Thank you for standing by. I will be your conference operator today. At this time, I would like to welcome everyone to the California Water Service Group Q2 2024 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the call over to James Lynch, Senior Vice President, CFO and Treasurer. Please go ahead.

Thank you. Welcome, everyone, to our second quarter 2024 results call for California Water Service Group. With me today is Martin Kropelnicki, our Chairman and CEO; and Greg Milleman, Vice President of Rates and Regulatory Affairs. A replay dial-in information for this call can be found in our quarterly results earnings release, which was issued earlier today. The replay will be available until September 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 second quarter 2024 results, I'd like to take a few moments to cover forward-looking statements. During the course of the call, the company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from the company's current expectations. 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 Forms 10-K, 10-Q, press releases and other reports filed from time to time with the Securities and Exchange Commission. I will now turn the call over to Marty to start this off.

Thank you, Jim. Good morning, everyone. Thanks for joining us here today. It's been a busy quarter, and we have a number of items we want to update you on today. First, I'm going to ask Jim to give you an update on our financial performance for the quarter. And I'll just lead into that by saying what a difference a year makes. Last year, no rate relief this year, hitting the 21 rate case some concluded and on the books has made a big difference. Also ask Jim to include some of the highlights of our capital program for 2024 Infrastructure Improvement Plan. We have Greg Milleman here today to talk about the filing of the 2024 General Rate Case and Infrastructure Improvement Plan for the State of California. This covers our capital forecast for the State of California for years 2025 to 2027. I want to spend a little bit of time talking about the recent California Supreme Court decision that protects water utilities rights to do process and preserves the decoupling. Spend some time talking about emergency response. If you watch the fires in California, it's been a very busy fire season so far this year. So we want to give you an update on the current fires as well as our community outreach efforts to continually improve our processes, which will help first responders spike fires. Give an update on the PFAS and the ongoing remediation activities the company has plans for the next 3 years. Give you an update on our business development activities and what's going on there. And we conclude talking about ESG and our recent ESG report that was published in May. So before giving you the operational update, I'm going to turn it back over to Jim to give you an update on the financial results for the quarter year-to-date. Jim?

Thanks, Marty. As Marty mentioned, our Q2 2024 financial results benefited from new rates and the rate structure authorized in our 2021 California GRC. In addition, since Q2 2023, our return on equity increased to 10.27% under our water cost of capital mechanism adjustment, and we benefited from water production offsets and other advice letter filings. As a result, our operating revenue for the quarter increased 25.9% to $244.3 million compared to our prior year Q2 operating revenue of $194 million. Reported net income for the quarter was $40.6 million or $0.70 per diluted share compared to $9.6 million or $0.17 per diluted share in Q2 2023. The quarter-over-quarter growth was driven primarily by a $19.3 million increase in rates billed to customers as authorized in our regulatory filings, an increase in accrued unbilled revenue of $10.4 million due to higher rates and an increase in the number of unbilled days and the recognition of $8.2 million in accrued [WRAM] revenues and $7.9 million in accrued WRAM revenues. As a reminder, our 2021 GRC was adopted in Q1 of 2024 and included 2023 interim rate relief, which totaled $64 million. $18.7 million of the interim rate relief was attributable to Q2 of 2023. Q2 2024 operating expenses were $196.1 million compared to Q2 2023 operating expenses of $178.1 million. The $18 million increase was primarily driven by $6.8 million in higher water production costs and $8.4 million in higher income tax expenses related to higher pretax earnings. The impact of the Q2 2024 activity on diluted earnings per share is presented in the Q2 2023 to Q2 2024 diluted earnings per share bridge on Slide 6. The more significant earning drivers were the 2021 GRC rate increases and increases in accrued revenue, which contributed $0.23, $0.26 and $0.14, respectively, to…

Thanks, Jim. On July 8, 2024, California Water Service submitted our Infrastructure Improvement Plans for 2025 through 2027 as part of its triannual general rate case. How Water proposes to invest more than $1.6 billion in its districts from 2025 to 2027. To enhance affordability, particularly for low use, low-income customers, Cal Waters application proposes a low use water equity program that would decouple revenues from water sales across its regulated service areas. Filing request total revenue increased of $140.6 million or a 17.1% increase for 2026, $74.2 million or 7.7% for 2027 and $83.6 million or 8.1% for 2028. The triannual filing begins an approximate 18-month review process by the commission. With that, I'll turn it over to Marty.

Thank you, Greg. Thank you, Jim. I want to start off talking about the California Supreme Court case that came out on July 8. As many of you probably have read the California Supreme Court in a unanimous decision ruled in favor of the 4 investment water utilities that brought to suit against the PUC. It's very important to note that the decision helps preserve decoupling and also protects the rights of utilities to have due process in the rate-making process. As you know, we are big believers in conservation. Decoupling in California goes back to the 70s when it was first used in the electric and gas industry, has played a major role in helping California reach its sustainability and renewability goals. We feel the outcome is really important because it enforces the importance of due process and rate making. In other words, the commission has to follow the rules that are set forth in the rate-making process as well as the company. But it also allows us to continue to better align with the state of California's goals around sustainability, reliability, affordability and conservation. If you follow the California rules over the last couple of years, California has gotten very aggressive at the state level about making conservation of water life. As I mentioned, decoupling is a very important tool that helps keep our customer rates affordable as we promote conservation to improve sustainability of critical water resources. So we're very happy with the outcome from the states of report. And as Greg mentioned, in the current filing that we just filed earlier this month, we have again submitted plans for approval to reimplement decoupling for our customers in the State of California. Moving on to Slide 14. I want to talk a little bit about where we…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Michael Gaugler from Janney Montgomery Scott.

Just one question. Back on Slide 9, your CapEx deck. Looking out, the note at the bottom, Marty, I think you referenced this that the estimates for 2024 to 2027 exclude PFAS-related capital investments. Given those investments are probably going to kind of be made, I'm wondering what the cadence of that would look like across the years, maybe not so much 2025, but maybe '26, '27, '28. And kind of where are your thoughts are there?

So let's go back to what our kind of basic goal is, which is we try to balance affordability and new capital while keeping the investment rate at about 3x the rate of depreciation. So that usually gives us about a 9% to 10% compound annual growth rate on the CapEx line. Clearly, as you can see, there's a big step up in 2025 and '26 associated with the rate case. Now those numbers, that's the full ask to the rate case. You never get 100% of what you asked for in the last rate case [Greg] I think including advice letters, we got about 79% of what we requested, which in the rate case prior to that, I guess that would have been 18 rate case in California, we're in the 80s. So for planning purposes, Michael, we're planning around that 9%, 10% CAGR on the CapEx. And the importance of that is it allows us to try to balance affordability on the rate side. The PFAS piece of it is that's a new standard that we have to comply with. And there was a lot of speculation on that because the EPA was a little slow on the uptake in getting the new requirements out. We run things like that, so things that are kind of newly being introduced into our portfolio as a separate program because in the case of PFAS, we have one project team within our company that's coordinated all of PFAS projects across our enterprise. And so that will be incremental. So I think you can expect a higher number probably in that '26 and '27 year driven by the PFAS investment. And a number of variables will come into that. Obviously, PFOS and PFOA and the forever chemicals had a lot of press. And if you remember early on in the draft information that was communicated. They said, "Oh yeah, you have to implement 3 years and they say, okay, no, I'll ask a 5-year implementation." It's really hard to look at customers in the eye and say, okay, 5 years from now, your water is not going to be safe, but don't worry about it until then, which is why we made the commitment that we're going to invest the money upfront. We're going after the PFOS treatments now and we're starting to process this year to implement those implemented treatment on those wells that require treatment. So I think you're probably looking at of '25 and '26. It will be higher of the 9.9% driven by the PFOS.

Our next question comes from the line of Davis Sunderland from Baird.

I wanted to ask, going back to the business development pipeline. And I apologize it might have been an error on my end but I had some choppiness coming through when you were talking about that. Maybe just any thoughts on how things are shaping up with smaller systems maybe having difficulties complying with the PFAS standards? And just any changes you've seen or opportunities that you've seen pop up related to some of these smaller systems that may sold into the acquisition pipeline or how you see this playing out? And then I have one follow-up.

It's interesting to asked that question. This week, we had our persons in charge of water quality out in one of the states that we operate in, giving a presentation to commissioners about what does PFOS, PFOA mean. And the good news is we got really good feedback that they love what we're doing, but they said, wow, what are all these small systems in our state going to do? So I think you're starting to see an awakening that there's going to be a huge capital requirement in some of these small systems that are probably undercapitalized and lack liquidity, and I think that will play to our benefit. The other thing in talking to our Head of Business Development, Shilen Patel, interfaces have been higher, the cost of capital has been up and seller expectations have remained pretty high. We're starting to see the seller expectations soften up a little bit, which is nice. And in the case of the deal I mentioned, the Kings Mountain, we actually purchased that system for $1, right, because the company just -- that they couldn't -- weren't the best operators. It requires capital. We have the ability to put that capital in the system, improve their service levels. And more importantly, it allows us to connect kind of the 3 systems and get that synergy of operating the 3 systems and those 3 sources of supply. So I think you're starting to see a little bit more movement in that area. Now business development M&A, right, in the water space just moved slow. How fast of a catalyst will it be? I think that's to be determined. I think the larger IOUs are held to a very, very high standard on water quality. And if we miss any new requirements, they fine the heck out of us. But I think, generally speaking, the EPA has a hard time enforcing those standards with private small companies that just aren't registering. And I think that piece will be interesting to watch. But certainly, we're seeing a softening of expectations with sellers, and I think we're starting to see a little bit more activity in small systems as the PFAS PFOA requirements come into play. And I think it's really important to keep talking about those new requirements, what does that mean and why they're important.

And then the only other one for me, you actually started to talk about it with Michael's question previously, just about never getting 100% of what you asked for. And I guess my question is to frame it up a little differently is have you had any pushback or do you anticipate any pushback with the proposed rate increases or any friction from the consumer how to get to your thoughts there?

It's still too early in the case. I mean, we just filed it July 8, and we've started receiving data requests on it. But it's really still what we're 3 weeks in, so it's still too early to tell what their overall feeling will be.

Yes, I would just add to that, look, inflation is high and everyone's feeling it, and our customers are not exempt from that, look how waters not exempt from that. And -- when we last plant, I gave a presentation or an update to the Board about our rate cases. And before I gave them kind of what the numbers looked like I talked about what some of our cost increases were over the last 3 years. Labor is up 15% to 20%. Chemicals are up 35%. [indiscernible] is up 200% since 2022. So that's one of the reasons why we try to balance affordability. That's why decoupling is really important, frankly, because it allows you to implement a rate design that people who use less water and especially people in underserved communities and people on fixed income, it allows you to potentially sell that water at below a marginal cost. And for the super users of the water, the people can afford to use a lot of water, and you charge them more. And so one of the things I like in the GRC application is the fact that we have a really nice rate design that really benefits the softer uses a water who are typically the fixed income and may be underserved communities and really ramps up the charging the people who can afford to pay the water bills and we want to use a lot more water. So I think it will be interesting to see, but obviously, affordability and inflation, it's a tough time right now.

Our next question comes from the line of Jonathan Reeder from Wells Fargo.

You just addressed my questions around kind of the GRC and the CapEx and the rate impact. But on results itself, was there anything in the $0.70 of EPS that was kind of nonrecurring or maybe a result of the rate show activeness of the 2021 GRC decision?

Well, certainly, in the year-to-date numbers, we had the -- I think there's $64 million of net income in the year-to-date numbers that -- well, I think we recorded $64 million in 2024 of 2023 income that will not repeat itself. In the deck I think I also mentioned that we carved out $18.7 million of interim rate relief, so $18.7 million of that $64 million was attributable to the second quarter of 2023. So people kind of want to get a sense of what the impact would have been had we had timely rate relief that kind of gives you a little bit of sense of how 2023 was impacted. Now as far as the quarterly results go, there really wasn't anything that was unique to the quarter other than the new rates, and those will continue on going forward that we did get in the 2021 rate case. So I guess if you're looking at year-to-date, I'd consider the fact that we did record the $64 million in Q1 of 2024 that will impact the entire year. But as far as the quarter goes, there was really nothing that was unique to the quarter.

And then along those lines, can you just help me understand what's included in the buckets on the Q2, like EPS bridge slide like -- specifically like the 2021 GRC bucket versus the rate increase bucket? Like where did the new mechanisms -- having the new mechanisms fall versus just the '23 base rate increase over that interim that you're talking about versus the '24 attrition increase? Like where do each of those fall in those 2 different bars?

So looking at the diluted earnings per share bridge, the Q2 2023 to Q2 2024 bridge, if you take a look at the general rate case bucket or bar, that really relates to the impact of the new rate structure and the new rates that we implemented in 2023 -- or I'm sorry, in 2024 as it relates specifically to the 2021 rate case. The rate increases, column or bar, if you will, that really relates to increases that we've had for water offsets, for advice letter filings and for the delta, the change in our cost of capital mechanism. So that really captures rates outside of the new rate design and outside of the new rate structure of the 2021 rate case. And then the change in accrued revenue there, that's principally a result of the change that we had in unbilled -- our unbilled revenue, both in the number of days and the rate impact from the 2021 general rate case.

So the $0.26 from a rate increase, does that include the '24 attrition increase related to the 2021 GRC?

No. That would -- I believe that's also captured. Let me get back to you on that, Jonathan, but I believe that's also captured in the 2021 general rate case. I think that, that captures all of the impact of the rate changes from the rate case.

You think the $0.23 out of the attrition?

I think so, yes.

And then on that change in accrued revenue, does that kind of pull forward earnings from Q3 then?

No, that represents principally what we have already delivered in terms of water service but have not yet billed our customers. So we record that revenue as an unbilled amount at the end of the quarter. We'll have a similar amount that we will bill at the end of Q3. And if there is a delta between the 2 of them, then we would certainly take that into consideration in terms of what the net impact is on the change in the unbilled revenue. The fact that there is days involved in the Q2 number would imply that potentially there will be less in the unbilled amount going into Q3, but it's not going to be meaningful.

And I don't know [indiscernible] certainly not the numbers for me, but it's been a warm summer.

It's been a very warm summers. And yes, to Marty's point, especially if you take a look at the end of the quarter, so the last couple of weeks of July -- I'm sorry, the last couple of weeks of June were very warm across all of our service territories, especially in California, but across all of our service territories. And we actually saw that in the first month of the Q3. So I think you'll see some of that that -- if you're just focused on the number of days, that difference is going to be mitigated significantly by the weather and I think by usage and rates. I don't think it's going to have a meaningful impact.

And then last question, just kind of segue to usage like given the loss of decoupling and the warm summer and everything, how has the usage been tracking versus what the rate case assumed?

Right now, we're tracking about 2% ahead of where we were at this time last year. And that's principally driven by the fact that the first quarter of last year was very wet and rainy. In the first quarter of this year, we experienced more normal conditions. We still had a very good level of precipitation in the first quarter, but not to the same extent we did in the prior year. And then we had a really good July. So we're tracking -- or June rather the second quarter. So we're tracking pretty well in terms of our usage going into Q3. As it relates -- I haven't gone back and check to see how it relates in terms of the rate case. If I can get back to you on that. But I think we were probably around 96% or right thereabouts, but I'll get the exact number for you and can circle back with you on that.

That 96% might be on a year-to-date basis?

Yes, that's the year-to-date.

There is no more question at this time. I will now turn the conference back over to Martin Kropelnicki, Chairman, President and Chief Executive Officer, for closing remarks.

Thanks, everyone, for joining us here today. As we move into Q3, again, it's going to be the busiest quarter for us operationally. It's usually our quarter that we experienced peak demand in terms of the services and the product that we provide. Look forward to giving you an update on Q3 and meaningful progress we're making on our infrastructure improvement plans and also the progress that we make on our PFOS, PFOA implementation plans. And really keep an eye on fire season. As I mentioned, so far, this has been a really busy fire season. I don't know what the future holds. I don't have a crystal ball, but I will tell you, it has been very busy from a fire season perspective so far this year. So we look forward to giving everyone a detailed update in Q3. And I tell them, please be safe, and we'll talk to everyone again real soon. Thank you for joining us here today. Thanks.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.