California Water Service Group (CWT) Q2 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to California Water Service Group Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, David Healey, Vice President and Corporate Controller. You may begin.

Thank you Carol. Welcome everyone to the 2021 second quarter results call for California Water Service Group. With me today are Marty Kropelnicki, our President and Chief Executive Officer O; Tom Smegal, our Vice President, Chief Financial Officer; and Paul Townsley, our Vice President of Corporate Development and Chief Regulatory Officer.

Thanks Dave and good morning everyone. Thanks for being with us for our second quarter earnings call. Today I'm going to talk a little bit about our financials and then turn it over to Marty and Paul to talk about some of the other aspects that are going on for the quarter. So I'm going to start and I'll walk through the slide deck. So as usual, I'll refer to the page numbers so you can follow along try to be as descriptive as possible if you don't have the slides with you. For the quarter, the company's net income rose to $38.2 million, as compared to $5.3 million in the second quarter of 2020. On an earnings per share basis that is $0.75 per diluted common share in 2021, as compared to $0.11 for the quarter in 2020. That was on slide 5. If you flip to slide 6, we can talk briefly about the year-to-date results. Here, we have a net income of $35.2 million on a year-to-date basis that compares to a net loss in 2020 of $15 million. And on a per share basis, we have earnings of $0.69 per share in 2021 and that compares to a loss of $0.31 in 2020. And for the year-to-date, the capital investments I will highlight $138.5 million of capital investments as compared to $133.5 million of CapEx in 2020. Flipping to the next slide, slide 7. The story here in the second quarter is very similar to what we talked about at the end of the first quarter. The financials are primarily better because we have the result of the 2018 California Water Service Company general rate case and that did a number of things for us. First of all, if you'll recall last year in the second -- first and second quarters, we did not book the interim rates or the regulatory mechanisms that the company eventually got approved by the commission, because of the uncertainty at that time. So we did book those in the third quarter of 2020. So when you're comparing our results here in 2021 to those results from 2020, keep in mind that you were missing a big chunk of what ended up being the earnings in 2020.

Thank you, Tom. Turning to slide 11. I'm pleased to report that California Water Service Company filed its General Rate Case with the Public Utilities Commission on time July 1. This rate case, the largest in our history is requesting approval of just over $1 billion in capital expenditures during the three year rate case cycle. We worked very hard on addressing customer affordability when preparing this case and have been able to keep increases under $5 per month for the median residential customer in all of our service areas. Because this will be our first rate case in which the full WRAM/ MCBA is not part of the filings, we've also taken a deeper dive into sales forecasting and rate design to enable us to balance customer affordability, revenue stability and conservation. This has led to a 6% lower sales forecast than in our last adopted, but also an innovative rate design which provides significant discounts for the first six units of water used each month and increases the amount of revenue collected in our fixed monthly service charge.

Thanks, Paul. Good morning, everyone. Two areas I want to provide operational updates on. Starting off on page 12, talking about the recently declared droughts and I say drought is plural given the approach the state has set forth early on in the second quarter. And by doing so, they were evaluating drought conditions on a county-by-county basis. As we wrapped up the second quarter, the drought kind of quickly spread and we have 51 of the 58 counties in the state of California now under a declared drought emergency. Accordingly, as part of our planning process and rate case process with the Public Utilities Commission, we filed what's called Rule 14.1 which is our water supply master plans in June. And within that water supply master plan is something called Schedule 14.1, which is our water supply contingency plans, which cover the various stages of drought. Very happy to share that on July 14, the Commission approved our Rule 14.1 plans as well as our Schedule 14.1 water supply contingency plans. We are officially in a Stage 1 drought in all the districts that we operate in. We are currently monitoring water supply conditions in every location within the state of California that we have. We have asked our customers for a voluntary 15% reduction over the summer months. And we're utilizing the same model that we developed during the last drought which is really doing what we call the customer-first approach trying to give our customers as many options as we can to help them hit their reduction targets. So we're utilizing that same model, which includes a drought steering committee that we have within the company that I meet with every other week as we go into the summer months.

Great. Thank you, Marty. If you will turn to slide 14. California Water Service Group has been busy in the business development area. In May, we announced our establishment of Texas Water Service and our entry into the fast-growing region of Texas, known as the Austin-San Antonio corridor. As part of our entry into Texas, we also announced our majority ownership of the BVRT Water Resource Company, which in turn owns four wastewater utilities in this Austin-San Antonio corridor. Also, in May, we closed on our acquisition of the Kapalua Water and Kapalua Wastewater Company and added a 1,000 new Maui customers to our Hawaii Water Service Company. Last month, in June, we announced the execution of a definitive agreement to acquire a wastewater utility on the island of Kauai in Hawaii, which will bring 1,800 Equivalent Dwelling Units to our Hawaii Water Service Company, and we will be filing the application with the Hawaii Public Utilities Commission shortly for its approval of this purchase. A week ago, in July, we filed an application with the New Mexico Public Regulatory Commission for approval to acquire the Morningstar Water Company in Northern New Mexico and bring its 2,000 customers to our New Mexico Water Service Company. And next week, we anticipate that the California Public Utilities Commission at its August 5 open meeting will approve our newest California utility known as The Preserve at Millerton, which is a greenfield or new development, water, wastewater and recycled water utility, which will ultimately bring about 2,800 customer connections to California Water Service Company. If you turn to slide 15, 15 is a little bit more detail on our entry into Texas, and you can see on this map the four utilities that we have and you can see that they are really poised to capitalize on the tremendous growth in this region. Remember that, Boston and San Antonio are among the five fastest growing cities in the US. We have approximately 2,500 customers and customer commitments today in among these four utilities, and anticipate that their combined service areas could build out to over 60,000 customers. Meanwhile, Texas Water Service is seeking out other opportunities in Texas. And if you turn to slide 16, that's my final slide, it's really a recap of some of our recent business development activity. We have a full pipeline of growth opportunities, and we are excited by the potential to further grow the company through acquisitions and through other deals. And with that, I will turn it back to Tom.

Thanks, Paul. I'm looking now at slide 17, and as promised in the first quarter, we've updated slide 17 and 18 which are CapEx and our rate base slides to reflect the proposal that's been made in the California General Rate Case. And so the last three bars on each of these charts represent the effect of the proposal, and I do want to remind everyone, obviously, that this is a proposal that's been made to the Commission and is going to be evaluated by the CPUC and a determination will be made, as Paul suggested, late in the year 2022 with an effect date of 2023. And so, these numbers can obviously change as we go through the regulatory process. But what it does show for 2022 through 2024 is that we would anticipate our combined CapEx with California and the other states to be in the range of $355 million to $365 million a year and that corresponds to the $1 billion proposal that Paul's group put to the CPUC plus the CapEx that we're spending in our other states. And then the result of that, if you flip to slide 18 is the estimated rate base that's associated with that. And once again, our current rate base is about $1.82 billion for 2021. We have another step increase that's associated with the last California rate case and that would potentially impact 2022 to give us a higher rate base adopted there. But the proposal that Paul has put forth to the CPUC, his team, would increase our rate base to the point of $2.2 billion, $2.5 billion and $2.75 billion combined, again with the other states, if that proposal were adopted as proposed. So certainly a lot for us to do in the regulatory process, but good news ahead from a company growth standpoint in all of the respects. So thank you Paul for doing both of those aspects of your work.

The heavy lift, so to speak, right?

Yeah. Paul's got that two big generating – revenue generating items.

All right. Well, I'm going to wrap us up here. Just in summary, Q2 results were in line with our expectations. Sorry for the lumpiness sifting through the financials as Tom did a really good job pointing out in our graphs in our earnings reconciliations. That was really driven by the late GRC that we had and there was not much we can do about that. But just to remind everyone that those comparables quarter-over-quarter year-over-year you got to factor-in that delayed General Rate Case. Clearly, we're seeing the effects of the drought in the second quarter with that unbilled revenue which is really our revenue accrual. We typically see as consumption increases as we move into the warmer months of the summer you'll see that accrual go up. And then you'll see a turn down in the winter when you see consumption go down as the rains start and on the West Coast. So, we clearly saw a pick up from the unbilled revenue due to the drought and the weather conditions. So, consumption went up earlier than we anticipated. Tactically there are really kind of four things going on that we're focused on as we move into the fourth quarter. Obviously, the cost of capital first and foremost in trying to get that wrapped up this year, followed by as Paul said the discovery phases of our 2021 General Rate Case for the state of California which is a Herculean event. There's a lot of data requests that go back and forth hundreds and hundreds of data requests. So we're going to stay vigilant and stay keenly focused on wrapping up those two regulatory proceedings. We look forward to working with Commissioner Houck to bring those to a successful resolution on time and on schedule. Additionally, tactically two big things going on, on the West Coast and specifically in California. One is the drought. And as I said, we are officially in a Stage one drought for our customers. And the second thing is wildfire season. There are currently nine wildfires burning in the State of California two major wildfires. The two major wildfires are burning in national forest area. So there are no threat to our service areas that we operate in. But obviously you're seeing smoke from the West Coast make it all the way to the East Coast as these smoke looms travel throughout the US. Big accolades to the Operations team for their early readiness for fire season this year. That means for us that August, September and October given the dry conditions we think could be pretty volatile. But I will say, the team finished their wildfire readiness planning ahead of schedule. All the employees have gone through all their trainings and we're ready to go into the hotter drier summer months focused on minimizing any damage from wildfires and making sure that our customers stay supplied with clean and fresh drinking water. And then lastly, strategically we're going to keep our focus on climate change resiliency for the long term focusing on the effects of climate change on our customers and our business and what we can do as a company to help slow those effects. And you'll hear us talking more about climate change and risk management and our K and Q filings that we put out there. in our investor presentations. If you haven't read our ESG report that's been put out there I strongly encourage you to do that. This is going to strategically be a keen focus of the company here I think for years to come. So with that Carol will officially end our prepared comments and we will open it up for Q&A.

You have a question from the line of Ben Kallo with Baird.

Hey guys, good morning.

Good morning, Ben.

A couple of questions. Just first on the unbilled revenue. Could you just maybe explain a little bit what -- so it's -- I understand you don't think it's going to be a carryover or is it definitely not going to be a carryover. And then I guess that's the question right there.

So Ben we've talked about this on multiple occasions and it's a confusing aspect of our business because the key thing to remember is that the unbilled revenue accrual is outside of our WRAM mechanism. And so, what we're doing is measuring the number of customer days that have not yet been billed for multiplied by the expected bill that would be occurring on those customers. And so what we've seen -- what we normally see is that that bill goes up in the third quarter and you have a higher unbilled revenue accrual in the third quarter this year. The bill went up more in this because of higher rates and more customer usage. And so that is reflected here in the second quarter and it's a bit unusual. So, what's going to happen is if you have a normal third quarter where that bill is still as high as it was. You're going to -- you would normally see a bump up in earnings in the third quarter representing that additional accrual. That probably won't occur at least to the extent that it has in the past. And so we're essentially that - I'd like to say that the unbilled revenue accrual that we're booking in the second quarter is really borrowing from third quarter earnings because this normally would be an effect that we'd see in the third quarter. Then when you get to the fourth quarter because of the colder weather and typically rain in our service areas you see a dramatic drop in the normal unbilled revenue and that is always a factor in why we don't earn as much money in the third quarter as we're reversing out that big summer unbilled revenue accrual because the bills are lower because we're in a winter period. So does that help Ben?

That's great. On the GRC, could you remind us kind of -- I think it was like $860-some million that you went in for -- in 2008, when you submitted it. And then, kind of what shook out? And then, maybe to the -- I know that you guys can't really talk to what will be allowed, but maybe talked about the $1 billion and what that consists of? I know, Marty you mentioned climate change. Is there a climate change-related stuff? And is that -- what California is looking for? Maybe just talk a little bit more about what's inside the rate case.

Do you want me to -- I can start on that. So the rate -- hi, this is Paul Townsley. So the rate case is very similar to our last rate case in terms of the types of projects that are included. Obviously, the replacement of aging mains in our -- all of our different service territories, is a big part of this case as well as well replacements treatment -- new treatment facilities and other, what I would call, bread-and-butter types of capital investments. So, I expect that the Commission review of our rate case will be on whether those particular investments are appropriate for this time or should be postponed to the future. But, I do not really expect a lot of controversy on the types of projects that we've included in this case. And I'm hoping that we will have a very good result coming out of the Commission in terms of the approval of the capital projects, just like we did in our last case.

Yes. And I think the thing I would add to that Ben. For those of you that follow kind of what we have focused on, on a management team, has really been better integrated planning for the rate case and for the company. And so, on the last rate case, we did very well on our ask versus what we received. That process that we followed in the last rate case, we've improved on for this rate case. I will say just kind of my gut feeling about the rate case. Normally the week, we file our rate case. Paul and his team are working close to 24/7 this year. I think because of just continued improvements in our planning process, in our capital planning process as well as our expense planning process for other categories. The team was very well in control that -- normally the week before the rate case, I'm bringing in dinner every night. I'm over there asking should I bring a masseuse to give people massages. I'm handing out toms. I'm bringing in caffeine. I'm bringing in doughnut at six in the morning. The team was really, really and just outstanding kind of control going into the final weeks this year. And I just think it's indicative of all the improvements we made in the planning process. And the significance of that, as we have learned, the more upfront work we do in planning, the capital and rate case items, the better we do with the outcomes. And so, I think we're feeling really good going into the rate case. I think the bigger challenge here is the fact that we're still in the middle of a pandemic. But we just got to remind people that these are for rates that take effect a few years from now. And so, it's not an immediate effect on somebody's rates right now. And as Paul said, we were keenly focused on affordability. One of the things, I really like with what the team did with the rate design is, as we move away from decoupling starting in 2023. We think we figured out a way to handle kind of the underserved and low-income communities while increasing our fixed cost recovery and balancing the rate plans out. And so, I'm anxious to see how this rate plan does. The team did I think, a fantastic job working with an economic modeling firm, modeling out how this should look. And I'm anxious to see how it's going through the Commission. I think the question is going to like the rate design.

Got it. And then, the last one is just with the cost of capital coming up, can you just remind -- or maybe give us kind of what we should be looking for as far as benchmark? And then, I think you said time was next couple of months?

So Ben, we've made the filing. We -- the commission's process internal to the timeline has slowed down a little bit, I will say. Normally you would very quickly have, what's called a pre-hearing conference, and the regulatory staff, the repair advocate staff, kind of said, well, we'll get you our report pretty soon, a month after the pre-hearing conference. We've not yet had a pre-hearing conference. And so, it's difficult to tell what the actual schedule is going to be. And Paul, you know the details more than I. But, we're expecting a staff report from them really sometime probably September-October time frame. And then, the normal process would be potential settlement discussions hearing over each of the parties' positions and then an eventual decision by the commission. I don't know that we have any expectation about what the repair advocate is going to come up with. Obviously, they usually come up with a lower number. And then, it goes from there.

Is there anything that's been in the market decided recently that could give us an indicator?

Nothing in California that I'm aware of.

Okay.

So, that -- no obvious benchmarks there.

Yes. Okay. Thank you. Thanks, guys.

Thanks, Ben.

Ladies and gentlemen, there seems to be no further questions at this time. So I'll -- at this time, I'll turn the call back over to management for any closing remarks.

Okay, Carol. Thank you very much. I know, it's earnings week and there's a lot going on. We appreciate everyone's support. Obviously we got a lot of iron in the fire here as we go into the second half of the year. And any kind of material changes that come out of the company, we'll communicate accordingly. And if nothing comes up between now and then, we'll talk to everyone for our third quarter earnings call. If anything material happens between now and then, you can look for us to put a filing out sooner. So, with that, thanks for being with us here today, and we'll talk to everyone soon. Be safe. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.