Operator: Ladies and gentlemen, thank you for standing by. My name is Desire, and I will be your conference operator today. [Operator Instructions] At this time I would like to welcome everyone to California Water Service Group First Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to James Lynch, Senior Vice President, Chief Financial Officer and Treasurer. You may begin.
James Lynch: Thank you, Desire. Welcome everyone to the first quarter 2025 results call for California Water Service Group. With me today is Martin Kropelnicki, our Chairman and CEO. Replay dial-in information for this call can be found in our quarterly results earnings release, which was issued earlier today. The call replay will be available until June 30, 2025. As a reminder, before we begin, the company has a slide deck to accompany today’s earnings call. The slide deck was furnished with an 8-K and is also available on the company’s website at www.calwatergroup.com. Before looking at our first quarter 2025 results, I’d like to cover forward-looking statements. During our call, we may make forward-looking statements, and because these statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ material company’s current expectations. As a result, we strongly advise all current shareholders and interested parties to carefully read 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. And now I’ll turn the call over to Marty.
Martin Kropelnicki: Thanks, Jim. Good morning, everyone and thanks for dialing in this morning to review our Q1 2025 results. We have a few items on the agenda today. One, we’ll talk about the strong first quarter. And just to remind everyone, we are in the third year of the general rate case in the state of California, which is our largest subsidiary and typically, the first quarter is one of our more challenging quarters. But Q1 of this year, actually, we did surprisingly well. We want to talk to give you an update on our progress with the 2024 general rate case, which remains on track. Talk about a couple of favorable decisions that we’ve had in both California and Hawaii on some other regulatory items. We can finally give you an update on what’s happening with the annual water supply in the West. And so before going into our topics up today, I’m going to turn it over to Jim to walk us through the financials, which, Jim, I think are a little confusing, but I think in the press release in the back, there is a reconciliation there that I found very helpful, I know was preparing for today. So Jim, I am going to turn it over to you.
James Lynch: Thanks, Martin. And what Marty was referring to is we did present non-GAAP information in our press release and we’ll be discussing some non-GAAP information on today’s deck as it relates to 2024. As we have discussed on previous calls, the company’s delayed 2021 general rate case decision resulted in interim rate relief, which was recorded in 2024. In reporting the first quarter 2025 results, we present both GAAP and non-GAAP financial measures with the non-GAAP financial measures in place to remove the impact of the 2023 interim rate relief from the 2024 results. On a GAAP basis, operating revenue for the quarter was $204 million compared to $270.7 million in the first quarter of 2024 and net income attributed to group was $13.3 million or $0.22 per diluted share compared to $69.9 million or $1.21 per diluted share in Q1 of 2024. Interim rate relief recorded in the first quarter of 2024 that related to 2023 included revenue of $90.3 million and net income of $65.8 million or $1.14 per share. When we adjust for the Q1 2024 interim rate relief first quarter revenue increased 13% over non-GAAP 2024 revenue of $180.5 million. In addition, first quarter net income and diluted earnings per share increased 225% and 214%, respectively, over Q1 2024 non-GAAP income of $4 million, $4.1 million and non-GAAP earnings per share of $0.07. Moving to our diluted earnings per share bridge, the primary drivers for first quarter 2024 were rate changes and increases and increased customer usage, which contributed $0.20 per share and approval of two advice letters, one to recover drought expenses and one to recover expenses related to the Palos Verdes pipeline project that together contributed $0.07 per share. Expense offsets included water production wholesale costs and customer usage increases of $0.08 per share and $0.04 per share and higher depreciation expense due to new assets placed in service. We are really pleased with the outcome of both the Palos Verdes and drought advice letter decisions and Marty is going to provide some more information on these decisions a little bit later in his remarks. Turning to Slide 7, we continue to make significant investments in our water infrastructure to ensure the delivery and safe, reliable water service. Company capital investments during the quarter totaled $110.1 million, a pace that was consistent with the record quarter we reported in Q1 of 2024. As a reminder, our capital investments do not include estimated $222.5 million of remaining key project expenditures. Also, estimates for 2025 through 2027 are predicated in part on the outcome of our 2024 general rate case in California and normal capital needs in our other subsidiaries. We expect our annual capital expenditures to increase during the next 5 years due to the continuing need to replace and maintain our water infrastructure. Turning to Slide 8, the positive impact of our capital investment program is demonstrated in our regulated rate based growth presented on the slide. If approved, as requested, the 2024 California GRC and infrastructure improvement plan with our other planned capital investments in other states would result in a compounded annual rate base growth of approximately 11.7%. Moving to Slide 9, we continue to maintain a strong liquidity profile. As of March 31, 2025, we had $44.5 million in unrestricted cash, $45.7 million in restricted cash and $315 million in availability on our credit lines. We continue to maintain strong equity and debt credit ratings. And with the cost of capital extension in California through 2026, our authorized 10.27% ROE will be applied to a supportive equity percentage in our authorized capital structure of 53.4%. With that, I’ll turn the call over to Marty for a few additional remarks.
Martin Kropelnicki: Thanks, Jim. I am on Slide 10 and I am pleased to report that yesterday, our Board of Directors approved our 321st consecutive quarterly dividend in the amount of $0.30 a share. As a reminder, in January of this year, we announced a dividend increase of $0.08 a share plus a special one-time increase of $0.04 a share, bringing the annual dividend from $1.24, up from $1.12. The dividend increase for 2025 represents about a 10.7% dividend increase and gives us a 5-year comp annual growth rate of 7.7% on the dividend line, which we think is a very healthy number. The special one-time dividend was met and approved by our Board of Directors to reward our stockholders who dealt with the delayed 2021 generate case and the financial challenges that it brought forth with it, including deciphering some of the financial reporting that Jim has been working on, I think, has done a good job with the financial statements this quarter. Looking to Slide 11 moving on to some stuff on the regulatory side, the California 2021 general rate case continues to move forward on schedule. Following the issuance from the California Public Advocates, they are basically reviewing the report of our rate case. We submitted our rebuttal testimony and we participated in settlement discussions during the month of April. While we are not able to reach a global settlement with the California Public Advocates, we are now working to identify areas of agreement in order to streamline the upcoming evidentiary hearings which will take place this month, the month of May. We remain confident in our test way that we provided in the rate case. I think as most of you know, we’ve – the last three cycles, we’ve invested heavily in how we plan for capital and execute our capital programs and we remain confident in our testimony and we look forward to moving into the evidential hearing phase of the process with the commissioner and with the judge. Moving on to Slide 12, a couple of other things that are noteworthy on the regulatory side. First and foremost, as part of the 2021 general rate case decision we are authorized to get what’s called an annual escalation rate. And so for 2025 that was filed – it is subject to an earnings test and I am very pleased to report that the majority of our districts pass that earnings test and it represents a $27.2 million additional revenue requirement that was adopted for this year. These rates went into effect of January 1. In addition, in California, the Palos Verdes – excuse me, Palos Verdes Peninsula Water Reliability project, that’s what happens when you let engineers name projects, they get really long. So I call it the Palos Verdes project. It was the largest project in the company’s history, which is replacing about 15 miles of main and kind of downtown Palos Verdes and kind of urban LA area. In January, we received a final decision approving the inclusion of $14.2 million of incremental capital cost for this project. So that’s been added to rate base. In addition, the decision allows us for a temporary surcharge to recover $3.8 million of carrying costs associated with that project. These new base rates were implemented in February and the surcharge we hit in April so last month. In addition, in California, in January, we received approval to recover $1.4 million in drought-related costs that have been tracked through the account. Related surcharges were implemented on April 1 of this year. Looking on a couple of other regulatory events that are happening around our systems turning to Hawaii. During the first quarter, we reached the settlement with the Ka’anapali general rate case with the Hawaii consumer advocates. The settlement sets a test year revenue at $7.5 million. So that’s a $1.1 million increase in revenue. So that will be going into effect later this month. And then lastly, kind of looking on to Slide 13, looking at our water supply going into the spring, that’s always a hot topic out west with the climate change. Overall, it’s been a very healthy winner out here on the West Coast. We have a strong snow pack in overall in California. It was 99% of normal for the month of April. For those of you that know the topography associated with California, the Sierras, it’s a very, very long range. And so you can be as far south as Southern California down in L.A. and all the way up well past Tahoe into Northern California. So, the range within the range is 85% to 120%. But overall, we are about 99% of normal on the snowfall for the state of California. This coupled with a very heavy rainfall during the winter and spring months, has put us in really good shape. And the major reservoirs remain above historical averages and we feel really good about the decision California is going into the summer months. We do not expect any other water supply issues in other states, including Washington, New Mexico and for the majority of Hawaii. Although in West Maui, West Maui continues to be in a drought and target conservation efforts are underway, but we do not expect any material issues in that area. Hawaii is a state that we are spending – maybe let me say it this way, taking a lot of the lessons learned in California in our conservation programs and applying that to states that have newer issues associated with drought and drought management. So we are taking a lot of the lessons learned in California and have planned those in our conservation programs in the West Maui area. So with that, moving to Slide #14, looking at the year ahead, as I mentioned at the beginning, it is the third year of the rate case cycle in California. This is historically a period where we see heightened regulatory lag and that, coupled with market volatility inflation and the potential for tariff effects on a lot of the goods and services we use during our construction projects means that tight management of controllable expenses remains a priority and it will be throughout the year. In addition to staying focused on the budget and execution of the capital plans, keeping the general rate case on focus and to avoid any major delays like we saw in 2021. I will say I’ve been generally pleased with the feedback we’ve been getting from the advocates, the commissioner’s office and the judge offices in terms of doing everything they can to keep the rate case on schedule, which I think is really good news. Looking at our growth strategy, the ongoing greenfield development that we have in Texas, it’s continued to develop very, very well and continued strong results. So we plan to stay focused in that South Austin corridor, which continues to grow. And we are also continuing to evaluate a number of domestic M&A opportunities. Although I just want to be clear, the main growth objective of California Water Service Group really is the rate base growth that Jim talked about earlier on the slide deck in that 11.7% compounded annual growth rate. So M&A is a supplemental growth process for us. Additionally, as we go into the warmer summer months, we want to maintain our best-in-class customer service and our water quality goals of no primary or secondary water quality violations. Obviously, we’ve got a lot of infrastructure investment to do over the remaining 9 months of 2025 especially coming out of a wet winter. As Jim referenced, we kept with the same pace that we had last year in the quarter on the capital investments, which we are very happy with, given the fact it was a very, very wet winter in California and that tends to slow us down on the construction management side. And of course, lastly, today being May 1, believe it or not, it is the official start of the fire season. So our teams are busy doing all the wildfire hardening projects that we do, clearing brush etcetera, getting all the equipment ready for the long drive summer months that lie ahead. So with that, overall, it was a very good quarter. We are very pleased with the results, financial results. Again, I will apologize that they are confusing. But again, that was nothing that the company can control. And again, I would just call your attention to the non-GAAP information that Jim provided in the deck to look at the quarters on a more normalized basis. And so Desire, with that, let’s open it up to questions, please.
Operator: [Operator Instructions] And our first question comes from the line of Angie Storozynski with Seaport. Your line is open.
Angie Storozynski: Thank you. So, I wanted to talk about the California GRC. We haven’t seen a settlement even though we were hoping for one. So, just wonder, I mean can you just give us a sense, for example, what are the key points of contention here? Is it decoupling? Is it O&M expense CapEx, just any sense of – or maybe from a different angle, what can you agree on with the consumer advocate? Thank you.
Martin Kropelnicki: Yes. Thanks Angie. As I mentioned in my previous comments, obviously, we did not reach a global settlement with the Cal advocates. Because we are settlement discussions, I really can’t get into the details of that, but to the comments I made, we are obviously going through a process right now and identifying areas that were non-contested. And that will be submitted to the judge in the prehearing conference as we move into the hearing part of the process. So, we really can’t say a whole lot. Other than it’s moving forward. And again, even with a non-abet to reach a global settlement with the commission, the commissioner, the judge and the advocates have all indicated a desire to keep the rate case in schedule. So, I anticipate this next phase going through the hearing components, we will continue to move on schedule as has the rest of the rate case. So, I can’t really say much more than that right now, but obviously, we will be filing briefs and stuff, etcetera, with the PUC here during the month of May.
Angie Storozynski: Okay. That’s all I had. Thank you.
Martin Kropelnicki: Thanks Angie. Have a good day.
Operator: Our next question comes from the line of Davis Sunderland with Baird. Your line is open.
Davis Sunderland: Hey Marty. Good morning guys. Thank you for taking my question.
Martin Kropelnicki: Good morning Davis.
Davis Sunderland: Maybe – if I could start, I actually like to piggyback on Angie’s question, just about the GRC. And thank you, Marty, for the updates on this. Just trying to get a frame of reference for the 2021 GRC and when you guys were able to see for the first time, hey, this might get delayed or it’s getting off the rails a little bit. How is this case progressing relative to that one? And I guess any insight to compare the two, or what that inflection point was if you can see what I am getting at, would be helpful. And then I have maybe one follow-up.
Martin Kropelnicki: Sure. That’s a very good question, Davis. The 2021 rate case right out of the chute, there were significant disagreements with Cal advocates and us and not only disagreements, it was hard to even get people on our own to even really talk about it. So, you had that and you had COVID and the fact that the commission was still on a work remote basis. There is just a lot of different factors then to now. To me, the most significant factor that I am tracking is kind of what are people saying and so I go back to the Commissioner Bakers clearly indicated in public comments, he thinks California is to do a better job rate case is done on time. I think that’s a big positive comment. We didn’t have that before in the last rate case. The fact that the Cal advocates in our discussion, even though we couldn’t reach a global settlement have indicated they want to do everything they can to get the rate case on time. And then the judge, I think the judge that we have a sign of this case, I think he is unbiased. I think he is very focused on the procedural law, which I think is a very good thing, and he is driving the rate case process really hard. So, I think to me, the big thing is kind of what the parties are saying involved in the process and the fact they are saying it. You didn’t have a whole lot of that going on in the last rate case. And I think a big stumbling block was the fact you were coming out of COVID and people could not get the room to even talk. So, I look at how the comments are lining up. They are very consistent. Everyone is indicating a desire to get this rate case done on time. I didn’t have comments like that in the last rate case cycle. So, I am a lot more bullish this time. Obviously, you can hit a procedural snag as we go through the process. But look, we are almost a year in – I guess we are 10 months into an 18-month process. And so far, every indication we have had is it staying on schedule, which I think is a good sign.
Davis Sunderland: That is super helpful and thank you for that. And then maybe if I could just ask one more, you mentioned tariffs and potential impacts in managing costs throughout the rest of the year. I don’t know if you could share any more just about how you guys are baking in potential elevated costs or the impact of rerouting supply chains into your outlook for the year or specifically if there is any meaningful year-over-year comps the rest of the year that we should consider as it relates to costs? Thank you again.
Martin Kropelnicki: Yes. That’s another good question. I think it’s still too early to tell if you look at the volatility associated with comments coming from the administration about the effects of tariffs, who is going to be tariffed, who is not going to be tariffed, what’s going to be tariffed, which companies are – which countries are negotiating, which countries are not. So, I still think it’s a little too early to tell. Obviously, in what we do and especially given our large construction project we have stuff that comes from all around the world. Panel boards have chips, chips come from Taiwan. We have steel and pipe and both PVC and steel that’s manufactured domestically and some of it comes from foreign sources. Some of the steel that’s manufactured domestically has iron ore that comes from Europe. So, it’s a very, very, very kind of murky situation. What I would say, and this is why I remain guardedly optimistic is we went through supply-constrained during COVID and our materials management team and our engineering management team, program management teams, we are able to navigate those supply constraints without disrupting our capital flow and our ability to get capital to the ground. So, up to this point, we have managed it. Likewise, we have had a fair amount of inflation in the last 2 years. We have been able to manage, absorb that inflation and still maintain our earnings momentum and our growth momentum. So, I remain guardedly optimistic, but I would be lying to you if I had a crystal ball, Davis, and I look at the economic indicators and say, oh, there is a clear sailing ahead, because clearly, the market is not saying that. And so for us, it’s continue to button down the hatches, continue to make sure that you are managing your overtime, your expenses. Obviously, we have things like wildfire management programs we have to do. We are not going to cut costs on that. But do everything we can is to keep everyone focused on kind of a disciplined budgetary approach and then being able to adapt to those things when they happen. And so Cal Water has had a good history to be able to hit their budgets during difficult times and we will maintain. Jim, anything that you want to add on that?
James Lynch: Yes. I think, Marty, the only other thing I would mention, Davis, is the financial markets have been whipsawed over the last – well, since April, the beginning of April. And we are continuing to keep an eye on what’s happening in the debt markets as well as the equity markets in terms of our future financings. Right now, there is a lot of volatility out there. And so we are hoping that as we go from the second quarter to the third quarter, that volatility kind of settles down and we will have a better sense of what’s available and the timing with which we want to enter the debt and equity markets. But to where we are right now, we are in a really strong position in terms of our short-term availability of financing to continue our strategic initiatives. And so we will just kind of keep an eye and hope for the best in terms of getting a little more I guess settled down financial markets that we can take advantage of later in the year.
Davis Sunderland: This is great. Thank you both. Appreciate it.
Martin Kropelnicki: Thanks Davis. Have a good day.
Operator: Our next question comes from the line of Jonathan Reeder with Wells Fargo. Your line is open.
Jonathan Reeder: Hey, good morning team. How are you?
Martin Kropelnicki: Good morning Jonathan.
Jonathan Reeder: So, it sounds like, Marty, the Q1 results were a little better than your internal expectations. Can you just kind of elaborate on like what drove that beyond what the waterfall chart shows, was it higher usage now that you are no longer decoupled or were there perhaps some favorable expense timing issues?
Martin Kropelnicki: Jonathan, it was a number of things. One, obviously, when we had a delayed general rate case, Jim did a really good job with the finance team really buttoning down the budgets. And so while the rate case was delayed, we really just – we cut spending every place we could until we got the rate case decision kind of put in place. So, we had to really prioritize our capital where we are spending it and any of the discretionary spend that the company had. So, I think in operations, the team has continued to do a good job with their budgets, even though we have loosened some of those budgets up once we got the rate case resolved. So, I think you can kind of start with that. In addition to that I think the water mix in this rate case is much more closely aligned to what actual is. And if you recall, when we are decoupled, you had some big differences between adopted and actual. So, the fact that the water mix is tracking closely together means that the rate case is a more accurate forecast. I think that’s helping us I mean you are absolutely right, Jonathan, you follow us for a while. Usually, when it’s the third year of the rate case, we always tell people, hey, don’t expect anything in the first quarter. And so I was really happy with the quarterly results, the year-over-year increase in earnings. And we will just have to keep executing to the plan. And again, to the question that Davis just asked, there is going to be curveball spot at us with everything that we are seeing in the market. And I think our ability to absorb those curveballs are positioned really well, whether it’s liquidity and the balance sheet that we have right now, our ability to reprioritize capital and expenses to meet our obligations and goals for the company for the year. So, water mix rate case and tariff differences as what I would contribute to you as well as good kind of budget management by the operating teams within Cal Water.
James Lynch: Yes, and then we did get from a usage perspective, we were unauthorized into the first couple of months. The third month in March, we got a little bit of wet weather, colder weather as compared to last year, and so that brought us back kind of close to where we were last year about the same time. So, year-over-year, a little better usage than we saw, we were hoping for a little bit better usage than what we saw. But I think it didn’t – not having the RAM did not hurt us in any way in Q1.
Martin Kropelnicki: Yes, Jim, I think the other thing it’s noteworthy too, are the step increases. And that $27 million in step increases, we are starting to see the effect of that into the tariffs. And it used to be, if you go back two rate cycles, our step increases would be $4 million, maybe $10 million. And so because we have done a much better job in executing our capital plan, the amount of uptake that we get on our step increase has been a lot higher. And that step increase, it’s basically an inflationary offset, but it is subject to an earnings test, and that earnings test is based on invested capital. So, that plays into this as well.
James Lynch: Yes. So, I guess Marty’s initial comments were – well, it’s a lot of things, Jonathan. We are kind of going through some of them, but we can’t point to one individual kind of pop that benefited the company in Q1. It’s just a combination of a number of items.
Jonathan Reeder: Alright. Great. Yes. It sounds like things are on track, and hopefully, you can keep them that way throughout the remainder of the year. I did want to shift quickly to the GRC. Previously, you mentioned that a settlement could potentially come either before or after the hearings. As such, do you believe a more expansive settlement or even a global settlement could still be achievable, or is based on the comments you are making today, is that ship sailed?
Martin Kropelnicki: I don’t know if I can really honestly answer that, Jonathan. I mean one of the things we did when we couldn’t reach a global settlement, we went back and we looked at previous rate cases with other water utilities in the state. And it’s really been a mixed bag. I mean we have seen where there has been a fully reached settlement, but then it takes 12 months to 1.5 years to get that settlement approved within the commission. We have seen two other the companies got a settlement and get be done close to being on time. So, it’s been really kind of a mixed bag. And that’s how I go back to kind of in my analysis, what’s the commissioner saying because the commissioner the way they assigned Hearing Officer, what’s the judge saying and what are the advocates saying and I suppose there is always a chance you could still reach a global settlement here during the month of May. But the indicators we are is we are moving into kind of the pre-conference hearings and taking their report and our report and things that are identified that there is no disagreement. We are identifying those. And we’ll submit that to the judge and then see what it says. So I suppose there is always hope, but from my position, I’m happy things are tracking on schedule, couldn’t reach a global settlement, can we still read something hard to tell, but we need to proceed as if we are not going to and head into the hearings in May and see where it goes from there. But generally, very happy with the fact that the commissioner the advocates and the judge have all been aligned saying the same thing. We are going to do everything we can to get this rate case done on time. Jim, anything you want to add?
James Lynch: I guess the only thing I’d add, Jonathan, is remember, there is kind of two areas that were – there was significant differences between us and the Cal Advocate, that being the approach to decoupling. And the second is we identified some significant capital expenditures that are required in our system and those two aspects of our rate case are kind of permeate throughout a lot of the different elements within the rate case. And so there was a big difference between where we were coming from and where Cal Africa was coming from on the larger issues. And so it’s not really a surprise that we weren’t able to get a global settlement. But I think if we can knock out some of those smaller items that Marty was talking about, it puts us in a good position, I think to move forward timely on the case.
Jonathan Reeder: Yes. So I mean that’s what I was going to say like, I mean, in the past, you’ve kind of reached like call it, a partial settlement. I mean, it sounds like that’s what you have kind of got here again with some of these undisputed items that take those off the table. But like you said, Jim, I mean based on the last GRC CapEx decoupling, those are major issues that ultimately had to get fully litigated and it sounds like that’s where we are again this time around?
James Lynch: Yes, I think that’s right, Jonathan. I think that’s right. And that’s why this next step, looking at their report, our report line of things that there is no disagreement on it and submitting that to the judge that may very well take those elements off the table and then we just focus on the major areas of disagreement, which would be kind of rate design decoupling, etcetera.
Jonathan Reeder: Yes, okay. And then last question for me and I apologize if you did mention it, but where do you stand on renewing the ATM program and what size do you think you’ll need when you do renew it?
Martin Kropelnicki: So we are in the process of kind of working with banks and whatnot. We do intend to renew it and it will probably be the spring sometime early this spring. We always like to have that availability for us to take advantage of the equity markets when opportunities and the timing is right for us to do. So, at this point, we are still in the process of reviewing with our finance committee of the size of the ATM and the different features that we may want to pursue on it, but I would expect we would announce something probably early spring here in the not-too-distant future.
Jonathan Reeder: Okay, great. Thanks so much for the time this morning.
James Lynch: Thanks, Jonathan.
Martin Kropelnicki: Thanks, Jonathan.
Operator: There are no more further questions at this time. I would like to turn the call back over to Martin Kropelnicki for closing remarks.
Martin Kropelnicki: Great. Thanks, Desire. Well, thanks everyone for joining us today. Q1 is done and in the books, as they say and we’ll move on to Q2 and obviously, as things change with the general rate case. We’ll look forward to updating everyone in July for our second quarter earnings call. So thanks for calling in today. Any questions, feel free to reach out. And everybody have a great day. Thank you.
Operator: This concludes today’s conference call. Thank you all for joining and you may now disconnect.
