California Water Service Group (NYSE:CWT) Q4 2022 Earnings Call Transcript

California Water Service Group (NYSE:CWT) Q4 2022 Earnings Call Transcript March 2, 2023

Operator: Ladies and gentlemen, thank you for standing by. And welcome to the California Water Service Group Q4 and Year End 2022 Earnings Call. I would like to turn the call over to Tom Scanlon, Corporate Controller. Please go ahead.

Tom Scanlon: Thank you, Mandy. Welcome, everyone, to the 2022 year and fourth quarter earnings results call for California Water Service Group. With me today is Marty Kropelnicki, our President and CEO; Tom Smegal, our Vice President, Chief Financial Officer; and Greg Milleman, our Vice President of Rates and Regulatory Affairs. Replay dial-in information for this call can be found in our year-end earnings release, which was issued earlier today. The replay will be available until May 1, 2023. As a reminder, before we begin, the company has a slide deck to accompany the earnings call this quarter. The slide deck was furnished with an 8-K yesterday afternoon and is also available at the company’s website at www.calwater.com. Before looking at this year’s results, we’d like to take a few minutes 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 may 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 Form 10-K, Form 10-Q, press releases and other reports filed from time-to-time with the Securities and Exchange Commission. I want to start by pointing out Note 16, in the Form 10-K the company filed yesterday. During the fourth quarter of 2022. The company identified an immaterial error from regulatory liability and corresponding decreases to operating revenue and deferred income taxes that were not recorded in 2019.

This is associated with customer refunds. The error does not impact customer billings or cash refunded to customers. The company corrected the error in the financial statements through a restatement of an opening retained earnings balance to the year ended December 31, 2020. For more details, please see the File 10-K. I’m going to pass it over to Tom Smegal.

Tom Smegal: Thanks, Tom Scanlon and good morning, everyone, I’m going to walk through as I usually do the results of our full year and our fourth quarter. And I’m going to start on Page five of the slide deck, which is a table of our financial results. And starting at the bottom of that table, our EPS for the year went from $1.96 in 2021 to $1.77 in 2022, a decrease of $0.19, our net income attributable to California Water Service Group declined by 5.1 million or 5.1%. The capital investments, I do want to highlight, we’ll be talking about that a little bit on the call today, increased $34.6 million to a new record of 327.8 million of CapEx for the year. To try to describe the full year financial results on the next page, remember that the big impact to the year that we’ve had is an $11 million negative unrealized change in the valuation of our non-qualified retirement plan assets.

That was the big impact for the year, obviously, it’s also the third-year of the California General Rate cycle. And typically in that third year, we see that rate increases don’t keep up with the operating expense increases. And that was certainly the case here in 2022. I want to jump then to the next slide and talk about the fourth quarter on Slide seven. In the fourth quarter, we did see and I know we talked in the first three quarters of the year about our unbilled revenue. We just see that unbilled revenue bounced right back up to where we had expected it to be as we talked about, and so the quarter was much better than the fourth quarter of 2021. Our EPS for the quarter was $0.35 per share, as compared to $0.07 per share in 2021. And the net income for the quarter in ’22 was 19.6 million, it’s an increase of 16.1 million.

So as I said, I’m flipping to Slide eight, the primary driver there was the reversal of the unbilled revenue, you saw that we had an increase of 11.1. And overall for the year, we had an increase of about $1.7 million in unbilled revenue. That’s fairly typical for us to have anywhere from positive a million, or two to negative a million or two that usually washes out with that factor. We did again, for the quarter increased operating expenses for a variety of reasons. And we continue to see a little bit of general rate increase associated with that GRC step increase that we got at the first of the year in 2022. The bridges describe those items that I just talked about, and I’ll leave those for you to look at. Again, the big factors on the year is the mark-to-market the big factor on the quarter is the increase in the unbilled getting that back to normal.

So we have a lot of regulatory matters to report on. We have Greg Milleman here with us. And I’m going to start with Greg, talking about our California cost of capital case.

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Greg Milleman: Thank you, Tom. On Page 11, we discussed the cost of California cost of capital. There’s really not much to report since the last quarterly report. There is no new news from the Commission. As of today, the following commission process the earliest that we could see a final decision would be April of 23. And I’ll turn it back to you Tom Smegal.

Tom Smegal: Thank you. Thank you, Greg. And because of the delay in issuing a decision, the company and can’t determine whether the commission is factoring in changes in market conditions, or other reasons for reviewing the cost of capital for this long. So we really can’t say where are the cases in terms of the timing, as Greg mentioned, as well as outcome. And as we’ve been talking about on the third bullet there on Slide 11. Given the success of our financing program, we know that we had lower cost of debt that was in the application and we don’t yet know whether the commission would apply retroactivity to the eventual cost of capital decision. We’ve seen and we’ve talked about a few things that lead us to conclude that that is not probable, given the facts and circumstances that we have right now.

But if the commission were to go back and go back to the beginning of ’22, we would expect that the reduction in cost of debt alone would be an $11 million annual negative impact for the company. But that would be recorded in any current period, when we do see a final decision from the Commission, if they go retroactive. Greg, turn it back to you for the rate case update.

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Q&A Session

Greg Milleman: Okay. On Slide 12, is the California general rate case update. As of today, the decision is two months late. There is no new news on when we will see a proposed decision. However, since the decision is late, we have opened an interim rate memo accounts that will allow us to track the difference between the current rates and the final rates that come out of the decision, which will be effective. or which is effective of January 1, 2023. Additionally, we received approval to increase rates in most of our districts by 4%. That we will commence starting April 15. 2023. Moving on to Slide 13, with a focus on the coupling. It’s a reminder that at start of this year, we are no longer decoupled. So we will be back to pre-2008 conditions.

There will be annual –because of there is no decoupling there’ll be annual variability in the sale and production, the water sales revenues as well as the production costs. But we knew that was coming. So to mitigate this in our 2021 rate case, we addressed it primarily by shipping more recovery at fixed costs to fix service charge of more of our revenue to fix service charge. And then, also use more realistic water mix sources — water mix from various sources to have a more realistic water production costs. And I’ll turn it to you now, Marty.

MartyKropelnicki: Great. Thanks. Greg. As we talked about, in the last conference call data the third quarter, Governor Newsom did sign in California on September 30 a new law asking the CPUC to reconsider decoupling, which was a big win for the water industry in the state of California. Shortly after that law was signed by the Governor, the California Public Utilities Commission filed a motion to dismiss our California Supreme Court case. They said it was now null and void based on the new law signed by the Governor. We disagree with that notion. I’m very happy to report that the courts dismissed CPUC motion to dismiss and so we are moving forward with our case with the California Supreme Court here during the first quarter of 2023.

That case has been fully briefed. And we anticipate having an oral arguments before the State Supreme Court, no later than mid-year of this year. So that court case is moving forward. I think all indications are going in the right direction. And we look forward to having our discussion with the courts here sometime over the next quarter or so. Greg, do you want to go through that California tracker status for 2023 of the delayed rate case?

Greg Milleman: Certainly. Thank you. On Slide 14, you will see various mechanisms, or trackers that the Commission allows to track loss revenues and expenses, these will all become effective January 2023. All but two of them cannot be calculated until the 2021 rate case is finalized. And the component parts and pieces are set by the final commission decision. The first two items, however, the incremental cost balancing account, and the conservation balancing account. We settled with Public Advocates, in this case on the component parts of those accounts. And so we’re able to calculate those now. The other mechanisms, we’ll need to get the final commission decision before we can actually calculate them, but the mechanisms themselves are not in dispute. I believe it goes to you now, Marty?

MartyKropelnicki: Yes, thank you. I want to give a little update on where we are at the drought of everyone has been following the storms during the first quarter of 2023. It’s been wet and wild winter in California. Having said that, a storm really is a drop in the bucket. We had a lot of rain, the first two weeks of the year as atmospheric river hit the West Coast all up and down the state which was good news for water supply perspective, filled up a lot of reservoirs in Northern California. And then we had a very, very dry February up until this week where we got more snow and blizzard like conditions in the CRS. I think as many of you know, groundwater levels wrapped very slowly to seasonal changes and one storm really doesn’t kind of change things.