital, and that means we're essentially continuing to grow rate base and grow future earnings while meeting the needs of our customers and working to keep rates affordable. And as I mentioned, when we're growing rate base and rate base is the asset in which stockholders earn a fair and equitable rate of return. When we grow rate base, we are growing earnings. And when we get to the end of this rate cycle in 2022, you'll see we'll just be a tad shy of $2 billion in rate base that will be earning an authorized rate of return. One of the other metrics we like to report on is our dividend compound annual growth rate. So how fast are we growing the dividend. And our 7-year CAGR comp annual growth rate is a little over 5%, meaning we're growing the dividend average annually at just over 5%, which is a very healthy dividend growth rate. So prior to talking about our goals and objectives for 2021, I want to just take a moment, as Pete did, and just say thank you to the men and women of California Water Service Group and all of the states that we operate in for doing an outstanding job for staying safe and for being on the job, 365 days a year, doing what you do best. Without you, none of these outstanding results would have happened. And so for that, I just want to say a special thank you for a job well done. Now looking at 2021 and what lies ahead. What are our challenges and our priorities, a lot of things happening with the commission within the state of California. First, we have a new commissioner, Commissioner Houck, and we look forward to working with her on regulatory items that affect the water industry. We also have a new director of the water division, and we look forward to working with him as he starts his new job. In April this year, we filed our cost of capital, which is a 3-year regulatory filing that's used to determine what's the appropriate return on equity for stockholders. So that is in process. And in July of this year, we will file our 2021 general rate case for California and the California operations, which is the biggest part of our business. As many of you have probably seen, the governor in the state of California has declared a drought, a regional drought in 39 of the counties in the state of California. 12 of our districts fall within those counties. So we're well underway with our drought prevention efforts and things we can do to help our customers save water and what goes along with a light winter, so this year, we had a light winter and light snowpack is the possibility of an early fire season and more PSPS, or public safety power shutdown events. So the operation team and the engineering team have been very busy planning for an early fire season and an early season of PSPS events in addition to being prepared for a drought. I expect us to continue our progress on ESG, especially on our climate change strategy and what we're going to do to do our part to make sure that we combat climate change as a utility trying to do the right thing. And you'll see us continue to be focused on our business development efforts and business growth. And I break those out in 2 ways for one simple reason. One, you have the organic growth of the growing rate base that we talked about. But then also as we -- in the M&A world, as we buy things that we bolt-on to our core platform, or we add customer connections to our existing book of business, I expect that we'll continue to have a robust business development pipeline during 2021. So overall, peak, we have a full plate this year. There is no lack of things to do, and I look forward to being back next year to report on our results for 2020 -- excuse me, 2021. I'm going to turn it over back to you.

Okay. Thanks, Marty. Truly a remarkable year. The directors and stockholders really congratulate you and the Cal Water team. We're so impressed and we still appreciate all you've achieved last year and to date this year. So it's well done. Thanks so much.

Thank you.

Now we will hear the preliminary report of the inspector of elections. Kathy, please report on the vote on the 3 proposals.

Thank you, Pete. 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 12 nominees have been elected, the advisory vote on executive compensation has been approved, and the selection of Deloitte & Touche has been ratified. At this point, I will close 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 Shannon Dean, our Vice President, Customer Service and Chief Citizenship Officer, to read us the questions and then either Marty or I will answer. So Shannon, if you're ready, we're ready.

Okay. All right. Here is the first question. At some point in the future, would it make sense to separate any of these service companies as a separate public company or possibly a private company?

Sure. Good question. Believe it or not, every -- all the companies are set up as separate utilities already, and that's due to how rate making works in the state jurisdictions that we operate in, and they are owned by California Water Service Group, so they're all wholly-owned subsidiaries. As of right now, we don't have any plans to spin-off any companies. We operate each utility and we do rate making kind of on a stand-alone basis, entity by entity, and then those earnings are rolled up into the holding company. We believe that by operating these entities with a holdco structure, you basically have a decentralized service delivery model. So you push the service delivery as close to the customer while having a very strong centralized back office, which allows us to get the economies of scale in terms of operating the utility. So we believe in the current environment, this is what helps lead to superior shareholder returns that could change at some point in the future, but where we are right now, we'll plan on continuing this business model going forward.

Great. Thank you. Next up is of the water utility companies in each of the different states, where are you seeing population growth? And does that coincide with spending on infrastructure there?

Okay. Let's break that down a little bit because the pandemic certainly has been a big disruptor in terms of where things are going to. I'll say what I'm most excited about being in Texas is that we are in that corridor between San Antonio and Austin, which is having explosive population growth right now. Unfortunately, some of that growth is people from the West Coast in California moving out to Texas. But having said that, we believe that's the right place to be, and we expect that our utilities in Texas will do very, very well. As I talked about in my comments, a big part of our capital program is replacement capital to replace an existing infrastructure. And when you think about some of our service territories, such as the San Francisco Bay Area Peninsula, that's pretty well built out. Or when you think about some of our areas down in L.A., that's pretty much built out. So part of the organic growth that we're seeing in rate base is the replacement of that aging infrastructure. And then when you see things like Texas, right? That's where we'll have growth for new customers and new customer connections are another example of the Ka'anapali system that we announced, which is just north of our Kapalua system that we picked up a couple of major hotels that are in the area, and I believe about 1,100, 1,200 new customers, but that growth in Maui, that's pushing out to the North is picked up in that service area. So I anticipate that we'll have growth in our organic rate base, which is existing aging infrastructure and also in new connections as we move forward in time.

And any more questions coming, Shannon?

No. There is nothing in the queue.

Okay. Seeing no more questions. That concludes today's meeting. So thank you all for attending, and we hope you will be able to attend again next year. Thank you all, and have a great day.

Thank you.