California Water Service Group

Good morning my name is Krista and I'll be your conference operator today. At this time I would like to welcome everyone to the California Water Service Group third quarter 2023 earnings conference 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 a question during this time simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, again, press star one. Thank you. I will now turn the conference over to David Healy, Vice President, Chief Financial Officer and Treasurer. You may begin your conference.

Thank you, Krista. Welcome, everyone, to the 2023 third quarter results call for California Water Service Group. With me today is Marty Propelnicki, our chairman and CEO and Greg Milliman, our vice president, rates and regulatory affairs 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 December 25th, 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 the form 8K this morning and 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'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 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-Q, press releases, and other reports filed from time to time with the Securities and Exchange Commission. I'm going to start by turning to slide four, which states our values and priorities. Moving on to slide five, third quarter financial highlights. As discussed last quarter, third quarter and year-to-date results primarily reflect the adverse impact of the delayed proposed decision from the California Public Utilities Commission, or CPUC, on CalWaters' pending 2021 general rate case to set new rates, rate design, and regulatory mechanisms. Once approved by the CPUC, the general rate case accumulative adjustment will be retroactive to January 1, 2023. There's one change from our last quarter's discussion. The delay of the General Ray case is now expected to move CPUC approval of the advice letter for the 2023 Drought Response Memorandum Account, or DREMA, operating revenue into calendar year 2024. We estimate the adverse impact of the delayed general rate case on third quarter 2023 operating revenue to be in the range from 14 million to 27 million, of which 5 million to 5.5 million is related to DREMA. Our estimate is based on our on the current positions of the parties to the California general rate case filing and consumption driven regulatory mechanisms. As noted on slide five, third quarter 2023 operating revenue decreased 11.3 million to 255 million as compared to the same period last year. The decrease was primarily from 29.6 million decrease in RAM and MCBA revenue as those mechanisms concluded on December 31st, 2022. The decrease was partially offset by 13.7 million of 2023 general rate increases and a 1.8 million reduction in revenue deferral. Third quarter operating expenses increased 10.1 million to 211.5 million as compared to the same period last year. The increase was in line with expectation and is noted on slide five was due mostly to increases in water production costs, bad debt expense, costs from a reduction in revenue deferral, employee labor costs and depreciation and amortization expense. Moving on to page six. During the third quarter of 2023, net income attributable to group was $34.4 million and diluted earnings per share was $0.60 as compared to net income attributable to group of $55.9 million and diluted earnings per share of $1.03 for the quarter ended September 30, 2022. As discussed, the delayed California general rate case proposed decision had an adverse impact on that income attributable to Group. As noted at the bottom of the slide, I'm pleased to report Group's capital investment during the third quarter of 2023 was $96. which was a 25% increase from the same period last year. And now I'll turn it over to Greg Milliman to cover slide seven.

Thank you, Dave. On slide seven, you can see, as we've discussed in prior quarters, we have three unrecorded California regulatory mechanisms that we are tracking. Our practice is not to record revenue revenue until the 2021 GRC amounts are known and approved by the Commission. All of these mechanisms, as Dave said, go back effective to January 1st, 2023. We have the largest, the interim rates memo account, tracks the difference between interim rates and our final rates. We have the moderate style revenue adjustment mechanism that tracks the difference between actual residential sales revenue and residential sales revenue at a single quantity rate. And then we have the drought response memo account that tracks the difference in sales revenue. Sorry, tracks the difference in reduced sales revenue from conservation during a drought. This will stay open until California Governor Gavin Newsom declares the drought over, which could happen sometime in 23, 24, depending on what happens with the weather in our state could stay open longer. Recovery from that will be by a separate filing. And as Dave indicated, those revenues will not be recorded in 23. They'll be recorded once the commission approves that filing. Turning to slide eight, this just gives you the financial impacts of the three recorded regulatory mechanisms for the third quarter. Again, as Dave said, based on the current position of the parties in the 21 GRC filing, we estimate an understatement of operating revenues during the third quarter to be in the range of $14 to $27 million or $0.22 to $0.41 earnings per share. Something of note would be right before the subtotal where it says MRAM. you'll see that they are negative numbers. This is right in line with what we would expect for the memorandum account. When you go into the summer months, customers are using water in the more extensive third and fourth tiers. And the single quantity rate is more in line with the second tier. And so it's basically starting to annualize the numbers that we would expect for the year. Later on in the DEX, we'll come across the slide that will show the same table with year to date results. And you'll see with almost three quarters of the year being completed, the numbers are coming in line with what we would expect on an annualized basis. With that, I will turn it back to you, Dave.