California Water Service Group

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. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, David Healy, 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 Kropelmicki, our President and CEO, Tom Smagle, our Vice President, Chief Financial Officer, and Paul Townsley, our Vice President of Corporate Development and Chief Regulatory Officer. Replay dial-in information for this call can be found in our second quarter results release, which was issued earlier today. The replay will be available until October 27, 2021. As a reminder, before we begin, the company has a slide deck to accompany the earnings call this quarter. The slide deck was furnished with an AK this morning and is also available at the company's website at www.calwatergroup.com. Before looking at the second quarter results, we would 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're subject to various risks and uncertainties, and actual results could differ materially from the company's current expectations. Because of this, the company strongly advises all current shareholders as well as interested parties to carefully read and understand the company's disclosures on risk and uncertainties found in our Form 10-K Form 10-Q, press releases, and other reports filed from time to time with the Securities and Exchange Commission. I'm going to pass it over to Tom to begin.

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 five. If you flip to slide six, 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 69 cents per share in 2021, and that compares to a loss of 31 cents 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 seven. 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 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. Our core operating costs are increasing as expected. We have lower equity AFEDC as anticipated, as we've talked about before. Capital spending is on track to our target, which is between 270 and 300 million for the year. We did have some other impacts on the quarter, and I'll talk a little bit more extensively about the unbilled revenue accrual, because that's giving us a big pop for the quarter. And the market value of some of our pension assets reduced our EPS by about $0.03 on the quarter. Flipping to slide eight, you can see the earnings bridge. These are the factors we were just talking about, rate relief. regulatory mechanisms, OpEx, there's benefit plan investments, mark to market there. The unbilled revenue is adding 17 cents on the quarter. And I guess I can talk about that now. It's also on the next slide. But what we've experienced in California is a a warmer and drier year, as Marty will talk about a little bit later. And what we believe is happening is we've advanced the unbilled revenue, which normally pops for us in the third quarter. We see that unbilled revenue accrual increasing very rapidly here in the second quarter. This happens from time to time with the company. We have inflections in our water sales that usually happen around June, July as the weather gets hotter in California. That seems to have happened on the earlier end this year. And so what we're looking at is earnings associated with recording the unbilled revenue accrual that would more likely in a different year be third-quarter earnings. And so we can talk a little bit about what that means. But the expectation that we would have, as described on slide 10, is that unbilled revenue generally will not add to earnings over the course of the entire year. And so this is really a seasonal effect. And so if you're looking at this from a modeling standpoint, this is not some new factor that's gonna give us extra profits for the year in most cases. And typically that's gonna come back down to around zero at the end of the year. Talking about slide 10, I do want to emphasize a couple of other notes. These are things that we've generally talked about on prior calls, but I wanted to remind the community and interested parties about these. As I mentioned, in Q3 of 2020, we recognized $43 million of net income, which was attributable to Q1 and Q2 of 2020. And that was because of the delayed California general rate case. We had not booked interim rates. and we had not booked the regulatory mechanisms because we weren't sure of the probability of recovery. And we did end up booking those in the third quarter. So another thing to think about is that the third quarter of 2020, we had an extremely high earnings release that quarter. That included all of this net income associated with Q1 and Q2, which is now being properly recorded in the proper period. So keep that in mind when you're thinking about the third quarter earnings coming up. Once again, our authorized rate base for all operations in total is 1.82 billion. That is, remember, we're rate regulated with a rate of return on rate base. And so you can work into a general range of earnings, so to speak, with respect to the company just by calculating the rate base times the rate of return and the capital structure there and get to that number. Our operating costs are increasing as expected, depreciation, property taxes, and wages in particular. As I mentioned on the last call, last couple of calls, the eligible mains and services state tax deductions will be lower in 2021, and that raises our effective tax rate. And that was something at the end of 2020 where we saw a big bump up from the enormous amount of state tax repairs deduction that we received that year. The net income from recognition of equity AFEDC in 2021 is lower and is expected to be lower because we have fewer long duration projects that are accruing equity AFEDC. Finally, to add here that The market value of the certain retirement assets, that was up quite a bit in 2020, and it's up a fair bit in 2021. We don't ever know what the market's going to do. I'm sure all of us would like to know what the market's going to do in the future, so we can't predict what that will add or subtract from earnings for the total year. So that's my financial update in general, and I'm going to turn it over to Paul to talk about the regulatory updates.