This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk12: Good day, ladies and gentlemen. Thank you for standing by and welcome to the California Water Service Group first quarter 2024 earnings call. During today's presentation, all parties will be in a listen mode only. Following the presentation, the conference will be open for question and answer. This call is being recorded. I'd like to turn the call over to Jim Lynch, Senior Vice President, CFO, and Treasurer. Please go ahead.
spk16: Thank you, Ellie. Welcome everyone to our first quarter 2024 results call for California Water Service Group. With me today is Marty Krumplnicki, our Chairman and CEO, and Greg Milliman, Vice President of Rates and Regulatory Affairs. Replay dial-in information for this call can be found in our quarterly results release, which was issued earlier today. A replay of the call will be available until Monday, June 24, 2024. As a reminder, before we begin, The company has a slide deck to accompany the earnings call today. The slide deck was furnished with an 8K and is also available at the company's website at www.calwatergroup.com. Before looking at the first 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 risk 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 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. And now I will turn the call over to Marty.
spk22: Thank you, Jim. Good morning, everyone. Thanks for joining us today to talk about our Q1 2024 results. We have a number of topics to cover today, starting with our strong operational performance, which is really highlighted by the final resolution of the 2021 general rate case. And I will say it's after going through the delays, which stretched out over 2023, it's nice to see the arrows all going in the right direction. And big kudos to Jim and the team for booking everything and getting it all set up here as we wrap up Q1. In addition, we'll want to talk about the implementation of the water cost to capital adjustment mechanism, which sets our return on equity for 2024 at 10.27%. We were able to secure an additional $83 million of COVID funds from the state of California to help our customers with past due balances that linger from our COVID times. And then talk about our, where we are with PFAS and the EPA's new regulation and our plans to be in compliance with that. And then finally wrap up talking about the commitment we made recently to reduce our scope one and scope two admissions. But prior to going into some of these more operational themes, I'm going to turn it back over to Jim to review the financial results for the first quarter of 2024. Jim? Thank you, Marty.
spk16: As Marty mentioned, our first quarter results benefited from the conclusion of our 2021 general rate case. Operating revenue for the quarter increased 106.5 percent to $270.7 million compared to the prior year first quarter revenue of $131.1 million. The implementation of two regulatory mechanisms authorized by the 2021 GRC decision had a significant impact on revenues, with the Interim Rates Memorandum Account, or IRMA, adding $80.7 million, and the Monterey-Style Water Revenue Mechanism, or MRAM, adding $31.7 million. Recorded IRMA and MRAM revenue included $70.2 million and $17.6 million, respectively. related to fiscal year 2023. Greg will walk us through the 2021 GRC decision later in the presentation. The revenue increase also included $13.9 million related to the recognition of water revenue adjustment mechanism or RAM revenue that was deferred in previous reporting periods. First quarter 2024 operating expenses increased $192.9 million compared to the first quarter total operating expenses of $148.6 million. The $44.3 million increase was primarily driven by $9.2 million in higher water production costs associated with the company's new incremental cost balancing account, or ICBA. Higher other operations expenses, primarily due to $11.4 million in deferred costs associated with the recognized deferred RAM revenue and a $21.2 million increase in income taxes related to higher pre-tax earnings. Net interest expense increased 25.5% to $15 million during the first quarter as compared to $12 million for the first quarter of 2023. The increase was primarily due to higher short-term borrowing rates and higher balances on our outstanding lines of credit. Reported net income for the first quarter was $69.9 million, up nearly 415% compared to a loss of $22.2 million in the first quarter of 2023. Turning to the earnings per share, first quarter 2024 earnings, diluted earnings per share was $1.21 compared to first quarter 2023 loss of 40 cents per share. The significant increase in EPS was driven by resolution of our 2021 general rate case, coupled with rate increases and the reversal of previously deferred RAM revenue. These increases were partially offset by increased expenses, including higher water production expenses related to the new ICBA regulatory mechanism, higher production expenses due to the reversal of RAM-related deferred production costs, and interest expense. Turning to capital, we continue to make significant investments in our water utilities to help ensure the delivery of safe and reliable water service. We invested just under $110 million in capital improvements during the first quarter of 2024. This was an increase of approximately 34% over the first quarter of 2023. For the year, we anticipate making approximately $380 million in capital investments, which includes an estimated 20 million in developer-funded projects. Depreciation for the first quarter of 2024 was $32.8 million, or approximately 30% of first quarter capital investment expenditures. The success of our capital investment strategy is reflected in our rate-based growth. Our overall rate base grew to an estimated $2.2 billion by the end of 2023. This was an increase of 15.4% over 2022. Further, based on our current plan capital expenditures and subject to regulatory approval, we estimate that rate base will grow to $2.36 billion by the end of 2024 and $2.47 billion by the end of 2025. Turning to dividends, at the beginning of the year, we increased the annual dividend 7.7% from $1.04 to $1.12 per share, which marked our 57th consecutive annual dividend increase. And yesterday, we declared a quarterly dividend of $0.28 per share for shareholders on record as of May 6, 2024. This was our 317th consecutive quarterly dividend. We continue to maintain a strong liquidity position. As of March 31st, 2024, the company maintained cash and cash equivalents of 88.3 million, of which 45.4 million was classified as restricted. Further, we had additional short-term borrowing capacity on our lines of credit of $320 million. Lastly, we were pleased to report that subsequent to the end of the quarter, We received approximately $83 million under the State of California Extended Arrearage Program. The program is designed to provide financial assistance to customers with past due balances that accrued during the COVID-19 pandemic. Marty will provide additional color on the program in a few minutes. With that, I'll turn the call over to Greg to give an update on our 2021 general rate case decision. Greg? Sure. Thanks, Jim.
spk30: I'm going to walk through some of the highlights of the decision we, for our 2021 GRC decision that we received March 7, 2024. Overall, the decision was financially very positive for the company. As Jim indicated, the decision increases adopted revenues after corrections for 2023 by approximately $41.5 million, retroactive back to January 1, 2023. The decision also adopted 95% of the requested operating expenses. It adopted a very favorable water mix for groundwater and purchased water that provides the company financial protection. It authorizes Cow Water to invest $1.2 billion, which is 86% of our request from 2021 through 2024 in our water system infrastructure projects. including approximately $160 million of infrastructure projects that may be submitted for recovery via the PUC's advice letter process. In fact, we've already filed an advice letter for 145 projects capitalized at $39 million for a $5.8 million increase in annual revenues. The decision provides a very progressive rate design that provides financial stability while benefiting low-income, low-water-using customers. And finally, and most importantly, when voting out the decision on March 7th, the commissioners all agreed that the process took too long. And so I'm hopeful that the decision on our 24 case will come out more timely. Back to you, Marty.
spk22: Great. Thanks, Greg. Just echo what you said when we were in the hearing room with the commissioners. Every commissioner did comment on that. We think that's a good sign that they recognize the problems this was causing not only for us, but also for our customers, and it's going to have a pancaking effect on their rates. I'm going to be on slide 10. I want to come back to the extended rear-ridge management program for the state of California. I think, as many of you know, we have been extremely proactive, our government affairs team in Sacramento, in looking for ways to help our customers who are still suffering kind of the hangover of the pandemic. You recall the state of California had an original rearage management program that kind of covered half of the COVID time, and then it cut off. And for that first part, the company was able to secure a little over $20 million that was applied to our customer balances during the COVID time. We were able to work with the state to take some of the unspent federal dollars that were allocated to the state and come up with a rearage management program, kind of number two. So we worked with the state. to appropriate approximately $300 to $400 million of unspent federal dollars and reopen up that window to allow utilities and water companies to apply for further funds to offset the past due balances from June 16th, 2021 through December 31st, 2022. Very happy to report that our application was accepted and we received the entirety of our request, which is $83 million that Jim mentioned. That money has been received, and during the second quarter, we'll be allocating those dollars to those past due balances, again, from between June 16th, 2021 through December 31st, 2022. These funds benefit both current and past due customers because all customers eventually bear the cost of uncollectible accounts. Moving on to slide 11, I want to take a moment to update everyone on where we are. with the PFAS regulations that have come out, also known as Forever Chemicals. We believe we continue to be well-positioned to meet the EPA's new guidelines. Across our portfolio, we have a rigorous and coordinated water quality assurance program with protocols in place to test and monitor the water we deliver to our customers. I think, as many of you know, that Investor on Water Utilities, we take public health as one of the most important things we do as a company. We've had a fair amount of experience with PFOA and PFOS in California and Washington. Our utilities have been complying with the previously issued PFOS guidelines issued by their state regulators. On April 18th, the California Public Utilities Commission dismissed our application requesting authorization to modify a previously approved PFOS expense balancing account to include capital investments related to the PFOS compliance. DPC indicated that we would need to file for recovery of the capital components of PFAS treatment later in the process. What that really means is, first of all, I was disappointed that they denied it. They dismissed it without prejudice, but it allows us to file a separate application or include it in the 2024 general rate case. And I believe, Greg, our plans are to file it as a separate application. That is correct. Outside the rate case. Despite the commission's shortsightedness recognizing the urgency that you need to get this PFAS treatment in the ground, the company put a press release out reaffirming our commitment to our customers that we'll be investing the $215 million expeditiously to put PFAS treatment in place for approximately 100 wells in all the states that we operate in. Overall, it is a group meeting at the parent company project. So we have a project director who is managing the implementation in all of our states in that group, or that project director reports in the management committee on a normal basis. And we have hit the ground running. We plan to spend probably between $12 and $20 million this year on PFAS treatment, and that'll ramp up as we go out into the implementation.
spk30: Before you move on, you mentioned people balancing account. I believe what's a memo.
spk22: Thank you. It is a memo account. So it's outside the rate case. We're incurring the cost. It goes to the panel, but we're allowed to track those costs. And we asked the commission to allow us to modify that memo account to pick up the capital components, which was denied. However, capital projects in the rate making world do accrue a few DC allowance for funds used during construction. service. Moving on to slide 12, where we talk about greenhouse gas and scope one and scope two reduction targets. As we worked on our decarbonization strategy and our ESG strategy overall the last five years, we recently made our commitment to reduce absolute scope one and scope two greenhouse gases by 63% by 2023 from our baseline 2021 year. Our targets are science aligned, which the team's done a very good job working with a third-party advisor to pull that data together. We expect to achieve these reductions through a multi-pronged approach consisting of the electrification of the fleet, water conservation, installing on-site solar where it makes sense, and looking at renewable electricity procurement. In other words, making sure we're tapping into the green side of the grid for the power that we use. As many of you may recall, water production and distribution uses a lot of energy. So, the more green energy we can use, the more it helps us drive towards that target, as well as the other components here in the multi-pronged strategy. Just as an FYI, group may evolve its decarbonization strategy if warranted due to changes in industry, working with our regulator, business, and other operating things that may happen, including SEC rules, et cetera. Overall, we're very committed to delivering value to our customers and stockholders while pursuing these reduction targets and believe it's the right long-term approach as we deal with climate change. Going on to slide 13, so just to kind of recap, very pleased with the start of 2024 and getting the 2021 rate case behind us. Nice to have that done. The numbers will be a little confusing obviously when we publish the 10Q here later on this week. There'll be more information so you can strip out what was the retroactive piece and what was the actual piece for the quarter itself. We're going to now turn our focus on implementing our infrastructure improvement plans. As Greg's mentioned, we have a lot of capital to get into the ground in addition to the PFAS. So the guidance that Jim gave everyone earlier does not include the $215 million commitment for PFAS or for the forever chemical treatments that we made to our customers. So that will be incremental. And one other thing to put on everyone's calendar, we have our state Supreme Court date on May 8th. And that's our oral arguments on the RAM decision from the commission. So we'll look forward to hopefully having some type of decision by the state Supreme Court. three months after the oral argument or so. So we're looking forward to having that day in court because we believe decoupling is absolutely essential to the state of California, its work on climate change, resiliency, and sustainability. So with that, I want to thank everyone for bearing with us through the delays of the 2021 general rate case. I want to thank the rates and accounting team for their hard work. Not only did we have to close out the year, but right after the year, we got the decision. We had to book everything, so the team did a fantastic job. getting that stuff all booked in the general ledger, and now we'll move forward onto our 2024 plans, investing in infrastructure, going after PFAS and getting the PFAS treatment put in place, and getting our rate case filed for the state of California on or around July 1st. So, Ellie, with that, let's open it up for questions, please.
spk12: Thank you. We are now opening the floor for question and answer session. If you'd like to ask a question, please press star and number one on your telephone keypad. That's star and number one on your telephone keypad. Our first question comes from Michael Govler from Janie Montgomery Scott. Your line is now open. Good morning, everyone.
spk15: Good morning, Michael. Good morning, Michael.
spk02: Just wondering if you could update us on water supply and water production costs. I noticed they were rather high in the quarter. I know Jim touched on it a little bit.
spk09: And maybe how we should think about that for the remainder of the year.
spk10: Sure, Jim.
spk16: Yeah, well, from a water supply perspective, Michael, the state of California is doing very well. I believe our snowpack for the second consecutive year was higher than our 20-year average, and I think it's the first time in an awful long time that we've had two consecutive years where we've beat the average. So I think we're looking good. There's been a good opportunity also for replenishment of some of our underground aquifers throughout the state in California. I think our other states are also similarly well-positioned in terms of actual water supply. We do have some operations in Texas. You know, most of our utilities down there are wastewater utilities, and I think that we've not seen the current water situation in Texas put any stress on those operations. As it relates to expenses and water expenses, you know, we do have in California with the new rate case, the new ICBA, which provides us some protection in terms of cost increases. in our water production, and so we will lean on that new mechanism and focus on that as our familiarity with the new mechanism becomes greater. And then I'd also like to point out that we did have an increase in other production expenses. I mentioned it in my comments, and those were primarily related to the recognition of the deferred RAM revenue. So, I would, I would view those more as something that will continue to reduce as we. As we kind of unwind those deferral deferred revenue costs.
spk22: Yeah, one thing I would add is just Jim said the snowpack was very, very good. Water supply and within the state of California, I think is doing great California. is still in a stage two drought. If you remember, we were racing towards a stage three drought, and then the governor's walked that back. We're still in a stage two drought, which I kind of expect the governor to stay in a stage two or maybe drop it down to stage one, given the longer term issues of sustainability with the state, climate change, the variations we get in the weather.
spk10: But overall, for 2024, we think we're in good shape in all of our districts.
spk11: All right. Thank you, gentlemen. Most helpful.
spk10: Thanks, Michael. Thanks, Michael.
spk12: Next question comes from Jonathan Reeder from Wells Fargo. Your line is now open.
spk08: Hey, good morning, team. Got a couple questions here, if you don't mind. First would be, you know, how should we think about the timing of the cash recovery of the retroactive 2023 GRC revenues?
spk30: Jonathan, this is Greg Milliman. We will be, because of the timing of the 21 decision in our upcoming filing on July 1st of our 24 rate case, we have been focused on implementing the new rate, get those into effect first, calculating what the lost revenue or the IRMA amount and the MRAM amount will be so that we could book that. We will be filing in the third quarter for recovery of those back monies. We need to go through May 31st when we're planning to have the new rates fully in effect and close out the Irma account. But then we need some time to put together that filing and start requesting it. So we'll start requesting it in the third quarter. It is based on a per CCF surcharge. So I would imagine in the summer it will be a little bit higher and then obviously in the winter months lower and go someplace from 12 to 24 months.
spk08: Okay. So it sounds like, I mean, those revenues aren't going to really come in in 2024. It'll probably be more 25 and 26. Yeah.
spk30: The revenues were booked in the first quarter. I thought your question was related to cash.
spk08: No, exactly, you are, yeah. The cash flows won't come in until 25 and 26. I apologize.
spk16: Yeah, the one thing I would point out, though, with the timing of when the new rates will go into effect, we will at least experience the positive cash uptick related to those new rates as we go into our more traditionally busy season.
spk10: So we were pleased to be able to get the rates effective as of June 1. Gotcha.
spk08: And then how should we think, I guess, about the $83 million, you know, rearage payment program, cash recovery, potentially like offsetting 2024 external equity needs?
spk22: Yeah, so if you remember during COVID, we were decoupled. So the revenues all accounted for through the decoupling mechanisms from the state of California. So this piece really becomes cash flow. So essentially, customers that have balances that are still past due from the period that I defined, June 16, 2021, through the end of 2022. those dollars will be applied to their balances. And then we'll also be applying some of those balances to the RAM balances that existed for those customers as well. So that'll all work its way into cashflow, but it won't really have a revenue effect. It'll have an effect on the age receivables that are still outstanding during COVID and you'll see a pickup in cashflow. So certainly that helps the company from going to the market and needing to issue equity right away. Obviously, water utility stocks over 2023. Everyone was down 20 plus percent. So we're not racing the market anytime soon to go sell stock. And Jim's not throwing any pieces of paper at me for saying that. But the reality is with this rate case and with the step up in the rate design, the movement from fixed or from variable to more being more recovered and fit, think about our capital needs we're still investing at three times our depreciation rate and as Greg mentioned we got 86 percent of our asked it's a 1.2 billion dollar capital program so we do have adequate lines etc but Jim and I will be evaluating that as we go throughout the year to define what those needs are obviously with interest carrying costs being higher um, you know, the stock being down and we still got to get our job done. There's a fine line that we'll be looking at our cap structure and trying to optimize that on behalf of our stockholders, but also our customers as well, because it helps play into affordability.
spk10: Okay.
spk08: So in terms of like absolute size of annual equity needs, that's still to be determined at this point.
spk16: Yeah, I think, I think so. You know, John, the, the, the real good news is that, um, from the recognition of the 2023, our ability to recognize the 2023 impact of the 2021 decision has brought us back to where we had hoped we would be at this point in time relative to our cap structure, which is, you know, very close to our authorized cap structure. So there's not a need right now in terms of forcing us, I wouldn't say forcing us, but directing us into which particular capital we would pursue in the event that we needed to pursue capital. And so I think right now we've got a lot of availability on our line of credit. We understand that the interest rates are still inverted, so we'll be taking a look at short-term versus long-term debt, amongst other things as we move forward. But it's only with the booking of the current rate case results, the 2021 rate case results that we're in the position now to kind of forecast out what we think we might need from a capital perspective for the remaining of the year.
spk22: Yeah, we're also benefiting from the higher ROE that went into effect on January 1st, the 10.27 ROE. So that's also helping us with our cash flows.
spk08: Yeah, sure. I'm glad you brought up the ROE kind of leads into the next question because I guess just given the the GRC final outcome and, you know, recovery of some of the CapEx through the advice letter recovery process, where do you expect your earned ROEs in 24 and 25 to come in relative to the allowed levels?
spk22: Oh, that's a very good question. 25 is certainly a little harder to talk about, but from a budgeting perspective and how we manage the company, right, we try to drive towards hitting that ROE Obviously, when you have a delayed rate case, it throws everything kind of off balance, significantly off balance. So I think for 2024, we should be at or maybe slightly above that ROE. For 2025, you start to get the period of regulatory lag. It starts to seep in. And obviously, inflation is a big deal. Getting back to Michael Gogler's questions about production costs, you know, in Northern California, you know, for time of use rates for electricity, it's now 40 to 50 So that's stuff that affects the operating side that will also lag. And hopefully some of it will get picked up in the rate case. But as inflation stays high, a lot of it gets pushed out into the next rate filing. So certainly for 2024, I think we're in excellent shape. For 2025, we're going to budget to hit our ROE. And that's kind of our job. And I think, as Jim talked about, is there an opportunity with inverted interest rates, short-term versus long-term? How we finance things, we're going to take a look at all that because our job is to operate as efficiently as possible while earning the ROE for our stockholders and keeping rates affordable for our customers. So 25, hard to comment on. 24, we're going to drive hard to hit the ROE.
spk08: Okay. And then lastly, I know you said you filed for 39 million of the advice letter recovery projects already. How much do you expect to file, you know, in total in 2024, and then what about in 2025?
spk22: That's to be determined. Jonathan, if anyone listened in to the rate proceeding, I thought it was kind of fascinating because the commission was really kind of focused on these 335 projects the company didn't get done, or they only got done five of these 335 projects. But as you know, numbers are relevant, right? During this three-year period, we probably had 5,000, 6,000 total projects that we completed. Those aren't talked about. They were just focused on these 335 projects that didn't get done. There's two failures that I see in the rate-making process in the state of California. One is the failure to recognize that projects now go through one or two and even three rate cage cycles. So you want to put a well in Southern California? By the time you procure the land, design the well, sign off on the treatment, build the treatment, go through testing, put it in service, it's longer than three years. And so the rate-making process in California fails to recognize these projects now are multi-cycle projects. The second thing that the commission fails to recognize in the rate-making process is as these projects get more complicated and go out farther in time, the level of contingency needed for those projects goes up. And if you listen to the hearing, the commission tossed out a lot of the contingencies associated with these projects. So those are the two things that Greg has to work on in the 2024 rate case. Obviously, they're kind of inbred into the process in the rate making process within the state of California. But those are the two of the things we're going to be focusing on in 2024, because both those things help lead to regulatory lag and, you know, The reality is, and you've followed us for a long time, we're very good about hitting our capital commitment numbers and getting that capital on the ground, right? It's really about on the backside, the rate-making process and the efficiency of the rate-making process. So we'll have to see what happens next, but I think we'll keep doing what we're doing and we're going to keep investing at three times the depreciation rate, which I think benefits our stockholders while focusing on affordability.
spk08: Okay, but out of those 160 million projects,
spk16: uh do you expect to like complete them all over the course of 2024 and 2025 or might some of those fall into the next rate case cycle still yeah we're we have a concerted effort going on right now to to uh reevaluate those projects uh from two perspectives one uh to confirm that they are still needed and and two uh to make with regards to that first point to make sure they weren't just uh projects that we've subsequently found other alternatives for, and two, to really identify what time period we are going to complete the projects and put them in service for those that remain out of the 160 million. So, at this point, I think that process is still underway, and we'll have a better sense for the timing of that here in the next couple of weeks.
spk08: Okay, thanks.
spk10: I appreciate you taking my questions. Thanks Jonathan. Take care Jonathan.
spk12: Question comes from Angie Storins from Seaport Research Partners. Your line is now open.
spk27: Thank you. So first maybe you alluded to the 10Q which will have more information about the retroactive impact on the first quarter earnings, but can you just give us a sense, like, roughly what it is from an EPS perspective versus the $1.21 that you reported?
spk16: Well, we haven't broken it down from an earnings per share perspective, but relatively speaking, there was approximately $90 million of earnings of revenue that was included in the the 2024 first quarter that related to the decision. And in addition to that, there was an incremental about $8.5 million of expenses that related to the decision.
spk27: Okay. I mean, you don't have guidance, so that's actually pretty important for us to have a basis to extrapolate from, right? Again, we would probably appreciate it going forward. Secondly, on the PFAS spending, so will you be booking AFUDC earnings associated with this capex? Will it flow through the income statement?
spk16: Well, AFUDC, we are eligible to use the AFDC mechanism as we move forward with those expenditures. I think the way you're asking the question, we will be able to reduce our interest expense for the AFU DC to the extent that we are making expenditures related to those projects.
spk27: Okay. And then just in general on PFAS, so we're starting to see some losses against investor-owned utilities related to PFAS, you know, the fact that, you know, or in general utilities were not attempting to remove the forever chemicals from distributed water in the past. And I'm just wondering, you know, how you can protect yourself. Is there anything in California that would allow you to, you know, limit the litigation risk and more importantly, limit any earnings impacts?
spk22: Yeah, I think from a liability standpoint in California, we have, we have, Hartwell decision, which basically says, if we're operating in accordance with the rules set forth by our regulator, that we have protection. So I'm not too worried about California compared to some of the stuff that we're seeing on the East Coast in terms of product liability associated with water, et cetera. From an earnings perspective, as Jim said, we'll accrue AFUDC on those capital projects. Most of the treatment is capital. And, you know, it's 100 wells out of 1,170 wells total that we have within group. So we'll accumulate the AFUDC on that, and then those other capital costs get picked up. And any of the operating costs, once we put those vessels into production, we'll track the incremental costs through the memo account and seek recovery of that at a later date. So I think we got kind of all the pieces in place that we need to have. I was just disappointed in the commission's decision not to recognize the capital now because the EPA has put that new standard out there. They did extend the implementation timeline. I believe it's over five years now versus over three. But, you know, customers don't want to hear we're going to implement PFAS treatment four and a half years from now. If Jim's drinking water that has PFAS in it, he wants to know we're treating it right away. And so that's why when we put our press release out, we pointed out we were disappointed in the commission's decision. And despite that, we reaffirmed our commitment. getting that capital in the ground as quickly as possible. And so from an operating cost perspective, I'm not too worried about it. To me, it's about making sure the water's safe for customers and implementing that capital as quickly as possible.
spk16: And then just one other point on that, Angie. We are pursuing any available grant money that may be out there to assist with the whole PFAS issue, as well as potential third-party liability.
spk22: Yeah, there's a lot of litigation around PFAS actually to the polluters, and there's been a ton of press on that. I don't want to get into the particulars of the case because we're a member of the action against the polluters, but we believe we'll get some dollars back from the polluters to offset the implementation costs and the capital costs of putting PFAS treatment in place.
spk26: Okay. And then lastly, as you mentioned, the
spk27: the weak performance of water utility stocks and the timing of your future equity needs. I'm just wondering, Ito, you raised your dividend by, I think, 7%, 7-something percent. So is this, do you think that going forward, depending on the stock performance, the growth in dividends is a lever for you to potentially use to adjust downwards, you know, if you have higher equity needs, you know, is this a lever in this high interest rate environment as well?
spk23: Again, what is this 7% plus linked to?
spk22: Sure. Well, if you go back to budget, yeah, if you look at our dividend increases over the last five years, they've been above inflation. You know, we have a payout ratio of target between 55 and 65%. We try to manage within that range. I personally believe that a compound annual growth rate of dividends is one of the key drivers to equity valuation in the marketplace. So, you know, looking at that CAGR number, as Jim mentioned, you know, we've grown the dividend every year for the last 57 years. So I have no reason to believe we won't continue down that path. Obviously, when the board looks at that, we look at, you know, what's the general market conditions? What was the dividend growth rate of other utilities? What are our capital needs? And we try to keep that all in balance. But obviously, for me personally, I think dividend growth is a key thing that our investors expect, and they like to see, and they like the stability of a water company. So to me, yes, it was a bear year for water utilities in 2023, but I think Three most important things we can do, you know, make sure water quality is the most important thing on our operating list. Continue investing at that three times the depreciation rate and keep growing that dividend. And I guess the fourth thing is making sure our customer service stays outstanding and best in class. We do those things.
spk10: In the long run, you create value for stockholders.
spk13: Very good. Thank you.
spk10: Thanks. Have a good day.
spk12: The next question comes from Davis Sunderland from Baird. Your line is now open.
spk10: Hey, Jim. Good morning. Thanks for taking the questions. Hey, Davis. Good morning. Thanks for joining us. I wanted to ask a PFAS question. As late as the business development, I guess, for the request, there's any updates on that that are noted, but specifically, has the PFAS created any opportunity for you guys to be more aggressive or more interested or, I guess, take a closer look at any of your systems who may have difficulty reaching them.
spk22: You know, Davis, we got about every third word there you were cutting out.
spk16: I think I'm going to answer a question that I think you asked, or at least I'll rephrase the question for Marty. Davis, it sounded like You said with PFAS out there, if we took a look at the business opportunities that are also out in the market right now that we may be pursuing, how are we considering the potential PFAS liability? And is that coloring our desire or interest in some of those potential opportunities?
spk22: Wow, you could hear that in that question? That's incredible. But let's answer that.
spk10: Is that the right question, Davis? I think we said, wait, Jim, a great error.
spk22: So let me answer that question. Yeah, you know, I think obviously the cost of capital has gotten a lot more expensive. And from a business development standpoint, we haven't, We've seen maybe a little bit of slowdown in things that go into our pipeline from a business development standpoint. But our business development team continues to be very, very busy. As Jim mentioned, you know, the stuff we got going on in Texas and other things we're doing in other states. So I think, you know, the PFAS thing, I think the smaller systems are going to struggle to be in compliance. And, you know, you think about for us, there's 100 wells, it's $215 million. And we're fairly good at implementing that type of treatment. We're very fast and we try to keep our overhead fairly low. If a smaller system doesn't have access to capital or they don't have the technical resources on site to figure out what the treatment should be, it's going to affect their ability to operate. I think the broader operating issue is for companies like Cal Water, are for Essential or Aqua or SGW or Middlesex, any of us that are public traded companies, you know, you fall out of compliance and the regulator finds the hell out of you or you end up getting sued by somebody, right? So, you know, we generally operate to the highest standards possible would be associated with that. When you're a municipal system, what's the recourse? And you think about the 60,000 systems out there that fall under the purview of the EPA, there's no way they can effectively monitor all those systems to make sure they're in compliance with PFO and PFOS. And so I give the Biden administration credit for, you know, trying to push through the PFOS treatment, get the EPA to move quicker. I think that's really important. But, you know, you'll have compliance lags on the municipal side where I don't think you're going to have that same problem on the investor-owned side.
spk16: Yeah, and I think as a result of... Marty's observations on that, we do think that as with any new regulation that comes out, it will put financial stress on some systems and that may open up the market. And yes, if we believe we could assist the customers in those markets, we would be interested in taking a look at those systems.
spk22: But even then, Jimmy, one of the things that happens, we take over a system, we got liability day one. So if you look at some of the work we've done, like in New Mexico, or we've taken over trouble systems, we work very closely with the regulator to get the rates paid up front before we buy them, that we have an implementation timeline so we don't get pinged on the backside with these penalties and fines. Because I think in the water world, the investor-owned utilities are the deep pocket for the regulators to find.
spk10: I apologize for the audio. All right, Davis, thank you. Thank you. Jim, good ears. That was impressive. You can decide for that.
spk13: Thank you.
spk12: As of right now, we don't have any raised hands, so I'd like to hand back over to the management for the final remarks.
spk22: All right, Ellie, thank you. Well, everyone, thanks for joining us today. Obviously, there's a lot going on. But at least one thing is off the list, the 2021 general rate case. That's in the rearview mirror. Obviously, there's a lot of work to do on the tariffs and filing the required documentation with the commission to start the collection of the retroactive piece. We'll be in a better position on our Q2 earnings call to talk about that. And then in between now and then, we'll be working on our 2024 general rate case and preparing for the state Supreme Court oral arguments on May 8th. Thank you for joining us today, and we look forward to talking to everyone really, really soon.
spk10: Have a good day.
spk12: Thank you all for attending today's conference call. We hope you have a wonderful day. You may now all disconnect to the session. Thank you. Music. you Good day, ladies and gentlemen. Thank you for standing by and welcome to the California Water Service Group first quarter 2024 earnings call. During today's presentation, all parties will be in a listen mode only. Following the presentation, the conference will be open for question and answer. This call is being recorded. I'd like to turn the call over to Jim Lynch, Senior Vice President, CFO, and Treasurer. Please go ahead.
spk16: Thank you, Ellie. Welcome everyone to our first quarter 2024 results call for California Water Service Group. With me today is Marty Krumplnicki, our Chairman and CEO, and Greg Milliman, Vice President of Rates and Regulatory Affairs. Replay dial-in information for this call can be found in our quarterly results release, which was issued earlier today. A replay of the call will be available until Monday, June 24, 2024. As a reminder, before we begin, The company has a slide deck to accompany the earnings call today. The slide deck was furnished with an 8K and is also available at the company's website at www.calwatergroup.com. Before looking at the first 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 risk 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 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. And now I will turn the call over to Marty.
spk22: Thank you, Jim. Good morning, everyone. Thanks for joining us today to talk about our Q1 2024 results. We have a number of topics to cover today, starting with our strong operational performance, which is really highlighted by the final resolution of the 2021 general rate case. And I will say it's after going through the delays, which stretched out over 2023, it's nice to see the arrows all going in the right direction. And big kudos to Jim and the team for booking everything and getting it all set up here as we wrap up Q1. In addition, we'll want to talk about the implementation of the water cost to capital adjustment mechanism, which sets our return on equity for 2024 at 10.27%. We were able to secure an additional $83 million of COVID funds from the state of California to help our customers with past due balances that linger from our COVID times. And then talk about our, where we are with PFAS and the EPA's new regulation and our plans to be in compliance with that. And then finally wrap up talking about the commitment we made recently to reduce our scope one and scope two admissions. But prior to going into some of these more operational themes, I'm going to turn it back over to Jim to review the financial results for the first quarter of 2024. Jim? Thank you, Marty.
spk16: As Marty mentioned, our first quarter results benefited from the conclusion of our 2021 general rate case. Operating revenue for the quarter increased 106.5 percent to $270.7 million compared to the prior year first quarter revenue of $131.1 million. The implementation of two regulatory mechanisms authorized by the 2021 GRC decision had a significant impact on revenues, with the Interim Rates Memorandum Account, or IRMA, adding $80.7 million, and the Monterey-Style Water Revenue Mechanism, or MRAM, adding $31.7 million. Recorded IRMA and MRAM revenue included $70.2 million and $17.6 million, respectively, related to fiscal year 2023. Greg will walk us through the 2021 GRC decision later in the presentation. The revenue increase also included $13.9 million related to the recognition of water revenue adjustment mechanism or RAM revenue that was deferred in previous reporting periods. First quarter 2024 operating expenses increased $192.9 million compared to the first quarter total operating expenses of $148.6 million. The $44.3 million increase was primarily driven by $9.2 million in higher water production costs associated with the company's new incremental cost balancing account, or ICBA. Higher other operations expenses, primarily due to $11.4 million in deferred costs associated with the recognized deferred RAM revenue and a $21.2 million increase in income taxes related to higher pre-tax earnings. Net interest expense increased 25.5% to $15 million during the first quarter, as compared to $12 million for the first quarter of 2023. The increase was primarily due to higher short-term borrowing rates and higher balances on our outstanding lines of credit. Reported net income for the first quarter was $69.9 million, up nearly 415% compared to a loss of $22.2 million in the first quarter of 2023. Turning to the earnings per share, first quarter 2024 earnings, diluted earnings per share was $1.21 compared to first quarter 2023 loss of 40 cents per share. The significant increase in EPS was driven by resolution of our 2021 general rate case, coupled with rate increases and the reversal of previously deferred RAM revenue. These increases were partially offset by increased expenses, including higher water production expenses related to the new ICBA regulatory mechanism, higher production expenses due to the reversal of RAM-related deferred production costs, and interest expense. Turning to capital, we continue to make significant investments in our water utilities to help ensure the delivery of safe and reliable water service. We invested just under $110 million in capital improvements during the first quarter of 2024. This was an increase of approximately 34% over the first quarter of 2023. For the year, we anticipate making approximately $380 million in capital investments, which includes an estimated 20 million in developer-funded projects. Depreciation for the first quarter of 2024 was $32.8 million, or approximately 30% of first quarter capital investment expenditures. The success of our capital investment strategy is reflected in our rate-based growth. Our overall rate base grew to an estimated $2.2 billion by the end of 2023. This was an increase of 15.4% over 2022. Further, based on our current plan capital expenditures and subject to regulatory approval, we estimate that rate base will grow to $2.36 billion by the end of 2024 and $2.47 billion by the end of 2025. Turning to dividends, at the beginning of the year, we increased the annual dividend 7.7% from $1.04 to $1.12 per share, which marked our 57th consecutive annual dividend increase. And yesterday, we declared a quarterly dividend of $0.28 per share for shareholders on record as of May 6, 2024. This was our 317th consecutive quarterly dividend. We continue to maintain a strong liquidity position. As of March 31st, 2024, the company maintained cash and cash equivalents of $88.3 million, of which $45.4 million was classified as restricted. Further, we had additional short-term borrowing capacity on our lines of credit of $320 million. Lastly, we were pleased to report that subsequent to the end of the quarter, We received approximately $83 million under the State of California Extended Arrearage Program. The program is designed to provide financial assistance to customers with past due balances that accrued during the COVID-19 pandemic. Marty will provide additional color on the program in a few minutes. With that, I'll turn the call over to Greg to give an update on our 2021 general rate case decision. Greg? Sure. Thanks, Jim.
spk30: I'm going to walk through some of the highlights of the decision we, for our 2021 GRC decision that we received March 7, 2024. Overall, the decision was financially very positive for the company. As Jim indicated, the decision increases adopted revenues after corrections for 2023 by approximately $41.5 million, retroactive back to January 1, 2023. The decision also adopted 95% of the requested operating expenses. It adopted a very favorable water mix for groundwater and purchased water that provides the company financial protection. It authorizes Cow Water to invest $1.2 billion, which is 86% of our request from 2021 through 2024 in our water system infrastructure projects. including approximately 160 million of infrastructure projects that may be submitted for recovery via the PUC's advice letter process. In fact, we've already filed an advice letter for 145 projects capitalized at 39 million for a 5.8 million increase in annual revenues. The decision provides a very progressive rate design that provides financial stability while benefiting low-income, low-water-using customers. And finally, and most importantly, when voting out the decision on March 7th, the commissioners all agreed that the process took too long. And so I'm hopeful that the decision on our 24 case will come out more timely. Back to you, Marty.
spk22: Great. Thanks, Greg. Just echo what you said when we were in the hearing room with the commissioners. Every commissioner did comment on that. We think that's a good sign that they recognize the problems this was causing not only for us, but also for our customers, and it's going to have a pancaking effect on their rates. I'm going to be on slide 10. I want to come back to the extended rear-ridge management program for the state of California. I think, as many of you know, we have been extremely proactive, our government affairs team in Sacramento, in looking for ways to help our customers who are still suffering kind of the hangover of the pandemic. You recall the state of California had an original rearage management program that kind of covered half of the COVID time, and then it cut off. And for that first part, the company was able to secure a little over $20 million that was applied to our customer balances during the COVID time. We were able to work with the state to take some of the unspent federal dollars that were allocated to the state and come up with a rearage management program, kind of number two. So we worked with the state. to appropriate approximately $300 to $400 million of unspent federal dollars and reopen up that window to allow utilities and water companies to apply for further funds to offset the past due balances from June 16th, 2021 through December 31st, 2022. Very happy to report that our application was accepted and we received the entirety of our request, which is $83 million that Jim mentioned. That money has been received, and during the second quarter, we'll be allocating those dollars to those past due balances, again, from between June 16th, 2021 through December 31st, 2022. These funds benefit both current and past customers because all customers eventually bear the cost of uncollectible accounts. Moving on to slide 11, I want to take a moment to update everyone on where we are. with the PFAS regulations that have come out, also known as Forever Chemicals. We believe we continue to be well-positioned to meet the EPA's new guidelines. Across our portfolio, we have a rigorous and coordinated water quality assurance program with protocols in place to test and monitor the water we deliver to our customers. I think, as many of you know, that Investor on Water Utilities, we take public health as one of the most important things we do as a company. We've had a fair amount of experience with PFOA and PFOS in California and Washington. Our utilities have been complying with the previously issued PFOS guidelines issued by their state regulators. On April 18th, the California Public Utilities Commission dismissed our application requesting authorization to modify a previously approved PFOS expense balancing account to include capital investments related to the PFOS compliance. DPUC indicated that we would need to file for recovery of the capital components of PFAS treatment later in the process. What that really means is, first of all, I was disappointed that they denied it. They dismissed it without prejudice, but it allows us to file a separate application or include it in the 2024 general rate case. And I believe, Greg, our plans are to file it as a separate application. That is correct. Outside the rate case. Despite the commission's shortsightedness recognizing the urgency that you need to get this PFAS treatment in the ground, the company put a press release out reaffirming our commitment to our customers that we'll be investing the $215 million expeditiously to put PFAS treatment in place for approximately 100 wells in all the states that we operate in. Overall, it is a group meeting at the parent company project. So, we have a project director who is managing the implementation in all of our states in that group. Or that project director reports in the management committee on a normal basis and we are, we have hit the ground running. We plan to spend probably between twelve and twenty million dollars this year on on treatment and that'll ramp up as we go out into the.
spk30: Before you move on, you mentioned PFOPS balancing account. I believe what you meant to say.
spk22: That's a memo account. Thank you. It is a memo account. So it's outside the rate case. We're incurring the cost. It goes to the P&L, but we're allowed to track those costs. And we asked the commission to allow us to modify that memo account to pick up the capital components, which was denied. However, capital projects in the rate-making world do accrue AFUDC, allowance for funds used during construction. service. Moving on to slide 12, where we talk about greenhouse gas and Scope 1 and Scope 2 reduction targets. As we worked on our decarbonization strategy and our ESG strategy overall the last five years, we recently made our commitment to reduce absolute Scope 1 and Scope 2 greenhouse gases by 63 percent by 2023 from our baseline 2021 year. Our targets are science aligned, which the team's done a very good job working with a third-party advisor to pull that data together. We expect to achieve these reductions through a multi-pronged approach consisting of the electrification of the fleet, water conservation, installing on-site solar where it makes sense, and looking at renewable electricity procurement. In other words, making sure we're tapping into the green side of the grid for the power that we use. As many of you may recall, water production and distribution uses a lot of energy. So the more green energy we can use, the more it helps us drive towards that target, as well as the other components here and the multi-pronged strategy. Just as an FYI, group may evolve its decarbonization strategy if warranted due to changes in industry, working with our regulator, business, and other operating things that may happen, including SEC rules, et cetera. Overall, we're very committed to delivering value to our customers and stockholders while pursuing these reduction targets and believe it's the right long-term approach as we deal with climate change. Going on to slide 13, so just to kind of recap, very pleased with the start of 2024 and getting the 2021 rate case behind us. Nice to have that done. The numbers will be a little confusing obviously when we publish the 10Q here later on this week. There'll be more information so you can strip out what was the retroactive piece and what was the actual piece for the quarter itself. We're going to now turn our focus on implementing our infrastructure improvement plans. As Greg's mentioned, we have a lot of capital to get into the ground in addition to the PFAS. So the guidance that Jim gave everyone earlier does not include the $215 million commitment for PFAS or for the forever chemical treatments that we made to our customers. So that will be incremental. And one other thing to put on everyone's calendar, we have our state Supreme Court date on May 8th. And that's our oral arguments on the RAM decision from the commission. So we'll look forward to hopefully having some type of decision by the state Supreme Court. three months after the oral argument or so. So we're looking forward to having that day in court because we believe decoupling is absolutely essential to the state of California, its work on climate change, resiliency, and sustainability. So with that, I want to thank everyone for bearing with us through the delays of the 2021 general rate case. I want to thank the rates and accounting team for their hard work. Not only did we have to close out the year, but right after the year, we got the decision. We had to book everything, so the team did a fantastic job. getting that stuff all booked in the general ledger, and now we'll move forward onto our 2024 plans, investing in infrastructure, going after PFAS and getting the PFAS treatment put in place, and getting our rate case filed for the state of California on or around July 1st. So, Ellie, with that, let's open it up for questions, please.
spk12: Thank you. We are now opening the floor for question and answer session. If you'd like to ask a question, please press star and number one on your telephone keypad. That's star and number one on your telephone keypad. Our first question comes from Michael Govler from Janie Montgomery Scott. Your line is now open. Morning, everyone.
spk15: Morning, Michael.
spk02: I was just wondering if you could update us on water supply and water production costs. I noticed they were rather high in the quarter.
spk09: I know Jim touched on them a little bit, and maybe how we should think about that for the remainder of the year.
spk10: Sure, Jim.
spk16: Yeah, well, from a water supply perspective, Michael, the state of California is doing very well. I believe our snowpack for the second consecutive year was higher than our 20-year average, and I think it's the first time in an awful long time that we've had two consecutive years where we've beat the average. So I think we're looking good. There's been a good opportunity also for replenishment of some of our underground aquifers throughout the state in California. I think our other states are also similarly well-positioned in terms of actual water supply. We do have some operations in Texas. You know, most of our utilities down there are wastewater utilities, and I think that we've not seen the current water situation in Texas put any stress on those operations. As it relates to expenses and water expenses, you know, we do have in California with the new rate case, the new ICBA, which provides us some protection in terms of cost increases. in our water production. And so we will lean on that new mechanism and focus on that as our familiarity with the new mechanism becomes greater. And then I'd also like to point out that we did have an increase in other production expenses. I mentioned it in my comments. And those were primarily related to the recognition of the deferred RAM revenue So I would I would view those more as something that will continue to reduce as we as we Kind of unwind those deferral deferred revenue costs Yeah, one thing I would add is just Jim said the snowpack was very very good Water supply and
spk22: California is still in a stage two drought. If you remember, we were racing towards a stage three drought, and then the governor's walked that back. We're still in a stage two drought, which I kind of expect the governor to stay in a stage two or maybe drop it down to stage one, given the longer term issues of sustainability with the state, climate change, the variations we get in the weather.
spk10: But overall, for 2024, we think we're in good shape in all of our districts.
spk11: All right. Thank you, gentlemen. Most helpful.
spk10: Thanks, Michael. Thanks, Michael.
spk12: Next question comes from Jonathan Reeder from Wells Fargo. Your line is now open.
spk08: Hey, good morning, team. Got a couple questions here, if you don't mind. First would be, you know, how should we think about the timing of the cash recovery of the retroactive 2023 GRC revenues?
spk30: Jonathan, this is Greg Milliman. We will be, because of the timing of the 21 decision in our upcoming filing on July 1st of our 24 rate case, we have been focused on implementing the new rate, get those into effect first, calculating what the lost revenue or the IRMA amount and the MRAM amount will be so that we could book that. We will be filing in the third quarter for recovery of those back monies. We need to go through May 31st when we're planning to have the new rates fully in effect and close out the Irma account. But then we need some time to put together that filing and start requesting it. So we'll start requesting it in the third quarter. It is based on a per CCF surcharge. So I would imagine in the summer it will be a little bit higher, and then obviously in the winter months lower, and go someplace from 12 to 24 months.
spk08: Okay. So it sounds like, I mean, those revenues aren't going to really come in in 2024. It will probably be more 25 and 26. Yeah.
spk30: The revenues were booked in the first quarter. I thought your question was related to cash.
spk08: No, exactly you are, yeah. The cash flows won't come in until 25 and 26. I apologize.
spk16: Yeah, the one thing I would point out, though, with the timing of when the new rates will go into effect, we will at least experience the positive cash uptick related to those new rates as we go into our more traditionally busy season. So we were pleased to be able to get the rates effective as of June 1.
spk10: Gotcha.
spk08: And then how should we think, I guess, about the $83 million, you know, rearage payment program, cash recovery, potentially, like, offsetting 2024 external equity needs?
spk22: Yeah, so if you remember during COVID, we were decoupled. So the revenues all accounted for through the decoupling mechanisms from the state of California. So this piece really becomes cash flow. So essentially, customers that have balances that are still past due from the period that I defined, June 16, 2021, through the end of 2022, dollars will be applied to their balances, and then we'll also be applying some of those balances to the RAM balances that existed for those customers as well. So that'll all work its way into cash flow, but it won't really have a revenue effect. It'll have an effect on the age receivables that are still outstanding during COVID, and you'll see a pickup in cash flow. So certainly that helps the company from going to the market and needing to issue equity right away. Obviously, water utility stocks over 2023. Everyone was down 20 plus percent. So we're not racing the market anytime soon to go sell stock. And Jim's not throwing any pieces of paper at me for saying that. But the reality is with this rate case and with the step up in the rate design, the movement from fixed or from variable to more being more recovered and fixed, think about our capital needs we're still investing at three times our depreciation rate and as Greg mentioned we got 86% of our asked it's a 1.2 billion dollar capital program so we do have adequate lines etc but Jim and I will be evaluating that as we go throughout the year to define what those needs are obviously with interest carrying costs being higher um, you know, the stock being down and we still got to get our job done. There's a fine line that we'll be looking at our cap structure and trying to optimize that on behalf of our stockholders, but also our customers as well, because it helps play into affordability.
spk10: Okay.
spk08: So in terms of like absolute size of annual equity needs, that's still to be determined at this point.
spk16: Yeah, I think, I think so. You know, John, the, the, the real good news is that, um, from the recognition of the 2023, our ability to recognize the 2023 impact of the 2021 decision has brought us back to where we had hoped we would be at this point in time relative to our cap structure, which is, you know, very close to our authorized cap structure. So there's not a need right now in terms of forcing us, I wouldn't say forcing us, but directing us into which particular capital we would pursue in the event that we needed to pursue capital. And so I think right now we've got a lot of availability on our line of credit. We understand that the interest rates are still inverted, so we'll be taking a look at short-term versus long-term debt, amongst other things as we move forward. But it's only with the booking of the current rate case results, the 2021 rate case results that we're in the position now to kind of forecast out what we think we might need from a capital perspective for the remaining of the year.
spk22: Yeah, we're also benefiting from the higher ROE that went into effect on January 1st, the 10.27 ROVs. That's also helping us with our cash flows.
spk08: Yeah, sure. I'm glad you brought up the ROE kind of leads into the next question because I guess just given the the GRC final outcome and recovery of some of the CapEx through the advice letter recovery process, where do you expect your earned ROEs in 24 and 25 to come in relative to the allowed levels?
spk22: Oh, that's a very good question. 25 is certainly a little harder to talk about, but from a budgeting perspective and how we manage the company, right, we try to drive towards hitting that ROE Obviously, when you have a delayed rate case, it throws everything kind of off balance, significantly off balance. So I think for 2024, we should be at or maybe slightly above that ROE. For 2025, you start to get the period of regulatory lag. It starts to seep in. And obviously, inflation is a big deal. Getting back to Michael Gogler's questions about production costs, you know, in Northern California, you know, for time of use rates for electricity, it's now 40 to 50%. So that's stuff that affects the operating side that, you know, will also lag. And hopefully some of it will get picked up in the rate case. But as inflation stays high, a lot of it gets pushed out into the next rate filing. So certainly for 2024, I think we're in excellent shape. For 2025, you know, we're going to budget to hit our ROE. And that's kind of our job. And I think, as Jim talked about, you know, is there an opportunity with inverted interest rates, short-term versus long-term? How we finance things, we're going to take a look at all that because our job is to operate as efficiently as possible while earning the ROE for our stockholders and keeping rates affordable for our customers. So 25, hard to comment on. 24, we're going to drive hard to hit the ROE.
spk08: Okay. And then lastly, I know you said you filed for 39 million of the advice letter recovery projects already. How much do you expect to file, you know, in total in 2024, and then what about in 2025?
spk22: That's to be determined. Jonathan, if anyone listened in to the rate proceeding, I thought it was kind of fascinating because the commission was really kind of focused on these 335 projects the company didn't get done, or they only got done five of these 335 projects. But as you know, numbers are relevant, right? And so During this three-year period, we probably had 5,000, 6,000 total projects that we completed. Those aren't talked about. They were just focused on these 335 projects that didn't get done. There's two failures that I see in the rate-making process in the state of California. One is the failure to recognize that projects now go through one or two and even three rate cage cycles. So you want to put a well in Southern California? By the time you procure the land, design the well, sign off on the treatment, build the treatment, go through testing, put it in service, it's longer than three years. And so the rate-making process in California fails to recognize these projects now are multi-cycle projects. The second thing that the commission fails to recognize in the rate-making process is as these projects get more complicated and go out farther in time, the level of contingency needed for those projects goes up. And if you listen to the hearing, the commission tossed out a lot of the contingencies associated with these projects. So those are the two things that Greg has to work on in the 2024 rate case. Obviously, they're kind of inbred into the process in the rate-making process within the state of California, but those are the two of the things we're going to be focusing on in 2024 because both those things help lead to regulatory lag and, you know, The reality is, and you've followed us for a long time, we're very good about hitting our capital commitment numbers and getting that capital on the ground, right? It's really about on the backside, the rate-making process and the efficiency of the rate-making process. So we'll have to see what happens next, but I think we'll keep doing what we're doing and we're going to keep investing at three times the depreciation rate, which I think benefits our stockholders while focusing on affordability.
spk08: Okay, but out of those 160 million projects,
spk16: uh do you expect to like complete them all over the course of 2024 and 2025 or might some of those fall into the next rate case cycle still yeah we're we have a concerted effort going on right now to to uh reevaluate those projects uh from two perspectives one uh to confirm that they are still needed and and two uh to make with regards to that first point to make sure they weren't just uh projects that we've subsequently found other alternatives for, and two, to really identify what time period we are going to complete the projects and put them in service for those that remain out of the 160 million. So, at this point, I think that process is still underway, and we'll have a better sense for the timing of that here in the next couple of weeks.
spk08: Okay, thanks.
spk10: I appreciate you taking my questions. Thanks, Jonathan. Take care, Jonathan.
spk12: Question comes from Angie Storins from Seaport Research Partners. Your line is now open.
spk27: Thank you. So, first, maybe you alluded to the 10Q, which will have more information about the retroactive impact on the first quarter earnings, but can you just give us a sense, like, roughly what it is from an EPS perspective versus the $1.21 that you reported?
spk16: Well, we haven't broken it down from an earnings per share perspective, but relatively speaking, there was approximately $90 million of earnings of revenue that was included in the the 2024 first quarter that related to the decision. And in addition to that, there was an incremental about $8.5 million of expenses that related to the decision.
spk27: Okay. I mean, you don't have guidance, so that's actually pretty important for us to have a basis to extrapolate from, right? Again, we would probably appreciate it going forward. Secondly, on the PFAS spending, so will you be booking AFUDC earnings associated with this capex? Will it flow through the income statement?
spk16: Well, AFUDC, we are eligible to use the AFDC mechanism as we move forward with those expenditures. I think the way you're asking the question, we will be able to reduce our interest expense for the AFU DC to the extent that we are making expenditures related to those projects.
spk27: Okay. And then just in general on PFAS, so we're starting to see some losses against investor-owned utilities related to PFAS, you know, the fact that, you know, or in general utilities were not attempting to remove the forever chemicals from distributed water in the past. And I'm just wondering, you know, how you can protect yourself. Is there anything in California that would allow you to, you know, limit the litigation risk and more importantly, limit any earnings impacts?
spk22: Yeah, I think from a liability standpoint in California, we have, we have, Hartwell decision, which basically says, if we're operating in accordance with the rules set forth by our regulator, that we have protection. So I'm not too worried about California compared to some of the stuff that we're seeing on the East Coast in terms of product liability associated with water, et cetera. From an earnings perspective, as Jim said, we'll accrue AFUDC on those capital projects. Most of the treatment is capital. And, you know, it's 100 wells out of 1,170 wells total that we have within group. So we'll accumulate the AFUDC on that, and then those other capital costs get picked up. But any of the operating costs, once we put those vessels into production, we'll track the incremental costs through the memo account and seek recovery of that at a later date. So I think we got kind of all the pieces in place that we need to have. I was just disappointed in the commission's decision not to recognize the capital now because the EPA has put that new standard out there. They did extend the implementation timeline. I believe it's over five years now versus over three. But, you know, customers don't want to hear we're going to implement PFAS treatment four and a half years from now. If Jim's drinking water that has PFAS in it, he wants to know we're treating it right away. And so that's why when we put our press release out, we pointed out we were disappointed in the commission's decision. And despite that, we reaffirmed our commitment. getting that capital on the ground as quickly as possible. And so from an operating cost perspective, I'm not too worried about it. To me, it's about making sure the water's safe for customers and implementing that capital as quickly as possible.
spk16: And then just one other point on that, Angie, we are pursuing any available grant money that may be out there to assist with the whole PFAS issue, as well as potential third-party liability.
spk22: Yeah, there's a lot of litigation around PFAS actually to the polluters, and there's been a ton of press on that. I don't want to get into the particulars of the case because we're a member of the action against the polluters, but we believe we'll get some dollars back from the polluters to offset the implementation costs and the capital costs of putting PFAS treatment in place.
spk26: Okay. And then lastly, as you mentioned, the
spk27: the weak performance of water utility stocks, and the timing of your future equity needs. I'm just wondering, Ito, you raised your dividend by, I think, 7%, 7-something percent. So is this, do you think that going forward, depending on the stock performance, the growth in dividends is a lever for you to potentially use to adjust you know, if you have higher equity needs, you know, is this a lever in this high interest rate environment as well?
spk23: Again, what is this 7% plus linked to?
spk22: Sure. Well, if you go back to budget, yeah, if you look at our dividend increases over the last five years, they've been above inflation. You know, we have a payout ratio of, target between 55 and 65%. We try to manage within that range. I personally believe that the compound annual growth rate of dividends is one of the key drivers to equity valuation in the marketplace. So, you know, looking at that CAGR number, as Jim mentioned, you know, we've grown the dividend every year for the last 57 years. So I have no reason to believe we won't continue down that path. Obviously, when the board looks at that, we look at what's the general market conditions, what was the dividend growth rate of other utilities, what are our capital needs, and we try to keep that all in balance. But obviously, for me personally, I think dividend growth is a key thing that our investors expect, and they like to see, and they like the stability of a water company. So to me, yes, it was a bear year for water utilities in 2023, but I think Three most important things we can do. Make sure water quality is the most important thing on our operating list. Continue investing at that three times the depreciation rate and keep growing that dividend. And I guess the fourth thing is making sure our customer service stays outstanding and best in class. We do those things. In the long run, you create value for stockholders.
spk13: Very good. Thank you.
spk10: Thanks. Have a good day.
spk12: The next question comes from Davis Sunderland from Baird. Your line is now open.
spk10: Hey, Jim. Good morning. I just wanted to ask a few questions. Hey, Davis. Good morning. Thanks for joining us. I wanted to ask a PFAS question. As it relates to the business development plan, I guess the request is any dates on that that are noted, but specifically, has the PFAS created any opportunity for you guys to be more aggressive or more interested or, I guess, take a closer look at any of your systems who may have difficulty reaching compliance.
spk22: You know, Davis, we got about every third word there you were cutting out.
spk16: I think I'm going to answer a question that I think you asked, or at least I'll rephrase the question for Marty. Davis, it sounded like You said with PFAS out there, if we took a look at the business opportunities that are also out in the market right now that we may be pursuing, how are we considering the potential PFAS liability? And is that coloring our desire or interest in some of those potential opportunities?
spk22: Wow, you could hear that in that question? That's incredible.
spk10: But let's answer that. Is that the right question, Davis? You got great ears. I think we said, wait, Jim, I have great ears.
spk22: So let me answer that question. Yeah, you know, I think obviously the cost of capital has gotten a lot more expensive. And from a business development standpoint, we haven't We've seen maybe a little bit of slowdown in things that go into our pipeline from a business development standpoint. But our business development team continues to be very, very busy. As Jim mentioned, you know, the stuff we got going on in Texas and other things we're doing in other states. So I think, you know, the PFAS thing, I think the smaller systems are going to struggle to be in compliance. And, you know, you think about for us, there's 100 wells, it's $215 million. And we're fairly good at implementing that type of treatment. We're very fast and we try to keep our overhead fairly low. If a smaller system doesn't have access to capital or they don't have the technical resources on site to figure out what the treatment should be, it's going to affect their ability to operate. I think the broader operating issue is for companies like Cal Water, are for Essential or Aqua or SGW or Middlesex, any of us that are public traded companies, you know, you fall out of compliance and the regulator finds the hell out of you or you end up getting sued by somebody, right? So, you know, we generally operate to the highest standards possible would be associated with that. When you're a municipal system, what's the recourse? And you think about the 60,000 systems out there that fall under the purview of the EPA, there's no way they can effectively monitor all those systems to make sure they're in compliance with PFO and PFOS. And so I give the Biden administration credit for trying to push through the PFOS treatment, get the EPA to move quicker. I think that's really important. But you'll have compliance lags on the municipal side where I don't think you're going to have that same problem on the investor-owned side.
spk16: Yeah, and I think as a result of... Marty's observations on that, we do think that as with any new regulation that comes out, it will put financial stress on some systems and that may open up the market. And yes, if we believe we could assist the customers in those markets, we would be interested in taking a look at those systems.
spk22: But even then, Jimmy, one of the things that happens, we take over a system, we got liability day one. So if you look at some of the work we've done, like in New Mexico, or we've taken over trouble systems, we work very closely with the regulator to get the rates paid up front before we buy them, that we have an implementation timeline so we don't get pinged on the backside with these penalties and fines. Because I think in the water world, the investor-owned utilities are the deep pocket for the regulators to find.
spk10: I apologize for the audio. All right, Davis, thank you. Thank you. Jim, good ears. That was impressive. You can decide for that.
spk13: Thank you.
spk12: As of right now, we don't have any raised hands, so I'd like to hand back over to the management for the final remarks.
spk22: All right, Ellie, thank you. Well, everyone, thanks for joining us today. Obviously, there's a lot going on. But at least one thing is off the list, the 2021 general rate case. That's in the rearview mirror. Obviously, there's a lot of work to do on the tariffs and filing the required documentation with the commission to start the collection of the retroactive piece. We'll be in a better position on our Q2 earnings call to talk about that. And then in between now and then, we'll be working on our 2024 general rate case and preparing for the state Supreme Court oral arguments on May 8th. Thank you for joining us today and we look forward to talking to everyone really, really soon.
spk10: Have a good day.
spk12: Thank you all for attending today's conference call. We hope you have a wonderful day. You may now all disconnect to the session.
Disclaimer