California Water Service Group - Q2 2024

Transcript

Operator (participant)

Thank you for standing by. My name is Dee, I will be your conference operator today. At this time, I would like to welcome everyone to the California Water Service Group Q2 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to James Lynch, Senior Vice President, CFO, and Treasurer. Please go ahead.

James Lynch (CFO)

Thank you, Dee. Welcome everyone to our second quarter 2024 results call for California Water Service Group. With me today is Martin Kropelnicki, our Chairman and CEO, and Greg Milliman, Vice President of Rates and Regulatory Affairs. A replay dial-in information for this call can be found in our quarterly results earnings release, which was issued earlier today. The replay will be available until September 30, 2024. 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 at the company's website at www.calwatergroup.com. Before looking at second quarter 2024 results, I'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. As a result, 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 Forms 10-K, 10-Q, press releases, and other reports filed from time to time with the Securities and Exchange Commission. I will now turn the call over to Marty to start us off.

Martin Kropelnicki (CEO)

Great. Thank you, Jim. Good morning, everyone. Thanks for joining us here today. It's been a busy quarter, and we have a number of items we wanna update you on today. First, I'm gonna ask Jim to give you an update on our financial performance for the quarter, and I'll just, you know, lead into that by saying: What a difference a year makes! Last year, no rate relief. This year, getting the 2021 rate case finally concluded and on the books has made a big difference. I'll also ask Jim to include some of the highlights of our capital program for 2024 Infrastructure Improvement Plan. We have Greg Milliman here today to talk about the filing of the 2024 general rate case and infrastructure improvement plans in the state of California.

This covers our capital forecast for the state of California for years 2025 to 2027. I wanna spend a little bit of time talking about the recent California Supreme Court decision that protects water utilities' rights to due process and preserves decoupling. Spend some time talking about emergency response. If you've watched the fires in California, it's been a very busy fire season so far this year, so we wanna give you an update on the current fires, as well as our community outreach efforts to continually improve our process in which we help first responders fight fires. Give an update on the PFAS and the ongoing remediation activities the company has planned for the next three years.

Give you an update on our business development activities and what's going on there, and then conclude talking about ESG, and our recent ESG report that was published in May. So before giving you the operational update, I'm gonna turn it back over to Jim to give you an update on the financial results for the quarter and year to date. Jim?

James Lynch (CFO)

Thanks, Marty. As Marty mentioned, our Q2 2024 financial results benefited from new rates and the rate structure authorized in our 2021 California GRC. In addition, since Q2 2023, our return on equity increased to 10.27% under our water cost of capital mechanism adjustment, and we benefited from water production offsets and other advice letter filings. As a result, our operating revenue for the quarter increased 25.9% to $244.3 million, compared to our prior year Q2 operating revenue of $194 million. Reported net income for the quarter was $40.6 million, or $0.70 per diluted share, compared to $9.6 million, or $0.17 per diluted share in Q2 2023.

The quarter-over-quarter growth was driven primarily by a $19.3 million increase in rates billed to customers, as authorized in our regulatory filings, an increase in accrued unbilled revenue of $10.4 million due to higher rates and an increase in the number of unbilled days, and the recognition of $8.2 million in accrued MWRAM revenues and $7.9 million in accrued IRMA revenues. As a reminder, our 2021 GRC was adopted in Q1 of 2024 and included 2023 interim rate relief, which totaled $64 million. $18.7 million of the interim rate relief was attributable to Q2 of 2023. Q2 2024 operating expenses were $196.1 million, compared to Q2 2023 operating expenses of $178.1 million.

The $18 million increase was primarily driven by $6.8 million in higher water production costs and $8.4 million in higher income tax expenses, related to higher pre-tax earnings. The impact of the Q2 2024 activity on diluted earnings per share is presented in the Q2 2023 to Q2 2024 diluted earnings per share bridge on slide 6. The more significant earning drivers were the 2021 GRC rate increases and increases in accrued revenue, which contributed $0.23, $0.26, and $0.14, respectively, to diluted earnings per share. These drivers were partially offset by increases in water production expenses of $0.09 per diluted share and other factors that netted to $0.01 per diluted share. Our year-to-date 2024 results benefited from the same regulatory outcomes as our quarterly results.

In addition, recall that in Q1 2024, we recorded benefits related to the California Extended Water Arrears Payment Program, or EWAPP. This enabled us to decrease the deferral period of WRAM and MCBA revenue and expenses. Our 2024 year-to-date operating revenue increased 58.4% to $515 million, compared to 2023 year-to-date revenue of $325.1 million. Year-to-date 2024 net income was $110.5 million, or $1.90 per diluted share, compared to 2023 year-to-date net loss of $12.7 million, or 23 cents per diluted share.

The year-to-date growth was driven primarily by cumulative rate increases from the 2021 General Rate Case of $131.5 million, $31.6 million in rate increases billed to customers, and the recognition of $16 million in previously deferred WRAM revenue as a result of securing the EWAPP funds for the payment of eligible customer balances. Year-to-date, 2024 operating expenses were $389 million, compared to 2023 year-to-date operating expenses of $326.7 million. The $62.3 million increase was primarily driven by increased water production costs of $16 million. That included $9.2 million related to the Incremental Cost Balancing Account, or ICBA. The ICBA is a new water cost recovery mechanism authorized in the 2021 GRC.

We also recognized $13.6 million in deferred costs associated with the recognition of deferred WRAM revenue, and year-to-date income tax increased $29.5 million due to higher pre-tax earnings. The impact of the year-to-date 2024 activity on diluted earnings per share is presented in the year-to-date 2020, 2023 to 2024 diluted earnings per share bridge on slide 8. The more significant earnings drivers are the 2021 general rate case, rate increases, and the decrease in deferred WRAM revenue, which contributed $0.82, $0.44, and $0.22, respectively, to diluted earnings per share. These drivers were partially offset by increases in expenses captured in the ICBA of 13 cents per diluted share, the recognition of deferred WRAM expenses of 19 cents per diluted share, and other factors net of 3 cents per diluted share.

Turning to capital, we continued to make significant investments in our water utilities to help ensure the delivery of safe and reliable water service. Group capital investments during the three- and six-month periods ended June 30, 2024, totaled $104.6 million and $214.4 million, respectively, which is an increase of 9.8% and 21%, respectively, over the same period last year. As of June 30, 2024, we've completed 56% of our annual capital budget of $385 million. As a reminder, our planned 2024 capital investments and our estimated capital investments for 2025 to 2027 do not include $226 million of estimated PFAS projects that will be constructed over multiple years, beginning in the second half of 2024.

Greg will discuss the planned capital expense for 2025-2027 that we applied for in the 2024 GRC and infrastructure improvement plans later on, on the call. The growth of our capital investment program is having a positive impact on our regulated rate base. Our overall rate base grew to an estimated $2.2 billion by the end of 2023. This is an increase of 9.4% over 2022. If approved, as requested, the 2024 California General Rate Case and Infrastructure Improvement Plan, coupled with the planned capital investments in our water, other water utilities, would result in a rate base growth of between 9% and 14%. Moving to Slide 11, we maintained a strong balance sheet with a capital structure of 59.5% equity and 45.5% debt.

During the six months ended June 30, 2024, we raised approximately $52 million from the sale of 1 million shares of stock under our At the Market, or ATM, stock equity program. We have $80 million remaining under the program that can be used to finance general corporate purposes, including planned capital investments and future strategic opportunities. On June 28, S&P affirmed our global credit rating of A+ stable. We are pleased with this upgrade, which speaks to our ability to navigate the credit markets in our California water utility. On July 22, the CPUC issued a proposed decision authorizing Cal Water to issue up to $1.3 billion in new debt and equity securities. Cal Water anticipates the CPUC will approve the proposed decision during its August meeting.

Martin Kropelnicki (CEO)

... And just to mention that yesterday, our board of directors declared a $0.28 per share dividend for our stockholders of record on August 12, 2024. This was our 318th consecutive quarterly dividend. Wrapping up on slide 10, we continue to maintain a strong liquidity position. As of June 30, 2024, the company had cash and cash equivalents of $82.7 million, of which $45.4 million was classified as restricted. Further, we had additional short-term borrowing capacity on our lines of credit of $355 million. With that, I'll turn the call over to Greg to give an update on our 2024 general rate case and other regulatory matters. Greg?

Greg Milleman (VP of Rates and Regulatory Affairs)

Thanks, Jim. On July 8, 2024, California Water Service submitted infrastructure improvement plans for 2025 through 2027 as part of its triannual general rate case. Cal Water proposes to invest more than $1.6 billion in its districts from 2025 to 2027. To enhance affordability, particularly for low-use, low-income customers, Cal Water's application proposes a low-use water equity program that would decouple revenues from water sales across its regulated service areas. Filing requests total revenue increase of $140.6 million, or 17.1% increase for 2026, $74.2 million, or 7.7% for 2027, and $83.6 million, or 8.1% for 2028. The triannual filing begins an approximate 18-month review process by the commission. With that, I'll turn it over to Marty. Marty?

Martin Kropelnicki (CEO)

Great. Thank you, Greg. Thank you, Jim. I wanna start off talking about the California Supreme Court case that came out on July 8th. As many of you probably have read, the California Supreme Court, in a unanimous decision, ruled in favor of the four investor-owned water utilities that brought the suit against the PUC. It's very important to note that the decision helps preserve decoupling and also protects the rights of utilities to have due process in the rate-making process. As you know, we are big believers in conservation. Decoupling in California goes back to the seventies, when it was first used in the electric and gas industry, and it's played a major role in helping California reach its sustainability and renewability goals.

We feel the outcome is really important because it enforces the importance of due process in rate making. In other words, the commission has to follow the rules that are set forth in the rate-making process, as well as the company. It also allows us to continue to better align with the state of California's goals around sustainability, reliability, affordability, and conservation. If you followed the California rules over the last couple of years, California has gotten very aggressive at the state level about making conservation a way of life. As I mentioned, decoupling is a very important tool. It helps keep our customer rates affordable as we promote conservation to improve sustainability of critical water resources. So we're very happy with the outcome from the State Supreme Court.

And as Greg mentioned in the current filing that we just filed earlier this month, we have again submitted plans for approval to re-implement decoupling for our customers in the state of California. Moving on to slide 14, I wanna talk a little bit about where we are with fire season and our emergency response programs. If you've been watching the news or if you look at the fire maps for the state of California, there are times it feels like the majority of the state is really on fire. So far this year, we've had 3 major fires near our service territories. We've had the Thompson Fire, the Park Fire, and the Borel Fire. Currently, as we speak, the Park Fire and the Borel Fires are still burning.

The Thompson Fire, which took place in early July, was around our Oroville service area, and it burned approximately 3,300 acres in a very small community in Northern California. The Park Fire and the Borel Fire, which started about a day apart, and one was up in Chico, California, near Chico, California, which has burned to date, as of this morning, 391,000 acres. That's equivalent to 610 sq mi, and it's approximately 18% contained. The Borel Fire, which is in Bakersfield, which is more central California in the Kern River area, has burned approximately 59,000 acres and is 39% contained.

I'm very happy to report that despite these fires coming very close to Cal Water assets, none of our assets have been, affected or, destroyed by the fires, and the company has just done an outstanding job at working with first responders, embedding our employees into the, the county and state EOCs to help coordinate water supply and to make sure that we do what we can to make sure firefighters have what they need to battle these wildfires. Unfortunately, it's very indicative that this is gonna be a long fire season. And as we get into the months of August, September, and October, I believe we'll be expending a lot of resources dealing with the continuation of what was a very wet winter and what now has been a very hot, dry summer.

Along with that, one of the things we do each year is we set certain corporate goals to host a certain number of what we call community EOCs, our Community Emergency Operation Center exercises. We tend to target these exercises in communities that don't necessarily have all the resources to pull off full tabletop exercises, to help communities and first responders better prepare for disasters. Recently, we hosted 2 of these events in the state of Hawaii, one on the island of Maui and one on the Big Island of Hawaii, or what's also known as the Kona Coast.

Both of these events were very well attended by first responders, local, state, and local and state officials, including members of the Hawaii Public Utilities Commission, civil defense, critical infrastructure companies, including the electric company, the county water departments, and other people who play an important role in dealing with these disasters. In my part of the presentation that I gave at the classes in Hawaii, and the classes include two pieces. There's a class piece of it, which is really how to use the Incident Command System, which is the basic FEMA model for dealing with emergencies. So that's the classroom-led part of the day. And the second part of it is a hands-on disaster simulation. As I told the people in the class I was participating in, I call it the three Cs.

It's absolutely critical that we connect, we communicate, and we coordinate. When we do that as critical infrastructure companies helping first responders, we help save lives, and that's very, very important in the world that we live in today, and a world that is dealing with climate change. Moving on to the next slide, I want to give you a brief update on where we are with the new PFAS PFOA standards. We're moving forward with our plans to implement our treatments on approximately 101 wells. If you look at the footnote on Jim's slides, which are slide 9 and 10, you'll see that our estimates have changed a little bit based on more data that we've been able to gather as we pull our project plans together.

So that number increased approximately $11 million to $226 million. As of right now, that's our best guess cost to treat the 101 wells that require treatment. By the way, that's 101 wells out of approximately 1,170 wells. That'll give you an idea of what part of our portfolio requires treatment. Just to remind everyone that the $226 million is not included in the capital forecast, on the rate base slide or the capital investment slide. It's included in the footnote, and the $1.6 billion that was included in the 2024 general rate case does not include these costs, so they're incremental to the investment projections that we've given the street so far to date.

We expect to refine these costs as more information comes in with the project plan. But overall, we're moving forward. We believe we will be adopting these standards ahead of schedule within our service territory. Our goal is to have them implemented within the next three years. And also one important milestone that was reached in the quarter is that we did file our phase one claim form in the 3M and DuPont class action settlements. So those class action settlement discussions are moving forward. As a reminder, Cal Water is the class rep in all PFAS matters representing the industry in those discussions. So overall, moving forward with the areas, our estimates moved up a little bit, but we are charging ahead as planned.

Moving on to slide 16, just to give you a brief update on what's happening on the business development and M&A side. It was a fairly quiet quarter for us. We did complete one very, very small but strategic acquisition called Kings Mountain Park Mutual Water Company. The significance of this certainly is not its size, but it's the fact that this little system lies in between our Bear Gulch system and the Skyland system here in the Bay Area that we acquired about a year ago. So our roots go back to Bear Gulch for a long, long time. We've owned and operated that system for a long time. Last year, we acquired the Skyland system, and we just closed on the Kings Mountain system. Putting these three pieces together allows for a more efficient deployment of capital.

It improves reliability and allows us to ultimately improve service to the customers in that area. More importantly, I think it's a good example of how we continue to consolidate and grow an existing service area that's, that's been built out. If you know, if you know anything about the San Francisco Bay Area, this is on the peninsula side of the Bay Area as you go up the 101 corridor. So even where there are places that may not look like there might not be opportunities to be more efficient, there clearly are. And I think this acquisition represents a good example of how we do this to continue to grow and try to become more efficient.

Since 2019, we've completed over 36,000 connections that we've added to our platform using this kind of tuck-in strategy, and we anticipate that we will continue to add at least 1%, 1.5% new connections going out forward into the future using this strategy. Next, I want to take a moment to give an update on our ESG report that was filed in May. If you're interested in ESG, you know, our plan aligns with the Sustainability Accounting Standards Board, but, and their Water Utility Service Industry Standards. It references the task force on climate-related financial disclosures, TCFD, and it references the Global Reporting Initiative Standards, GRI. So all that information is available in our plan.

In the report that was just filed, we make our commitment to reduce our greenhouse gases, scope one and scope two greenhouse gases, by 63% by the year 2035. We plan on accomplishing this through a multiprong approach that includes electrification of our fleet, continuing aggressive water conservation, building alternative energy sources of supplies to some of our service areas, and aggressively going after renewable electricity procurement. As you may recall, water utilities use a lot of energy in pumping and transporting water. And we believe using this multiprong approach, we can easily achieve these goals by 2035 and hopefully ahead of schedule. In addition, I want to point out just a couple of fun things.

You know, obviously, the water, water quality compliance, that is a core part of our DNA, that we exceed all the primary and secondary water quality standards every day that we operate in all the states that we operate in. That's a big part of our bonus plan that our employees participate in. But if you saw a few weeks ago, we announced that we just completed our tenth year of our scholarship program. So this year, Cal Water again awarded more than $80,000 to 12 students in California, Hawaii, and Washington. Since starting the program in 2014, we have awarded more than $750,000 to students in our service area, and we're very, very proud to do that.

One of the things about being a 98-year-old water company sometimes is you forget about younger people. This program that we've been in now for a decade has been very, very successful, and it's a lot of fun going through the application process and looking at some of the students of our customers, many of whom are first-generation college students, and what their goals are and what they're studying, and how they want to go get their education and come back and help make their communities a better place. So we're very, very proud of that scholarship program. And then lastly, I wanna share with everyone that recently ISS updated our ESG score to 72.28. So that's their raw score, 72.28.

On their scale, that gives us a B plus, and while a B plus is not an A, there are no As that have a ESG score in the water utility space. We are the highest-rated ESG score for an investor-owned water utility in North America, according to ISS. So, just kudos to our ESG team on our continuing implementation of our strategy, as we move forward in dealing with climate change and how we support our communities, employees, and our shareholders. Okay, so, in conclusion, overall solid quarter, as Jim mentioned. I know the numbers are a little bit confusing. I'll, I'll apologize. I said that was circumstances beyond our control.

You know, we had to book all the 2021 rate case in 2024 and not 2023, but clearly, you're seeing the benefit of the rate relief start to flow in with the company. I'm very, very happy with the capital numbers that Jim shared with you, the 9.9% kind of quarter-over-quarter, and the 21% kind of year-to-date growth on CapEx. I think that's indicative of our continued focus on our infrastructure improvement plans and how we're trying to improve sustainability and reliability on behalf of our customers. Q3 is typically our busiest quarter. It's usually our peak demand quarter from an operations perspective. As I mentioned, you know, it's gonna be busy just in the normal course of operations, but we're also dealing with a very significant fire season this year.

So, as I mentioned, we have two fires right now that we've been allocating resources to, the Borel Fire and the Park Fire. So it's gonna be a very, very busy quarter from a fire prevention perspective and working with our first responders to make sure they have what they need to fight the fires. Having said that, it's also we're in the middle of the rate case, and so all the data requests are coming in and going through, working through the requests of the California advocates. So we'll continue to try to keep our general rate case on schedule. But overall, I'm very happy with the performance for the quarter. I'm happy we got our rate case filed on time. I'm happy that we are continuing our growth in our capital programs.

More importantly, I think I'm happy that we're doing what we do on the emergency response side. Because, again, if you follow those three Cs, you help save lives. And at the end of the day, I think that's one of the most important things that we do. So, with that, Dee, I'm gonna hand it back to you, and we will open it up for questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question or are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, it is star one to join the queue. Our first question comes from the line of Michael Gaugler from Janney Montgomery Scott. Please go ahead.

Michael Gaugler (Analyst)

Good morning, everyone.

Martin Kropelnicki (CEO)

Good morning, Michael. Good morning, Michael.

Michael Gaugler (Analyst)

Just one question. Back on slide 9, the CapEx deck. Looking out, the note at the bottom, Marty, I think you referenced this, that, you know, the estimates for 2024 to 2027 exclude, PFAS-related capital investments. Given those investments are probably gonna be made, I'm wondering what the cadence of that would look like across the years. Maybe not so much, so much 2025, but maybe 2026, 2027, 2028, and kind of where your thoughts are there.

Martin Kropelnicki (CEO)

Sure. So let's go back to what our kind of basic goal is, which is, you know, we try to balance affordability and new capital while keeping the investment rate about three times the rate of depreciation. So that usually give us about a 9%-10% compound annual growth rate on the CapEx line. Clearly, as you can see, there's a big step up in 2025 and 2026 associated with the rate case. Now, those numbers, that's the full ask of the rate case. You never get 100% of what you ask for in the last rate case, Greg, I think-...

including the advice letters, we got about 79% of what we requested, which in the rate case, prior to that, I guess that would have been the 2018 rate case in California, were in the 80s.

Greg Milleman (VP of Rates and Regulatory Affairs)

Yeah, very similar.

Martin Kropelnicki (CEO)

Yeah. So, you know, for planning purposes, Michael, you know, we're planning around that 9%-10% CAGR on the CapEx, and the importance of that is it allows us to try to balance affordability on the rate side. The PFAS piece of it is, you know, that's a new standard that we have to comply with. And there was a lot of speculation around that because the EPA was a little slow on the uptake in getting the new requirements out. We run things like that, so things that are kind of newly being introduced into our portfolio as a separate program, because in the case of PFAS, we have one project team within our company that's coordinating all the PFAS projects across our enterprise. And so that will be incremental.

So, you know, I think you could expect a higher number probably in that 2026 and 2027 year, driven by the PFAS investment, and a number of variables will come into that. You know, obviously, PFAS and PFOA and the forever chemicals have had a lot of press. And if you remember early on in the draft, information that was communicated, they said, "Oh, well, you have to implement it in 3 years." And they said, "Okay, no, and now it's a 5-year implementation." It's really hard to look your customers in the eye and say, "Okay, 5 years from now, your water is not gonna be safe, but don't worry about it until then," which is why we've made the commitment that we're gonna invest the money upfront.

We're going after the PFAS treatments now, and we're starting the process this year to implement those, implementing treatment on those wells that need required treatment. So, I think you're probably looking at for 2026, well, 2025 and 2026, it'll be higher than 9.9% driven by the PFAS.

Michael Gaugler (Analyst)

All right. That's, that's all I had, gentlemen. Thank you.

Martin Kropelnicki (CEO)

Thanks, Michael.

Operator (participant)

Our next question comes from the line of Davis Sunderland from Baird. Please go ahead.

Davis Sunderland (Analyst)

Hey, Marty, Jim, Greg, good morning, guys. Thank you for taking my question.

Martin Kropelnicki (CEO)

Sure.

Davis Sunderland (Analyst)

Wanted to ask, going back to the business development pipeline, and I apologize, it might have been an error on my end, but I had some choppiness coming through when you were talking about that. Maybe just any thoughts on how things are shaping up with smaller systems, maybe having difficulties complying with the PFAS 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 or how you see this playing out? And then I have one follow-up.

Martin Kropelnicki (CEO)

Yeah, you know, it's, it's interesting you ask that question. This week, we had our a person who's in charge of water quality out in one of the states that we operate in, giving a presentation to commissioners about what is PFAS, PFOA mean. And the good news is, we got really good feedback that they love what we're doing, but they said, "Wow, what are all these small systems in our state gonna do?" So I think you're starting to see an awakening that there's gonna be a huge capital requirement in some of these small systems that are probably undercapitalized and lack liquidity, and I think that'll play to our benefit.

The other thing in talking to our head of business development, Shawn Patel, you know, interest rates have been higher, the cost of capital has been up, and seller expectations have remained pretty high. We're starting to see the seller expectations soften up a little bit, which is nice. And in the case of the deal I mentioned, the Kings Mountain, we actually purchased that system for $1, right? Because the company just they couldn't... weren't the best operators. It requires capital. We have the ability to put that capital in the system, improve their service levels, and more importantly, it allows us to connect kind of the three systems and get that synergy of operating those three systems and those three sources of supply.

So I think you're starting to see a little bit more movement in that area. Now, you know, business development, M&A, right, in the water space, just moves slow. How fast of a catalyst will it be? I think that's to be determined. You know, I think the larger IOUs are held to a very, very high standard on water quality, and if we miss any new requirements, they fine the heck out of us. But I think, you know, generally speaking, the EPA has a hard time enforcing those standards with private small companies that just aren't on the radar screen. I think that piece it will be interesting to watch.

But certainly, we're seeing a softening of expectations with sellers, and I think we're starting to see a little bit more activity in small systems, as these PFAS, PFOA requirements come into play. And I think it's really important to keep talking about those new requirements, what does it mean, and why they're important.

Davis Sunderland (Analyst)

Great. That's super helpful. Thank you for that. And then the only other one for me, you actually started to talk about it with with Michael's question previously, just about never getting one hundred percent of what you ask for. And I guess my question is, to frame it up a little differently, is, have you had any pushback or do you anticipate any pushback with proposed rate increases or any friction from the consumer advocates or your thoughts there? Thanks, guys.

Martin Kropelnicki (CEO)

Frank, that's probably more a question for you.

Greg Milleman (VP of Rates and Regulatory Affairs)

Sure. It's still too early in the case. I mean, we just filed it July eighth, and we've started receiving data requests on it, but it's really still what, we're three weeks in? So it's still too early to tell what their overall feeling will be.

Martin Kropelnicki (CEO)

Yeah, I would just add to that. Look, inflation is high, and everyone's feeling it, and our customers are not exempt from that. Look, Cal Water is not exempt from that. And when we last month, I gave a presentation or an update to the board about our rate case, and

James Lynch (CFO)

... before I gave them kind of what the numbers looked like, I talked about what some of our cost increases were over the last three years. You know, labor's up 15%-20%. Chemicals are up 35%. Ductile iron's up 200% since 2022. So, you know, that's one of the reasons why we try to balance affordability. That's why, you know, decoupling is really important, frankly, because it allows you to implement a rate design that people who use less water, you know, and especially people in underserved communities and people on fixed income, it allows you to potentially sell that water at below a marginal cost. And for the super users of water, the people who can afford to use a lot of water, you charge them more.

And so one of the things I like in the GRC application that we put in is the fact that we have a really nice rate design that really benefits the softer users of water who are typically the fixed income and maybe underserved communities and really ramps up the charging of people who can afford to pay the water bills and who want to use a lot more water. So I think it'll be interesting to see, but obviously affordability you know and inflation it's just a tough time right now.

Jonathan Reeder (Analyst)

That's great. Thanks, guys. Appreciate the time.

James Lynch (CFO)

Thank you.

Operator (participant)

Our next question comes from the line of Jonathan Reeder from Wells Fargo. Please go ahead.

Jonathan Reeder (Analyst)

Hey, good morning, team.

James Lynch (CFO)

Morning, Jonathan.

Jonathan Reeder (Analyst)

You just addressed my questions around kind of the GRC and the CapEx and the rate impact. But on results itself, was there anything in the $0.70 EPS that, you know, was kind of non-recurring or, you know, maybe a result of the retroactiveness of the 2021 GRC decision?

James Lynch (CFO)

Well, certainly in the year-to-date numbers, we had the, I think there's $64 million of net income in the year-to-date numbers, that, well, I think we recorded 64 million dollars in 2024 of 2023 income that will not repeat itself. In the deck, I think I also mentioned that we carved out 18.7 million dollars of interim rate relief. So $18.7 million of that $64 million was attributable to the second quarter of 2023. So if people kind of want to get a sense of what the impact would have been had we had timely rate relief, that kind of gives you a little bit of sense of how 2023 was impacted.

Now, as far as the quarterly results go, there really wasn't anything that was unique to the quarter, other than the new rates, and those will continue on going forward, that we did get in the 2021 rate case. So I guess if you're looking at year to date, I'd consider the fact that we did record the $64 million in Q1 of 2024, that will impact the entire year. But as far as the quarter goes, there was really nothing that was unique to the quarter.

Jonathan Reeder (Analyst)

Okay. That's helpful. And then along those lines, can you just help me understand what's included in the buckets on the Q2, like, EPS bridge slide? Like, specifically, like, the 2021 GRC bucket versus, you know, the rate increase bucket. Like, where did the new mechanisms, you know, having the new mechanisms fall versus just the 2023 base rate increase over that interim that you're talking about, versus the 2024 attrition increase? Like, where do each of those fall in those, in those two different, you know, bars?

James Lynch (CFO)

So, looking at the diluted earnings per share bridge, the Q2 2023 to Q2 2024 bridge, if you take a look at the General Rate Case bucket or bar, that really relates to the impact of the new rate structure and the new rates that we implemented in 2023, or I'm sorry, in 2024, as it relates specifically to the 2021 rate case. The rate increases column or bar, if you will, that really relates to increases that we've had for water offsets, for Advice Letter Filings, and for the delta, the change in our cost of capital mechanism. So that really captures rates outside of the new rate design and outside of the new rate structure of the 2021 rate case.

And then the change in accrued revenue, that's principally a result of the change that we had in our unbilled revenue, both in the number of days and the rate impact from the 2021 General Rate Case.

Jonathan Reeder (Analyst)

Okay, so the $0.26 from the rate increase, does that include the $0.24 attrition increase related to, you know, the 2021 GRC?

James Lynch (CFO)

No, that would. I believe that's also captured. Let me get back to you on that, Jonathan, but I believe that's also captured in the 2021 General Rate Case. I think that that captures all of the impact of the rate changes from the Rate Case.

Jonathan Reeder (Analyst)

Okay. You think the $0.23 has the attrition?

James Lynch (CFO)

I think so, yes.

Jonathan Reeder (Analyst)

Okay. And then on that change in accrued revenues, does that kind of pull forward earnings from Q3 then?

James Lynch (CFO)

...No, that represents principally what we have already delivered in terms of water service, but have not yet billed our customers. So we record that revenue as an unbilled amount at the end of the quarter. We'll have a similar amount that we will bill at the end of Q3. And if there is a delta between the two of them, then we would certainly take that into consideration in terms of what the net impact is on the change in the unbilled revenue. The fact that there's days involved in the Q2 number would imply that potentially there will be less in the unbilled amount going into Q3, but it's not gonna be meaningful.

Martin Kropelnicki (CEO)

Yeah. Tim, Tim, I probably too, and I don't know this for certain. I don't have the numbers for me, but it's been a warm summer.

James Lynch (CFO)

It's been a very warm summer.

Martin Kropelnicki (CEO)

Yeah. Yeah.

James Lynch (CFO)

Yeah, to Marty's point, especially if you take a look at the end of the quarter, the last couple weeks of July, I'm sorry, the last couple of weeks of June were very warm across all of our service territories, especially in California, but across all of our service territories. And we actually saw that in the first month of the Q3. So I think you'll see some of that if you're just focused on the number of days, that difference is gonna be mitigated significantly by the weather and I think by usage and rates. I don't think it's gonna have a meaningful impact.

Jonathan Reeder (Analyst)

Okay, and then, yeah, last question, you just kinda segued to with usage, like, given the loss of decoupling and, you know, the warm summer and everything, how has the usage been tracking versus, you know, what the rate case assumed?

James Lynch (CFO)

Well, I think that's a good, it's a great question. Right now, we're tracking about 2% ahead of where we were at this time last year. And that's principally driven by the fact that the first quarter of last year was very wet and rainy. And the first quarter of this year, we experienced more normal conditions. We still had a very good level of precipitation in the first quarter, but not to the same extent we did in the prior year. And then we had a really good July, so we're tracking... Or June, rather, the second quarter. So we're tracking pretty well in terms of our usage going into Q3.

As it relates, I haven't gone back and checked to see how it relates in terms of the rate case. I can get back to you on that, but I think we were probably around 96%, or right thereabouts, but I'll get the exact number for you, and can circle back with you on that.

Jonathan Reeder (Analyst)

Okay, that 96% might be on a year-to-date basis?

James Lynch (CFO)

Yeah, that's a year to date. Yeah.

Jonathan Reeder (Analyst)

All right. Thanks so much for the time this morning, guys. Congrats on a great quarter.

James Lynch (CFO)

Thank you.

Operator (participant)

Again, if you would like to ask a question, please press star one on your telephone and wait for your name to be announced. Again, it is star one to ask for a question. There's no more question at this time. I will now turn the conference back over to Martin Kropelnicki, Chairman, President, and Chief Executive Officer, for closing remarks.

James Lynch (CFO)

Great, thank you, Jean. Thanks, everyone, for joining us here today. As we move into Q3, again, it's gonna be the busiest quarter for us, operationally. It's usually our quarter that we experience peak demand in terms of the services and the product that we provide. Look forward to giving you an update on Q3 and the meaningful progress we're making on our infrastructure improvement plans, and also progress that we make on our PFOS, PFOA implementation plans. And really keep an eye on fire season. As I mentioned, so far, this has been a really busy fire season. I don't know what the future holds. I don't have a crystal ball, but I will tell you, it has been very busy from a fire season perspective so far this year.

So we'll look forward to giving everyone a detailed update in Q3. And until then, please be safe, and we'll talk to everyone again real soon. Thank you for joining us here today. Thanks.