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Thank you for your patience, and welcome, everyone, to the California Water Service Group Second Quarter 2023 Earnings 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. [Operator Instructions.] Thank you. I would now like to turn the call over to Marty Kropelnicki, Chairman, President and Chief Executive Officer. Mr. Kropelnicki, please go ahead.

Great. Thank you, Jack. Good morning, everyone. Thanks for joining us this morning. Apologies for the technical difficulties. We had some problems with our telecommunication line getting through. So, sincere apologies for that. With me today is Dave Healey, our Interim Vice President and Chief Financial Officer; and Greg Milleman, Vice President, Rates and Regulatory Affairs. Prior to getting into the results for the quarter, I'm going to turn it to Dave Healy to go through our statement on forward-looking statements. And Dave, why don't you jump into the financial results for the quarter, please.

Thank you, Marty. Replay dial-in information for this call can be found in our quarterly results release, which was issued earlier today. The replay will be available until September 25, 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.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 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. Our presentation starts on Slide 4 with their values and priorities. And moving on to Slide 5, I'll discuss the second quarter results. So, during the second quarter of 2023, net income attributable to group was $9.6 million and diluted earnings per share was $0.17 as compared to net income attributable to group of $19.5 million and diluted earnings per share of $0.36 for the quarter ended June 30, 2022. As we discussed last quarter, second quarter results primarily reflect the temporary absence of 2023 California general rate increases and regulatory mechanisms included in our 2021 general rate case. As a result of the delayed California general rate case, there was a decrease in second quarter 2023 operating revenue as compared to the same period last year. Additionally, operating revenue decreased $13.8 million due to a 10.4% decrease in customer usage. General rate increases during the quarter were approximately $3.4 million, with most of it in California, along with the delay to our GRC, the commission authorized a 4% general rate increase for most of our California districts effective May 5, 2023, until the final 2023 GRC general rate case increases are authorized by the commission. This added approximately $3 million to operating revenue during the second quarter. Total operating expenses decreased slightly in the second quarter of 2023 as compared to the same period last year. Net interest expense increased $1.7 million, mostly due to an increase in interest rates and $23 million of additional borrowings on our short-term lines of credits. We invested $95.2 million in capital improvements during the second quarter of 2023, a 25.1% increase over the same period last year. This was a second quarter record for our company. In California, the governor extended the state's arrearage program to help customers struggling to pay monthly water bills. The program covers delinquent customer balances 60 days past due or written off during the period from mid-June 2021 to December 31, 2022. Our plan is to file our application for these funds with the State Water Resources Control Board at the end of September. One last item. We filed the California advice letter in July to increase annual operating revenues, $24.6 million to offset known increases in California water production costs. Our EPS bridge is on Page 10. And now I'll turn it over to Greg Milliman to discuss the temporary absence of 2023 California General Rate Case, general rate increases and regulatory mechanisms.

Thank you, Dave. Looking at Page 7, consistent with the first quarter. We are using the same mechanisms available from the California Public Utility Commission to track the temporary impact of revenues whilst revenues from the delayed decision. The three primary mechanisms are shown on this slide. Moving to Page 8. We currently estimate that a temporary impact of the delayed decision on second quarter 2023 operating revenues to be between $19 million and $29 million based on current positions of parties in the 2021 GRC filings and consumption-driven regulatory mechanisms. While I'm on this topic, I'd call your attention to Slide 13, which is the same information, except for the year-to-date activities where the temporary delay in revenues is estimated to be $43 million to $63 million. With that, I'll turn it back to you, Dave, for Slide 9.

Thank you, Greg. The second quarter earnings bridge is on Slide 10 and moving to Slide 11. For the six-month period ended June 30, 2023, net loss attributable to group was $12.7 million or $0.23 loss per diluted common share compared to net income attributable to group of $20.6 million or $0.38 earnings per diluted common share for the six-month period ended June 30, 2022. As Greg discussed, results for the six-month period ended June 30, 2023, reflect the temporary absence of 2023 general rate case, the 2023 California general rate increases, and regulatory mechanisms included in our 2021 general rate case. Operating revenue was $325.1 million for the six-month period ended June 30, 2023, compared to $379.2 million for the same period in 2022. The $54.1 million or 14.3% decrease -- revenue decrease was due to a $21.8 million increase in revenue deferral, a $15.2 million decrease in RAM and MCBA revenue and a $22.9 million decrease in customer usage, which was partially offset by general rate increases of $5 million. Total operating expenses for the six-month period ended June 30, 2023, were $326.7 million compared to $342.8 million in 2022, a decrease of $16 million or $4.7 million. Other operations expenses for the six-month period ended June 30, 2023, were $42.4 million compared to $55.3 million in 2022, a decrease of 23.2% or $12.8 million. The decrease was primarily attributable to the deferral of $17.8 million in costs related to the revenue deferral. Water production costs decreased $6.6 million or 5% to $125.9 million in 2023 compared to $132.4 million in 2022. The decrease in water production costs was primarily attributable to a 9.7% decrease in customer usage. These decreases were partially offset by increases in administrative and general expenses of $4.9 million, depreciation and amortization of $2.2 million and property and other taxes of $1.5 million. During the first six months of 2023, the company invested $177.2 million in infrastructure improvements. This is also a record for the company. The company's ATM program increased cash by $112.7 million during the first six months of 2023. We are pleased with the results of our ATM program, and we will continue our at the market, or ATM program, through March of 2025. The year-to-date EPS bridge is on Slide 15. And now I'll turn it over to Greg Milliman for a regulatory update.

Thank you, Dave. In regards to the cost of capital proceeding, the key point related to this decision is that it is perspective from July 31, 2023, going forward. After implementation with the water cost of capital mechanism, our ROE will have increased from 9.2% to 9.57%, and our debt will be trued up to our actual lower comps to borrow of 4.23%. Further, if the bond index continues as it is current and following its current trends, we expect the water cost of capital mechanism will be triggered again at the end of -- or the beginning of October and have an increase effective January 2024. On Slide 17, it is the California 2021 GRC update. Shortly after extending the decision on June 29 to the end of the year, December 31, 2023, the commission assigned a second judge to our proceeding. This judge has had a long career with the commission, and he's already started working on our general rate case, considering that now we have two ALJs on our case, we're hopeful that we will have a proposed decision before the end of the year. Moving forward to Slide 18, I will turn it over to Marty.

Great. Thanks, Greg. Just a quick update on the PFOS, PFO events that are happening. I think as we put in the last quarter deck, the draft regulations came out from the EPA [four ways] it was confirmed. Based on those draft regulations, we think it's incremental $200 million approximately of investment needed to treat approximately 75 wells in the five states that we operate, 75 million wells as of right now. Yet the draft regulation is adopted as it is, we'd have to be in compliance by 2026. That's a bit of a tight time frame. But having said that, in California, and California has the strictest water quality standards in the states, we started working on this back in 2018. So, we are well ahead of the curve here and continue to move ahead judiciously as we wait to see when those get adopted. Also noteworthy, and this is a treaty big pivot for all of us that belong to NAWC, the National Association of Water Companies. We've all gone after the rate -- the polluters. And some of you may have seen in The Wall Street Journal, there has been a number of proposed settlements that have gone before the courts and ready to be finalized. We are personally involved in that litigation for the states that we operate in. And any recovery costs will go to offset the cost for customers as we implement treatment necessary to remove PFOA and PFOS from our drinking water. Moving ahead to the next slide, I want to take a moment to talk about business development. As in the past, [BD] has had another busy quarter, really since we talked last time at the end of Q1, we announced the California Public Utilities Commission approved us closing on the Skylonda Mutual, which is in the Bay Area. That is not a big number of customers. It's 176, but it's a small system that's on both sides of our system. So, by acquiring Skylonda it allows us to build an interconnect between three parts of the Bay, the two parts that we own and the one part that Skylonda and improve reliability and resiliency in the Bay Area. In addition, we closed on the Stroh system in the state of Washington that's adding 900 connections to our Washington Water service company in the Pacific Northwest. And we got the Hawaii Commission approval to close our -- excuse me, to move ahead with the HOH Utility. So, HOH and KSSC are both on the Island of Hawaii. So, this gets us in our fourth island, it's a wastewater system that will add approximately 2,200 wastewater connections. That means we'll be on Maui, we'll be on the big island of Hawaii. We're on Oahu and now we're moving into Hawaii. So overall, it was a busy quarter for our business development team and pipeline continues to be full. The team is busy. Again, in the water space, there's not really, really big acquisitions. They're pretty few and far between. But certainly, there's enough of kind of bolt-on things that we're seeing that complement our existing business that are close or parallel to our existing businesses that we can acquire and bring on to our system and achieve economies of scale to help reduce costs for customers and improve service. Looking ahead on the next slide, on the capital investment and depreciation slide. As Dave said, it was a record quarter for us in terms of new capital and $95.2 million getting out of the ground. Clearly, we're making up some of the ground for a long wet winter out on the West Coast. I think the team has done a good job at speeding that up. And also year-to-date, it was up 22.5%, which was $177.[29] million. So, we are on track for our targets for 2023. I think more importantly, if you pull back a little bit, give you an idea of why our rate case is probably a little more complex than some of our peers in the state of California. For 2022, 2023 and 2024, that's over $1 billion of capital that we will have invested in our system. So, the rate pay sets delayed, it's a $1 billion rate case. So, it's a big thing to work through. I'm glad I'm not Greg Milliman, he gets to deal with all the details of that, but it's complicated as we work with the commission and move forward. But the good news is the capital investment is continuing. We continue to stay on track with our investment dollars and the steps we're taking to improve resiliency and sustainability. Looking at the next slide, this is just a snapshot of what our regulated rate base looks like for group, assuming the rate case is adopted as is. This will obviously change when we get a proposed decision, and we'll update this slide accordingly. But this will give you a sense of what the earnings growth will look like as the rate base continues to grow. So, kind of where are we just taking a step back and looking at the quarter. Obviously, we're still in a holding pattern with the delayed general rate case in California. And while that is disappointing, as I mentioned, it is very complicated. I will say we were very happy with the cost of capital decision that came out and was adopted in the second quarter that moved quickly once the proposed decision came out. As Greg mentioned, we're encouraged by the second ALJ being added to our general rate case. We're very familiar with this judge. We've had other cases before this judge. And I think he's very schedule-driven, he's very by the book, and I think he's very objective, which is good in terms of adding new ALJ. I don't think you can want anything more than that. And hopefully, it will help kind of facilitate the process. Obviously, despite the delays we continue to make significant progress with our business plan, whether it was the record capital that was put into the ground for the quarter, the continued growth through business development. In this case, it was in California, Hawaii and the State of Washington. And we also published our third annual ESG report, including what we're doing in our Scope 1 and Scope 2 emissions and what we're doing to do our part to combat climate change on behalf of our customers and improve sustainability and reliability. So, as we wait, we're going to keep executing the business plan. And as Greg said, we're optimistic that hopefully get a rate case before the end of the year. Once that rate case, a proposed decision comes out, that will allow us to book a number of mechanisms that we can't book right now, and that's why we share the numbers that we shared and the ranges are provided to give you a sense of what the high and the low is based on those mechanisms that we're not building right now. Lastly, I want to take a moment to talk about a new board member who joined our Board of Directors. Some of you may have seen that. Charles Patton joined our Board. Some of you who may know, Charles, he's a 37-year utility veteran with an outstanding background in operations in external and governmental affairs and rates. He is an outstanding leader. We're very, very lucky to get him on our board and he had his first board meeting with us yesterday. So welcome Charles to the California Water Service Group Board. So, Jack, that's the update for now. Why don't we open it up for questions, please?

Certainly. [Operator Instructions.] Our first question comes from the line of Angie Storozynski with Seaport.

Thank you. So, I mean, there's just so many moving pieces in your earnings power. So just a couple of things. One, you were hoping to actually have a final decision in the GRC this year or just a proposed one? And I'm assuming that you need a final decision to book all of these revenue adjustments back to retroactively to 1/1/2023. Is that correct?

Angie, we are hoping to have a proposed decision by the end of the year with a proposed decision that should provide enough confidence for the accounting departments to go ahead and book the various items that have been deferred.

Okay. And if I were -- I mean, you show us all of the revenue adjustments that would have happened for the first half is obviously the gain on pension. But is there like a rule of thumb that we can apply just to even have a ballpark sense of the earnings power? Like what is the -- roughly the distribution of earnings, for example, we can infer what the first half earnings would have been based on the adjustments you had showed us. I mean can I assume a certain percentage of contribution to the total earnings of 2023?

Yes. Angie, that’s why we gave you the range is what we believe the high and the lower. You’ll have to determine kind of what point in that range you think is the best one to look. But we thought the best thing we can do is kind of show the two goal posts. And obviously, we’ll come out between those two goal post. Historically, we’ve done, especially the last two rate cases, we’ve done very well in our rate cases. I think that the Cal Water team has really upped their game the last three cycles in terms of putting together a quality rate case and getting to a successful resolution with the Public Utilities Commission in California. The harder thing is we are officially decoupled from decoupling. So, under the old decoupling rules, we could show you what the consumption curve was, that was in the rate case. And obviously, our pattern follow that consumption curve – now that we’re really demand-driven, it’s going to move around a little bit, and we haven’t had to really kind of look at it or think of the business that way in over 12 years. So, this year, what we’re going through getting away from decoupling, the earnings will move around based on seasonality and based on the weather and based on consumption. And obviously, we had a very, very wet first quarter. We had a fairly wet second quarter and consumption was down, but now we’re hitting this massive heat wave, which is happening all over the U.S., and I would expect consumption to jump up quite a bit in the third quarter. So, I know that’s not a super clear answer, but those are the variables that we deal with internally as we do the accounting and work on our rate cases.

Jonathan Reeder with Wells Fargo.

I know it's very difficult given the moving pieces this year, just to maybe kind of expand on Angie's question there. Can you discuss, I guess, how customer usage is tracking against the usage levels that are included in the GRCs partial settlement agreement? Obviously, it's weather influenced to some degree in the first half, or not to some degree, it is weather influenced in the first half of the year, but maybe how you expect the full year to come in against those usage levels?

Jonathan, that's challenging to predict into the future what would happen. But right now, without decoupling, and I believe Dave reported that we're at about 10%, 90% of consumption that is predicted in the rate case. And because of that, all the mechanisms -- but for the one mechanism related to lost revenues from the drought, the other mechanisms are based on actual consumption. And the drought memoranda the mechanism related to lost revenues from the drought will capture the lost consumption revenues associated with the drought for a period of time but that is uncertain as to how long that mechanism will continue with the governor having removed mandatory conservation and still left in place as executive orders related to continuing drought or conservation efforts for the state.

Right. And when did those mandatory conservation measures get looked at, was it in like early April?

It was in April.

Okay. So that 90% is against what's actually included in the GRC settlement, partial settlement?

Correct. That's right.

Okay. Got you. So, I guess, with the loss of full decoupling and taking into account those usage trends as well as, I guess, the cost to supply the water that should be coming in much more favorable to you. Do you expect, I guess, by having the Monterey-Style RAM this year, is it going to be a headwind or a tailwind to kind of EPS? Is it still a headwind given the loss of decoupling? Or these lower supply costs, are they potentially going to help you to a decent amount that flow to the bottom line?

Jonathan, I can take that question for you. So, I don't know what the consumption is going to be in the second half of the year. But if it is -- if we're still at 90%, there will be a small positive value in the Monterey-Style RAM mechanism..

Okay. And that's netting, I guess, the revenue impact against the supply?

Yes. It's just -- it tracks a single quantity rate to the actual quantity rates filled. And there's a certain level. And right now, we're at 90%, we're not at 100%. But it's not going to be a big value.

Okay. All right. No, I appreciate the help there. Congrats on a good outcome in the cost of capital and good luck to getting the rate case at least proposed decision before year-end results.

[Operator Instructions.] Davis Sunderland with Baird, your line is open.

Good morning. [indiscernible] this year. We don't get too deep in [indiscernible] of course, but in the event that there isn't a proposed decision by the end of the year, how should we think about the changes to CapEx deployment next year or risk going beyond the end of 2023? And then I have one follow-up.

Sure. That's a good question because, obviously, our capital program is included in the 2021 general rate case. And the company takes a risk-based approach to prioritizing its capital. So, the capital spending we're doing now, we feel are necessary improvements that we have to make in order to maintain the system and to do things like wildfire, [indiscernible], things that we've had to step up our efforts for climate change adaptation. In the event, there is a capital project that is not approved of the rate case, it will get picked up -- in the 2021 rate case, it will get picked up in the next rate case, the 2024 rate case. So, any financial exposure is really going to be associated with the depreciation in the interim period and how we pick it up in the next rate cycle.

Got it. That's helpful. And one other question, maybe just about the PFOS legislation. You mentioned going into litigation against some of the parties that may have been responsible or the polluters. Is there any -- on quantifying some of these benefits or time line associated with that? And then I know you guys called out some potential other sources of funding that could maybe offset a portion of the $200 million in CapEx costs. Just any other detail about what those funds may be or when those might be applied?

Yes. We don’t know yet. And if you follow the litigation and the paper, these are multibillion-dollar settlements. And obviously, there’s a group of claimants to that settlement. We’re one of those claimants. So, we don’t know how it’s going to kind of work out or how it’s going to be distributed. I will tell you though, our General Counsel is very active and is the class representative in the lawsuit. So, we work very closely with the counsel, the group’s plaintiffs’ counsel to understand how those pieces will work. So once the settlements get more clarity and a judge approves them, then we’ll get into the position of working with the reps, the people involved in the litigation of how those funds will be distributed and then a proposal is made to the judge and the judge has to adopt it and then they start distributing those funds. I anticipate, and this is just a personal opinion, but I anticipate that those settlements are going to be millions and millions of dollars. And again, the main point about it, it’s not going to help from an investor standpoint because those funds will all go to offset the capital costs associated with the treatment. So, it really benefits the customer, and that’s where it should be. And so, then what’s left over that doesn’t cover the invested capital for PFOA and PFOS treatment, that will get rate-based treatment. But obviously, we want to try to offset as much of that cost because it’s incremental to our capital program, that $1 billion that I talked about for 2022, 2023 and 2024, this $200 million is going to be on top of that. And so, you run the risk of having rate shocks. We really want to try to minimize the effect of the customers. So, settlement funds, I think in 2024 or 2025, are very, very likely. In addition to that, we’re looking at trying to get grant funds and other money from the state and federal level, especially for underserved or poorer communities. It’s one thing to put in PFOS treatment in the Bay Area for Silicon Valley, it’s really different when you go to some of the rural areas of California that have the same water quality standards and it’s a much lower number of customers, a much lower number of connections and its overall economically not the same environment, as an affluent area like the Bay Area. So, grant funds and proceed dollars from the litigation will all go to offset those costs for custome’s.

That was our final question. I'll now turn the call back over to Mr. Kropelnicki for closing remarks.

All right. Hey Jack, first of all, thank you for getting my name right. You're about 1 out of 100 who can get it right. And just for the record, it took me till about the age of 12 before I could spell it or say my name right. So, thank you for having my name correctly. Everyone, thanks for joining us. Again, all eyes on the general rate case, that's a focal point. But while we're doing that, we're not taking our eyes off the business model and we're going to execute our business plan to our full avail that we can. We'll look forward to talking to everyone at the end of Q3 and our earnings call will be on October 26. So, thank you for being with us this morning. Apologies for the technical delays. We had some issues with technology and the lines working correctly. So, thanks for bearing with us, and we'll talk to everyone later. Thank you and have a good day.