Participants

James Lynch; Chief Financial Officer, Senior Vice President, Treasurer; California Water Service Group

Martin Kropelnicki; Chairman of the Board, President, Chief Executive Officer; California Water Service Group

Angie Storozynski; Analyst; Seaport Global

Davis Sunderland; Analyst; Robert W. Baird & Co., Inc

Jonathan Reeder; Analyst; Wells Fargo

Presentation

Operator

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the 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, Desiree. Welcome everyone to the first quarter of 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 earning 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 of 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 materially from the 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 10K, Form 10, 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 Martin.

Martin Kropelnicki

Thanks, Jim. Good morning, everyone, and thanks for dialling 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 the Q1 of this year actually we did surprisingly well. We want to talk, 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 and finally give you an update on what's happening with the annual water supply in the West.
And so, before going into our topics of today, I'm going to turn it over to Jame to walk us through the financials, which Jame, I think are a little confusing. But I think in the press release in the back there's a reconciliation there that I found very helpful. I know I was preparing for today. So, Jame, I'm going to turn it over to you.

James Lynch

Thanks, Martin. And what Martin 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've 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 of 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 for $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 of 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 Palace 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're really pleased with the outcome of both the Palace Verdes and drought advice letter decisions, and Martin 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 PFAS 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-based 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 Martin for a few additional remarks.

Martin Kropelnicki

Thanks, Jame. I am on slide 10, and I'm pleased to report that yesterday our board of directors approved our 321 consecutive quarterly dividend from the amount of $0.30 a share. As a reminder, in January 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 five-year annual growth rate of 7.7% on the dividend line, which we think is a is a very healthy number.
The special one-time dividend was meant and approved by our board of directors to reward our stockholders who dealt with the delayed 2021 General rate case and the financial challenges that it brought forth with it, including deciphering some of the financial reporting that Jim's been working on. I think he's 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're basically review or their report of our Rate case. We submitted our rebuttal testimony, and we participated in settlement discussions during the month of April.
Well, 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 may, we remain confident in in our testimony that we provided in the rate case.
I think, as most of we, we've. The last 3 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 other things that are noteworthy on the regulatory side. First and foremost, as part of the 2021 general rate case decision, we're 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'm very pleased to report that the majority of our districts passed that earnings test.
And it represents a $27.2 million additional revenue requirement that was adopted for this year. These rates went into effect on January 1st. 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 Maine, 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 in incremental capital costs 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 will begin 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 DRMA account.
Related surcharges were implemented on April 1st of this year. Looking at a couple other regulatory events that are happening around our systems, turning to Hawaii, during the first quarter, we reached a settlement with the Ka’anapali General Rate Case with the Hawaii Consumer Advocates. The settlement that's attached to your revenue $7.5 million so that's a $1.1 million increase in revenue, so that'll 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 climate change. Overall, it's been a very healthy winter out here on the West Coast. We have a strong snowpack and 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 long range.
And so, you can be as far south as Southern California down in LA and all the way up, well past Tahoe into northern California. So, the range within the range is 85% to 120%, but overall, we're 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 position 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 continues to be in a drought and targeted conservation efforts are underway, but we do not expect any material issues in that area.
Hawaii is a state. That we're 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're taking a lot of the lessons learned in California and applying those in our conservation programs in the West Maui area.
So, with that moving to slide number 14 looking at the year ahead, as I mentioned in the beginning, it is the third year, 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 and 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.
Look at our growth strategy, the ongoing greenfield development that we have in Texas is continuing to develop very well and continues strong results. So, we plan to stay focused in that South Austin corridor which continues to grow, and we're also continuing to evaluate a number of domestic M&A opportunities.
Although I just want to be clear, the main growth objective of the California Water Service Group really is the rate-based growth that Jim talked about earlier on the slide deck and that 11.7% compound 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 goal goals of no primary or secondary water quality violations.
Obviously, we got a lot of infrastructure investment to do over the remaining 9 months of 2025, especially coming out of a wet winter. As Jame referenced, we kept with the same pace that we had last year in the quarter on the capital investment. Which we're very happy with, given the fact it was a very wet winter in California, and that tends to slow us down on the construction management side.
And of course, lastly, today being May 1st, believe it or not, it is the official start of the fire season. And so, our teams are busy, doing all the wildfire hardening projects that we do, clearing brush, etc. Getting all the equipment ready for the long dry summer months that lie ahead. So, with that overall, it was a very good quarter. We're very pleased with the results, financial results.
Again, I'll apologize that they're 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 Jame provided in the decks to look at the quarters on a more normalized basis. And so, Desiree, with that, let's open it up to questions, please.

Question and Answer Session

Operator

Thank you. (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, Jersey. We haven't seen a settlement even though we were hoping for one. Just, 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 where you know where, what can you agree on with the consumer advocate. Thank You.

Martin Kropelnicki

Yeah, thanks, Angie. As I mentioned in my previous comments, obviously we did not reach a global settlement with the cattle advocates and Because there are settlement discussions, I really can't get into the details of that, but to the comments I made, we're obviously going through a process right now and identifying areas that were non-contested, and that will be submitted to the judge in the pre-hearing 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 not able 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 on schedule. So, I anticipate this next phase going through the hearing components will continue to move on schedule as the rest of the rate case. So can't really say much more than that right now, but obviously we'll be filing briefs and stuff, etc. With the PUC here during the month of May.

Angie Storozynski

Okay, that's all I have. 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 Martin, Jame, good morning, guys. Thank you for taking my question.
Maybe if I could start, I actually like to pay you back on Angie's question just about the GRC and thank you Martin 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'm 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 advocates and us and not only disagreements, it was hard to even get people in a room 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's just a lot of different factors then to now. To me, the most significant factor that that I'm tracking is kind of what are people saying? And so, I go back to, the commissioner Baker's clearly indicated in public comments he thinks California needs to do a better job getting rate cases 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 CA 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 out on time. And then the judge, I think the judge that we have assigned to 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's 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're 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 you know people could not get in a room to even talk. So, I look at how the comments are lining up. They're very consistent. Everyone's 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'm a lot more bullish this time. Now, obviously you can hit a procedural snag as you go through the process. But look, we're almost a year and I guess we're 10 months into a 18 month process and so far, every indication we've had has been is 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 and 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's any, meaning for year your comps the rest of the year that we should consider as it relates to costs, and thank you again guys.

Martin Kropelnicki

Yeah, it, 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's going to be tariffed, who's not going to be tariff, 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. And 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 kind of murky situation. What I would say, and this is why I remain guardedly optimistic, is, we went through supply strain constraints during COVID and our materials management team and our engineering management team, program management teams were able to navigate those supply constraints without disrupting our capital flow and our ability to get capital on the ground.
So, up to this point we've managed it. Likewise, we've had, a fair amount of inflation in the last two years. We've been able to manage absorbing 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's clear sailing ahead because clearly the market's not saying that. And so, for us it's, continue to button down the hatches, continue to make sure that you're managing your overtime, your expenses. Obviously, we have things like wildfire management programs we have to do. We're not going to cut costs on that.
But do everything we can to keep everyone focused on kind of a disciplined budgetary approach and then being able to adapt to those things when they happen. And soy Waters had a good history of being able to hit their budgets during difficult times and will maintain. Jim, anything that you want to add on that. Yeah.

James Lynch

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're continuing to keep an eye on what's happening in the in the debt markets as well as the equity markets in terms of our future financing.
Right now there's a lot of volatility out there and so, we're hoping that as we go from the second to the third quarter that volatility kind of settles down and we'll have a better sense of what's. Available in the timing with which we want to enter the debt and equity markets.
But to where we are right now, we're in a really strong position in terms of our short-term availability of financing to continue our strategic initiatives and so we'll just kind of keep an eye and hope for the best in terms of getting a little more. I guess settle down financial markets that we can take advantage of later in the year, yeah.

Davis Sunderland

This is great, thank you I 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.
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're no longer decoupled or were there perhaps some favorable expense timing, issues?

Martin Kropelnicki

You Know Jonathan, it was a number of things. One, obviously, when we had to delayed general rate case, Jim did a really good job with the financing 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're 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've 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, it's much more closely aligned to what actual is. And if you recall when we were 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 cases is a more accurate forecast. I think that's helping us.
I mean, you're absolutely right, Jonathan, you followed 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 that the year-by-year increase in earnings. And we'll just have to keep executing, to the plan.
And again, to the question that Davis just asked, there's going to be curveballs thrown at us with everything that we're seeing in the market, and I think our ability to absorb those curveballs are positioned really well, whether it's liquidity in the balance sheet that we have right now or 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 is what I would attribute to you as well as good kind of budget management by the operating teams within Cal Water.

James Lynch

Yeah, and then we did get from a from a usage perspective, we were at. I authorized 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

Yeah, Jim. I think the other thing that's noteworthy too is are the step increases and you know that $27 million in step increases. You're starting to see the effect of that, into the tariffs. And it used to be if you go back to rate cycles, our step increases, would be $4 million maybe $10 million. And so, because we've done a much better job at executing our capital plan.
The amount of uptake that we get on our step increase has been a lot higher and that step increase is 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, yeah.

James Lynch

I guess Marty's initial comments were, well, it's a lot of things, Jonathan. We're just, we're kind of going through some of them, but we can't point to one individual kind of pop that that benefited the company in Q1. It's just a culmination of a number of items.

Jonathan Reeder

All right, great. Yeah, 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're making today is that ship sailed.

Martin Kropelnicki

You know 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've seen.
Where there's been a fully reached settlement, but then it takes, 12 months to a year and a half to get that the settlement approved within the commission. We've seen, two of the companies get a settlement and get being done close to being on time.
So, it's been really kind of a mixed bag and that's why I go back to kind of in my analysis what's the commissioner saying because the commissioner believe the assigned hearing officer, what's the judge saying and what are the advocates saying? And I suppose there's always a chance you could still, reach a global settlement here during the month of May,
But the indicators we are as we're moving into the kind of the pre-conference hearings and taking their report and our report and things that are identified that there's no disagreement on, we're identifying those, and we'll submit that to the judge and then see what he says. So, I suppose there's always hope, but from my position I'm happy things are tracking on schedule.
Couldn't reach a global settlement. Can we still reach something hard to tell, but we need to proceed as if we're 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're going to do everything we can to get this rate case done on time.

James Lynch

I guess the only thing I'd add, Jonathan is remember there, there's kind of two areas that where there were significant differences between us and the advocate that being the approach to the 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 Afica 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 the smaller items that that Marty was talking about, it puts us in a good position, I think, to move forward timely on the case.

Jonathan Reeder

Yeah, so I mean that that's what I was going to say like I mean in the past you've kind of reached like, called a partial settlement, I mean it sounds like that's what you've 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, sounds like that's where we are again this time around.

Martin Kropelnicki

Yeah, I think that's right, Jonathan. I think that's right. And that's why this next step looking at their report, our report lining up things that there's 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, etc.

Jonathan Reeder

Yeah, 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?

James Lynch

So we're in the process of kind of working with banks and whatnot. We do intend to renew it, and it'll probably be this 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're still in the process of reviewing with our finance committee of the size of it 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.

Martin Kropelnicki

All right, thanks.Johnathan

Operator

There are no more further questions at this time. I would like to turn the call back over to Martin Karpelnicki for closing remarks.

Martin Kropelnicki

Great, thanks, Desiree. 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.