Q2 2020 California Water Service Group Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily.
Until that time your line is when they can be placed on music hold thank you for your patience.
[music].
This time I would like to welcome everyone to the California water service groups second quarter 2020 earnings Conference 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.
<unk> <unk> asked a question during this time simply press star and the number one on your telephone keypad.
I would like to withdraw your question press the pound cake.
Thank you I would now like to turn the call over to Mr., David Healy Vice President Corporate controller. Please go ahead Sir.
Thank you Lisa.
Welcome everyone to the 2022nd quarter results call for California Water Service group.
With me today are Martin Kropelnicki, our president and CEO, and Thomas Smegal, or Vice President Chief Financial Officer.
Replay dial in information for this call can be found in our second quarter results release, which was issued earlier today. The replay will be available until September Thirtyth 2020.
As a reminder, before we begin the company has a slide deck to accompany the earnings call this quarter.
Slide deck was furnished with an 8-K. This morning and is also available at the company's website.
Yeah.
I'll be it'd be a Todd how water group dot com.
Before looking at the second quarter results, we'd like to take a few moments to covered 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 uncertain.
Teas and actual results could differ materially from the company's current expectations because of this the company's strongly advisors 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 welcome everyone to our second quarter earnings call.
Just as a preface I think most of you were on the call are aware that.
The major factor for the company in this quarter is that really the same as it was in the first quarter and that is that we have not received either a proposed decision or decision on or California General rate case, which was expected prior to January 1st of 2020.
I'm going to begin the results discussion on slide eight of the deck and talk a little bit about a quarter and then on the year to date basis and they go on from there.
For the second quarter, starting from slide eight our net income decreased by 11.7 million.
To five point Threemillion and that is a difference from 35 cents gain in the second quarter 2019 to an 11 cents gain.
In the second quarter or 2020.
The Big factor here is that we had no rate relief.
From the California Commission and.
We estimate that yes, the rate really good comedy and there's two big factors here in the same to package, we talked about on the first quarter call.
It's a total of 29.1 billion that we believe would have been achieved this this additional pre tax income if the commissioning rendered a decision on a favorable basis to the company and of that for the second quarter 10.9 million represents the pure delay.
Resulting from the settlement agreement that the company filed with the consumer advocate back in October 2019.
And so that is being tracked him in interim rate a memorandum account for future recovery, and then 18.2 million, which represents income from our disputed cost recovery regulatory mechanisms. Those remember our mechanisms that we've had for many years of first of all to decouple our sales from right.
The new.
I will talk quite a bit more about that later in the call and then secondly, our regulatory mechanism for the pension and health care balancing accounts because those are in dispute in the case, we didnt record them as we would normally I have had we recorded them in the quarter. We estimate an additional revenue would have been.
18.2 million.
Those are regulatory mechanisms match up to some cost increases that we had in the quarter. We had 6.5 million increased water production expenses.
Of which 5.7 million would have been offset by those regulatory mechanisms and we had 2.1 billion of increased pension benefit expenses, which also would have been offset by those regulatory mechanisms have they been in place.
Other factors for the quarter, a we saw a rebound in our unrealized benefit plan investment performance that was 3 million higher than in the second quarter 2019.
And other things that happened, which would be typical of a utility company in our situation or depreciation expense.
Went up a very similar to the first quarter. So it was up 2.2 million in the second quarter and that's related to increase plant investments in 2019.
And we didn't have an increase in our maintenance costs of about a million dollars.
Turning to slide nine on a year to date basis, very similar story and very similar explanation all the numbers are different but.
But the explanation is the same store net income.
Decreased by 24.4 million.
To a loss of 15 million a year to date basis in terms of earnings per share a we have a loss of 31 cents screw year to date as compared to a gain of 19 cents 29 team.
Thanks again, the two factors related to the rate case, we believe that had a rate case been adopted and it was favorable to the company on these matters the 19.8 million representing the delay of the settlement agreement amounts and 26 million related to our regulatory balancing account. So we.
Disgusting.
For the year to date basis, or unrealized benefit plan investment performance, a was 4 million lower than in the first half 2019.
And that's a really due to a comparatively strong market conditions in the first quarter 2019.
And other impacts on a year to date basis again, very similar we see depreciation expense increased 4.3 million and maintenance expense increased 1.6.
On slide 10.
This is a very similar slide to what we gave you in the first quarter earnings deck.
Our our opinion of the estimated.
Benefit from on a full year basis from the California GRC has not changed that's shown in the table on that churn we believe the benefit is.
Between a 38.9 42.2 million on an annual basis.
And so we continue to expect that when we get a decision in the case that that will be the benefit to the company.
Our 2020 sales forecast as we as we mentioned last quarter or about 7% lower than the 2019 adopted sales so.
In discussion of the the Ram and the MCB, a we believe that were much more likely.
To be closer to adopted sales than than we were in 2019.
And.
As I mentioned earlier, we would have been allowed to ever cord additional revenue of 5.6 to 10.9 million in the second quarter.
Yes, yes, the settlement had been adopted.
With the low end of the revenue range linked with 5.2 million reduction in depreciation expense.
So getting a little bit more granular on slide 11 on the disputed GRC items I just wanted to.
Point out that the the two things that are the Ram the MCB a we believe that on the on the in the second quarter. That's about 14.9 million that would have been recorded in those balancing accounts and that the pension and medical cost balancing accounts, we believe would have been 3.3 million.
And again, we're highly confident that past amounts that are recorded in those accounts are recoverable regardless of the commission's decision on a go forward basis in our current general rate case or any other disputed items in the rate case, we don't believe or major factors in either the second quarter or the year to date results.
Ages of stuff working I'm going to skip the S. Bridges that we have because those are described in the narrative.
And I'm going to turn it over to Marty for an update on code 90.
Good morning, everyone. Thanks Tommy.
It certainly has been a ah interesting second quarter dealing with the cobot 19 pandemic.
As I think most people know utility workers are considered a essential workers and therefore, most of our employees 90 plus percent of our employees I have been at work in the field every day.
Accordingly that makes protecting those employees as well as protecting our customers are very very important where complying with all local regulations in our service areas as well as we were an early mandate or masks and other PPD for all of our employees.
As you've probably seen in the press, California, and specifically Southern California, L.A. counties and current counties I have seen a surgeon cases.
And we have seen increasing caseload hospitalizations in the past few weeks, a as well as we've seen a handful of employees also contract the virus outside of work.
So in cases like that we've been able to minimize any disruption of service. Obviously, we isolate any employee that has any type of exposure and in order to keep them from getting the other employees sick and we've been successful in doing so our customer centers at all four states I have remained closed and will remain close until until further.
Notice and we have suspended all collection activities and the effort to keep people supplied with water.
In addition, weve off Robert additional help through our direct grant program as you may recall the company allocated a half a million dollars for charitable contributions some of that went to work and local food banks in local food pantries throughout their service areas I know the part of that I Grant went too.
What we called it a direct aid our direct graph for customers, who are struggling to pay their bills.
And so that's probably a to b I think beneficial and more importantly received a lot of letters from from customers, who appreciate the fact that we are helping them out.
Today, we have had no disruption of service. This despite cobot 19. In addition, there were some of the writing and stuff that we saw.
Yeah.
And that May and in early June and so we have country continue on track doing we do best which is providing clean drinking water for our customers coming you want to go to the business impacts the pandemic.
Sure. Thanks Marty.
So we have seen increased customer account aging.
And remember this is due in part to the increased unemployment rate and also in part to the regulatory commissions, telling us that we can't have collection activity on the company I think as Marty you May have noted last quarter, we voluntarily suspended collection activity before our state regulatory commissions required.
Just to do that but nevertheless, there are now regulatory mandate to suspend collection activity and in California that mandate.
At this point goes through April of 2021, so going to be a long term suspension of collection activity. Our bills that are outstanding more than 90 days and those are the build that would normally have been sent to collection those bills increased to 3.4 million and in the past when we've had those bills Synta collection only a portion.
One of those amounts are typically uncollectible.
So we've raised our estimate on the balance sheet. This is the bad debt reserve balance for doubtful accounts from 0.8 million to 1.6 million as at the end of the second quarter.
Or water sales have continued strong, particularly on the residential side.
That is offsetting a drag on sales in business industrial and public authority sales that last bit I think was school closures for example in the in the late spring, we do see in resort areas in Hawaii in particular a decline in.
Sales.
That we're observing there.
The California utility caliber Cal water as we mentioned in the first quarter activated the catastrophic event memorandum account that allows us to track costs associated with Cowen.
And in the second quarter, we recorded approximately 600000 of incremental operating expenses to the memorandum account a those are amounts that we will seek to recover.
Later filing from the commission a memorandum account as you'll recall is not something that we typically a book or the revenue from until Theres, an authorization to recover that revenue.
In addition to the 600000 of incremental operating expenses, when we do have bad debts and and those do go to collection at the end of this period or that will be included in our request to the commission.
Recovery.
Hawaii has a very similar mechanism that we're working to put in place there's been a filing with the Hawaii, Oh public Utilities Commission as well there are liquidity is strong.
And at the end of June at the end of the quarter, we had 114 million in cash and additional current capacity on our lines of credit.
More than $70 million.
Marty you want to talk to us about all the fun stuff in California.
There's a lot going on in California.
Starting off with somebody who may have seen the CP you see the California property treaties Commission extended its deadline for considering and concluding on our 20, <unk> and general rate case to September Thirtyth.
That means in order to meet that deadline that commission last issue a proposed decision no later than August 20 steps that we continue to monitor that and hopes that we can get that wrapped up as Tom pointed out earlier were feeling to financial consequences of not having rate relief and it gets pretty confusing I each quarter to talk about our results with and without.
Rate relief, so we hope to get that wrapped up in the third quarter.
Perhaps more importantly from a policy perspective on June excuse me July 3rd the steep you see issued a unexpected proposal and unrelated case and I want to read to you that the full name by this Oh I R and I'll come back and talk about the full names called are evaluating the Commission's 2010.
Water action plan objectives of achieving consistency between class a water utilities low income right assistance programs.
Providing rate assistance to all low income customers of investor on water utilities and affordability so was that.
Oh I are looking at the consistency.
And the goals.
You mean consistency.
Hello, and comment right assistance programs.
So this July 3rd proposed decision that kind of came out a lot less field.
If adopted would require Cal water and other water utilities that are regulated by the CP you see to propose renewing its decoupling mechanism in the next general rate case.
This decision is troubling for a number of reasons first and foremost it drives conclusions on it on a very very limited.
Set of data and evidence in fact, we don't even know what was used to construct the data tables used by the commission to try. These conclusions there were only two hours at workshops provided our and in conjunction with that with this rule making.
And we think it's just it's just the bad decision.
Also goes against the state schools of making conservation away a life and we have aggressively going after decoupling and conservation early on as prescribed by the water action plan.
So were very much involved a and talking to the commission a last week and this week about this proposed decision and find it going in the wrong direction of the state's policy and support of conservation and the conservation goals in the state just to remind everyone, California has a AG business, it's over 60 billion dollar.
Since the largest AG stayed in the Union.
And were growing and population from almost 40 million to 45 million over the next decade. So the idea of getting rid of decoupling.
And well.
Basically implementing what's in this oh I are essentially increases rates for most of the customers, including low income customers. So where we are just flat out against and we are lobbying against it.
Also unclear what the effect of this policy decision what could have on the current proposed decision that we're waiting for so legally it should push into the next rate case cycle.
But we're looking into that and digging into that right now so.
There will be more to come on this on this PD that was issued I hear in early August we have a lot of efforts.
Focused on basically asking for a whole to get more evidence upon the record and to add a full examination of all the data that's available for the last 12 years of decoupling and we believe that commission.
I would get to a different conclusion, if they had all the evidence on the table.
Looking at the capital investments or for the for the quarter of the frankly was a highlight with with everything going on that's been kind of negative news, it's nice to see there a capital program I was up 9.5% compared to the same period last year. So we had $133.5 million invested and.
In the first half 2020.
The company previously estimated it would spend between 260 and 219 million in capital during 2020, well the company has experienced some individual projects slowdowns, we've seen other things like our main replacement program be haven't been able to accelerate so overall, we remain on track at least as of right now.
Mid year 2020.
Of course that could change depend on how things go with the virus and if there's any more pending shutdowns that could affect our overall ability to get capital invested and put into the ground. In addition, we've added an incremental $5 million and capital investment a.
For our Bahrain Airview acquisition that closed during the second quarter and if you turn to page I want to talk about business development, which includes right here view.
The Washington Water service company and they the Washington, New TC, which is the commission mute and Washington approved our acquisition and we closed the acquisition in June which now makes Washington Wire service company the largest.
Investor owned rate regulated utility by the U.T.C. in the state of Washington.
In addition, we have filed applications in Hawaii and with the regulators for approval of our Kalo system and a wahoo and a couple of really system in Maui for the change in control and we anticipate that was closing hopefully by the end of the first quarter 2021.
You see in the slides at rainy River you added approximately 18500 customers.
Hello, a system will add about 200 customers and for the history buff stats the.
The former Barber's point air base on the on Oahu, that's going to be redevelop.
And to residential and commercial properties and then the comparably water and wastewater system, which is just north of our kinda poly system on the island, a mally, which has a couple large hotels golf courses and developments. So you add though is that closing out the two and Hawaii that would add just under 4% to our total cost.
My connection count for the year 2020, which we think is very healthy given all we've been dealing with what the pandemic and everything else. So our business development team has continued to be busy and continue to do good work [laughter]. Tom you want to go through the the next couple of flights.
Sure. Thanks, Marty so on the capital investment Mystery Slide, which is slide 19, we did update or 2021 projection to include additional $5 million of investment in former Rainier view water.
We'll see a little bit of a bump there and if you flip to slide 20, which is our regulated rate base. We have now included the estimated increased rate base in 2020 as well as capital investments in 2021 for Rainier view and so those numbers have gone up just a little bit obviously that's much.
Smaller than our California operations and it doesn't change the shape of those curves that we have updated those numbers.
As you can see we continued to be on track as Marty mentioned.
And our expectation is that these these are still the numbers assuming the settlement gets adopted by the commission I will add an it's.
Apologies that is not in the in the deck, but you'll notice on slide 20, we have a third row is called advice letters included in the settlement.
About 150 million, that's the California settlements.
Yesterday, the company filed with the commission and advice letter to begin the recovery process on its palace Verdi's water reliability project.
This is a 96 point I think it's a 96 million dollar authorized advice letter for that very large project the largest project and the company's history and we did make that advice letter filings. It is subject to a review process and we don't anticipate that that advice letter will be approved anytime soon.
We're targeting early 2021 for the approval of that advice letter but.
For just for those of you were looking at the rate base and that the light Green area. If you will on that chart. The good news is that most of that has been already now been filed for.
Oh, so Marty I'll turn it over to you for wrap up.
Great. Thanks, Tom.
Well [laughter] you should get a sense, there's probably three or four main things were focused on in the third quarter.
First the that PD the proposed decision on affordability and low income assistance.
Staying focused on that as well as our efforts to conclude on our 20 and 16 general rate case. This is.
One of the longest delayed rate cases, I think we probably had at least to last decade. So are anxious to get that wrapped up with the commission and get put to bed.
Additionally, the Cobot response, you know it seems to change every day and CDC requirements keep moving around and we have to show up to work every day, we're not a company that has a lot of employees sheltering in place we have to show up and continued to produce and provide water for our customer so making sure. We continue to take every step possible to protect.
Our employees.
And our customers as we deal with Cobot and we go into the fall season, which includes going into the flu season.
And lastly, and this may become one of them are more important items as we move later into the third quarter were moving into wildfire season, and the real possibility have continued public safety power shutdowns and as we know that power may go out, but people still need water and so that the operations team has done a very good.
That preparing for wildfire and the P.S.P.S. season, and we are well ready to handle.
Any challenges that come our way so Q3, it looks to be a very busy quarter for us and we look forward to sharing our results with you as we wrap up the quarter.
And report our results at the end of October so what that lease that we will open it up for questions. Please.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Durgesh Chopra with Evercore ISI.
Hey, guys. Good morning, and thank you for taking my question.
Good morning Durgesh.
Before I ask you I just want to say that I truly appreciate all the work hearing all all your transparency clearly very very challenging time things for you guys, but you've sort of kept the investment community of up to speed on everything that's been going on so so kudos to you for doing that.
Look I wanted to ask you on the on the on the on the proposed decision just a quick clarification, if I go back to slide 11.
Is the proposed decision sort of applicable to the Ram Nmcf decoupling mechanism, which in the second bullet or is it.
The Ram MCV, a decoupling along with the pension and medical costs.
I just wanted to sort of just get some clarification on that.
Sure. The proposed policy decision of the commission or the low income docket is focused only on the Ram and MCV mechanisms and and again as Marty said the way that the proposed decision is written.
Would impact the company in the next rate case cycles. So it would be the 2021 filing if that if that proposed decision were adopted without.
Any.
Any changes and so it wouldn't affect either of those things on the.
Interim period.
However, you should know that the ratepayer advocate, obviously litigated that issue the Ram issue with US here in this rate case and they have supplied comments to the commission in the rulemaking that suggest why wait let's get this over with for Cal water and so it's it's certainly something that we need to be.
Wary of.
We need to continue to fight against and make sure that the commission understand that it's not just flipping a switch to go from being a de coupled water utility to not be can decouple.
Theres some severe rate design changes that have to take place.
What the decoupling did back in 2008, just to remind everyone is that allow the company to adopt an incredibly risky rate design, you've seen that in the WRAM balances that we've had over the years, but that the redesign is such that more of our costs are being recovered through quantity rates rather than fixed charges and more of those quanta.
The rates are being recovered through the talk here. So it it's a it's an accelerating cost recovery that focuses our oh fixed cost recovery on those customers who are using a lot of water and if you look at the company's who don't have decoupling those companies that have the M. Ram.
This adjustment mechanism you will see that they recover far more of their revenues through fixed costs and they have much flatter redesigns and so it would be premature and Oh really discouraging if the commission were to.
Take the Ram out of play for Us in the current rate case without without changing the redesign and that's really the one good thing in the proposed decision.
There's a sea of bad enough proposed decision, but the one good thing is that it recognizes theres a great deal of effort that needs to take place to change the redesign and other factors.
To get rid of around mechanism.
And so we hope that at least that languages persuasive on the commission Intercurrent case, I hope that helps there again.
Understood done that Super helpful. Yes, and then just on the as rich Tom Slide 12, So am I thinking about this correctly the sort of the impact of the 14.9 million that shows up in the sort of the auto production cost Bar chart is that the right way to think about it so.
You're not getting essentially recovery for those higher then allow water production cost is that that what to think about it.
Yes, so on the Bar chart, you see the water production costs that isn't going to equal exactly the 14.9 million because part of that 14.9 million is the but lower revenue that wasn't achieved.
So I mentioned that water sales were about where we wanted them to be I think there about 96% of adopted so the smaller component of the 14.9 million, which is actually of the revenue loss from not having decoupling rather than just the.
The water sales component.
Understood that makes sense.
Then just finally any sort of color that you can share with us obviously.
Seems like from your commentary on the on that you've met with a commission a couple of times here in the past two weeks. So what is your expectation. When you do August six you think that the commission actually rules on it or you suspect that this will sort of be addressed in a in a future proceeding just any color that you can share with us I would be appreciated.
Sure so.
So weve divvied up the medians I did the first couple of means and Tom's that comes in to do one or two of them this week as well.
Where we think it's a fair question to always ask about kind of low income and underserved communities.
Having said that we think it's it's a pretty big reach to go from saying, we're going to examine yeah. The consistency of low income right pair assistance programs to saying give about a decoupling.
So that's been kind of our message to the to the commission.
And it's it varies kinda Commissioner by Commissioner you know I pad, one one commissioner say well I, just don't believe and conservation and I think we shape.
Get rid of increasing block rates and shrink the number a tier so that's the problem with that it's smacks right into the goal of what they're trying to accomplish which is kinda equity among on underserved communities and low income repairs that increases rates for almost all classes of customers and frankly, when you do that you start to reward.
The high water users and penalize the low water users. So our point has been really simple at a minimum put a hold on it allow for a proper examination of all the data and facts not just is very narrow limited band of data that we believe the Cal advocates put together and and then let's have a full discussion.
About it it's a really big polishes policy shaft, and so on one hand, the state water resources control boards done all this work on making conservation away alive.
And how do you continue to grow the economy dealing with the growing AG business dealing with the growth in population and making conservation away a life and now you have a PD coming out saying, we want to undo all that so you know there's theres that theres a break there that's really important in terms of state policy versus what the Cpcs trying to.
To proposed implementing so we're pointing out those those and consistencies because we think are very important.
For those of you remember when we implemented the Ram we kind of took it on a Chen initially from a wall Street perspective, because we were giving up our ability to make more money as water sales went up and we said back then it was just it's the right policy decision for the state and for the company because we want to aggressively promote concert.
Nations. So we're laying out the arguments you know that when you talk today. The commissioner staff. They are pretty tight lipped. The policy advisors are pretty tight lipped. They ask on a lot of good questions around our positions and about the data that we're relying on.
So we're asking for a minimum of a hold if not a an alternate basically kind of scrapping the proposed decision and it's scheduled to be discussed on the six of.
I've August and we'll have to wait and see what happens any commissioner can put on hold on to our stay.
Likewise, another commissioner could write an alternate.
Understood. Thank and just one last one quickly and I. Appreciate you answering all my questions will you be issuing sort of a release, it's on August six or an 8-K like regardless of where this thing goes given that it's a pretty material event for you or or I'm not ready to say that this time.
Well keep everyone updated I think if theres a hold just a plane hold on August six that may not result in an 8-K, but any actual decision or.
Indication of an ultimate proposed decision being published that's going to.
Thats going to result in a official communication.
So I'm just thinking back to almost it yes, I think if you don't see something it means that it was it was held because you'll you'll see something in any other guys.
Okay perfect. Thanks, guys.
Your next question comes from the line of Ryan Connors with Boenning and Scattergood.
Great. Thanks, good morning.
Good morning.
So I wanted to continue discussion on non decoupling from it and maybe play Devil's advocate on your view that this is.
At this and new proposal is.
Policy, you mentioned, taking it on the Chen from the Street I think we probably through a few of those jobs.
And then you know the reason is that we believe that one of the reasons why are we use in California or close to the low in the country.
Is that you know notwithstanding your comments Tom about the the riskiness of the rate structure. They have argued that you know that that a decoupling mechanism.
Reduces the inherent risk in the business and the seems like they've been successful and that kind of pushing our always down. So I guess my question is let's just imagine for segment that you know that you don't get your wish and this thing does move ahead might there be a silver lining in that it takes away their ability to argue that a at least to the extent.
The extent they can't make the.
Opposite argument, they've been making all along and could we actually see some relief on the are are we side. The next few years if that were to happen.
Ryan those are those are very good points I think that the the fact pattern, though to keep in mind is remember that our cost of capital as a group effort that is for companies three of whom have a the ram mechanism in the fourth be San Jose water and they've if you go back to all.
Those proceedings Theres never been a recognition of any difference in the allowed our OE between the three Ram companies and San Jose water with respect to the cost of capital and the riskiness there.
And so I'm not sure that we can put a lot of fee in the idea that removing around mechanism would cause there to be an increase to our or are we.
And so I am hopeful that you're right but.
At the same time, I'm, a little bit doubtful that that's out might actually take place.
I'll just I'll just leave leave that there will have to we'll have to wait and see and obviously.
For those of you don't recall, we will be filing for a new cost of capital next March that would be a theoretically effective on January onest of 2022.
And that's that the standard process with the commission merged yet anything to add there.
No I think Thats right I I think.
If the decoupling.
Reduced the risk we at we would certainly be hitting our OE every year and certainly that hasn't been the case over last 10 years I think it helps remove the disincentive.
Tip Primo water sales right and allows it because it unlocks and the margin on but I think you know to your point right. If it goes the other way you know that that does become an argument and the cost to capital and certainly we would evaluate that with the economist that help us right our testimony and we'll look at.
That quantitatively and quantitatively.
But I think it's still just goes back to me it gets back to simple math and the policy decision for the state as.
California is a massive massive state and and you know there is no quote unquote no no new sources of water. You know you couldn't go to de Sal, which is which is a large carbon footprint very expensive and so your lease cost alternative has can continue to be conservation.
And there's there's 40 years, a case study on electric and gas side in California that decoupling work. So I really think it's a short sided decision with a very narrow band from within the commission. That's trying to do this and I think there logics, just bad but I think to your point if yes.
If they if they reverse it would we potentially use that argument our cost of capital got potentially and it's probably a fair argument I don't know gaining traction there they're pretty hard to argue with on cost of capital.
But we could certainly try.
Got it Okay now I think you've covered a lot of the big picture or excuse me the the tactical issues pretty pretty well. So and then my last question would just more big picture very big picture in nature. You know if you look at the coated situation.
On the surface. It seems like regulated utilities have not really been treated that well from a from a policy and a stimulus standpoint to be on the one hand, you are deemed essential and you've got to keep operating which which is Scott costs money, but then you're required to give the product away. If that's what your customers are saying they need even though we've got massive stimulus.
Coming out of the federal government for households in terms of unemployment benefits and stimulus check. So I guess my question is how do we get there and you know are there any efforts underway industrywide to kinda lobby for better treatment as we move forward into these next round the stimulus to say Hey, you know if we're going to see some of these checks out can we require.
Some level some kinda audit to make sure that people are taking care of their basics water electric et cetera, before they're doing more discretionary things. It just seems like the utilities are kind of caught in a bad spot here in terms of how this is playing out in any thoughts on that.
You know all on let me take it first Tom and then you can jump into Tom.
Any WPC I think as you know we recruited Rob Paulson, you know that could that government affairs team I think has been very busy kind of tracking monitoring trying to get input on the bills I think what's what's challenging with any stimulus bill kind of right now and we saw today with the contraction a a GDP.
As I think we're talking kind of mere survival points right now for people who haven't been working.
So I think it's a little harder to kind of push that we're pretty fortunate for us we have the catastrophic.
But memo account that allows us to to track incremental costs.
That we incurred as a result, a a pandemic and there's a potential for future recoverability of those costs. Once we collect them all and filed from it and they go into review so what I think as more interesting. It is for that for the customers that we use that that direct grant program for.
I have received a half a dozen letters this week from people customers, who have never met.
Thank you need for the grant program and the majority letters are basically said. Thank you really appreciate the health I know I fell behind but I'm on a payment plan and I plan on paying the company back and so on you know I want to give you that credit back and please use it someplace else and accumulate who needs at more.
And and what's been a really.
This is kind of help make for Tom and I with it what the quarter with our auditors are here, we got board meetings.
When I got those letters actually Smile and said you now despite all this stuff that's out in the world.
There are people out.
Out there, who care and do the right thing and so.
I think it's all to be determined I think you know.
Try to take a walk on my lunch break.
Things are still tightly shut down on the west coast restaurants aren't opened hotels aren't opened the economic consequences of this downturn are going to continue to be massive so I think it's a little hard as utility to kind of pushed at agenda point now.
Federally well, they're looking at a packages I'm more interested and if they do a.
Capital improvement program our.
Capital spending program and making sure that the the water utilities get a fair and equitable treatment on any dollars that might be allocated for a capital projects and what's what they're considering right now and the Hell and Rob Paulson has been very very involved with that Tommy anything you'd add on that.
No I think thats great Marty.
Great well hey, thanks for your time this morning.
Thanks, Ryan I appreciate it.
Your next question comes from the line of Jonathan Reeder with Wells Fargo.
I'm running Jonathan.
Jonathan.
Morning.
Do you think there's no need to be something about the low income right or docket.
Before you get.
GRC proposed decision Ram uncertainty.
I don't know the answer to that Jonathan I think that we.
That could be an issue in the GRC I don't know that I don't know that it is or it isn't I think the way that the.
I'd in the low income is written it doesn't affect our GRC.
But I cant get into the mind at the folks that are that are working on our current Trc case, that's certainly a possibility.
I mean, I guess from my perspective, it just seems like the.
Unless the CP you see remove the Ram MCB issue entirely and doesn't open a separate investigation and issue.
DRC proposed decision needs to earn any outcome and this docket.
Yes, I think the difference Jonathan is the GRC, there's been a proposed settlement that that's been on the table since October.
And I think from that from a case law perspective, there are two separate proceedings or ours was supposed to be concluded by 12, 31, 2020, 19, So I havent seen and I was going back in my mind thinking about all the years I've worked at Cal water and also Pacific gas <unk> electric have I've ever seen.
And kind of a a retroactive.
Rate, making type of ruling comes from the PC and I can't think of one so I think the merits from a case loss perspective speak to our favor, but as Tom said, it's really hard you look at what this piece called new where it ended up in it and the fact that was a very very very limited.
Dataset and you do kind of scratch your head and so well, we're trying to figure out what the ex going on with it so.
So I think I would say never say never but I think the arguments are in our favor.
And the case laws in our favor, but I would say never say never because you just never now.
Let me, let me give you one more thing Jonathan our two two more data points on this first of all under state law. The commissioners can't talk to one another about these cases and remember that our general rate cases with Commissioner Randolph.
It's our understanding that she cannot have talked to introduce monosem is about for policy decision. Then so whatever delayed I was involved in our rate case at least up until July 3rd had nothing to do with the policy decision that gives me the service was working on.
At least as a theoretical legal standpoint goes in commercial land off is a good government lawyer, meaning that she's a lawyer, who believes and good government. So I don't believe that that wall had been breached so whatever delay in a rate case at least up through July 3rd didn't have anything to do with the policy decision.
I'll also point out that I know, it's probably not a company that most of you follow but the liberty water utilities that are in California have a proposed decision.
And that decision addresses some of these same issues of around and other balancing accounts. The proposed decision came out I think just on Monday of this week Ami maybe it was Friday of last week and that does not coordinate with the the policy proposal. It says the Ram.
Doing great.
Oh that the park water and Napa Valley.
Should continue the Ram mechanisms they should continue their pension balancing accounts.
And so.
It doesn't seem like there is a coordination of efforts there.
But.
Again, we'll have to wait and see what what eventually comes out.
Right I mean, I guess, what I'm just trying to think of it is there any scenario where.
This proposed decision in the low income repair docket.
Different investigation, but then you are proposed decision in the rate case don't comes out. So nope you can't have the Ram MCV.
That doesn't seem to make sense that you know he gets pulled away in one docket miles the broader Paul you discussion is going on bill.
You know Conversely, if I guess the PD is adopted in its current form and the low income ratepayer.
Okay.
And it says okay, it's going to get right, Okay and.
The next rate case, so not in this current one.
I would think them back to back though the next for this current GRC proposed decision should include continuation of it you know versus I guess public advocates that position that get rid of it right away.
I seemed.
Equally they shouldn't be intertwined.
Yes that one should or shouldn't have been influence in the other.
Laying the proposed decision your general rate case, but now they are intertwined.
Yeah, I know I I see what you're saying Jonathan I think if the PD in the low income case were adopted as it was originally written.
There would be a very very difficult for the commission to concurrently come out and say Cal water should get rid of their ram mechanisms in the case that they filed in 2018 I totally agree with you there.
And so I guess, that's a potential silver lining I did point out earlier the comments, obviously from the reader advocate that let's get this over with the kind of kind of comments. So that could potentially result in a change the proposed decision in the policy case.
We're very hopeful that that is not the case, but.
But you're right from that standpoint, I think they wouldn't want to have two decisions in conflict with one another.
Yeah. Thanks for mentioning that about Liberty utilities, I wasn't aware that I mean that.
That's interesting to I guess.
Regardless of mine I mean, you kept the chances.
The side.
Low income repair document at this August.
You know last I saw I think it was on a.
[laughter] agenda for approval.
Yeah.
Oh, that's typically where it starts Jonathan so until somebody.
Pull that off consent or puts a hold out that that's the typical pattern is it started it starts out as an agenda decision then it starts on consent.
It really is dependent upon the commissioners and their offices, citing that.
The comments that we've made and the the effort than we've been making to educate people on this issue our meritorious enough to delay the proposed decision or potentially to write an alternate decision. There has not been a specific response from any commissioner as of now to hold the PD or.
[noise] offer to change the PD and that.
Not be typical for them to announce that kind of thing. These are all usually very last minute kinds of items. So unfortunately, I think we're going to be waiting.
Even as meetings continue to go on and not just Cal water, but the other parties in the case and other interested parties continue to meet.
I don't think you're going to hear about a hold or potential alternate until very close to that next to next Thursday is meeting.
Okay really appreciate and additional color and good luck.
All these complications yeah.
Thanks, Jonathan Thanks Shannon.
Your next question comes from the line of Angie form Iwinski with seaport.
Hi.
Well, you know that she's going to ask any questions about the around because.
Nobody really knows.
As soon as however, so you have to the catastrophic memorandum accounts for its cold it related expenses and so I just wanted to make sure that means that.
When you report earnings adjusted earnings that both cost and not flowing through the piano now because you're deferring them.
No no from accounts is that correct. So actually that's not correct. So the catastrophic event accounted a memorandum account and our accounting policy is that we will recognize regulatory assets and liabilities from balancing accounts.
Memorandum account has a reasonableness check and that is at the end of.
At the end of the filing process. So I mentioned in the six the 600000 in the quarter that we booked to the memorandum account that's in the personnel as expense and in a future period.
We would file for recovery from the commission and be able to.
We would book revenue associated with that once were approved to do so by the commission.
Okay, because you were pretty much the only California utilities I can think of when I cover electric.
Gas and water, but that's still slow those expenses.
Well I think everybody else assumes that there was an assumption of recovery such those are not.
Not expense.
Okay, well I'll get to get you in touch with our auditors and.
Working on that.
That's just going to companies right. That's been the company's revenue recognition policy for for some time, so we feel comfortable with that distinction between balancing accounts, a memorandum accounts and our trigger again is the commission, giving us or to recover or something and.
And then we'll go ahead and booked out as a rig asset and booked as revenue.
Mhm, so similarly any types of backup power expenses for Psps.
Events that also will be flown through the piano.
Correct and that if you'll recall I believe last year, we did have an amount of extent they don't have that in front of me.
We have different a memorandum account for Psps and we do you expect to file for recovery on that its in its in our financial statements from last year I don't have that in front of me to give you the number but that did flow through the piano now and is expected future recovery once you make that filing.
Okay. Thank you.
Thanks.
And there are no further questions at this time.
Right.
Great well.
Everyone. Thank you, obviously there'll be a lot happening during during the third quarter as Tom said, you know as we get through the proposed decision.
Affordability, if theres any major things are we we'd be doing a a filing on that.
And we're working on the rate case and get into cobot. So we'll look forward to talking to everyone. At the end of Q3 I. Thank you for your questions today and for on being here and we hope everyone safe and well talk to soon thanks everybody.
This concludes today's conference you may now disconnect.
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