Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- California Water Service Group (CWT, Financial) reported a significant increase in operating revenue for Q2 2024, up 25.9% to $244.3 million compared to the prior year.
- Net income for the quarter saw a substantial rise to $40.6 million, or $0.7 per diluted share, compared to $9.6 million or $0.17 per diluted share in Q2 2023.
- The company has made significant capital investments, totaling $104.6 million for the quarter and $214.4 million year-to-date, reflecting increases of 9.8% and 21% respectively over the same periods last year.
- California Water Service Group (CWT) maintained a strong balance sheet with a capital structure of 59.5% equity and 45.5% debt, and raised approximately $52 million from the sale of 1 million shares of stock under its ATM stock equity program.
- The company received an upgrade in its global credit rating to A+ stable from S&P, reflecting its strong financial position and ability to navigate credit markets.
Negative Points
- Operating expenses for Q2 2024 increased to $196.1 million compared to $178.1 million in Q2 2023, driven by higher water production costs and income tax expenses.
- The company faces significant capital requirements for PFOS treatment projects, estimated at $226 million, which are not included in the current capital forecasts.
- California Water Service Group (CWT) is dealing with a challenging fire season, with multiple fires near its service territories, requiring significant resources and coordination with first responders.
- The company anticipates potential pushback on proposed rate increases due to high inflation and affordability concerns among customers.
- The business development and M&A activities in the water space are slow-moving, and the company is seeing some softening in seller expectations but still faces challenges in consolidating smaller systems.
Q & A Highlights
Q: On slide 9, the CapEx there. I'm looking out at the notice the bottom Marty, I think you referenced this sector and the estimates for 2024 to 2027 exclude and PFIs related capital investments, given those investments are probably going to kind of be made. I'm wondering what the cadence of that, but look like across the years, maybe not so much, 2025, but maybe 26, 27, 28 would kind of where your thoughts are there?
A: We try to balance affordability and new capital while keeping the investment rate at about three times the rate of depreciation, which usually gives us about a 9% to 10% compound annual growth rate on the CapEx line. The P. phos piece is a new standard we have to comply with, and we have a project team coordinating all P. phos projects across our enterprise. This will be incremental, so expect a higher number in 2026 and 2027 driven by the P. phos investment.
Q: Any thoughts on how things are shaping up with smaller systems maybe having difficulties complying with the PFS standards and just any changes you've seen or opportunities that you've seen pop up related to some of these smaller systems that may fold into the acquisition pipeline?
A: We're starting to see an awakening that there's going to be a huge capital requirement for small systems that are undercapitalized. This will play to our benefit. We're also seeing seller expectations soften up a bit, which is nice. For example, we purchased the Kings Mountain system for $1 because the company couldn't manage it. This allows us to connect three systems and get operational synergies.
Q: Have you had any pushback or do you anticipate any pushback with proposed rate increases or any friction from the consumer?
A: It's still too early to tell as we just filed the rate case on July 8th. However, inflation is high, and everyone's feeling it, including our customers. We try to balance affordability, and decoupling is really important for this. Our rate design benefits low-use customers, typically those on fixed incomes or in underserved communities, and charges more to high-use customers who can afford it.
Q: On results itself, was there anything in the $0.7 of EPS that was kind of nonrecurring or maybe a result of the retroactive notice of the 2021 GRC decision?
A: In the year-to-date numbers, we had $64 million of net income in 2024 from 2023 that will not repeat. For the quarter, there was nothing unique other than the new rates from the 2021 rate case, which will continue going forward.
Q: Can you help me understand what's included in the buckets on the Q2 EPS bridge slide, specifically the 2021 GRC bucket versus the rate increase bucket?
A: The General Rate Case bucket relates to the impact of the new rate structure and rates implemented in 2024. The rate increases bucket relates to water offsets, advice letter filings, and changes in our cost of capital mechanism. The change in accrued revenue represents unbilled amounts due to higher rates and more unbilled days.
Q: How has the usage been tracking versus what the rate case assumes, given the loss of decoupling and the warm summer?
A: We're tracking about 2% ahead of where we were at this time last year, driven by more normal conditions in the first quarter and a very good June. We're around 96% of the rate case assumptions year-to-date.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
