Q4 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to be California, Water Service group fourth quarter and year end 2019 earnings results teleconference. At this time, all participants or any listen only mode.
We will conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.
My mind read this conference call is being recorded I would now like to turn the conference over to Mr., David Healy, Vice President and corporate controller. Please go ahead sorry.
Thank you Tiffany.
Welcome everyone to the 2019.
Quarter and year end earnings call for California Water Service group with me today, our Martin Kropelnicki, our president and CEO.
Thomas Smegal, our Vice President Chief Financial Officer, and Paul Townsley, Our Vice President of business development, and Chief regulatory Officer.
Replay dial in information for this call can be found in our year end and fourth quarter earnings release, which was issued earlier today.
A replay will be available until April 27, 2020.
As a reminder, before we begin to.
The company has a slide deck to accompany the earnings call.
The slide deck was furnished with an 8-K. This morning and is also available at the company's website at Www Dot Cal water group Dot com.
Before looking at the year end in fourth quarter.
Results, we'd like to take a few moments to covert forward looking statements. During the course of the call. The company may make certain forward looking statements. Because these statements deal with future sense, there are subject to various risks and uncertainties and actual results could differ materially.
From the company's current expectations because it does the company strongly advises all current shareholders as well as interested parties to carefully read and understand the company's disclosures on risk and uncertainties found in our form 10-K.
Form 10-Q press releases and other reports filed from time to time with the Securities Exchange Commission.
I'm going to pass it over to Tom to begin thanks, Dave and good morning, everyone. Welcome to our annual earnings call I'm going to start a walking through the slide deck and I apologize I realized that we don't have page numbers on the slide deck. This time, but I'm going to start with the a table of financial results, which is almost six pages.
Jack and that is our for a full year results starting with earnings per share or we had earnings per share of $1.31. That's down five cents or 3.7% from the earnings per share last year for the full year net income was 63.1 million that's down 2.5 million.
In our 3.8% or from the earnings last year flipping to the quarter fourth quarter.
Our earnings in the fourth quarter on a per share basis were 24 cents down eight cents from the fourth quarter of 2018, and our net income was 11.3 million down.
4.1 million from the earnings in the fourth quarter 2018, I will highlight actually for both of these slides our capital investments for the year were 273.8 million.
That is.
The highest a recorded a capex that we have as a company and is result of a big fourth quarter for Capex costs. So looking at the bottom of that fourth quarter chart.
78.8 million of Capex in the fourth quarter up substantially from the fourth quarter 2018, we'll talk a little bit about that later in the slide deck.
I just going to the general description of our financial highlights for the year remember that this is the third year of our California General rate case cycle that 2015 rate case in California, and this is the time when our rate relief is the most limited what we saw in rate relief did not cover the increases that we saw.
In asset related costs, and wages and other operations costs and so that is unfortunately fairly typical of the way things go in California with this cycle, a well Paul Townsley will talk in a moment about our general rate case and that test year for next year, but that's typically they kind of thing that we.
And the third year, but California general rate case cycle for a company.
We did see a reduction of 4.4 million in business development expenses that was offset by the non recurrence of 3.3 million that in 2018, we received as a drought cost recovery.
The third item here is our public safety power shut off said wildfire risk reduction activities that was 2.1 million for the year, we've identified that throughout the year.
The change in the value of our benefit plan investments actually added 7.4 million. This year that was partially offset by a small reduction to unbilled revenue 2.2 million and a 1.6 million again have a nonrecurring benefit that they had occurred in 2018 from our company owned life insurance.
Our fourth point here is that our final effective tax rate was 22% that was higher than the 20% a tax rate in 2018 that is due to a decrease in the state tax deduction for repairs and that resulted in about a 2.3 million dollar reduction.
Net income.
And I mentioned the Capex, so look very quickly to the fourth quarter financial highlights and again. The difference here is primarily rated related to things I talked about a moment ago. The drop program costs that did not recur that recovery there 3.3 million up the general rate case fare increases that we had that.
We're not offsetting entirely our increases for wages operating expenses and asset related costs, the psps cost in the quarter and various other.
Other items that were typical of the year.
So now I'm going to flip over to Paul and I've talked a little bit about our 2018 general rate case Yep. Thank you Tom so.
We are.
We filed the settlement with the California Public Utilities Commission last October October eight.
And that was a settlement that we reached with the California public advocates office that settlement resolve.
The the vast majority of all of the issues that were in play in our rate case.
And including in that settlement, where about $609 million of new capital investments that were.
Agreed to in a settlement and about $200 million of capital that had been authorized in either in 2018 or prior years.
There were a handful of items that were not resolved in the settlement. Those included the continuation of our revenue water revenue adjustment mechanism or Ram.
Continuation of our sales reconciliation mechanism.
Some balance in accounts for pension and medical costs and then some some.
Other items, including depreciation working capital and the.
Financing during construction.
We are awaiting a proposed decision for the administrative law judge.
The judge has approved interim rates going into effect as of January one.
But we've not received a PD or proposed decision from the judge yeah, either on the settled items or on the disputed items and the commission has indicated that it is planning to issue a decision in the first half of 2020.
Tom.
Next fall so in light of the rate case delay we thought it was important to note that.
We may have some unusual reporting in the first quarter of 2020 and the reason for that is that a that management is not.
Not yet comfortable with the disputed issues in the rate case and May elect in the first quarter earnings report, if we don't receive a proposed decision indicating the approval of these items. We may elect not to report are balancing account regulatory assets and liabilities in the first quarter earnings report I think we will provide.
Color and so we will provide a a range that's out there what would have been booked had we when these issues or had we known that these issues were confirmed to be to be one.
However that the actual results of the first quarter. If we don't get a proposed decision may not reflect these balancing accounts and so it may look different than a first quarter that we typically see for the company remit remember that we do have interim rates and rates that go back to January onest. So when a decision is issued the commission.
Has currently indicated that they are expecting to issue a decision in the first half of the year.
We would be able to go back and get credit for those things in the first quarter. So.
Just want to make sure that we don't surprise anyone in late April if we don't get a decision or proposed decision by then.
Just to be aware that that that might happen.
[noise] and Marty you when talking about Capex, yes, thanks, Tom So I want to briefly update everyone on the capital program. Tom gave some of the final financial highlights a little little earlier.
For the full year, our to our company funded and developer funded capital investments came in just shy of $274 million.
Which is a new record for us as the increase above eight tenths of 1% compared to 18, but the more important statistic as the quarter over quarter. So Q4 2019 to Q4 2018 to Q4 2019.
<unk>, 33.9% increase in capital spending we invested $78.8 million in the fourth quarter. The increased investment in the fourth quarters, which are the two things really one we have that the palace verities water supply reliability project underway, which is the largest project in the company's history.
Made really good progress on that project in the fourth quarter and that project will be wrapping up here in the second half of 2020. In addition, we had a very mild fire season, and if you followed our story and our footprint in California.
We have a very broad footprint and a lot of various that can be affected by potential fire threats. So.
It was nice to have a light fire season in 2019 and that allowed us to continue to focus on our capital program and achieved as a result that we saw in the fourth quarter, which again was at 33.9% increase.
In addition, the company implemented its aftermarket equity program that was has been designed and implemented to fund our capital needs for the next three years, we anticipate raising approximately $300 million through 2020.
And through the end of the year, we'd raised $19.3 million, a new capital to fund our capital acquisition program. So very very happy with the results of our ATM program and how that's working in the market.
[noise] business development activity, Paul you want it was an update absolutely. So our business development activity here at the company continues to accelerate and we signed a number of deals in 2019 that once they have become approved through the various regulatory commission.
We'll increase our customer base by about 4.5%, so pretty sizeable increasing customer count.
Just a few of them are noted here on this slide on November six we announced an agreement to acquire the Rainier view water company. This is in Washington State Rainier view brings 18000 customer connections to the company and when when approved when completed.
Well above double the size of our Washington operations, We have filed a change of control application with the Washington Utilities and Transportation Commission.
And we expect that the commission well approved this transaction and the first half and the second half of 2020.
On December 23rd of last year, we signed an agreement to acquire the copper Lou a water company and couple of waste treatment company. These are on on Maui.
And they serve a combined a thousand connection to the Capello resort and then in January of 2020 of this year, we filed an application where the California public Utilities Commission.
To enable us to serve.
It was previously announced which is the preserve at Miller 10, which is a greenfield development and central California, So lot of activity on that front.
[noise] I'm going to come back to talk little bit more about wildfire and public safety power shut off also known as Psps as I mentioned earlier, the mild fire season was a blessing this year.
That allowed us to to excel in the capital side.
Nonetheless, we have to remain vigilant with our program.
If you recall in 2019, we did have a number of psps events that took place, especially in northern California. At one time, we had 64 locations without water none of our overseas without power none of our customers went without water service over that extended period of time without power.
We incurred about $2.1 million, a total cost between the psps in the wildfire prevention efforts.
1.5 million on the readiness for Psps and approximately 600000 on the wildfire prevention.
We're already working on the program for 2020, we pulled the team together with you at our lessons learned what do we need to improve on going into this year.
So those plans are well underway and we anticipate that will incur a further costs in 2020.
As we get ready for wildfire season in further prepare for pop power outages throughout the state.
We will be seeking regulatory recovery and future filings for our expenses associated with these these two events, but overall I think the company's planning efforts and execution of the their business plans around these events.
It's very good and 2019 I look forward to carrying that forward and 2020 and taking care of our customers. During these events.
Next I want to briefly talk about a point at a compound is also known as people on P. Foster.
This has been a hot media topic over the last several months.
Piepho and P. Foster manmade substances down very commonly in the industrial process and consumer products, So firefighting foams shampoo clothing.
Food rappers anyone at home, who uses baking sheets are baking paper when you bake cookies, so the bottoms dunkin to burn.
They can pick it they all contain these compounds called Piepho and peak losses. There are commonly about 5000. These total compounds in the class of families Piepho NP Foss. Our two of these compounds found these on these compounds that are also called forever chemicals.
So far there remains no regulatory maximum level set by either the environmental protection agency, our state regulators in states that we serve.
We have seen MC else become effective at set at the state level in New Jersey in New Hampshire.
And we anticipate other states will follow.
We anticipate the EPA may be speeding up their process as well the come out with an mcl and the states that we serve a we think the regulation will rapidly evolving. In addition in February. This month of 2028, we saw the California's division at drinking water revised downwards. Its response level for people at a 10 parts per trip.
In and P. Foster 40 parts per trillion. A response level is not a health standard, but basically indicates when you have a well that is at that responds level DDW recommends taking that out of service and so with with their guidelines. There's a risk assessment that takes place and you have to test or what.
In accordance with their guidelines for testing, we have completed that testing.
In California, we had approximately 11 wells.
That were at or around that response level that that we are taken out of service.
Having said that we've made a decision to go ahead and test all of our water sources in all four states for people and Pete boss just to ensure that we have the complete dataset.
And comprehensive information on our water supply to put that into perspective, that's 11 wells have approximately 1100 and so throughout the rest of 20 to 20, we will continue to test all of our water sources, even though they don't fit the selection criteria as defined.
By DDW are that are the EPA and just to see what else.
Out there.
Our goal always as public health and to minimize any exposure to our customers and we will continue to work with the state to do that to ensure we had the highest level or water quality.
We also anticipate that we'll be able to recover some of these costs are regulatory filings as we're getting water along the process and then lastly on this point. The company has also I joined the consolidated product liability litigation against the manufacturers a firefighting foams, which we believe is a leading cause of contamination into the end of the water supply so.
I'll be more to come on Piepho NP boss, it's a rather complicated topic.
We're happy to talk about that more detailed people ask questions, but keeping on the mcl to know that were ahead of the program and we're doing the right thing.
Next page I'm going to talk about the decoupling balancing accounts.
For 2019, our sales ended up at 86% of the adopted estimates in California.
Thats, where were subject to the Ram and they MCB a certain net Ram receivable went up 62.6 million that's up from 56.1 million at the end of 2018.
Our adopted sales have been adjusted lower due to the triggering the sales reconciliation mechanism that allows us to adjust our sales when they don't meet the target in the second and third year for rate case cycle and how the SRM not been in place. The WRAM balance would have been quite a bit higher by $14.9 million higher than it is.
So we're very happy that we have had that mechanism.
Got it turned a couple of pages forward to our Capex.
Not many changes on the Capex table, although we do reflect couple of Capex for 2019, the projections for 2020 and 2021 are similar to the projections that we showed at the end of the third quarter and those are the result of the the rate case settlement that we expect a connection to approve sometime in the first half of 2020 flipping to.
The next page, which is the regulated rate base.
I will highlight one one change here, which is that we've updated 2019 and 2019 now reflects the year end rate base. So of what was there before was a representation of the advice letter project that we were able to get under the regulatory regime.
The 2015 rate case, most of those advice letter projects were not filed by year end and will be filed in upcoming upcoming years, particularly the palace Verdi's water supply reliability project and so thats. The reason that that data point has come down a bit but theres no change to the projected rate base.
Going forward 2020 through 2022 those remain the same as we indicated in the.
In the slide deck in the third quarter.
Marty you want to Rev wraps up here, yes, thanks, Tom so.
Hopefully everyone gets a sense that we're keenly focused on wrapping up our 2018 general rate case as Tom mentioned earlier, there maybe some noise. If we start bleed over into the second quarter with or without a proposed decision and we're hoping to CPC will conclude on our general rate case.
Which will allow us to avoid a lot of busy work that frankly is just extensive and doesn't provide a whole lot of a marginal value.
How do we have got a state that number so.
We're going to stay keenly focused on that.
We look forward to so welcoming the Rainier view employees to our company as Paul mentioned, we filed with the you Tc and hope to have that deal closed sometime mid to second half of 2020, we've been very impressed with the rent interview employees and their processes by which they run their company and we believe that there's a strong cultural fit with our.
Culture, and they will be a welcome addition to our family.
Then lastly.
We'll stay focused on operations the evolving people up he boss issues.
Preparing for wildfire season at more Psps outages during the year and making sure that we've maintained high quality water, while serving our customers to the best durability. So as you wrap up 2019, I think it was a very successful here. It's a little disappointing the rate case is getting delayed because of the company ended up I think a fantastic job trying to keep that.
On track.
We have to wait for the regulators now and we're going to keep doing what we deal which is investing capital.
And build our company to serve our customers. So what that Tiffany I will turn it open open it up for questions answered. Please.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone. If your question has been answered or do you wish to remove yourself from the Q. Please press the pound key we'll pause for a moment to compiled acuity roster.
And again that is style one.
At this time I'm showing no questions in the queue I will now turn the call back over to Mr. Marty proper Mickey.
Thanks, Tiffany I know our good friends that off we're having an analyst day to day and our ours ours call as scheduled during our analyst day. So I will be in the office all day. If anyone has the any follow up questions feel free to reach out to Tom and we'll all be here and we'll take any one on one questions anyone has and thank you for your support during 2019, and we'll look forward to to.
Welcome to everyone.
Throughout 2020, thank you and have a good day.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day.