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

Thank you for standing by. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the California Water Service Group Third Quarter 2024 Earnings Call. [Operator Instructions] Now I would like to turn the call over to Jim Lynch, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Kathleen. Welcome, everyone, to our third quarter 2024 results call for California Water Service Group. With me today is Marty Kropelnicki, our Chairman and CEO; and Greg Milleman, Vice President of Rates and Regulatory Affairs. Replay dial-in information for this call can be found in our quarterly results earnings release, which was issued earlier today. A replay will be available until December 30, 2024. As a reminder, before we begin, the company has a slide deck to accompany today's earnings call. The slide deck was furnished with an 8-K and is also available at the company's website at www.calwatergroup.com. Before looking at third quarter 2024 results, I'd like to take a few moments to address 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. As a result, 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-Qs, press releases and other reports filed from time to time with the Securities and Exchange Commission. And now I'll turn the call over to Marty.

Thanks, Jim. Good morning, everyone, and happy Halloween. We're happy you can join us here today. I'm very pleased to share with you our results for the third quarter of 2024. There's really 5 main topics that we want to cover today. The first one being our strong third quarter financial performance that continues to benefit from the regulatory release in the State of California. We want to give an update on the 2024 general rate case, where during the quarter, we had our initial pre-conference hearing and we've been assigned an administrative law judge and a commissioner to oversee our case. We received approval of certain advice letters from the California Public Utilities Commission that's going to allow us to collect $94.2 million in certain regulatory balances through 2027. We want to talk about the record amount of capital that we've invested this year and what that looks like going into year-end. And then lastly, take a moment to talk about our continued environmental leadership and corporate recognition and talk about a few awards that we won during the quarter. But to start things off, let's do like we typically do and have Jim Lynch take you through some of the financial analysis that highlights the quarterly results. Jim, back to you.

So as Marty mentioned, our Q3 2024 financial results continue to benefit from new rates and the rate structure authorized in our 2021 California GRC. As a result, our operating revenue for the quarter increased 17.5% to $299.6 million compared to our prior year Q3 operating revenue of $255 million. Net income for the quarter was $60.7 million or $1.03 per diluted share compared to $34.4 million or $0.60 per diluted share in Q3 of 2023. The $44.6 million increase in Q3 2024 revenue was driven primarily by a $42.2 million increase in rates billed to customers as authorized in our regulatory filings and an increase in customer usage, including usage by new customers of $9.6 million. These increases were offset by a $9.4 million reduction in our Monterrey Water Rate Adjustment Mechanism, or our MWRAM. Recall that the MWRAM is a rate adjustment mechanism that includes a tiered rate structure tied to usage. In periods of warm dry weather when usage increases, the MWRAM typically decreases. The balance typically increases in cooler wet weather when usage declines. Q3 2024 operating expenses were $232.8 million compared to Q3 2023 operating expenses of $211.5 million. The $21 million increase was primarily driven by $2.7 million in higher water production costs due to an increase in wholesale rates and higher customer usage, a $3.2 million increase in depreciation and amortization due to new assets placed in service and $11.5 million in higher income taxes related to higher pretax earnings. In addition, net other income increased $3.8 million during the third quarter primarily due to an increase in unrealized gains on nonqualified benefit plan investments of $5 million. The impact of the Q3 2024 activity on diluted earnings per share is presented on Slide 6. The more significant growth drivers were rate and usage increases of $0.56 and $0.13 per diluted share, respectively. In addition, gains on nonqualified benefit plan investments contributed $0.09 per diluted share. These drivers were partially offset by the change in MWRAM balance of $0.12 per diluted share and increases in water production expenses and depreciation and amortization expenses of $0.04 per diluted share, respectively. Year-to-date 2024 results benefited from the same regulatory mechanisms as the quarterly results. Year-to-date operating revenue increased $234.5 million to $814.6 million in 2024 compared to $580 million year-to-date in 2023. Year-to-date 2024 net income was $171.1 million or $2.93 diluted share compared to year-to-date net income in 2023 of $21 million or $0.38 per diluted share. The growth in revenue was primarily driven by cumulative rate increases, including 2024 IRMA of $95 million, 2023 interim rate relief from the 2021 GRC of $87.5 million and the recognition of deferred WRAM revenue of $15.6 million. In addition, the change in our 2024 MWRAM balance added $12.4 million and increased usage contributed $8.8 million. Year-to-date, 2024 operating expenses were $621.8 million compared to year-to-date 2023 operating expenses of $538.2 million. The $83.6 million increase was primarily driven by an increase in water production cost of $15.4 million due to increases in wholesale water rates and higher usage. Water production costs increased an additional $3.3 million due to the incremental cost balancing account or ICBA, that was authorized in the 2021 GRC. We also recognized $13.1 million in deferred costs associated with the recognition of deferred WRAM revenue and higher depreciation and amortization expense of $9.3 million. Also, year-to-date income tax increased $41.1 million, primarily due to higher pretax earnings. The impact of year-to-date 2024 activity on diluted earnings per share is presented on Slide 8. The more significant earnings drivers include cumulative rate increases in 2023 interim rate relief and recognized deferred WRAM revenue of $1.29, $1.19 and $0.21 diluted earnings per share, respectively. The change in our 2024 MWRAM balance and increased usage added another $0.17 and $0.12 diluted earnings per share, respectively. These increases were partially offset by higher water production expenses and the recognition of RAM related deferred water expenses of $0.25 and $0.18 diluted earnings per share, respectively and higher depreciation and amortization of $0.13 diluted earnings per share. As a reminder, our 2021 GRC was adopted in Q1 2024 and included 2023 interim rate relief, totaling $64 million. $15.2 million of the interim rate relief was attributed to Q3 2023 and $50.4 million would have been attributable to the 2023 9-month period year-to-date. Turning to our capital. We continue to make significant investments in our water infrastructure to help ensure the delivery of safe and reliable water service. Company capital investments during the 9-month period ended September 30, 2024, totaled $332.2 million which is 86% of our $385 million 2024 capital budget. As a reminder, our planned 2024 capital investments and our estimated capital investments for the period from 2025 through 2027, do not include $226 million of estimated PFOS projects that will be constructed over multiple years beginning in the fourth quarter of 2024. Greg will discuss planned 2025 and 2027 increases applied for in the 2024 GRC and infrastructure improvement plan later on in the call. The positive impact of our capital investment program is having on regulated rate base is presented on Slide #10. Our overall rate base is projected to grow to $2.36 billion by the end of 2024. This is an increase of 7.3% over 2023. If approved, as requested, the 2024 California GRC and infrastructure improvement plan, coupled with planned capital investments in our utilities and other states would result in a compounded annual rate base growth of 11.7%. Moving to Slide 11. We continue to maintain a strong balance sheet with a capital structure of 61% equity and 39% debt. During the quarter, the CPUC issued a final decision granting Cal Water Authority to issue up to $1.3 billion in new debt and equity securities to finance water system infrastructure investments from 2023 to 2027. We raised approximately $34.5 million during the quarter from the sale of 639,000 shares of common stock under our at-the-market or our ATM stock equity program. Year-to-date, we've raised approximately $86.5 million from the sales of [ 1.6 million -- 390,000 ] shares under the ATM program. We have approximately $43.1 million remaining under the program that can be raised for general corporate purposes in the future, including planned capital investments and strategic opportunities. On the debt side, Cal Water completed the sale and issuance of $125 million of first mortgage bonds, the bonds in a private placement that closed October 22, 2024. The bonds bear interest at a rate of 5.22% and mature on October 22, 2054. Cal Water is the bond proceeds to refinance certain existing borrowings on its short-term bank line of credit. And just to note, yesterday, our Board of Directors declared a $0.28 per share dividend for stockholders of record on November 11, 2024. I believe that's November 12, 2024. This is our 319th consecutive quarterly dividend. Moving to Slide 12. We continue to maintain a strong liquidity position. As of September 30, 2024, the company had cash and cash equivalents of $105.2 million of which $45.6 million was classified as restricted. Further, we had additional short-term borrowing capacity on our company and Cal Water lines of credit of $340 million. With that, I'll turn the call over to Greg to give an update on our 2024 general rate case and other regulatory matters. Greg?

Thanks, Jim. On Slide 13, we discuss the 2024 General Rate Case. I'm pleased to report that we continue to make progress with our 2024 General Rate Case filing. We've completed the initial prehearing conference and a judge and Commissioner have been assigned to our case. The assigned commissioner to the case is Commissioner Baker. We are pleased with this assignment given his past work at the California public advocates to educate CPUC on a negative customer impacts associated with rate case delays. As Jim mentioned earlier, we're proposing to invest $1.6 billion in our districts from 2025 to 2027, including approximately $1.3 billion of newly proposed capital investments to continue providing reliable, high-quality water service. This application includes our innovative low-use water equity program designed to decouple revenue from water sales while keeping rates affordable and reinforcing conservation goals. Our proposal includes rate increases to generate an additional $140.6 million for 2026, $74.2 million for 2027 and $83.6 million for 2028. We are now 4 months into the standard 18-month review process with the PUC and are actively responding to data requests. We've completed all our district tours and are preparing for public participation hearings later in the year. With that, I'll return the call back to Marty.

Greg, just out of curiosity, the volume of data requests kind of consistent with past rate cases.

Yes, consistent with past rate cases.

Moving ahead, I'm on Slide 14. I want to take a moment to talk about our cost of capital for 2025. As many of you know, we have in California, what's called a cost of capital adjustment mechanism. Cost of capital adjustment mechanism basically tracks the utilities AA -- utilities bond index from October 1 to September 30, the following year. In the event there's a 100 basis point change or greater the company can make -- apply for an adjustment to its ROE, both up and down. So I'm very happy to report that the period ended September 30, it was less than 100 basis point change and therefore, it locks in our ROE for 2025 at 10.27%, which we think is a very good ROE. Moving on to the next slide. Other regulatory mechanisms. There's a few things that happened in the quarter that I think are important. As I mentioned in my opening comments, we filed a number of advice letters for recovery that have been approved by the CPUC here in California. There's 3 primary filings that I want to emphasize. One is the IRMA, which is the incremental rates memo account, the 2023 MWRAM balance and the 2023 Incremental Cost Balance Account. The combination of those 3 things total approximately $94.2 million that we will be collecting over the next 3 years. For 2024, we expect to collect about $11.6 million from these balances as we move into the new year. Going on to Slide #16, I want to take a moment to talk about our environmental leadership and corporate recognition. First of all, I continue to be very proud of the recognition we received for our environmental stewardship and workplace excellence. The Alliance for Water Efficiency recently posted a study that highlighted the important impact of our conservation programs, which have reduced customer bills by approximately 21% over the last 15 years compared to projections with customers that did not have the same type of conservation program. So we're very happy with the results of the survey and what we've helped our customers has achieved over the last 15 years. In addition, the U.S. Environmental Protection Agency awarded California Water Service the WaterSense Excellence Award for the second consecutive year. This recognizes the promotion of our water-efficient products that we have in our conservation programs. The products that we've implemented to date will save an additional 395 million gallons over the life of the devices useful life for our customers. Additionally, during the quarter, we were named one of the World’s Most Trustworthy Companies by Newsweek for its second consecutive year. This places us among only 5 water utilities that are recognized and honored in the energy and utility category. And then lastly, for the ninth consecutive year, we were recognized as a great place to work, reflecting our ongoing commitment to creating an exceptional workplace environment and supporting our employees. I think as many of you have probably heard me say that, yes, we are a company of fixed assets, pipes and pumps, but our most important assets are our employees, because they're the ones that make it all happen and they're the ones that interface with our customers. Lastly, I want to take a moment to mention our 8-K that we filed during the quarter that announced the retirement of Ron Webb, who is our Vice President and Chief Human Resource Officer. Ron will be retiring on April 1, 2025. Ron has done an excellent job as our Head of HR and has been an outstanding HR colleague and friend who has made countless contributions here at Cal Water. I want to take a moment to personally thank Ron and wish him all the best as him and his wife, Tina, prepare for retirement, and he will be dearly, dearly missed. I think as everyone can appreciate, as the CEO, one of your closest confidence is your HR executive. And Ron, it's been just a fantastic 10 years working with you, and I'm going to miss working with you and wish you all the best in retirement. Having said that, we have started a national search for Ron's replacement, and I hope to be in a position to announce his replacement by year-end or early 2025. So where does that take us for the quarter? Very happy with the results for the quarter. Results were in line with our expectations. They are a little bit confusing. I think Jim did a good job laying out all the moving parts and how they fit together, given the delayed 2021 general rate case. Moving forward, it's really simple. The strategy is focused on getting the capital on the ground as in the press release. And as Jim mentioned, we've invested a record amount of capital this year. So we're going in the fourth quarter very strong and doing investments in our infrastructure improvement plan. We want to stay focused on customer service and servicing our customers and then also on the 2024 General Rate Case. As Greg said, so far, things are moving and tracking the plan. We want to make sure we do everything we can to make sure that we conclude that rate case by the end of 2025 with new rates in effect 1/1/26. So there's a lot going on. The other thing I'd just point out is, as Jim said, on the rate base growth side. We've historically been about the depreciation rate, investment rate, and that's bumping up in this next cycle or 2. And it's given that the growth of the internal capital needs of the existing infrastructure plus the incremental $226 million. That's not reflected in that 11.7% CAGR number on rate base growth that will be incremental. So overall, we have a lot of stuff happening within the company, and it's really -- the strategy really straight forward. We're going to stick to what we do, which is getting the capital on the ground and serving the customers. And I guess one thing I'd wrap up before we open the comments. It's just fire season this year. Surprisingly, for our service areas have been -- has been relatively light. We had 3 major fires this year that were close to our service areas, none of which did damage to our service areas, at the Thomson Fire, the Park Fire and the Boreal fire. So nothing major that affected our service territory. I'm very happy to report that we are getting the first snowfall this week in the Sierra, which is a good sign that winter's off to a start will help bring down the last few weeks of fire season that we have here, which typically goes on until the end of November. So with that, Kathleen, we will open it up for questions, please.

[Operator Instructions] your first question comes from the line of Jonathan Reeder of Wells Fargo.

I wanted to start out just to get your view on the CPUC's recent decision to hold the PD and CalAm's rate case? I know the PDs language was pretty strongly against restoring pool decoupling. But do you think there are enough commissioners that are supportive of decoupling? Or might we just see some of the rationale language in that section revised?

Jonathan, this is Greg. And the kind of feeling of the industry right now is -- it was a strong sign that the PD was held almost a little over a month, maybe 2 months to the December meeting. But there is not a consensus on exactly what that could mean. That could potentially mean that we are tightening up the language around disallowing it or going the other way and putting in the language that would allow it. It's just too soon to tell.

Okay. Fair enough. I can't tell either.

Jonathan, one thing I would add to that, and I haven't read the full decoupling application for any of our peer companies in California. But I do know in our application, we were keenly focused on 2 things that I think are important. And I think this may be a strategy differential for us. One, we were very focused on conservation as we originally were when we originally decoupled back in the early 2012, I guess [indiscernible] that was number one. The other thing we focused on in our new rate design in our application was kind of underserved communities and having a rate design that helps low-income customers with kind of a lifeline rate that first year. So in our application, it wasn't just about conservation. It was also about low-income communities and making sure there's like a lifeline rate there that reduces customers on the lower term of the economic -- or the lower range of the economic spectrum. And we think that's going to be really, really important.

Yes. No. And that's where, I think, if it is even just softening the language in that BD, it kind of then opens the door to right -- some of these reimagined ways of, I guess, designing the decoupling where it really focuses on some of the goals you just mentioned, Marty.

Right, right. And I think what's important about this community piece for the people on the lower economic scale is -- that's a stated goal of the commission. It's -- they've made that very public. They're very interested in it. And I give the team here a lot of credit, we took that to heart in the design of our decoupling mechanism that we filed for in our rate case.

Okay. Great. I look forward to that -- to see how that plays out. Also, I know the CPUC recently issued a decision lowering the energy utilities allowed ROEs by 42 basis points in 2025 by effectively reducing the magnitude of the 2024 cost of capital mechanism increase. Is there any avenue for the CPUC to do something similar for the waters for 2025?