Q1 2021 California Water Service Group Earnings Call

Hello, and welcome to the California Water Service Group Q1, 2021 results conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during that time, you will need to press star and the number one on your telephone keypad.

It is now my pleasure to turn today's call over to our host David Healy VP of control. Please go ahead.

Thank you Lonnie and welcome everyone to the 2021 first quarter results call for California Water Service group with me today are Marty <unk>, our president and CEO Thomas.

Thomas Nagel, our vice President and Chief Financial Officer, and Paul Townsley, Our Vice President of corporate development and Chief regulatory Officer.

Replay dial in information for this call can be found and our first quarter results release, which was issued earlier today. The replay will be available until June 30th 2021.

As a reminder, before we begin the company has a slide deck to accompany the earnings call. This quarter. The slide deck was furnished with an 8-K. This morning and is also available at the company's website at W. W. Dot Cal water group Dot com.

Before looking at the first quarter results, we'd like to take a few moments to cover forward looking statements.

During the course of the call the company May make certain forward looking statements because these statements deal with future events. They are subject to various risks and uncertainties and actual results could differ materially from the company's current expectations.

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.

Yes releases and other reports filed from time to time with the Securities and exchange Commission's I'm going to pass it over to Tom to begin.

Thank you, Dave and good morning, everybody and welcome to our first quarter results call I'm going to and tie.

Hi, My comments to the slide deck and I'm going to start on slide five which is the raw results table and comparative 2020 through 2020, one and our operating revenue for the quarter was up.

On to $147 7 million from $125 6 million and the first quarter 2020 and we'll talk about the reasons for that and in a moment and our net loss decreased from $20 3 million to $3 million as well as our earnings per share loss for share rather.

Went from 42 cents loss to six net loss for the quarter on capital investments I'll point out on this slide were up very slightly and Oh and.

According to our plan and then switching to slide six on our financial highlights.

So as we mentioned and as I mentioned, a moment ago the and.

<unk> decreased by $17 3 million and that was primarily the result of the adoption of the California General rate case late last year.

So we had a couple of different factors associated with that and the first was obviously the rate increases associated with that that added on.

$4 million of revenue.

In addition to that if you'll recall back in the 2021st quarter, we did not recognize our balancing mechanisms. That's the Ram and the M. C. G coupling mechanism as well as our pension and healthcare balancing.

Balancing accounts and by recognizing them here and Oh the.

The first quarter of 2020, one as they were continued and adopted and the rate case were adding $7 6 million of revenue and associated with that.

We did have as you'd expect and increases in our other operations depreciation.

Yeah and associated costs and that offset somewhat.

And the revenue increases from the rate case as well as the recognition of the mechanisms.

As we had mentioned that year and R E.

D C equity that's the funds used during construction and equity funds used during construction.

Is lower.

As a result of a lower amount on construction work in progress. During 2020, we had a significant capital project associated with the Palace Vertes Peninsula water reliability project and that was adding to our a P. D. C equity all year, so we're expecting to see lower and.

D C equity.

Throughout the year and in the quarter it was down about $1 million on.

Our capital spending I mentioned is up slightly we believe we're on target for.

For capital for the year.

And then two other items that are outside of our general control, but I did want to mention because they are fairly significant and the quarter. The the market value of certain of our retirement plan assets.

Was.

And so the market value increased <unk> 3 million as compared to a loss of $4 7 million and the first quarter of 2020, so kind of a return to normal.

That item.

A D H town.

First quarter, 2020 and then our Unbilled.

Very similar we had a.

$100000 loss on Unbilled revenue and very small and probably more typical as compared to a negative $3 7.002 million 20, which was sort of an atypical drop in that unbilled revenue accrual and so those two items I'd say are a little bit more normal compared to the abnormal.

And that were that were in the last year.

Flipping to slide seven and I won't talk in detail about this but this is our waterfall EPS Bridge chart.

That covers those same the same topics.

Next on slide eight I'll, just make a brief comment about the tax rate I know some of the analysts look at the the effective tax rate of the company.

Just wanted to remind everyone that during 2021, we are refunding to customers and rates $19 million of excess deferred associated with the change in tax rate for the tax cut and jobs Act and that drives down the effective income tax rate to 6%.

So there's a there's a the.

The revenue is down and the tax rate is down and so we aren't making any money on that but but just when you see the headline tax rate its very low.

The second thing there was a big benefit at the end of 2020 related to our mains and services repairs investments and a state tax deduction that were allowed to take there.

And just to update you on the estimates in 2020, we had 160 million of deductible mains and services repair investments and our current estimate for 2020. One is that we will have $60 million that qualifies for that test that tax treatment and so that's going to be a factor that is.

Can be a little bit lower for the year 2021 capital spending is still anticipated to be between 270, and 300 million that hasnt changed.

But it's just the timing of the close of certain projects that is going to change that that tax qualification.

Next I'm going to turn it over to Paul Townsley to give a regulatory update.

Thank you Tom.

I will touch on two items this morning regulatory items and California. This morning. So on the first one is our cost of capital filing.

The cost of capital and if you will remember is filed once every three years.

And our last one was in 2017, because we had a one year extension, we will be filing that cost of capital application.

On Monday may 3rd and.

And in our application that we will be filing with the commission, we're requesting a return on equity of 10.35% that is up.

Up from the currently approved 9.2% cost of equity.

We also will be taken advantage of refinancings and new debt issuances.

And our embedded cost of debt is going down 128 basis points from the previously authorized 5.51% cost of debt to a new cost of debt.

One point to 3%.

Coupling those two together the increase and cost of equity and the decreased cost of debt.

I mean that our rate of return authorized rate of return that we're requesting will go up just slightly from 7.48% and seven 5% and what that really means from a customer perspective is that the median bill increase would be about 34 cents a month so really.

And not a big change on the customer's bill at all.

Now you'll recall that the.

And the.

Cost of capital filing will.

It will be reviewed by the commission and.

And wed be approved for to be effective in January 2020 two.

I'd also point out that our capital structure, which is about 53% equity and 47 at 47% debt will remain unchanged and this particular application.

Not only are we refinancing.

<unk> debt with new lower cost debt.

Because we've been investing so much capital and have been obtaining new debt at a lower cost that is really what's helping drive our overall cost of debt down which is a benefit to our customers.

The second item I'll talk about just briefly is R.

Our three year general rate case filing.

That will be filed on July.

July 1st actually July 3rd because the first day and weekend we.

We are working on that right now.

And we will provide more information to you all when we get to our next quarterly conference call.

With that I'll turn it over to Marty.

Thanks, Paul Good morning, everyone I wanted to provide a quick update on our continued efforts and responding to the COVID-19 pandemic.

First and foremost let me start off by saying, we have continued to see the incremental benefits and people being vaccinated and all four states that we operate and currently over one third of our employees have been have been vaccinated, which is which is great news.

<unk> was a little bumpy at first but we've seen those bumps kind of smoothed out and we continue to see daily increases and a number of employees that we've seen and vaccinated as well as we have seen a steep decline and a number of cases of COVID-19 found within the Cal water family are from our employees, we only had a.

Five cases and in the first quarter debt.

We're seeing where employees have become sick and then recovered to date, we've had no we sustained and a loss of a life with Cal water and voice for which we're very grateful for.

In terms of supporting our customers we have maintained a suspension of all collection activities and all four states.

And to see that lifted and in different states around the U S and the four states that we operate and our suspension of our suspension of collection activities is still and full force.

We have seen and continue to see an increase and customer accounts aging from suspension of collection activities that builds currently over 90 are about $11 $6 million and we are.

Gesture on bad debt reserve and an additional half million dollars from $5 2 million to $5 $7 million and I'll talk more about some creative things are doing and working with the commission a little bit later on and collection activities.

The incremental expenses associated with our COVID-19 response was approximately $300000.

And that gets recorded and a memo account for a potential recovery at later dates and Hawaii and California.

Interesting to note that water sales have.

And 105% of adopted really driven by the fact, the residential demand has been higher and thats been offset by lower <unk>.

And industrial use and so as we start to see business used to kind of pick back up and things get back to normal we will expect to see that the business and industrial and sales pick up.

Liquidity remains strong we had $84 $4 million of cash and additional capacity of $115 million on lines of credit and subject to some borrowing conditions. So I think we weathered the worst and the COVID-19 storm and we are starting to come out of it, California, which is the largest and two that we operate in.

Catch up and be fully opened back up for business Youre on June 15th going on to the next slide I want to just take a moment to talk about our recently published ESG report and our report was published a few weeks ago that aligns with our SaaS and referencing G. R. I is now available there is a link and the deck debt.

And we'll take you to the report. Additionally for those of you that get the hard copy of the annual report proxy. There's a summary ESG report. That's included in our annual report a lot of hard work went into producing our first ESG report, we're very very proud of it and we're very proud of the work we're doing on ESG and frontier and I look forward to reported more on this as well.

Work on our ESG related projects throughout 2021 and.

I'm on a hand it back over to Paul do you gave me a quick update on acquisitions Paul.

Thank you Marty.

Business development effort and.

And Cal water has been very active and very successful.

You will recall that last year, we closed upon two deals that was the Rainier view water system in Washington, and the care and host system I'm, sorry, the lower system and Hawaii.

Are you can see on slide 12, we have six other on.

And announced acquisitions that we're working on the first one the top of the world water and wastewater system, we actually expect to close that here.

Within the next few days.

So very exciting to be adding another system to the Cal water or in this case, the Hawaii water family and the other.

Items listed on this list to preserve and Millican Animas Valley, Kehoe and Sky Lahnda and stroke as you can see we have activity and all of our operating states.

And we are working to get all of those closed as well so.

<unk> announced a number of announced systems a number of other systems day on the pipeline. It is an exciting time for acquisitions.

Our company.

And with that Marty I will give it back to you.

Actually I'll call on.

Yeah on undergraduate I'm, sorry, Tom Tom will to no slide no worries no worries. So we're on slide 13, and this is our traditional graph.

Capital investment last quarter, we added a line for depreciation and so you can see.

The relationship between the Capex that we're making and the depreciation that occurs every year and our systems.

And the point there being that we've been averaging about three times, our depreciation accrual every year for the last five years and.

So this chart and projection only goes through this year and our estimate there are 285 is is the midpoint between our window of $270 million to $300 million of Capex during the year.

And we win when we have our second quarter call and we released the details of our.

General rate case, and California, I'll be updating this slide so that youll see the years 'twenty 'twenty two through 2020 core on here as well.

Flipping to slide 14.

This is our rate base slide and similar comment here, which is that we will project rate base out from 2023 through 2025 on the basis of the rate case filing and Youll see that in the second quarter slide decks.

So not too much new on the rate base estimate on slide 14, right now.

Marty I'll turn it over to you for the summary.

Thanks, Tom just a couple of things as we close on our call and get ready for Q&A.

First and foremost Q1 is our slowest quarter, it's always nice to get it done administratively it's a very heavy quarter, because we have our year end audit and get the annual report on the skin and this year, we got the ESG report on.

And that takes us and a very very busy Q2, administratively with the filing of our cost of capital proceeding that Paul talked about where we're request and a slight increase as well as filing on our 2021 general rate case, and our 2020 one general rate case is voluminous.

And as tens of thousands of pages that gets filed here with the commission this quarter and a lot of effort go into port and that rate case off. So we look forward to getting that on file and moving forward and as Tom said, we will update everyone.

On our second quarter earnings call on where our requests came in at for the 2021 general rate case.

Additionally, and this is more kind of kind of late breaking news and some of you may have seen and depressed. The last 24 to 48 hours a few parts of the state of California have declared drought emergencies, and particular governor Gavin Newsom and the state of California declared a drought emergency for Sonoma and Mendocino counties and <unk>.

Oregon, and California, and given that the very mild winter season that we had this year and coupled with the fact that our snowpack.

As of earlier this week was only 25% of normal we fully expect to see more drought declaration at the local level happened throughout 2021.

For those of you that know we spent and remember we spent a lot of time on our emergency preparedness and emergency planning Likewise as part of the rate case process. We are updating our water supply and master plans, which also include crowd contingency master plans.

What does that mean at a 25000 foot level, the reservoirs and California. Currently there they are in decent shape I wouldn't say they are in great shape, but they are in decent shape going into the summer months. The real issue from a drought perspective is what is winter going to look like this year and if it's a light winter again and what happens in 2022, so that'll be something to watch.

And as we move into <unk>.

What is potentially a more disruptive fire season, and a more disruptive public safety power shutdown season, given the fact, it's been such a dry winter for us.

As we think about fire season, and PSP season, as we pointed out and our ESG report. Despite the many challenges of operating in a COVID-19 environment over 97% of our employees have completed their emergency response training this year and our efforts are well underway to be prepared for early fire season, and the various PSP.

And then that could happen throughout the state.

As you May recall last year, despite a number of PFS events throughout the state that went on and some cases for two or three or four days and none of our customers went without water due to successful plan and by the company contingency planning and the ability to move resources up and down the state to make sure we kept our systems pressurized and.

And our pumps running.

As we get into kind of hopefully what will be the final throws here of COVID-19, and we are seeing things improve and as I mentioned earlier June 15th is the official date declared by the California Governor that the state will officially reopened and are back to some amount of normal and that has to be defined.

We continue to work with what the commission on creative solutions for customers that have been impacted by COVID-19 and particular as part of the low income or IR phase two.

We did propose a program for <unk> management somewhere to what the electric utilities got approved recently and as part of our proposal we proposed that.

People, who have past due balances due to COVID-19 as long as they keep paying their water bills that we would give them a credit equal to 112th of the outstanding balance provided and they they keep pay making their payments.

Until they are paid in full and current and then that credit that gets issued every month would go into a balanced and account for recovery at a later date.

This program for the water industry has not been approved yet, but it has been approved for the electric industry. So we're waiting to see what the commission does with that.

Obviously, we'd like to see those past due balances get get paid down as we get back to a more normal operating environment.

Having said all that it is very nice to get Q1 day, and it's very nice to see.

The light hopefully at the end of the tunnel with COVID-19.

And C and employees get vaccinated and starting to get back to what is a normal environment. We.

We do not have all of the employees back and the offer shirt, 90% of our employees have been at work every day because they are field employees.

Our corporate employees are the ones that are corporate offices have been the ones that have been working more remotely and we are on the process of finalizing our back to work plans and we'll continue to monitor the local jurisdictional requirements to bring people back to work. So that can vary county by county, and the state of California, but our plans are developed and we're <unk>.

And once we get the green light to bring people back to work.

So with that Lonnie, we will officially wrap up our prepared comments for the first quarter of 2021, and we will open it up for questions. Please.

As a reminder, that is star and the number one of your telephone keypad again that is star and the number one we'll pause for a moment to compile the Q&A roster.

Yes.

Yeah.

Yeah.

And again to participate in the Q&A session that is star and the number one or your telephone keypad.

Yeah.

Marty I did get the comment from one of our analysts that every California utilities, having their earnings call at the same exact time.

Yeah.

Saw that too Tom and I know there are another.

Earnings reports coming out today, which is the hard thing about earning season.

And.

And we have a comment from the line of bank Hello with Baird.

Hey, guys.

And then Google, Google and California water utilities.

I do.

And I didn't put star war and that was a problem.

Uh huh.

So Martin just on the last point and I Hope you guys are all well and it's good to hear your employees or will go on too.

The last point about the drought, so ive been reading about two and a.

And the Cowboys and data.

On the.

Hum.

Yes.

My interest.

What is that what you guys do and I guess it goes for you Tom and Paul.

What are the discussions like with.

The PUC and know that builders.

The difference in opinion about this guidance.

Yeah, I'll take the first steps and then Paul I'll, let you jump in on on the Commission side let.

Let me, let me start off by saying.

And we've never officially gone out of stage, one drought at Cal water.

Well coming out of last drought the mandatory restrictions were taken away.

May we all we hit our targets our conservation targets, which was good and we are very strong advocates for saying we need to keep these restrictions pretty tight because we're hitting goals and getting consumption down.

Two things happen right, one when the governor declared a drought emergency.

It's probably the easiest path forward for us to get a memo.

Count for that area the GAAP.

But on a clearly indicated in his comments earlier this week that he expects the drought to be kind of very regional based on our regional water supply and so for us for Mendocino.

And Sonoma County, we don't have operations in those counties.

We did we would apply for a drought and memo accounts now having said that we're also seeing some of the water agencies like East Bay mud or the northern Martin water district declare a stage one drought and so the northern Martin and water District, we do have two systems and northern California.

And that are affected by that and.

At that point, Paul and his team will likely go and try to apply for a memo account based on the local agency reporting a drought emergency so I think Ben what it means we have to go through it and watch and see the difference between where we are right now and where we Werent and 2015 was we have 25% of our snow pack if you.

And remember back in 2015 Governor Brown to the famous press conference and.

No matter, where they normally do a snowpack reading, where he is normally where we would normally be standing on seven feet of snow and he withstanding a green pasture. So we do have some snow pack. The reservoirs are indecent shape. That's why the real issue here is going to be what happens in 2022.

Notwithstanding we do expect to see more local drought conditions being declared at the local level and maybe not necessarily statewide.

As of right now I don't know, Paul and anything you'd want to add on that.

Yes at the commission, it's been and.

And this is still early days, we've been getting inquiries from commission staff and to our.

Preparation and so we've been responding to some of those data requests.

Aspect of the drought of courses and higher potential for P. S. PFS and Theres been a lot of ongoing attention to commission on public public safety power shutdowns and so we've been continuing to engage on those but I don't think that the commission has really begun to focus on the drought and what.

And we'll see more of that as the year unfolds.

Great.

Maybe for you Tom.

No.

You guys kind of read through on stupid things as far as the regulatory dates.

And the dates go.

And just sorry.

Youll come.

All clear.

Could you just walk through one more time and fully sorry.

Yes, but that is no.

We should watch out for.

Yeah, absolutely so.

This Monday, we're gonna be filing our cost of capital application.

And that we've we've outlined the parameters of that debt. So that's filed around my first and expect it to be adjudicated by the end of the year. That's the plan that's in and the Commission's model.

And if it doesn't get done.

And that's for California, right Best for California, correct, Yeah, and then.

And then in and then in addition to that we have the general rate case that.

That will be filed around July one and again, Paul mentioned that this weekend days and I think there's there's a little bit up load sometimes that gets filed.

And the day after the fourth of July.

Just because of holidays and whatnot. So we'll we'll see that that'll be early July lets put it that way.

And that is an 18 month process. So the California General rate case is not expected to produce a result until.

The effective date of January one of 2023 and as we just found out or we just saw last year.

And that can get delayed and those have often been delayed.

Two of our last three general rate cases have been delayed more than six months. So so.

And so we'll have to see about when that is effective both of these California.

Fillings are subject to interim rates, if they are not decided on time and so the effective date is the is essentially those those effective dates.

We do also have a rate case that were filing and Washington state.

And as part of it.

Part of the Rainier view acquisition, we agreed with the commission to file a new rate case for both the both our existing and the Rainier view.

Group.

This year and so that'll be done this year, but that'll be a lot smaller.

Got it and then just.

On the.

On the.

On the two important.

It's that simple.

Simple throughput percent number.

Versus your debt.

And last number.

How much interest do interest.

Interest rates.

Does that matter or or or or.

How much does it matter.

And you guys think would you would you create.

So.

Ben it's pretty technical what goes into these.

The company applications, we have.

And the metric economists to witness.

Looking at a lot of you know that.

Standard models DCF models cap capital asset pricing models et cetera.

And to come up with those recommend recommended.

Rates for return on equity.

So I don't know that it's one point or another that's driving it to be higher I think we asked for more than that and the.

And the 2017 case I'd have to go back and look.

One thing that I wanted to point out we haven't done that on the slide is that.

In California, it's been unusual that the water utilities have had quite a bit lower Roe and the electric utilities.

And if you look at other states around the U S and you probably know this as well as well as we do.

There is not a discount for water utilities and in fact were smaller organizations and the electrics and almost every case.

And so you would assume that there is a bigger financial risk there.

But California has always had for some reason a discount on the ROE for waters, so that the ROE that we're suggesting here the 10 and three five is actually more in line with the electric ROE and California.

So, we'll see where that goes I think that we have some good arguments for that and.

I think our witness is strong and we hope to prevail on it.

Yeah, I agree with the upfront.

On California.

On a scale maybe the last thing and so you guys particular on one questions Marty just on.

On the on.

Infrastructure.

Good day.

Pat.

Package and that Theres, a lot to be determined.

Was any of that.

Impact your how would you think about price.

And thank you very much.

Sure actually Ben that is a very very good question and it's a very kind of complex area with a lot of moving parts.

Our National Association headed by Rob Paulson.

Former FERC Commissioner and former head of the Pennsylvania PUC.

And has been very involved with the efforts on the hill, obviously for allocations to the state revolving funds and we want to make sure that we fight for access to those funds within the state when they get allocated but it can vary state by state as those funds get pushed analysts, it's mandated and the federal and federal laws.

The other big thing Thats been talked about is as part of the bailout Bill is there any dollars that are going to be available for <unk> management and we have been involved and those in fact, we were at an event with one of the governors. This week, where we were emphasizing the point that any dollars that come from the feds.

That is for a COVID-19 relief for customers with with.

Outstanding balances investor on water utilities, there customers are taxpayers as well and we shall have equal access to those dollars. So nothing concrete yet it's a very gray area.

On the Department of Health Service has had has had dollars since the late fall they haven't pushed down yet to the states. We're watching that we're involved in discussions with them about what happens when those dollars do get pushed out and trying to secure access for those dollars for our customers, but nothing has been finalized yet Ben but.

Believe me when I say, we are all over it we have our federal team working on it and we have our our CWA and teams that California Water Association teams working on it and we have our local government affairs people working on it and that's to be determined I expect to see some dollars flowing from the fed's down to the state probably some time here on the second quarter, but not.

And it's been determined about how the mechanics are actually going to work out but discussions are underway.

Good so thank you very much guys take care.

And talking to you.

Okay.

And again that is star and the number one on your telephone keypad.

There are no further questions at this time.

Great.

Thank you everyone. Thanks for taking time for being here today, I know Theres a lot of conference calls happening concurrently as Tom mentioned earlier.

And if anyone ask questions. If you get a chance. Please read the ESG report and you'll see all the great stuff, we're doing on the ESG side, and we look forward to reporting on our progress with the general rate case, and our cost of capital at the end of the second quarter, so everyone be safe be well and we'll look forward to talk and everyone. At the end of the next quarter on our next earnings call.

Thanks, everybody have a great day Lonnie back to you.

This does conclude today's conference call. Thank you for your participation you may now disconnect.

And.

And we will.

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