Q3 2019 Earnings Call
Please be advised to today's conference is being recorded if you apply any further cysewski safeguards era I would now like to end the costs, obviously have to get today Mr., David <unk> Vice President corporate controller. Please go ahead.
Thank you Sean tell.
Welcome everyone to 2019 third quarter earnings call for California Water Service group.
With me today is Marty Kropelnicki, our president and CEO .
Thomas Smegal, our Vice President Chief Financial Officer, and Paul Townsley, Our Vice President business development, and Chief regulatory Officer.
Replay dial in information for this call can be found in our third quarter earnings release, which was issued earlier today. The replay will be available until December 31st 2019.
As a reminder, before we begin the company has the slides to accompany the earnings calls this quarter.
Slide deck was furnished with an 8-K. This morning and is also available at the company's website.
BMW, Dod Cal water group Dot com.
Before looking at this quarter's results, we'd like to take a few moments to covered forward looking statements.
In the course of the call the company May make certain forward looking statements because these statements deal what the future events. They are subject to various risk and uncertainties and actual results could differ materially from the company's current expectations because of this the company's 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.
Thanks, Dave Good morning, everyone and happy Halloween.
I'm Gonna go quickly over our financial results starting on page six of the flight deck.
And there I'd like to 0.1st to net income and the net income was up up to $42.4 million, that's up 17% from a third quarter 2018, our earnings per share were 88 cents. That's up 13 cents from a third quarter 2018, which was 75 cents 70.
Present increasingly BS or capital investments were down slightly up 73 million for the quarter as compared to 79 million for the same quarter last year a.
A year to date basis, if you flip to slide seven.
Our net income rose slightly to 51.8 million a 3.1% increase from the net income in the third in the year to date period of 2018 earnings per share is a dollar eight that's up again slightly from a dollar for in 2018 same period or capital investments for the year to.
They period or are also down 194.9 million as compared to 212.9 million in a year to date period through 20 or 28.
So flipping to slide eight for a general sense of what happened during the quarter.
So the net income increase of 6.2 million is largely attributable to three or four factors here are the primary big driver here is our unbilled revenue accrual was $5.5 million higher than in the third quarter 2018 that represents really a bounce back from the lower Unbilled revenue.
Accrual that we had in the first two quarters of year and you'll recall, our first quarter earnings call.
We had a pretty pretty major reduction in that quarter or in Unbilled revenue didn't come back in the second quarter now it seems to come back.
So so that's what we're seeing here in the third quarter.
The core components of our Capex, if you look at our rate increases of 6.1 million outstanding.
Expense increases, including depreciation wages on property taxes kind of offset that a rate increase a bit in embedded in a paragraph second paragraph on slide eight we spent about 800000 on preparation for the electric utilities public safety power shut off programs.
And other wild fire mitigation efforts.
We'll be talking about that a little bit more in detail later in the deck.
We had a reduced amount of business development expenses of one point Threemillion that was obviously in 2018, we were going going through a a a business development process and finally, we had an increase in our ABDC UBS Your point 8 million during 2019 third quarter.
I will skip over the slide.
Nine and 10, which are the earnings bridges, you can look at them at your leisure and I will turn it over to Paul Townsley give us an update on the 2018, California General rate case, Thank you Tom.
Good morning, everybody in.
My second of last year 2018, we filed our triennial.
California General rate case, where the California public Utilities Commission.
And in that case, we requested $828.5 million of new capital investments over the prospective three year period 2019 through 2021.
Earlier this month on October Eightth, we filed a settlement agreement with the California Public Utilities Commission.
Settlement agreement was one that we reached where the California public you to.
Public advocates office, formerly known as the opposite Ratepayer advocates.
And the settlement agreement covered the majority of the issues that were in play in the rate case.
Included in the settlement agreement it was $609 million of new capital improvement over that three year period like 2019 to 2021.
And approximately $200 million.
Authorized capital improvements that were off that were initiated in 2018 in prior years. There were a few items that we did not reach settlement.
Oh on and these are our items that are being.
Requested of the commission to make a determination on you can see those on slide 11. They include the the Ram and the sales reconciliation mechanism some of our balancing accounts for pension medical costs.
Depreciation rates working capital ABDC and am higher advanced metering.
The settlement agreement and the discrete items will be.
Just decided by the commission or our anticipation is that that will be decided by the commission in December and that new rates will go into effect effective January 120 20.
Thank you.
[noise] alright, good morning, everyone. It's Marty here I'm going to talk briefly about our capital program.
Two accomplishments I want to cover with you our two things I want to accomplish day talking to you.
One give you an update on our spending year to date, which is down slightly worried about just shy of $195 million year to date, that's a decrease of about 8.5%.
That's primarily driven by one of the general rate case as Paul said, we have settled the capital components of the general rate case, the step up from the last rate case to the current rate cases about a 30% increase in capital spending, which which is very significant. This is the highest percentage vast we've ever received Anna.
Rate case.
And you don't get those results without significant support from engineering and in the process. During the year, we used a lot of engineering hours that would normally be dedicated to getting the capital on the ground. They were diverted to getting the capital secured and the rate case that clearly has affected our capital investment this year.
In addition, we've been dealing with public safety power shutdowns and wildfires. The Psps program I'll talk about in the wildfire program will talk about in just a minute, but clearly those two things have slowed down a capital spending for the year.
We now estimate that our 2019 capital spending levels, we will be between 250 million at 260 million for the year with higher capital spending and 2020 and 2021 again following the increase that we have in the rate case, so while I would have liked it got a little more capital in the ground this year under the circumstances.
Of the rate case, and the exhaustive effort that the engineering team had to go through to prove out the capital needs of the company and dealing with this psps mess that we have in the state of California, I think it's understandable why we're a little short of our capital targets. This year and we plan on making those up next year.
In addition, the company filed a registration statement this morning.
With the Securities Exchange Commission for a 300 million to our common stock offering to be aftermarket or ATM program and Tom why don't you take us through the ATM program. Thanks, Marty. So this morning, the company signed an equity distribution agreement and file that registration statement as Paul mentioned, we have identified more than 806.
Million dollars of capital improvements that are covered by the proposed partial reiki settlement in California, plus the capital that will be completing in other states.
And so this really gives us a need for capital to fund those those additional.
In.
Additional improvements we do plan to maintain a balance equity structure, that's consistent with our regulatory authorizations and we've chosen as market equity approach because we believe it's a long term spending plan is not one big chunk of money that we're going to spend all at once and therefore, we'd like to be a issuing equity over the course of the three year period in an effort.
But to match that up reasonably well with the capital spending.
And in addition to that you can you can see the difference between 806 million at 300 million. Obviously, we will be a using our retained earnings and other other funds to finance the capital and we do expect that we will probably issue debt from time to time to balance that capital structure and continue financing those.
Those capex programs.
Going to turn it back to memory.
Thanks, Tom.
It hasn't been the best year or the best we excuse me in the Golden State. The last seven to 10 days as we've dealt with multiple.
Power shutdowns and then as wildfire season has kicked in and then talk about the Psps program first and I'll give an update on the wildfires in the state of California.
We have Wouldnt last 10 days, we've got multiple outages across our service territory, specifically, we've had up to 62 of our locations without power one of the largest being in the San Francisco Peninsula area. We have approximately 75000 meters, which serves about a quarter of a million people that were out without power for for a number of.
Days.
Having said that I'm very pleased to report that the company's planning around the Psps program and our approach to emergency response has executed flawlessly. Despite the multiple outages throughout the state none of our systems lost power Orlowski's me last pressure our when try.
We had adequate backup generation to fire up all of our locations and none of our customers one without water.
We've spent about $1.1 million total between the two programs the Psps program and the wildfire program the details or in your slides there and we anticipate spending approximately $2 million in total expenditures for the rest are for totaled up 2019 with the bulk of it remain.
Associated with the Psps program.
There's been a really really rough week from a power supply standpoint in the state of California.
I think if you're watching in the National news programs, if you're reading of the local newspaper the Wall Street Journal.
It's really been a big issue in the state of California, as a as Governor Newsome has said, it's it's unacceptable it's been very disruptive at multiple levels.
I haven't been born and raised in California, and lift through the Loma Prieta earthquake and.
A whole bunch other disasters. This is about as worst of I've seen that and when you lose power a lot of things don't happen again, we're very happy and very proud of our employees that kept all of our systems.
The pressurized and working but that has been at a substantial cost a lot of over time running generation backup generation.
Our fuel cost associated with that et cetera. So I think we'll see more of the effect of that as we close close at close out the quarter.
We will seek regulatory recovery of our costs for the PS pass program.
And for the welfare program later on the year and into next year, taking them I want to talk about the wildfires. So two events happened kind of concurrently here. These massive outages at the same time, we kind of went full steam and to fire season.
There are a total of four major fires that we've been following in the state of California, There's the easy fire, which erupted yesterday and Simi Valley near the Reagan Presidential Library, which is right next door to 1000 Oaks Westlake system.
That was the same close the same area that was hit by wildfire last year that was so devastating.
That's buyers burned almost 1700 acres, it's 5% contained as of this morning.
The real issue down there are the red flag warnings and the fact that you have the eastern wins and at one point, the east ones, which are the east Wednesday blow eastward.
East to west and they're very dry warm wins at one point some there as clocked east wins at almost 100 miles an hour yesterday morning yesterday afternoon.
The getting fire, which.
Erupted right around the getting museum off highway one on one.
Not a real big fire, but it's a heavily populated area.
745 acres that burns, 27% contained again same red flag warnings in southern California, The Big fire, we've been dealing with in Northern California is that can cade fire, which is up in Sonoma County, If you recall Sonoma County got hit really hard last year during wildfire season, what the Mendocino complex fire in the year before that the Sun.
The Santa Rosa buyers.
That's almost an 80000 acre fire, it's 45% contained as of this morning.
And believe or not we went from record heat.
Last week to now we have freeze warnings take the taking place taking place in the same areas. So.
Big swings and whether temperature.
And weather conditions.
Around the Sonoma Ariad 185000 people displaced who were evacuated.
We have a handful of small systems up in that area, which usually it's not a problem.
With evacuations a lot of people went to the beach and it's it's deal and beach is one of our systems and so keeping that small system going when you have thousands of evacuees showing up the cap, but on the beach has been a bit of a challenge, but again that system has stayed in operation stayed pressurized.
As of this morning, Theres, another fire and San Bernardino County called the Hillside fire.
Let's just start off against small about 300 acres, 15% contained but those east wins or whats really damaging down in the south.
As Governor Newsome declared a state of emergency in the state of California.
And 124 hour period, we had approximately 334 wildfires flare up in the state. So it's been just a really busy time for firefighters and water providers to make sure that the systems. They price rise. So it looks like weather conditions are going to level out this week, which is good.
Can you give everyone a chance to get their arms around these fires we still have approximately 45 days a fire season left.
We will see how that goes but again for all the systems owned by Cal water our systems of Allstate pressurized and we have provided water services to our customers and anyone in the fire zones.
Marty, let's let Paul talk about the performer for chlorinated components.
Thank you. So slide 15 is on our Perfluorinated compounds, we call these people costs and people.
These are among the contaminants that have received significant regulatory attention and media attention this year.
The EPA us EPA is required utilities, a sample and test for these Kim these chemicals.
Between 2013 in 2015.
But what's happened is that the detection levels.
The analysis have improved in recent times and the EPA is actually going to require more testing in the coming years.
California as often the case leads lead the effort and has added additional testing in 2019 in some areas as well.
California has set a notification levels of between 5.16 0.5 parts per trillion very low levels.
This is not an enforceable water quality standard, but complying with regulation requires notifying customers about the presence of their chemicals.
Of the almost 1000 wells at the company has throughout California about 30 of these wells. So very small percent have tested above the notification level and we are we're notifying customers.
We are very much involved in tracking the regulation and as these regulations evolve we anticipate that we'll be able to construct and operate treatment systems to remove the chemical or reduce the chemical to be in compliance with any future maximum contaminant level requirements.
Thanks, Paul I'll give a quick update on our decoupling balancing accounts.
That slide 16, and 17 or the Ram receivable balance net is up to 62.6 million. That's up from 56.1 million at year end of 2018, and Thats really been driven by our lower sales this year, our sales or about 84% of adopted.
In the third quarter and they were in the eighties year to date before that so we're seeing him definitely lower water sales in California.
And our systems this year in 2019.
We do have that SRM sales reconciliation mechanism that allowed us to adjust our adopted sales at the beginning of the year that has helped somewhat and if we hadn't had the SRM, we believe that our balance in the Raymond Okay would've been about $11 million higher at the present time and so good to have that regulatory mechanism working.
For us.
And next I'm going to flip to slide 18, which is our capex history and projection. So slide 18, and 19 have been updated now for the California partial rate case settlement as Paul mentioned that rate case settlement is subject to the approval of the CPC and there are couple.
We'll have outstanding issues related to capital.
That are fairly minor in terms of the total capital that would be allowed but nevertheless provide a little bit of uncertainty here. So for slide 18, our capex projection. We're now as Marty said projecting between 250 into 60 million in 2019.
We expect that to rise to about 275 million in 2020, and 285 million in 2021.
And that if you added together totaled up to about 800.
$10 million, which is approximately what we have in the rate case settlement. So that could go up if we get some of the disputed issues and if other other things move around if you flip to slide 19. This shows the effect of those the Capex and.
Projected rate base settlement on the rate base of the total company.
And the the box that I've added on this chart from the last few times that you've seen this shows the the range of outcomes that we see the topline for 2020 through 2022 represents the base settlement plus our rate base that we have another states are projected in other states. So thats kind of the low end.
The disputed items are on the second line.
Those include four wellhead treatment plants as well as the AFUDC element of the rate case.
That are in there as well as the.
Potential changes due to the depreciation rates that are being disputed.
The third line represents the advice letters that are included in the settlement.
We believe those advice letters will not be effective in rates until 2021, although we could be authorized to file those advice letters as soon as the middle of 2020, we just don't believe that the projects that are identified there will be complete and in service and able to process those advice letters for effective rates until 2021 and so.
Finally, the fourth line there represents the potentially allowable rate base. If we were to win on the disputed issues as well as get the advice letters filed an in service so.
What you can see is this is very consistent with what we were describing prior to prior to the rate case settlement that we do anticipate a pretty large increase in the companys regulated rate base.
We talked about this a couple of quarters ago, but just to refresh obviously the Companys capital program from 2014 onward has been a big driver of our rate base, however up until the.
The latest federal tax law, we were taking advantage of bonus depreciation and accelerated depreciation that was limiting the growth of our rate base.
That has shrunk considerably under the new the new tax cuts in jobs Act and so what we're seeing is the effective combined effective increased capex as well as decreases in the attacks deferrals associated with those items, resulting in a pretty pretty big change in the.
Trajectory of our rate base. So that's something that we talked about its something that is.
Coming forward and we believe that that will be in place when when the rate case gets adopted.
And Marty I'm going to turn this.
Sure. So obviously our focus between now and ended the year is getting the general rate case.
Closed up buttoned up and the items of dispute hopefully resolved before the end of year as Tom mentioned, we've been busy getting this this ATM program put in place and getting that off the ground and Thats been filed and as I mentioned wildfires season is well underway and deliveries Psps public safety power shutdowns.
And making sure that weve minimized the disruption to our customers. So kind of three three focal points going into the end of year. That's what we're going to focus on and what that we will open it up for questions. Please.
If you will have taken that your question. Please press star one I guess telephone keypad again that is star. One quick question. The pause for just a moment to come to advocate a roster.
Yes.
And your first question will come from the lot of how Sunbelt W. am.
Hi, Good morning. Thank you for the very comprehensive comments I have a few questions you don't mind.
The first one is for Tom or Paul.
I got the color on your settlement very helpful and just curious what kind of additional details can you give in terms of the revenue requirement that you agreed to in the base settlement relative to your for example, the 50 million revenue requirement at.
In your one.
Sure assign we've not we've not been able to publish that yet because of the speed at issues, but let me give you a little bit of color if I can.
Remember that the rate case was filed back in July of 2018, and since then we've received a rate increase for the.
The step rates are the escalation rate increase for 2019 that was about 16 million. We've received additional water offsets which were contemplated in the case. So in total we versus kind of are already received about 20 million of the 50 million that we asked for ops. So there's been several other adjustments that were made through the course of.
The settlement process and.
And so we would anticipate that.
Big disputed issues is depreciation that's going to have a big swing on the revenue requirement.
But but we would anticipate a significantly smaller general rate increase than the 50 million that was that was proposed there.
Okay.
Got you Thats helpful. In the second for you Tom.
Coming to the WRAM balance the ramp receivables.
My question is from an accounting rule perspective, how many months do you have please remind me.
You have to collect visa receivables.
So there is an accounting rule, which allows for us to treat this is a current.
Current asset and liability as long as its recoverable within 24 months.
From the date that it was incurred and if you look through our 10-Q's and 10-K.
You will find description there, where we are deferring small amount for those balances, which we don't believe or recoverable within that period.
Those have to deal with balances that exceeded 10% of the the operating districts revenue requirement and their special rules that the commission to.
To deal with that and those end up being longer amortization periods.
And so the calculations done there we have a deferral of revenue that's built into all of our operating operating model and you'll see that in every Q and in the K.
I have noticed in but just wanted to make sure I understand and just for argument's sake.
Did you say, you're not able to collect.
Correct any of the receivables or a big chunk of the receivables again argument sake within that 24 month purity and then just how did your 60 million or so you are not able to correct fit 30 million within that 24 month period from a pure accounting rule point of view.
Would you have to bend reverse the revenue entry.
In Europe , if you're not able to corrected within that 24 month period.
Dave Healy here, but.
Dave you want to take a crack at that.
Yes. So this is.
When we are unable to collect the receivable, we reapply for collection and we reset the period for the collection of that amount.
So.
There is more certainty of collection once the commission allows you to.
To build the remaining amounts and typically the remaining amounts or are small or minor.
Does that help you.
Not quite what I'm looking for just very simply just trying to understand the accounting rules and I'm happy to follow up after this call, but my question really is Dave.
Tom is let's just pick a number 10 million 20 million whatever the amount is off the 60 million. That's currently outstanding receivable argument sake that just paid 20 million. That's that's not collected within the 24 month period argument sake viewed.
Then from a pure accounting requirement in your income statement. You then have to write off for write down in that 20 million revenue.
Next question.
I understand the question I think I think what you're missing is that when we defer the revenue were also different deferring a cost associated so when you see that 30 million and you imagine that we have a scenario where work thats not collectable within 24 months, there's a cost component associated with that.
According to the accounting rules were booking that and so it's a really much smaller impact if that hypothetical were to be adopted.
I think we have to go to the next question then let's let's take this offline and we can have a conversation about Victor you still need more detail.
Thank you so much really explanations appreciate it.
Again, ladies and Gents just ask about your question Press Star one.
Again that is start went to ask a question.
I'm showing no further questions at this time do you have any closing remarks.
No just want to thank everybody for their interest in the company and we look forward to talking to you.
At the year end earnings call. Thanks, everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.