Yahoo Finance California Water Service Group (NYSE:CWT) Q1 2024 Earnings Call Transcript
California Water Service Group (NYSE:CWT) Q1 2024 Earnings Call Transcript April 25, 2024
California Water Service Group beats earnings expectations. Reported EPS is $1.21, expectations were $0.21. California Water Service Group isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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 would like to turn the call over to Jim Lynch, Senior Vice President, CFO and Treasurer. Please go ahead.
Jim Lynch: Thank you, Ellie. Welcome everyone to our first quarter 2024 results call for California Water Service Group. With me today is Marty Kropelnicki, our Chairman and CEO; and Greg Milleman, 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 8-K 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 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 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 it over to Marty.
Marty Kropelnicki: 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 – 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 of 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 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 1 and Scope 2 emissions.
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?
Jim Lynch: Thank you, Marty. 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% 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 MWRAM, adding $31.7 million. Recorded IRMA and MWRAM 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 WRAM 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 WRAM revenue and a $21.2 million increase in income taxes related to higher pretax 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 $0.48 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 base 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 planned 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 31, 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 will turn the call over to Greg to give an update on our 2021 general rate case decision. Greg?
Greg Milleman: Sure. Thanks, Jim. I am going to walk through some of the highlights of the decision – 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 Cal Water to invest $1.2 billion, which is 86% of our request from 2021 through 2024, and 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 or 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 7, 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.
Marty Kropelnicki: Great, thanks, Greg. Just echoing what you said when we were in the hearing room with 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 the rates. I'm going to be on Slide 10. I want to come back to the Extended Arrearage 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 and 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 arrearage 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 arrearage management program kind of number two. So we worked with the state to appropriate approximately $300 million 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 16, 2021 through December 31, 2022. Very happy to report that our application was accepted and we received the entirety of a 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 16, 2021 through December 31, 2022.
These funds benefit both current and passed to 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 any of you know, that invest and invest around 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 PFAS in California and Washington.
Our utilities have been complying with the previously issued PFAS guidelines issued by their state regulators. On April 18, the California Public Utilities Commission dismissed our application requesting authorization to modify a previously approved PFAS expense balancing account to include capital investments related to PFAS compliance. CPUC 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 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.
Greg Milleman: That is correct.
Marty Kropelnicki: Outside the rate case. Despite the commission's short-sightedness, 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 meaning at the parent company project. So we have a project director who is managing the implementation in all of our states in that group. 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 million and $20 million this year on PFAS treatment, and that’ll ramp up as we go out into the implementation period over the next couple of years.
Greg Milleman: Marty, before you move on, you mentioned PFAS balancing account. I believe what you…
Marty Kropelnicki: 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, and that’ll accrue out throughout the process until we put that plant in 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% 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 multipronged 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 multipronged strategy. Just as an FYI [ph] 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 10-Q 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 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’ll be incremental. And one other thing to put on everyone’s calendar, we have our state Supreme Court date on May 8, 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 probably 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. It’s work on climate change resiliency and ability. So with that, I want to thank everyone for bearing with us through the delays in 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 place, and getting our rate case filed for the State of California on July, around – on or around July 1. So Ellie, with that, let’s open it up for questions, please.
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