Good morning and welcome to the California Water Service Group Quarter Two, 2022 Earnings Release Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome, David Healey, Vice President and Corporate Controller to begin the conference, over to you.

Thank you, Polly. Welcome everyone to the 2022 second quarter earnings call for California Water Service Group. With me today is Marty Kropelnicki, our President and CEO, and Tom Smegal, our Vice President, Chief Financial Officer. Replay dial-in information for this call can be found in our second quarter earnings release, which was issued earlier today. 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 this morning and is also available at the company's website at www.calwatergroup.com. Before looking at this quarter's results, we'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 risk 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'm going to pass it over to Tom to begin.

Thank you, Dave, and good morning, everyone. Welcome to the second quarter earnings release call. I want to start talking about the financial summary on Slide five and I'll get into some of the details in just a moment. But just to give everybody the topline, our net income attributable to the Group is $19.5 million or $0.36 per share and that's down considerably from $38.2 million and $0.75 per share in the second quarter of 2021. For the year-to-date period, that is a relatively similar result, in that our net income is $20.6 million or $0.38 per share, as compared to $35.2 million or $0.69 per share in the comparable year-to-date period in 2021. Flipping to Slide seven, we will get into some of the details of this. The primary focus of the change in earnings has to do with our unbilled revenue accrual. I've been with the company now 25-years and I've been in management talking it out, financials, I think for about 12-years with you all and we often talk about our unbilled revenue accrual. The thing to remember is that this is the calculation that we do, the value of water that has been used by our customers, but it's not yet billed and is therefore outside of our regulatory mechanisms and this has some fluctuation within the year and we talk about it in every quarter. If you've been with us for a little bit in -- the second quarter of 2021, there was a substantial increase in our unbilled revenue accrual and -- however that came down to a normal range at the end of the year. This year in -- kind of in reflection of the large increase last year, we have a large decrease in our unbilled revenue accrual that was $15.2…

Great. Thanks, Tom. Good morning, everyone. Thanks for joining us here today for the second quarter results discussion. The General Rate Case, the 2021 California General Rate Case, California being our largest operating entity has continued, we have concluded on our hearings and briefs have been filed with the administrative law judge. We still anticipate that the GRC to have an effective date of January 1, 2023 and there has been no change in the contested items among the party. Having said that, there is still no major disagreement between the parties over sales and water -- water mix production that was included in the General Rate Case. Accordingly, we have allowed the administrative law judge that a partial settlement may be filed sometime in August. Tom, do you want to cover the cost of capital, I think you look closer to that one.

Sure, thanks. Thanks, Marty. So very similar story procedurally with respect to our cost of capital proceeding in California, the hearings have concluded, the briefs have been filed and the ALJ has that -- has the cost of capital case under consideration. I wanted to remind the investing public that in our filing for cost of capital, we requested a lower cost of debt that had last been adopted in the last case. And if that were adopted along with no other changes to cost of capital, we would expect to see an $11 million reduction to our revenue coming out of California as a result of the lower cost of debt. That's our financing and refinancing program that brought our cost of debt down from 5.51% in the last case to 4.23% on a weighted average basis in this case. And so, we have not taken a reserve for that amount in part, because we don't know the timing, an effective date of the cost of capital case, and in part because there's two other elements to the cost of capital case that are unknown at this time. Those elements are the cost of equity, return on equity, and also the capital structure for the company. And so, investors should be aware that that's out there and the commission could make that retroactive, but we have not yet booked that into our results here in 2022. Marty, I will turn it back to you for drought update.

Great. A couple of things going on with the drought. First and foremost, the drought continues. I think, as we've seen the heat wave, not just in the U.S., but really around the world, it highlights the continued need to focus on supply resiliency and sustainability. California are -- as we mentioned last quarter that the California State Water Project deliveries were cut to 5% that was impacting some of the regions who solely rely on the water from the State. For us, customer usage is down 5% in the second quarter, compared to 2021, but I think the broader trend is the most important. If you look at the water savings number or conservation number year-to-date, it's 2%, it's 5% for the quarter, but if you look at just the month of June, it was over 11% and that's a good sign that our drought programs and our messaging to our customers is starting to take hold and I would expect that number to grow as we go into the drier summer months, July, August, and September. In terms of drought spending, if you remember, all the State is on a stage to drought alert from the State of California, where about $400,000 during the quarter that's recorded in a memorandum account, which is incremental cost that has been used to respond to the drought for recovery at a future date and the total balance that balancing account now since 2021, which is when the government declared the drought is about $1.2 million. So drought messaging has started to take hold going into the dry summer months and we want to push that number up as high and as close to that 20% target that we have as a state as possible. Couple of other items to watch in…

Sure. And just as a reminder for Slide 14 and 15, we've made no changes to these slides and we wouldn't expect to make changes until we had a significant event coming out of California regulation or any new project that we announced and so you'll see Slide 14, the capital spending targets, shown there, those are relative to the California General Rate Case request, no changes, except for the update on the year-to-date figure, and the same with the rate base, that rate base is relative to the California General Rate Case request plus the rate base in our other states. And Marty. I'll turn it over to you for a summary.

Thanks, Tom. So where are we? In summary, as Tom mentioned, the change in the unbilled for the quarter was a major item, market volatility that we've all seen and lived with throughout 2021, has lowered the unrealized valuation of certain retirement plan assets in our non-qualified plans and those will float up and down based on market condition changes and volatility. The core business remains strong as we await regulatory outcomes in California and for those of you that have been with us a long time, as you know, it's the third year of the rate case process for us. It's always the hardest time of the three-year cycle for Cal Water, the California entity, as we wait for regulatory approval of our General Rate Case. So we have the most amount of regulatory lag at this time and as we wait all eyes are on the commission as we try to resolve the cost of capital and the 2021 General Rate Case. Management remains focused on the drought, that's a big deal. In California, we're going into the peak summer months, August, September, and October for fire season and obviously mitigating supply chain issues and of course the collection now of receivables for past due for customers who haven't paid their water bill in a while. Between that and focusing on the General Rate Case, it's going to be a very busy second half of 2022 for the company. And of course, closing out, I'd just like to say that the growth opportunities that the BD team worked on have remained strong and I expect that to continue as we go into the second half of the year. So with that, Paulie , we will open it up to questions. Paulie, you there?

Sorry, apologies. And your first question comes from the line of Ben Kallo and that was from Baird. Your line is now open.

Hey, gentlemen.

Good morning, Ben.

How are you?

Good, how are you?

Good. Maybe just on, Tom just you're back to how you started with the unbilled revenue estimates. If I look at Slide 15 -- and maybe my first question is, have you guys thought about giving annual guidance all of the range, maybe kind of rope us all in, just because of the intricacies of working in California?

So we have discussed that internally, we've not come to any conclusions on giving annual guidance. The remainder is of course with Slide 15 that we are a company whose profits are relative to its rate base.

Great.

And so, what we're showing there is the estimated regulated rate base of the corporation in total, including California and the other states and the opportunity to earn a return on investment is what drives a company like ours. So, generally speaking, over time we would hope to earn the authorized return on the investment in rate base and that's generally that was shown on Slide 15.

And that would be the $1.95 for ‘22?

No, sorry, that $1.95 that's $1.95 billion of rate base.

Okay, I understand. Sorry, I was reading that incorrectly. And then Marty, just on your CapEx deployment, are you noted that you guys are on schedule for the year, but obviously all the risks out there, could you just maybe talk through how it's changed since last quarter? I think maybe I asked the same question then, but, if it's gotten better in supply chain or same to same got worse?

Sure. I would say, Ben, in a lot of ways it's gotten worse and it's just the lead times that we're seeing to order, I can't capital inputs, but you know there -- it's pipes, it's valves, its fittings, we just finished the study internally and as we were pulling the report together over the last two weeks, the lead time for ductile iron went from eight to 12 weeks to 26 weeks, and so if you think about the number of capital projects that we do on an annual basis and the timeline to do design, permitting, and then procurement, that procurement piece what order -- pre-ordering going out that far out now, it has the real potential to slow us down a little bit. Now, when I say slow us down, it just means that capital will take longer to get into the ground, right, especially in California, where we have a perspective test year, so the capitals approved is part of the rate case, then our job is to get it into the ground, so we're not a historical state or perspective state in California. So we're just seeing those timelines taking longer to order stuff and so some of the things the team has been doing, they've been putting stuff out a bit earlier. They have been expanding the supplier base. We have loaded up on items we can get now that we may not have a need for right now, but we know we're going to need them in the next six months to 12-months. So the team really has done an excellent job at keeping us on track, but again it's a global supply chain issue and it's just taking longer to get stuff and -- especially water main. And so our goal is to have zero effect, but I think the probability of that is very low because the supply chain is getting more constrained at this point in time. Does that makes sense?

It does. Tom, back to the cost of capital. Obviously, interest rates have changed since you filed, does that have any bearing on the decision or is there a way for you guys to go revisit that or no?

So, Ben, there is -- that's a little bit of an interesting question from a regulatory process standpoint and I don't mean to be vague about it, but the data that was supplied in the initial case was really 2020 data, going back to the end of that year as far as what was put into the input models from the analysts. We did have hearings and we did have briefs in the case where I'm certain and this public documents you can go read them, we tried to draw the commission's attention to the fact that since those data points have been drawn actually the interest rate environment and the market environment had changed really dramatically. It's up to the commission, the administrative law judge, and the five commissioners to recognize that and make a decision that incorporates that newer data. They're not necessarily obligated to. One of the things though that the parties agreed to and we've had as a mechanism in California for many years is a water cost of capital adjustment mechanism. So, in looking at a baseline period of the Moody's AA Utility Bond Curve, if there is a change of more than 100 basis points upward or downward it triggers a change in the return on equity of 50% of that, so a 100 basis point change in the Moody's AA Curve would change the cost of equity by 50 basis points. There’s -- that’s a collar, however, if you get to 99 basis points it doesn't change. And so it's -- that's something that's out there for extreme events when we look at the data now, compared to the baseline Moody's AA and what's out there in the market right now, it appears that we're close to triggering for 2023. So if the commission were to just leave the data alone and just react with the cost of capital adjustment mechanism, there is a possibility that we would get a bump from their authorized amount to 50 basis points higher amount for return on equity. However, it's a 12-month weighted average, and so it's very dependent actually on what's happening with interest rates over the entire period, it's not at a point in time. And so we don't know if that would trigger here for 2023. It seems more likely that it would trigger for 2024 given that the rates, the instantaneous rate is now much higher than the trigger point, but you'd need those many months of higher rates to trigger the weighted average. So all of that being said, we're hopeful that the commission can do the right thing. Look at the data that's come out lately and make sure that the companies have a fair return on equity that is reasonable in the current environment.

Great, thank you. Then my last question just with energy utilities increasing rates, I don't know if across all of your service areas, but we read about a lot of that, how does that impact you from, I guess, your rate case, I mean, does that factor in at all when commission say that well, we can raise rates here because there have be raise over there. And then also your -- how does it impact your rate payers who are fighting your rate case as well? Thank you.

Let me try to address it just from a mechanical standpoint first, and as a reminder that California since the 1970s has allowed the water utility companies a tracker mechanism for power costs, purchase water cost, and pump tax costs as well. And so there is no material financial impact on the company when electric power rates change that's essentially a pass-through, but from the psychology of the commission's standpoint, I think that we're really kind of in a little bit of a whipsaw situation, which is interesting. I've read the brief from the ratepayer advocate in our rate case, and they initially back when they -- we had filed our testimony back in January, February. They were talking about how awful the economy was and how everything was very -- everyone was jobless and they were reacting to the pandemic. Their later statements have to do with inflation and have to do with the impact of the very hot economy on our customer base and the people in California. And so it's, obviously, there is a populism factor when you talk to any appointed or elected official, anyone that's representing the public. In total the electric power cost is not the biggest impact to the company, it's probably our fifth or sixth biggest cost, compared to purchase water and employee wages and that sort of thing. So it's certainly a factor we think when the commission evaluates our rate cases, but we're hopeful that it's a little bit more mechanistic. And Marty, add on if you have anything?

Yes, I was trying to think back, Tom, at my time here with Cal Water with you, I mean, I've never had a commission not to consider input cost to production, and then to your broader point of, well, if they’re raising rates, you can't raise your rates. I've never heard that argument raised by the commission that's always been input cost into our production. The other thing I would say in terms of just affordability, in general, if you look on Page four, where we have kind of our corporate strategic map. The first thing you see is affordability and so we try to base stay very focused on affordability, what it means to our customers encompassing everything that we do, including those power input costs. So when we do our rate case planning and look at where we're driving to for the next three, six, nine, 12-years, we try to take affordability under advisement, and I think that's really kind of paid off for us, because the last part of your question was, you're talking about customers who might be intervening in our rate case, and we have a couple of intervening parties in this current rate case, there are two cities and they've always kind of been involved, but they've been pretty silent the last couple of rate cases. So, we don't have a lot of intervenors kind of hitting us on that side about affordability, and I guess, because we've done a pretty good job of trying to balance that with the needs of growing the rate base and the capital needs of the company and the needs to protect and promote water, health, and conservation within the State.

Thank you guys very much. I appreciate it.

Bye, Ben. Have a good day.

And we will pause for any final questions. There are no further questions at this time. I'll turn the call back over to Marty Kropelnicki.

All right. Polly, thank you, everyone, thanks for joining us today. As mentioned, all eyes on the California regulatory activities and fire season and the start-up of the collection process in the state of California and we'll look forward to giving everyone an update when we end Q3 and I guess that will be, Tom, the end of October, will be the next earnings call that we'll update everyone. So, thanks for joining us. Be safe, have a great day and we'll talk to you soon. Thank you.

This concludes today's conference call. You may now disconnect.