California Water Service Group

Good day and welcome to the California Water Service Group Q1 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask the question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. I'd now like to welcome Mr. Tom Scanlon, corporate controller, to begin the conference. Tom, over to you.

Thank you, April. Good morning and welcome, everyone, to the 2023 first quarter results call for California Water Service Group. With me today is Martin Kropanecki, our president and CEO, and Thomas Smagle, our vice president and chief financial officer. Replay dial information for this call can be found in our quarterly results release. which was issued earlier today. The replay will be available until June 26, 2023. 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 8K yesterday afternoon. It is also available at the company's website at www.calwatergroup.com. Before looking at this quarter's results, we'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. 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 10Q, 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, Tom. Good morning, everyone, and thank you for joining us on our first quarter results call. I'm going to start on slide number five of the slide deck, which is just a table of our financial results for the first quarter. And what you'll see there is a large drop in revenue, which I'll get to in just a second. We had a decrease in operating revenue of $41.9 million, or 24.2%. That lines up with a decrease in operating expenses of $15.3 million, and that's a reduction of 9.3%. The effect of those, among the other things that went on during the quarter, was that we had a net loss quarter of 2023 of 22.2 million or 40 cents per share and that compares to net income of 1.1 million or 2 cents per share in the similar quarter last year. I do want to highlight and we'll talk a little bit more later about the increase in capital investments of 19.7 percent in the quarter and that is certainly good news for the company's business plans. Turning to slide number six, The big story for the quarter that we are describing in this document and in the press release is that we had a combination of severe weather in our main service areas in California, very wet and cold weather here in California, and really what I would call a gap in our regulatory mechanisms. This gap is temporary, and we'll talk a little bit, probably a lot, about where we go from here in terms of those mechanisms. So on slide six, the big impact to revenue, both build and unbuild revenue. Again, the extremely wet winter in California, we saw a 12% decrease in our sales. And remember that sales in California are usually quite low to begin with in the first quarter, in the wet months of January, February, and March. The weather pushed down our unbilled revenue accrual, $5.8 million as compared to last year. And here's where we get into the regulatory mechanisms. So in 2022, during a similar period, we had an offset of $12.1 million by our RAM and MCBA mechanisms. And you'll recall from our past presentations that the RAM and the MCBA are no longer active in 2023 for CalWaters. And that's the regulatory decision of the commission. Those mechanisms are being replaced somewhat by other mechanisms. However, those mechanisms are tied up in the delayed California general rate case. And so we have on the deck here, again, in the middle of slide six, an estimate of what would have been recorded had we had a rate case in two accounts that would have been The first is the DREMA account, which is the Drought Response Memorandum account. That is an account that tracks lost sales during a drought period, and we are still in a drought period in California. We estimate that were the rate case effective during the period, that balance would have been from $6.5 to $7 million of revenue recovery from the DREMA account. In addition to that, the Monterey-style account RAM mechanism, that's a price adjustment mechanism, not quite similar to our full decoupling RAM, but a mechanism that would be in place with the rate case, that would have generated $9.5 to $11 million of revenue. So not yet regarding the potential for a rate increase, you can see where the regulatory mechanisms that are not currently in place wanted to highlight here is revenue deferral so in accordance with GAAP when we are collecting our balancing account balances in California we have to evaluate how much of that is going to be recovered within 24 months and because of the large balances that we have in the RAM and in other balancing accounts some of the surcharges to customers exceed that length of time and so we've had to defer revenue That deferral of revenue is an increased deferral of $18.8 million for the quarter, and that was offset by cost deferral of $15.4 million in the quarter. And so, again, that doesn't have a lot of impact to net income, but you do see that on the top line on the revenue side. Flipping to slide seven, just a couple of other notes about the quarter. We did see a gain, increased gain on our non-qualified retirement plan assets as compared to 2022. In the same period, $4.6 million gain there. Our water production costs fell, as you'd expect, due to lower sales by $6.5 million. Couple of other financial highlights. I mentioned 82 million in capital improvements. We had heavy rains in a lot of the quarter in California. Despite that, we were able to get a lot of construction activity done. 19.7% increase from the same period in 2022. As you saw, as we filed right at the end of the quarter, we have a new revolving credit agreement increase the amount available to the company and to Cal Water from $550 million to $600 million, and that is a new five-year revolving credit agreement. And then just a reminder that beginning in Q2, in May here, Cal Water expects to increase most customer rates by 4% on an interim basis pending the resolution Moving very quickly to slide eight, which is our EPS bridge, and this just shows the factors that I discussed. The other two factors that I haven't mentioned, I'll mention here, is that A&G and other operation and maintenance expenses, apart from the deferral, that decreased our EPS by seven cents. That's your typical operating expense increases on an annual basis. About the fourth bar over is just what we would call property-related expenses, so interest, depreciation, and property tax as a result of having a higher invested capital base for the company. One thing that is not on this EPS bridge, and if you flip to slide nine, is any potential for actually a rate increase associated with the California general rate case. I do want to highlight that. And so the unrecorded regulatory mechanisms, we already talked about the last two, the MRAM and the DREMA accounts. We also have an interim rate memorandum account. Remember that the California general rate case is effective back to the 1st of January of 2023. We estimate that had the case been adopted, we would have seen an interim rate memorandum account balance between $8 and $15 million. And that represents, the eight represents the position of the rate for advocate. The 15 million represents the position of Cal Water in the case. And so there's a lot of caveats to that. Obviously, the judge is independent. The judge can choose to change rates in whatever manner that they feel the evidence warrants. But that gives you a guideline of where the advocate is and where Cal Water is with respect to the rate increase for the first quarter. we would not anticipate booking that amount until after a rate case is decided and that interim rate memorandum account is scheduled for recovery. Finally, the fourth mechanism is the incremental cost balancing account, and that is also tied up in the rate I will keep going with slide 10, the California regulatory update. Not a lot to report here. First bullet is that we did see the cost of capital case get a decision extending the statutory deadline. They now have a deadline of August of 2023 to complete that case. Commission could complete the case, but by that time, or they could issue another decision extending their statutory deadline. So we don't really have any information on that. As a reminder, that cost of capital case, one of the issues there is whether it would be effective at the date of the decision or retroactively. And so we've identified, as we have for the last several quarters, the potential impact to the company if that decision is retroactive back to January 1 of 2022 when it was originally expected to be effective. And there's So I'll stop for a moment and turn it over to Marty to talk about the drought.