Q4 2020 California Water Service Group Earnings Teleconference
Ladies and gentlemen, thank you for standing by moving to the California Water Service Group year end 2020 earnings Conference call.
At this time, all participant lines on that listen only mode. After the speaker presentation. It will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone.
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The conference your Speaker today, David Healey, Vice President and corporate controller. Please go ahead Sir.
Thank you Victor welcome everyone to the <unk> 'twenty 'twenty year end and fourth quarter earnings.
[noise] results call for California Water Service group with me today is Marty crop on Nicky, our president and CEO.
Tom <unk>, our vice President and Chief Financial Officer.
Paul Townsley, our vice President of business development, and Chief regulatory Officer, and Shannon Dean on.
Our vice President of customer service and shapes citizenship officer.
Replay dial in information for this call can be found in our year end earnings release, which was issued earlier today.
The replay will be available until April 26th.
As a reminder, before we begin the company has a slide deck to accompany the earnings call. This this quarter and year end.
The slide deck was furnished with an 8-K. This morning and is also available at the company's website at Ww Dod Cal water group Dotcom.
Before looking at this quarter and year end results, we'd like to take a few minutes to cover forward looking statements. During the course of the call. The company may make certain forward looking statements.
Because these statements deal with future events, they are subject to various risk and uncertainties and actual results could differ materially from the company's current expectations.
Because of this the company strongly advises all current shareholders as well as interested parties to carefully read and understand the company's disclosures on risks and uncertainties found in our form 10-K form 10-Q press releases and other reports filed from.
Time to time with the Securities and exchange Commission's I'm going to pass it over to Marty to begin.
David Good morning, everyone. Thank you for joining us as we recap our 2020 efforts and released our 2020 results. We thought we would do it a little bit differently. This morning, I'm going to start off with some brief comments overview on the year and I'm going to hand, it over to Tom and then we'll go through our normal deck.
I wanted to do that because almost by every measure 2020 was a year like no. Other we started the year with a delay to general rate case that was this was almost a year late that we were able to book here in December and we finished the year 2020 with record earnings. It was a year of record capital spending as we invested on.
Almost $300 million on our infrastructure improvement program, which is up nine 1% from 2019, which was our old record.
As part of this program, we replaced a record 169000 feet of Maine During 2020, and we completed the largest single capital project in the company's history. The pallets Varidase Peninsula water reliability project that went into service in the fourth quarter of 2020.
We closed on our transaction of our acquisition of Rainer view water, which doubled the size of Washington water and as many of you may have noted we increased our dividend eight 2% earlier this year on January given our strong financial position that we were ending the year with.
At a time when many companies were cutting spending in adjusting to the economic shock associated with the pandemic, we recognize the critical role our economic activity plays in the communities that we served as part of this we donated thousands of units of PPE to first responders and.
In the communities that we serve and many of these communities that were under prepared with more of the rural communities.
We donated a record $1.7 million to various community support organizations that support our customers during a difficult time with the pandemic, we increased the size of the of the Cal water philanthropic scholarship program.
For all eligible customers and that continues that we serve ameren recorded a record $51.4 million in diverse spending on diverse suppliers that help us achieve our mission throughout the service area.
We forgave more than $400000 on overdue balances for customers struggling to pay their bills.
Of course, we suspended shut offs very early on during the pandemic are to ensure our customers have the water they needed to fight the pandemic at their homes.
On the governance side, we completed the first ever ESG materiality assessment that lays the foundation for our continued work on climate change sustainability conservation and other major ESG and enterprise wide risks that can affect that can affect our operations.
We ended the year with zero primary and secondary water quality violations.
And despite the worst fire season in California history, coupled with numerous public safety power shut downs, none of our customers experienced any major outages during the dry hot summer months and fire season.
The Cal water team a water professionals operating safely seven days a week 24 hours a day 365 days a year doing what they do best and we accomplished all of this during the worst pandemic in the last hundred years. It was truly a year of countless challenges in many unknowns and we're very proud to share our results with here.
Do you hear today, having said that I do want to take a special moment to thank all the Cal water employees for their hard work and dedication that has led to the outstanding results that we noted during 2020 on and with that I'm going to turn it over to Tom to start us off going through the Dax Tom.
Great. Thank you so much Marty I'm going to start talking about the slide deck on slide five our if you want to follow along if you have a copy of the slide deck in front of you and this is our traditional table of results and I'll just highlight a few key results as Marty mentioned, our net income was a record it was 96.8.
<unk> million dollars for the year 2020 that was up.
On a little bit over 50 per cent for the year the earnings per share of $1 97, again was up over 50% from the earnings per share offered on 2019, and the Capex that Marty mentioned, almost 300 million that was up 9% from the year before for the fourth quarter, which will also talk about <unk>.
We did see increased earnings per share of 31 cents versus 24 cents from the prior period.
And net income of $15 5 million versus $11 3 million in the prior year at the same time. So let me talk a little bit about the financial highlights and what what led to this result on slide seven the increase was primarily due to the adoption of the cash.
<unk> General rate case as those of you who have been following US know we were waiting for a final decision on that rate case throughout the year and did in the third quarter book, what we had anticipated to be the final results of that rate case that turned out to be correct. The rate case was adopted on December 3rd without.
Any changes or material changes from what was expected to be adopted at the end of our third quarter. So.
The rate case really added to our revenue and net income. It also lowered the adopted purchased water and purchase power expense.
And when those those items came in a little bit higher during the course of 2020, we're allowed to book revenue associated with the balancing accounts that we have for the modified cost balancing account associated with purchase water purchase power.
And so what Youll see is that margin between revenue and water expense was what really that that's what really increase our earnings for the year. One other big factor that is both a factor within the rate case and outside the rate case, our lower effective income tax rates so within the rate case.
We are returning to customers, our excess deferred taxes associated with the lower federal tax rate and the tax cut and jobs Act and that is a planned program over about a nine year period. So what youll see in our rate cases is lowered income tax expense on lower revenue that goes directly back to.
Customers and then the second item was we exceeded our expectations for our repairs and maintenance deductions and this is the tax treatment that we have on mainline replacements within our water systems, we're able to expense that for tax purposes and that exceeded the estimated in the general rate case and added to our earnings.
For the year and for the fourth quarter.
And Marty and I have mentioned and also the capital investment, but just to highlight again, a $298 7 million in capital improvements, including the completion of the palace, where he's peninsula water supply reliability project.
For the fourth quarter. Some of the same factors that I talked about the rate increases from the general rate case, the increased repairs tax deductions offset by general and normal operating cost increases.
We do have our traditional bridges on slide nine and 10 I won't go over these in detail as I normally don't but.
But as you can see the general rate increases and regulatory mechanisms that modified cost balancing account I referred to that's the bulk of the difference in earnings between 2019, and 2020, followed by the repairs tax treatment.
And you can see the other factors as you go through the bridge there.
So I did want to take a moment as I've been doing for the last a couple of quarters and talk about our earnings breakdown give some some context on understanding about how the company makes money well.
Talk about this for 2020 and for 2021. So in 2020, we we estimated that the California rate case adopted on net income of $76 million.
And if you see this is on slide 11, if you see down below we had some differences from the G. R. C adopted earnings associated with our California regulated operations in some.
Some good and some bad.
<unk> in particular, adding two expense was a recorded bad debt that was higher due to Covid and then we'll talk in more detail about that later on the call.
But we did see it in some sense due to COVID-19.
Lower travel costs training costs outside services costs for the company as we were in Lockdown and obviously employees, we're just not getting.
Out in other places.
Through travel and training.
We had lower depreciation and property taxes, then were adopted in the rate case and this is really a timing difference and as you'll see on the next slide we expect that to revert back to normal next year.
Finally going up to the outside of the California rate case are regulated activities outside of California added $3 8 million of net income.
And additional net income for the year came from sort of what I would call outside of our core regulated earnings the recognition of a F E D.
F E D C equity was $5 million the mark to market on our benefits plan investments added $3 4 million are nonregulated activities added $1 4 million.
And the repairs tax treatment added $3 3 million above what was allowed in the general rate case in California.
So moving to 2021, just a little bit of a kind of a walk through about what you expect on what to think about the variables for 2021.
We have had a step rate increase in California, as well as the inclusion of the palace <unk> pipeline in our rates and so we believe that we have regulated rate base in California of one 7 billion.
And that gives us an adopted net income of $83 5 million.
Now as I mentioned, the depreciation on property taxes are likely to be higher due to those 2020 plant additions we record depreciation.
Beginning in the year following the year that we install a new facility.
Our bad debt expense will likely continue through most of 2021 were under a moratorium.
The collections process at least through June in California, and at least through the first quarter in other states.
Part of what happened in 2020 was due to the rate case delay, we we delayed hiring some of the authorized physicians associated with that rate case, because we were uncertain as to how the commission was gonna finally decide that issue.
We therefore have to hire some authorized physicians in 2021 and that will add wages.
Our other states will perform we expect similarly to how they performed in the past.
And then this outside of core regulated just to make sure of the analysts are aware we have this recognition of a P. D C.
Which is likely to be lower in 2021 after completion of major projects in 2020, and what we mean there is that this E. F. E. D. C is recognized on the construction work in progress and we believe we're going to have a less balance over time on construction work in progress in 2021, just because we've had some major.
Projects that were sitting in progress for a long period of time in 2020.
The mark to market on those benefits plans investments as well as our Unbilled revenue are always unknowns for the company and they do vary from quarter to quarter and year to year. Our nonregulated activities have some variability and then finally that last piece, which added to earnings in 2020, which was the net income effect of the state tax.
Repairs deduction.
That is going to be determined by our construction completion in 2021. So that's another variable for the company.
That is my a quick outlook on it.
Explanation for earnings of 2020 on outlook for 2021, and I'm going to turn it over to Marty now to talk a little bit about the details of our COVID-19.
Dynamic response.
Thanks, Tom.
So yes, looking ahead with Covid and looking backwards and looking forward, it's kind of staying where we are.
Going to continue to operate with enhanced safety protocols Cal water develop that five stage Covid response plan.
We have been operating in stage three of that plan.
Which is keeping people on pods strict PPE requirements dispatching our employees from remote locations versus having them come into a central location at 90% of the Cal water employees had been at work every day throughout the pandemic. Some of our corporate staff has worked remotely but most of our assets are in the field on most of those.
Assets in the field have been productive all year, which is what helped lead to the record results that we've seen for 2020.
And it continued to suspend water shut offs at least through the end of the first quarter of 2020 different states have different mandates, California is under a mandate.
But we will work through that and we've seen that.
Increase in customer receivables greater than 90 days, it's about $9 $6 million and I think that's really the effect of the economic shock and people not being at work.
As a result of that we have increased on a reserve for doubtful accounts from $2 7 million to $5 2 million in the fourth quarter.
Our COVID-19 related expenses during the fourth quarter or about $400000, there's a potential for recovery in both Hawaii and California in that way a memo accounts established with those states for Covid related expenses.
It's interesting to note that water sales in the aggregate we're close to the adopted which is we came in about 96 per cent of adopted sales, which is up about four 9% from 2019.
It was interesting that we've seen increases in residential usage offset by lower business in industrial and public authority usages. So as people have sheltered in place and businesses remain closed we've St. Martin <unk> usage on the residential side and they came pretty close to kind of netting out.
We ended the year with strong liquidity, we had $44 $6 million on cash and current boiler borrowing capacity in excess of $180 million on our line of credit which are subject to certain borrowing restrictions.
So overall I Cal water has weather the COVID-19 storm quite well.
Thankfully, we don't have any loss of employee life with Covid I.
I think all of us know somebody or work with somebody that has lost share life to COVID-19 and thankfully at Cal water all of our employees have been safe.
And I attribute that to an outstanding safety program and early adoption of strict PPE requirements.
Given our safety team here at Cal water.
For something new and it's something we spent a lot of time working on in 2020 I'm on I turn it over to Shannon Dean to talk.
About our ESG efforts Shannon thank.
Thank you Marni.
Before I dive into our ESG highlights for 2020, I'd like to start with the strategic framework, we developed eight years ago, which you see on slide 14, if you're following along.
Long before ESG with top of mind for so many investors we were setting strategy around ESG you can see on our math right. There in the center, we set our purpose was to enhance the quality of life for our customers communities employees and stockholders and we were driven by our core values of integrity service.
Value corporate citizenship.
So doing the right thing has always been on our DNA.
Moving on to 2020.
Something that we.
Ignite this even though we were doing so many good things on the ESG space, we werent doing a very good job of telling our story.
As Marty mentioned at the outset, we completed a materiality assessment early in the year to help us identify the top most relevant ESG topics for us to help sharpen our focus.
And now we're working on an ESG report that aligns with SaaS fee and references to Eri, which will be available in early April.
So that's the reporting side.
As for ESG performance 2020 was a very good year, despite all of its challenges.
On the environmental side, we combined our water supply.
And demand management team so that we can sharpen our focus on climate change.
Also completed phase one of our new climate change study, that's really going to help us going forward.
And then we also continued our industry leading conservation program.
Programs that we implemented in 2020 will save an estimated 43 million gallons of water every year, which is pretty impressive when you consider much of the year. If we were in lockdown mode.
Marty mentioned on the social side all of the wonderful things we did with.
With the backdrop of Covid, whether it was forgiving customer balances are keeping our employees safe are really supporting the charitable organizations that need it on so much.
And then when it came to governance.
To highlight that we introduced at corporate citizenship and ESG practice section to our proxy to enhance our disclosure.
Our first virtual only stockholder meeting and we added.
Guidelines to our corporate governance guidelines.
Regarding board diversity.
So I think we had a very good year in 2020, and I will say in 'twenty. One 'twenty one we're really looking forward to progressing on our journey.
And doing even more and well look forward to reporting on that on a regular basis and so with that I'll hand, it off to Paul.
Thank you Shannon.
As Marty reported earlier in 2020, we completed our California General rate case in new rates here going into effect has have gone into effect in 2021. So that's been positive, but we are as 2021.
Dawn on US we have a very full regulatory plate for us this year.
We will be filing a cost of capital application with the California Public Utilities Commission on May 1st.
Triennial application and so we're due to file that this year.
Also this year in July 1st we will be filing our triennial, California general rate case.
Remember that those rates would be effective I expect it to be effective on January one 2023. So that's going on we also have a number of other smaller rate cases in our other states that we'll be working on this year. So it is really a very full plate of regulatory activity in the California General rate case.
We anticipate that we will be filing in requesting continued strong capital investment for our communities.
Communities in California, we're also going to be working on.
Our rate design in this upcoming rate case, continuing to refine and improve our sales forecast and water cost forecast.
And we're doing that because we're just getting better and better at it and also in this particular case, we expect that we will have a disc discontinuance of our Ram or our revenue decoupling mechanism.
So we're really focusing on how to adjust all of these things. So we can still continue to provide affordable and reliable water service and enhanced conservation so with that I will turn the slide deck over to Tom.
Thanks, Paul So just as a little bit more color on our capital investment update as we've been mentioning we.
<unk> invested $298 7 million and developer and company funded capital investments in 2020.
They exceeded our target range, our target had been I think $2 60 to $2 90, and that was primarily due to the favorable working conditions. We have throughout the year with Covid. There was a lot less traffic and a lot more availability of contractors and subcontractors. So we were able to accomplish more than we had anticipated our target for 2021.
$270 million to $300 million remember, we're in the third year of the California General rate case authorization that came out of the 2018 general rate case that was a total of about 808 hundred 30 <unk>.
Over three years and so we've got the California spending plus spending in other states. It gets us to that target range for 2021.
When we do file the rate case that Paul just mentioned.
We anticipate releasing our capital plans for.
For 2022 through 2024, and this will be our estimate based upon our rate case filing and obviously.
That filing will be subject to adjustment based upon the commission's action throughout that process on that case.
Flipping to slide 18, I wanted to mentioned that development that's happening today.
We're announcing today that we have priced $280 million in first mortgage bonds group.
Private placement process are we.
Price of $130 million of 30 year bonds with a coupon of $2 87 per cent and $150 million of 40 year bonds with a coupon of three point O 2%.
The bonds are going to be funded on May 11, 2021, we're very excited about.
On the opportunities that this provides for us to continue our capital investment program to balance debt and equity for the company as we go forward with major capital improvements that we've been undertaking.
One of the things I will highlight and again ties back to what Paul just mentioned is that this this issuance along with the other.
The other issuances of debt that we've done in the last couple of years is going to bring our weighted average debt cost for the company for California Water service company below four 3%.
Benefiting our customers through the cost of capital process and application beginning in 2022, the adopted our weighted average cost of debt back on the 2018 cost of capital I believe was 551%. So we've seen a substantial reduction in the overall debt.
Cost that we can share on can pass that back onto our customers as.
As you all know we are running on aftermarket stock issuance program. That's the other side of this debt and equity.
And in 2020, we issued $82 6 million worth of <unk>.
We realized $82 6 million on stock sales through that at the market program, we do expect to raise about $300 million of equity over the duration of that program.
On slide 19.
For those of you who've been following us for a bit of time. This is a little bit different look at our Capex chart I wanted to emphasize debt.
We've added the line item here of depreciation so what you can see is the bars on the chart on slide 19 reflect our Capex that's happened over that period of time and a line. That's shown is are accumulating depreciation.
For each of those years and what we mean to derive from this is debt. The company has very clearly been <unk>.
Investing capital at a rate that is over three times depreciation from.
On the period of 2015 through 2020, I think I calculated this at three one times depreciation, but it's over $3 one or over 3%.
Alright, let me say that again over three times depreciation.
And we're hopeful that that can continue going forward to the next general rate case as you can see the estimate for 2021.
The range that we gave was $270 billion to $300 billion in the 285 represents the midpoint of that range.
On slide 20. This is our traditional rate base chart. This has been updated with our adopted rate base for 2020, and the adopted range of rate base for 2021 as you can see we have a an adopted rate base of 1.81 billion right now and we have a few advice letter.
Projects.
I remain to be approved in California, those projects can be approved during the year or during next year and so that's listed as a variable from from the high the low for rate base for 2021.
So I'm going to leave it at that and I'll, let Marty take over on slide 21.
Thanks, Tom looking at the business outlook for 2021, a couple of things to note first and foremost we have a new commissioner at the California Public Utilities Commissioner and we look forward to working with commissioner how can her new assignment as she starts her new job at the commission.
She has a legal background.
A number of years as the ALJ she's been a commission on advisor. So she is someone who knows the rate, making in regulatory world well and we think she was it find peck to add to the California PUC.
Behind Liane, Randolph, who are who termed out.
In addition, we have a new head of the water Division here was named Taryn Chase. So we look forward to working with parents in his new role as he heads up the water division at the California Public Utilities Commission.
We have just really kind of a handful of things that are going to be focused on really the first half of the year. One as Tom mentioned is filing the 2021 general rate case in particular with the new rate design.
Getting rid of decoupling. So we're very keenly focused on that we're also very keenly focused on the affordability impacts of not having decoupling on what it means for lower income customers. So the team is busy working on that and trying to work on a very progressive rate design that kind of meets the needs of all of our of all of our customers.
We will be filing our cost of capital.
C denied our request for a one year extension on our cost of capital. The rationale was frankly pretty good wishes that we hadn't had a cost of capital proceeding in four years and that way at this time to come in so the rates team is busy working on that.
As I mentioned earlier Covid Covid is not going away anytime soon and we will continue to monitor and track.
The changes in the CDC guidelines on what that means for our employees, making tweaks and adjustments as we go through the ebb and flow of the peaks and valleys of the pandemic.
With the same goal overall goal in mind, which is keep customers safe to keep our employees safe and then as Shannon mentioned and we're going to continue our investment in ESG efforts, we took a big quantum leap in 2020 getting that materiality assessment on as Shannon said, it's in our DNA. We've just realized we got to explain things a little bit better and be a little bit more.
I think youre going to see us continue to make big strides on the ESG side to improve our transparency for our investor base.
In summary, as we wrap up what was a challenging year, we performed very very well through the pandemic and what the delay general rate case, we got finally got that done we ended the year with record earnings per with record capital spending we kept our employees and our customers safe and try to do everything we can to help both of those sets of.
Individuals our employees and our customers today get fullest extent possible on why we need to thank our board for allowing us to overspend, our budgets on contributions and forgiving on some of the bad debt on the Cal water Board was fantastic to work with during the crisis and quickly.
Recognize the role that we play in terms of helping our communities out.
It was a strong year of business development, probably the strongest share we've had in the last 20 years in the business development team has continued their work.
With a full pipeline of potential opportunities for the company to consider.
And overall, we just look forward to starting a new year with a new set of challenges and getting 2020 behind us. It truly was a long year. Although we had great results don't Kid yourself. Those results took a lot on people's efforts in and we're very thankful for the team that achieved these record results so well that Victor we're going to open it up for Q&A. Please.
As a reminder to ask a question you will need to press star one on your telephone and to withdraw your question just press the pound key.
Once again Thats star one for questions. Please send violently from kind of the Q&A roster.
Our first question will come from.
<unk> been kind of low from Baird you may begin.
Hey, guys Hey, Benjamin.
Congrats on the 2020 ended up getting withdrawal.
It's hard from a from.
From our standpoint.
On the work that your employees that.
Thank you.
On the numbers just feel free.
For 'twenty one.
Consensus numbers.
Number's ticking Bill.
I think that's a product of maybe not having the right case fully baked in.
Maybe if you could just help us with that I'd point to.
How we should think about longer term growth.
You know as you go through the next rate case.
And some words.
Thank you.
Yeah Ben.
Let me start and end this brings us back to slide 12 in the in the deck.
And we can talk.
It's certainly more about that with other questioners as well as yourself, but so.
So we do see if you look if you kind of compare slide 11 on slide 12, if you will we do see an increase in earnings in that core, California regulated authorized earnings.
Because of the jump in rate base and so we're looking at a rate base of $1 6 billion in $2021 7 billion in 2021, and so that in debt is a positive to earnings and think about that in the longer term when I. When I showed the capex growth we've got.
Roughly $175 million.
Additional capex minus depreciation every year, that's going to keep adding to the rate base of the company and that will continue to grow the earnings of the company. These other factors that we talked about on slide 12, some of which were additive to earnings in 2020 day, they may or may not be as additive in 2021 and so.
That's kind of the the message there is that theres a lot of variables outside of that kind of core regulated earnings potential.
And a couple of things that were very favorable for us this year, particularly I wanted to highlight the depreciation expense.
And the depreciation was lower than was adopted so we made more money on the California regulated operations, then was adopted for us and that's really a timing issue because as we complete plant projects. The depreciation comes in the next year, we had a lot of major project completions in 2020, that's going to hit.
In increased depreciation in 2021, so that's a factor which will tend to pull our earnings back a little bit toward toward that regulated calculation.
So some of the things like that.
When do you believe that debt.
2021, that's going to be a little bit more moderate but as I say, we do have the increase in rate base and.
You would expect that would that would increase.
Increase the earnings of the company in a general way does that make sense Ben.
It does.
Go ahead.
Go ahead no go ahead, though on the Biz Dev brought Marty or Paul or Tom.
Oh God.
On the Washington deal was it was going to I mean, how do we think about where your focus on.
Geographic.
Probably don't want to sort of <unk> conference call, but.
Where you're focused on.
You know buying assets.
And then maybe we've been.
You did.
Any kind of infrastructure from what you've seen to the impact you or not and pet too. Thank you.
Hi, Ben This is Paul I will talk about the Biz Dev side of it we have a very full pipeline of opportunities that we're working on it.
So an exciting time for us to be in business development and we do continue to focus.
On the states that we are in and states.
States that are in the western part of U S. We believe that's our sweet spot.
<unk> seen a number of other acquisitions that we've announced over the last couple of years.
And you will continue this should continue to see that kind of activity from us.
But I can't talk about anything that's in the pipeline until we're ready to announce it.
Yeah, the only thing I would add to what Paul said, Ben This is Marty as we tend to be value buyers. So we like acquisitions.
That are potentially under capitalized that maybe have some operating challenges that need capital and where we can we can raise them up to our operating standards and so.
We're not out doing M&A, because we have lack of growth in the core and the core rate base growth clearly at a three times depreciation rate work run rate base just by following our capital improvement program our investment from a program that we have within the company, but as Paul said, we're out there looking kind of on all of all the corners of the states that we operate in.
And looking for a good kind of.
Small debt.
Essentially mid size companies that are ready to sell and move on and need a capital infusion and need some help and those are the ones that are ideal for us. So I think we'll stay kind of focused on the value side of the equation as we evaluate these deals.
Thanks.
Congrats on the ESG from.
Thanks, Ben Thanks, Dan we appreciate it.
Hey, Tom just the one thing I would add to your point about the depreciation.
The record investment of almost $300 million and 2020, but we also closed a record $391 million to plant and that's that big bubble that'll come through on shop in depreciation in 'twenty and 'twenty one.
Marty that's right yes.
And once again Thats star one for any questions or one.
Our next question comes from line and Easter was in ski from Seaport Global.
You may begin.
Thank you.
On the advocacy group.
First of all as noted.
The Commission wants you to come on.
From four years since the last proceeding now they do talk about lower interest rates and I'm just wondering.
So it's mostly about the cost of funds.
On the cost of equity I mean, and also how that change coming in on.
2022.
What impact to earnings I E are you currently meaningfully benefiting from.
Lower interest rates on the book side Upsides circumstance.
Sure, let's figure out Uh huh.
Paul and maybe Paul I will start with the kind of the last side of that.
So there's a couple of things going on that are that are difficult throughout.
2020, and continuing through 2021, we are we do have a lower cost of debt on it on a.
Weighted average cost basis, but we have a little bit more debt than we would normally anticipate and that is due to this collections.
And primarily the collections issue and also the Ram issue and frankly, the third thing being the delay in the California rate case. So we have a number of dollars that are out there that are owed to us.
And that requires us to increase our financing cost.
To maintain the cash reserves at the company. So I would say are we net net benefiting from lower interest rates I think that.
It's pretty much a wash right now.
We would expect it to improve as we collect the cash from the 21 general rate case, but I think going forward as those things normalize out obviously, it's important for us to pass on to customers the lower cost of debt.
And I think that's going to be a key consideration of what we do.
In that cost of capital filing I think when we look at it I think the overall.
On the overall rate change is associated with the cost of capital that we will file in may it's going to be pretty moderate considering that lower cost of debt that's out there. So.
Hopefully that helps I don't know Paul do you have any other thoughts on that.
On that issue on the.
The equity side, Yeah, we are to be honest, we're still in the middle of doing the analysis of all of that.
We still have over two months before we make our filing we have R. R.
We're doing our research now on on appropriate cost of equity to include it in our filings. So it's too early for us to really be able to say.
What we are anticipating filing for and then of course it is.
There is a process that we go through.
The consumer advocate will file their points of view and of course, we're also doing this in conjunction with three other water utilities. So what the commission ultimately decides towards the end of this year is really on.
At this point.
Great.
Separately.
You will.
We will be preparing to file next day.
C, which will have no fool them.
And then I understand that you're talking about changes in the on the rate design, which will be embedded on this filing but I'm just wondering if there's some lessons learned from them.
Susan from San Jose water two years, so coming below the water production volumes meaningfully below and.
If you feel like that's a risk that you are ready to manage on how you're planning to adjusted net filing.
So I will start this is Paul.
Mhm.
Where the loss of the full decoupling.
It's obviously very important debt, we are as accurate as we possibly can not only on the water sale side.
But also on the water production cost side.
Ram and the MTBE EBITDA, if you will.
And.
We've been spending a tremendous amount of time focused on both of those issues in preparation for this case.
The end of the day their forecasts and our forecast are you know.
What we actually see in 2023.
324, and 25 are uncertain.
Really trying to anticipate.
Potential turn downs in terms of water sales because of drought or economic conditions and trying to make sure that our risk exposure is equal.
In essence have picked up our cost of production and water sales in which our downside risk interrupts on upside risk balanced.
So it's a.
It's an iterative process, we've been working on this from months and months so far.
We expect that when we're ready to make a filing in July we're going to have pretty solid numbers, but at the end of the day.
We'll just have to see how that all plays out.
Good and my last question on the non California systems.
I'm assuming that given.
Given that Hawaii is a net and you know given the debt.
Downturn on tourism.
You would expect to see some higher realized on ROE.
And on that non California rate base.
2021, simply because again, there's going to be a pick up in sales volume so that day.
I think that just from a business perspective, what Marty said is key and that is we don't know where COVID-19 is going it looks really good right now if you draw a straight line through the the direction of the Covid cases in the pandemic.
The vaccinations, you'd say boy, we're going to be out of this by summer and everything is gonna be lovely, but we don't know that that's actually the case right there could be another surge there could be other variants that come in.
So I guess, if you suppose that the COVID-19 situation improves to the point, where people are wanting to travel to Hawaii.
That's going to be a plus there.
I think we have favorable redesigns in Hawaii, we did not see as big a downturn in profitability as you might expect given that we have a high volumetric charges that cover hi, hi per.
Your city costs and so if you look at.
As we do internally, we look at the margins in Hawaii, and frankly, considering that the hotels were closed and there wasn't much travel there we did okay in Hawaii. This year. So there there would be an uptick.
If COVID-19.
Is radically diminished, but I don't think it's going to be as big of an uptick as you might expect.
And then in our other states, Washington, and New Mexico.
Our customer base are almost completely.
Residential small amounts of commercial so we have not seen too much of effect there because of the downturn.
And just one follow up on this so some.
Some of the system flat at midyear.
So if you if you were to give us the annualized impacts earnings impact from those systems.
So that we have a better year over year comparison, what would be the incremental earnings if you weren't too on older systems saw a year June 2020.
Yes, probably the biggest one on the only one that would matter in any way to the company would be right in your view.
And I think you could go to the Washington, UTC and look up the regular regulatory filing I think the the rate base. Paul There last adopted was about $13 million for that system. I know, we have a rate case coming in that will be filing this year as mandated in day and the acquisition. So so it's a.
Again, a return on that rate base.
But you can calculate but the other systems have been relatively small the biggest acquisition in Hawaii is not closed yet and that's the cap Aloha.
The capital on a system, we expect that to close pretty soon here and hopefully in the first quarter.
And that that could add a little bit to Hawaii.
Okay cool thank you thank.
Thank you.
Thank you once again that started one for a question star one.
One moment for questions.
And I'm showing no further questions in the queue I'd like to turn the call back over to the speakers for any closing remarks.
Great. Thanks, Victor on behalf of the team here at Cal water. Thank you for joining US here today any follow up questions feel free to reach out to us and we'll look forward to announcing.
Our Q1 results with everyone day end of April or early May so be safe have a great day and thank you for your support during 2020. Thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you from participating you may now disconnect.
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