Q3 2022 California Water Service Group Earnings Call
[music].
Hello, and thank you for standing by my name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the California Water Service group third quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
To ask a question during this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question price at Star One again I'd now like to turn the conference over to David Healey, Vice President Corporate controller. Please go ahead.
Thank you Regina welcome everyone to the 2022 third quarter earnings results call for California Water Service group with me today is Marty <unk>, our president and CEO, Thomas <unk>, Our Vice President and Chief Financial Officer.
Sure Paul Townsley, Vice President corporate development.
And Greg Melamine, Vice president of rates and regulatory affairs.
Replay dial in information for this call can be found in our third quarter earnings release, which was issued earlier today.
The replay will be available until December 26, 2022.
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 at Ww, Dr. Cal water group Dot com.
Before looking at this quarters 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 of the state because these statements deal with future events. They are subject to various risks and uncertainty.
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.
I'm going to pass it over to Tom to begin thank you, Dave and welcome everyone to our third quarter earnings call I'm going to be going through our in fact, all of our presenters today will be going through the slide deck with reference to page numbers. So you can follow along and I believe on the webcast the slides will track with us so.
I'm going to start on page five of the slide deck for a quick summary of the financial results for the third quarter you can see the numbers there that our operating revenue was up $9 6 million or three 7%. Our operating expenses were up $15 8 million or eight 5% are the result of.
Those are two items is that our net income was down 6.5 million or 10, 10, 5% and our earnings per share were down 17 cents from $1 20 to $1 three I.
Do you want to highlight on the sheet and we'll be talking about it later that our capex was up in the quarter.
From $69 2 million to $77 5 million.
Similarly on slide six our year to date financial results.
We can see net income is down 20.
$21 2 million on a year to date basis, and that's about that's 50 cents on a year to date basis in an earnings per share.
<unk> sense.
Turning to slide seven for a little bit of the color on the on the quarter.
So we've been talking all year about our unbilled revenue and about the changes in valuation of our nonqualified plan assets.
And in this quarter, we actually saw an increase.
In our Unbilled revenue accrual that is largely because the accrual was so so low in the last quarter and we talked about that in the last quarter. So we saw Unbilled revenue go up this quarter. However, we continue to see a softness in that mark to market valuation of our nonqualified plan assets in that.
That was a $2 million change there the operating expenses went up as I mentioned earlier due to inflationary factors are for the most part we saw wage increases increases in the cost of goods and services. We saw Q2 items that are probably pretty.
Mounsey ends we did see them in the quarter, our uninsured loss expense was up in the quarter that that is oh, when when someone is injured or makes a claim against the company that that's a somewhat volatile and then we did increase the reserve for bad debt and we'll talk about that a little bit later in the call but.
That is an increase as compared to the Q3 of 2021 four.
For the year to date are really the bulk of the description year to date are in the change in earnings has to do again with the Unbilled revenue and with the change in the valuation of our Nonqualified plan assets are you can see of the 21.2 million decrease in net income attributable to CWT.
The it was a 9.4 million reduction in Unbilled revenue at.
$11 4 million are associated with the planned assets again, the unbilled revenue as we mentioned last quarter, we expect to normalize by the end of the year with a change on a year to year basis, no more than plus or minus $2 million. So we'll continue to evaluate that as we go forward.
And.
I did want to highlight actually for the a year to date.
And that our financing program has been going very well, we issued 470000 shares during Q3, and we issued $2 2 million shares in the last 12 months in our ATM programs and so very very happy with the results there.
I won't dwell on the bridges those say essentially the same thing that I was just saying in visual form.
And then on our call. This morning, we're going to talk quite a bit about our regulatory affairs, particularly in California on slide 11, I'm going to start by giving you an update on the California cost of capital.
Case, so there was no update.
During the quarter from the administrative law judge.
As.
As those who are on our call last quarter. We will know the case was submitted in June all the parties completed their testimony and there.
The briefs and reply briefs those raw completed in the summer and so we're all just waiting on the administrative law judge.
You issue a proposed decision and then the commission to issue a decision in the case the calendar is getting a little tight here.
There is still a potential that the CPUC could issue a final decision this year, but in order to do so we would have to see a proposed decision from the judge really within the next two and a half weeks because the commission voting.
Voting meeting scheduled in December is very light due to the holidays, we would expect.
Yes, we got a proposed decision after November 15th we would not get a final decision in 2022 and so it's it looks looking increasingly likely that a decision in cost of capital will come later later than the end of the year because of the delay in issuing a decision I know that.
Many of the analysts have been focused on yeah, obviously interest rates going up in the economy since since the time that we submitted we can't determine how the commission is going to evaluate those changes we know that the testimony that was made in June did include some evidence of the <unk>.
Inflation and the interest rate changes that had happened up to that point, but.
But we're not certain how that might impact and we're not certain about the impact of potentially the water cost of capital adjustment mechanism.
And that whether that would trigger or not depending upon the final outcome of the case.
And just a reminder, as we've been saying that given our financing program are the proposed cost of debts in our application was there's quite a bit lower than the last adopted cost of debt and what that means is when a case is eventually decided and when the commission set the starting date at that time.
We will have.
About an $11 million reduction to the.
The debt cost and and that we expect to be passed through to customers. We don't yet know what the timing is on the effective date of a decision and so the company is not reserved for for that amount or any other amounts associated with a potential outcomes of the cost of capital case.
Next I'm going to turn it over to Greg Milliman for slide 12 to give an update of our general rate case.
Thank you Tom.
As you can see a lot of the slide already we did reach a settlement with the public advocates office, primarily on non revenue items that was filed with the commission. The cases now in the hands of the.
L. J two right the decision, but it's unlikely we will get that decision before the end of this year.
Does that we plan to file for interim rates in the fourth quarter to be effective January 2023.
Those rates are subject to refund and will be true that based on the Bible outcome in that decision.
Moving to slide <unk>.
<unk> with a focus on decoupling.
In the a significant change for Cal water starting in 2023 lots of the mechanism to decouple sales from revenue.
Dan.
To that end that settle that with public advocate reduces our revenue volatility it has realistic water production costs.
Further in the event that the drought persists. The commission has the mechanism there though.
Louds water companies without brands to track lost revenues and amendment.
Lost revenue due to the drought in a memorandum account for a potential future recovery. So we'll be filing to open that as well before the end of the year.
And then with that.
Now I'll turn it over to you Marty.
Great. Thanks, Greg and I'm on the bottom of page 13 for everyone. That's following along.
Some of the Big news for US that came out on the last day of the quarter September 30th Governor Newsome signed into law for the state of California Senate Bill 14, 69 cents a Senate Bill 14, 69 ran largely unopposed as bill we've worked on in the last couple of years, which is a big win for our water industry within the <unk>.
Date of California.
The Bill does not mandate decoupling, but the bill clearly says it's the intent of the legislature to ensure that class a water corporations are authorized to establish revenue adjustment mechanisms that provide for full decoupling of sales and revenue in order to incentivize conservation. So we spent the last two years working on this bill what what the other.
Water companies.
Restaurant water companies in the state of California, It was nice to see and the governor signed it into law.
And put on the books now shortly thereafter.
In fact last week on the 21st the.
The CPUC you filed a motion what the California Supreme Court to dismiss the court case that we filed.
It's centered around decoupling and there's a very finite detail here. The court case that was filed with the state Supreme Court wasn't necessary about the final decision to eliminate the pilot program of decoupling. It was really about the lack of due process that the commission didn't follow their own process to make that determination and out of.
Course cost us or we didn't have the opportunity.
To get an adequate information on a record for the commission to make an adequate decision on decoupling. So theres a finite detail there at this point I still believe that the state Supreme Court case, well, we'll move ahead since that the court did accept the basis of our argument, which is lack of due process.
Although the CPUC did file a motion to dismiss so we are responding to that but based on where we are right. Now I believe the court case, we will continue to move forward on the basis of the original filing which is lack of due process. So big win in the state Legislature, what Senate Bill 14, 69, we're continuing with the court case and the state Supreme Court about lack of due process.
Moving onto the next page.
Page 14 and talk about the drought.
Let's start off talking about the left hand side of the slide where we are with our memo account. If you remember in 2020 one the governor declared a drought emergency that allowed us to establish a memo account to track incremental costs associated with our drought response, so things that we're doing above and beyond whats in our current <unk>.
Case to respond to the drought.
For Q3, our incremental drought expenditures were about $400000. So they are expensed in the period. They go to the memo account.
Our total in that memo account sensitive inception at 2021 it's about one $4 million. So there's $1.4 million of drought related items and we've expensed in the current period that will seek future recovery on at all at a later date.
Moving on to the right hand side of the Slide Conservation is working and this is why we think decoupling is really really important.
And California customer usage is down about 19% in Q3 as compared to our adopted numbers that's down about 7% compared to 2021 earlier. This week, we filed our numbers what the state of California, which we're required to file every month.
And average consumption was down about 10% in the month of September alone. That's the average number I wanted to give you a sense of the variance, though with some of the districts that had large savings Westlake.
In southern California, their consumption was down 36, 6% in the month of September Palo Verde as switches.
South of Westlake L. A peninsula there their consumption was down 25% in the month of September and Los Altos, which is just down the street from US here in Silicon Valley their consumption was down 26% in the month of September alone.
So again this is why we believe decoupling is really important that second bullet point.
Given the declines that we've seen in consumption given our drought response program.
Balance and our decoupling account is now $94 $8 million. So we'll be filing to recover at a later date looking at the NOAA forecast for the for the falling for the winter and now that we're officially on fall.
Yeah, they're forecasting lending conditions, which tends to be warmer weather for us, which means less snowfall and potentially less rain. Obviously, we'll have a good look at winter between now and when we announce earnings the end of February .
While we're hopeful that we have a wet winter of the natural show uncertain to the contrary again, that's why the decoupling mechanisms are so important because it allows us to aggressively pursue conservation for our customers and helps ensure resiliency of our water supply. So the continued drought conditions going into 'twenty three we expect them to continue.
And again in the face of climate change decoupling is really important water resiliency is really important. So if you read our ESG reports are going to continue on the path. We're on to promote conservation and make sure we have a resilient supply going into the future years going onto the next slide slide 15 to talk about the capital program.
Despite a lot of headwinds a lot of economic headwinds our capital program.
Mainly on track, we had an increase of 12% year over year on our capital investment program. We also called our infrastructure improvement program.
And we've had a six 9% year to date increase in our and our capital investments So happy with how that's going but certainly as we deal with supply chain headwinds like all of US are dealing with right now the longer those headwinds continue to more likely will at some point they will start affecting us we continue to monitor the supply chains and the procurement team here at <unk>.
Cal water and the engineering team has done an outstanding job at doing a lot of pivoting and bending and turning in thinking about new ways to add to stay ahead of the supply chain issues in.
In particular ductile iron pipe. It's now 12 months lead time to get ductile iron pipe and when you have a large main replacement program that starts to pose some challenges.
So we continue to look for areas that we can reduce risk in our supply chain, including the potential for stockpiling raw materials used in our capital production.
On process and stockpiling of us for future days in future weeks and future projects ahead.
As we move into the fourth quarter, just to remind everyone construction activity can be adversely affected by weather, but based on the lending conditions. I think we're gonna have a fairly decent fourth quarter. When it comes to capital investments I'm going to hand, it over to Tom to give you an update on that customer COVID-19 that updates. Thank you Marty.
As a as Youll recall us, saying at the end of the second quarter. We were authorized finally by the California Public Utilities Commission and by the Governor to start the process of shutting off customers for nonpayment remember that during the Covid pandemic, we had been held to not shutting.
Can anyone off from March of 2020 until the summer.
And while we had gotten California state aid to pay a number of customer bills last year, we that reduce the number of delinquent accounts, it's still going to take us months and maybe many months to address the remaining 90 day delinquent accounts and <unk>.
So we're working through that process now starting that process. The late this summer we.
We did have some success in the quarter are reducing.
Reducing the balance that is 90 days past due by $3 5 million, that's an important step for us it's a good sign for our program.
In comparing our third quarter of 2022 to the third quarter of 2021, however in that quarter last year, we had recorded the state aid and therefore, the customer delinquency balances had dropped dramatically in the third quarter of 2021, and that's why you see an increase in our bad debt reserve.
This year, we're very encouraged by the collection program that we have in place now we do expect that to continue and accelerate as we get into the fourth quarter and into the first quarter of 2023, and we look forward to talking about how how successful we are in bringing down that bad debt balance next year.
Next I'd like to turn it over to Paul Townsley to give us a business development update.
Thank you Tom I'm on the next slide which is an exciting slide we continue to set a brisk.
A very brisk pace and our utility acquisitions.
With 10 announced deals in process as you can see on this slide we have.
Five new announce deals this year. They include the Camino real utility in Texas, the Cook wheel of South shore community services, otherwise known as K S. SCS.
On coli in Hawaii, the Monterey water system in new Mexico.
Green acres system in Washington, and the throes water system also in Washington.
In addition to those five we also have three other deals that have been approved by their respective state public utility commissions and we're going through the final closing process. Those include H O H utilities.
Again in Hawaii.
Kehoe wastewater on the Big Island in Hawaii.
And the Sky Lando water system in California.
And then finally.
On the slide you will see that we have closed two deals so far year to date.
They include the Animas Valley system also known as Morningstar water in New Mexico, and the rail yard utility in Texas. So all of these kind of all put together they represent up to 8600, new water connections.
And about 10000, new wastewater connections that are under process. This year.
As you can see we're growing in each of the states that we have utilities and that our recent entry into the state of Texas.
Already looks quite promising in terms of growth.
Finally, our acquisition pipeline remains robust and we anticipate continued opportunities.
Coming next year.
And with that Tom I will hand, it back to you.
Thanks, Paul.
As per usual I have included in our slide deck for the quarter.
The projection and progress of our Capex and our rate base.
Once again, the yellow bars on slide 18, and 19 represent what we filed for in the California General rate case, and so obviously with that case pending and no settlement on Capex for the case, we don't have a way yet to adjust those numbers to what might be authorized by the commission.
But I do show there and reflect here the $222 million a year to date capex in our in our total systems throughout 2022.
Marty I'll send it over to you for a wrap up great. Thanks, Tom and.
In closing.
Q3 was about in line with what our expectations were what within the company. Obviously, we're not immune to the inflationary issues that we're all experiencing and we're seeing inflationary creep move into our P&L.
That coupled with the regulatory lag that we would typically see in the third year of the rate case. It certainly is affecting our our profitability, but we are performing and where we have budgeted two so we're very happy with the outcome, where we are in the third quarter.
The market headwinds, we expect that to continue as what's in the press release and as Tom mentioned, we do have to we do have certain.
Plan assets associated with a nonqualified retirement plan.
While the changes get recorded below the line were still required to essentially evaluate and value of those assets at the end of every quarter and it flows through below the line on our P&L, So theres no buying and selling of asset Sarah just that change asset value given that the volatility that we're seeing in the market and we expect that's going to continue.
And the 2023 years that we deal with some of these strong economic headwinds that we're dealing with.
As we as we go into the fourth quarter and into 2023, and what are we going to be focused on obviously, concluding in the cost of capital in general rate case or at the top of the list. Those are two very important proceedings for us and affect the biggest book of business that we have which is our California utility.
As I mentioned earlier, we expect the drought to continue into 2023 and our strong drought response.
And also dealing with the supply chain issues again, the team has done a great job on the supply chain side, but at the law as long as these headwinds continue the more likely they are to start affecting us at some point here in the future.
In addition, as Paul mentioned, we want to continue to execute on our growth plans and our business development pipeline. So while we're all dealing with the economic uncertainties that are around us each and every day right now our balance sheet has remained strong we have plenty of cash we have a we have been able to continue our growth in our capital program as well as.
Our business development pipeline, and we remain mission, driven and serving our customers and doing what we do best which is being a water and wastewater utility so going into the end of the fourth quarter strong and we will go into 2023 strong. Despite all the handle with headwinds that we're facing as a as a company I want to take them.
And closeout on setting a little different for this quarter, one I just want to point out I hope everyone saw the press release that we appointed MS. Terry Bayer to be our lead director.
Terry is an outstanding leader seasoned executive.
And she has been on the board since 2014, she started to chair our capital and investment Committee in 2019 in September we nominate her to be our lead director. She has just an outstanding person. We're very fortunate to have someone of <unk> caliber on the board. She has a strong background in public health and she also has a law degree from Stanford University.
And I hope all of you will get a chance to meet Terry at some point here in the future because we're very very honored to have her as our lead director and then lastly, this is Dave Healey, our corporate Vice President corporate controller as last conference call with Us.
Dave is going to be retiring at the end of December and they've started with us over 13 years ago as our director of financial reporting.
He was promoted promoted to our corporate controller and then ultimately.
He was promoted to our vice President corporate controller, and principal accounting Officer, David has done an outstanding job for Cal water not just on the financial reporting side, but also on the tax strategy side. David is one of the rare individual individuals in the accounting world that data is excellent and taxes and also excellent in financial reporting and he is going to be daily.
Really missed and we will anticipate announcing dave's replacement hopefully by the end of the year, but Dave I just want to say thank you for all you've done at Cal water and it's been an honor to have you on our team and welcome and it's been a blast so with that Regina we will open up the line for questions. Please.
At this time, if you'd like to ask a question simply press star followed by the number one on your telephone keypad again that is star one to ask a question, we'll pause for just a moment to compile the Q&A roster.
Our first question will come from the line of Andrew <unk> with Seaport. Please go ahead.
Thank you.
Lots of questions, but let me maybe first start with the taxes now that you mention them. So there seems to be a pretty substantial increase in year to date income taxes.
I think close to three 3 million is it just timing related and is there some true up happening in the fourth quarter.
So I'll go ahead and answer that this is Dave Healey.
So.
Part of.
If you recall with when the corporate income tax rate decreased to 21% in 2017.
The way utilities handle that is the reduction is move to a long term liability and refunded to ratepayers.
And it's the timing of when the refunds or refunded to ratepayers. So.
The 2018 and 2019.
<unk> Star Ray Ratepayers were paid a.
To them during the years 2021 and 2022.
In 2022.
$4 million less than was refunded in 2021, and that's what's driving the $4 million decrease so its partner for our effective tax rate calculation.
And that's what's causing it.
Uh huh.
But is it a decrease because this is <unk>.
Increased site and the operating costs you basically.
That's right.
Okay. So when we when we.
When we do the tax refunds, how it's recorded as a reduction to income tax expense. So theres more of a reduction in 2021 and 2022.
I understand so it's fair to assume that this 4 million year over year Delta persist through the end of the year.
Yes, even though it will continue through the end of the year and then.
And then it flattens out for the next three years. So there was just a little catch up.
<unk> was.
For the years 2018 in 2019 and it only was in years 2021 and 2022.
Okay I understand very good and then secondly again.
Just going through the results year over year, there seems to be a pretty meaningful pickup in and nonregulated expenses and so I assume that some of it has to do with those uninsured losses.
Michael It looks like about $10 million increase year to date again year over year.
Yeah. So.
When we talk about the unrealized.
Loss.
On our.
Our nonqualified pension plan investments.
It's recorded in nonregulated expenses in that that's what's driving that change.
Yes.
That's the mark to market, yes, yes, okay. That's fine so I understand that one okay. So then.
Going back to the regulatory proceedings that are still pending so the.
The Trc in light of the inflation that you're seeing in your cost structure.
Much of that is already reflected in that.
The pending DRC and is there a way.
Basically true up some of the costs that you were seeing before the final decision is mandated.
That's a great question.
Greg do you want to take a first crack at that about how we incorporate new inflation into the <unk> process.
Absolutely as part of the settlement and undisputed items, we made a request with the commission that at the time that proposed decision has put forward that it reflect the most current inflation factors on all of our expenses and.
That would be the mechanism that we would do.
The the rising inflation, that's going on right now from when we filed the case in July 2021.
And then Angie.
There's still an appetite and so sorry.
We're still about to file an update before the proposed decision is issued.
No at the time I think.
Go ahead Greg.
I was just going to say at the time, we file the case, we estimated what inflation would be for the years 2023.
Okay that has significantly changed.
As part of this.
The original filing we made a special request.
That has not been disputed by public advocates that says when the commission put sport that proposed decision that they will update all of the expenses based on the most current inflation factors at the time okay.
So that okay.
And the other thing the other thing to add there there Greg didn't mentioned is remember that in California, we have escalation increases in the second and third year of the <unk> and those also incorporate the most recent inflation factors and so.
While while greg's talking about incorporating into 2023 calculations.
Calculations for rates. There is also a 2024 and potentially twenty-five if this continues to be a high rate of inflation.
Understood. Okay, so moving on to the cost of capital proceeding so.
So I mean I.
And that there is a delay.
Yes.
The.
I mean is this lady.
Debates as to land.
Our cost of capital kicks in I mean.
I thought it was pretty obvious it's one 122 and it is not dependent on the exact timing of the final decision now.
The review period is 122 or through December 31, 20 for now.
So it's an interesting question I think that you have to look also at what's going on with the California energy cost of capital on and the pending case, there with what's happening with the with the.
A proposed decision from the administrative law judge and the alternate proposed decision of the President of the Commission.
The issue that we have and the reason that we are not recording the Reg liability associated with the lower cost of debt is that the procedural steps that the commission would normally take.
To ensure that rates could be made retroactive have not been done there was no filing for interim rates Theres no memorandum account to track interim rates are those of the normal procedural processes that would require that would allow the commission to go back in time.
And so right now that's the that's the situation in the in the process.
So so we're we're still waiting to see what that decision says.
And obviously, we'll book to whatever that decision ends up saying, but we don't have any evidence one way or another at this point.
Where obviously disclosing the amount in case it does go back and so you have that in the in the slide deck and it's in the 10-Q as well.
Okay and my last question on the if I understand this $11 million associated with the lower cost of debt but.
And I see that you're issuing equity quite a bit.
Now what is your expected equity layer at the subsidiary at the California subsidiary by the end of the year and <unk>.
Is this cost of capital proceeding were to lower the allowed equity layer in line with what our year end number will be what would be that the reduction in revenue.
So Greg.
Greg I'm not sure that we've calculated the reduction in revenue associated with adopting the ratepayer advocates physician associated with that and Andy I'm, sorry, sorry about that.
But it's several additional million as I as I think I understand it.
That might be taken out of the return.
As far as the.
As far as the first part of the question goes I believe that if you look at the financials in the 10.
<unk> 10-Q, I think we're about 50 50, right now within California, as our current equity capital structure, and so that you'd say is actually probably as high or higher than what the commission staff recommended and so obviously in there as an opportunity at any time.
For comments to the decision.
When we get to anytime we get a proposed decision that will certainly be part of our comments that look they said our cap structure was was below 50% and in fact, it's already at 50% as of as of the date whenever that comes out we expect with the ATM program that will continue to rise.
<unk>.
And we obviously have a plan to get to 53.
4% equity.
And expressed that plan to the commission. The staff is just completely using a historic.
Evaluation, which we don't think is appropriate at this time.
Awesome. Okay. Thank you I have plenty more questions, but I'll, let others ask thank you okay. Thank you.
Again to ask a question simply press star one on your telephone keypad. Our next question will come from the line of Jonathan Reeder with Wells Fargo.
Hey, good morning team thanks for taking my questions.
Yes, just wondering do.
Do you have any insight. The ALJ is currently drafting the PD is are you now or is there still potentially other high profile.
No cases, so sequenced before it.
Okay.
Jonathan it's difficult to say the administrative law judge's work independently at the commission.
For those of you don't know.
Was it a regulatory for Cal water for quite some time and works at the commission before that so feel comfortable saying.
<unk>.
I know a little bit about how ALJ is where you'd have to look at what other cases of this particular ALJ house, and then you'd have to evaluate whether.
It is sort of like you need to be a fly on the wall. So to speak to understand as Commissioner Commissioner House that has the case is she driving other are there other things that she's working on that are keeping her from helping the judge issue a decision in this particular case and I don't think we know the answer to any of those questions at this point.
The energy cost of capital case is obviously, a data point, which could impact how they view our case.
In some respects, but I believe that's a different judge and I know that's a different.
Commissioner so so I don't know that that would stand in the way of this case going forward.
Okay, Yes.
And I know all the ins.
Ins and outs and was hoping you guys might not because I certainly have a harder time piece and the piece of the puzzle together on that so.
I think in reference back to <unk> question, I think that the company would really appreciate it if the commission at least issued a proposed decision.
We have to release earnings.
In February of next year. So that we just have some guidance on that question about the effective date.
And I know Theres a lot of folks are just assume that that effective date is back to the to the start and we're not convinced of that at this point so.
I think we'd like to get that get that answer on the books at least in terms of a PD I think that would be very helpful to us.
And I would really hope theres a PD by.
Yes, we do too we do too.
In terms of the decoupling legislation that was passed does it specify you know that the requests must be made as part of like a <unk> or could it be requested.
As a standalone item either just by Cal water by all the utilities together.
Yes, I believe it specifies its picked up in the next <unk> filing.
Jonathan are Greg might have some insight into that I think you're still on the call right.
Yes, yes actually it specifies the JRC Island, your next ERC or by mutual agreement of the company and commission by an application.
Queens CRC. So there is an opportunity to file or something before our 2020 for Trc.
Yeah.
Okay.
And so.
Have you guys I guess formulated our strategy based on that like is it.
Wait to see how the Supreme Court case.
Case kind of plays out or.
Might you do that separate Avenue requested in between.
Yeah.
Well I mean.
Go ahead, Greg I'll, let you go first.
Oh I was just going to say, what we're going to do Jonathan.
Starting in 2023 has put together are our case.
Or.
Re requesting decoupling that we would either file and our 2020 for Trc, which would be July or make the decision based on how things are.
We are going with with.
With the Supreme Court or other companies, if we wanted to try and file it earlier through an application.
But the decision has yet been made actually when we would file it.
Okay.
Jonathan I think.
Critical element here is that if you recall back to the to the decision which wiped out the decoupling. There we didn't have an opportunity to put in any evidentiary testimony.
And the commission really railroaded us in that case, and so we don't want to go off half cocked and filed something that doesn't have.
Robust information behind it about how effective the program is and has been and so that's why we're not likely to go file next week.
As Greg said, we're going to spend some time working on our testimony, making sure that we have the facts all lined up before we put that out yeah and I think we are keenly interested in the state Supreme Court case, there was a 1% chance they would take the case and they accepted the case in the cases on the merits of lack of due process. So so I think we want.
To get into that a little bit to see how the state Supreme Court is going to look at it and consider that.
Yes, so what is the I guess kind of the timeframe on resolution from the Supreme Court now is there any.
Statutory time frame and then.
Two if they do.
But you know youre due process rights were violated.
Does that just strictly in the the order by the commission.
And you have decoupling.
Coupling this is automatically back in or.
What exactly are the.
Bring court rules in your favor.
Well, it's the state Supreme Court I don't think they are locked into our schedule per se I mean, we had to go through an application process of that'd be reviewed then they had to accept the case and then will be oral arguments sometime hopefully in the first quarter.
And then I think they tend to move fairly quickly. The question of what happens next is a good question I don't think we know because I don't think we've had too many water cases in front of the state Supreme Court I think we're on a little bit of unchartered ground I think they could bacon null and void the commission's decision and send it back to them. They can say this isn't binding.
You need to go back and open that particular case to get evidence on the record I I think we're kind of in a new zone here.
But again, we're very happy of the state Supreme Court took the case on the basis of our argument, which is lack of due process.
Yeah.
Yeah.
Okay.
Alright.
Yes.
Yes, I think between the legislative win in the state taking the case I mean I feel like we've had good momentum on this issue and.
As I mentioned to the Governor and the Governors office, it's are they.
They should perceive it as a bit awkward that a publicly traded company. Our publicly traded set of companies that are calling and saying hey cap cap, our upside which is what decoupling does but but look at the exact environment that we're in and the state of California, you know, what the drought and the climate change issues and so it's a.
And this is my personal opinion, it's a little absurd to think we're getting a rent a decoupling when we're in this horrible drought. It just doesn't make a lot of sense for the customer does make a lot of sense for us et cetera. So we.
We have stuck by our guns of decoupling, because it's the right policy position for us to be and to serve the state of California, and our customers within the state.
Right and obviously, there's been some turnover at the commission.
Other order originally handed down any sense, how the newer commissioners feel about decoupling.
Not yet I mean, when we take on the slide we talk about the new paradigm I think that's what we mean by that.
The commission has still been largely remote still uncommon pandemic mode.
So face time has been somewhat limited and obviously you have rules around that.
Ex parte rules that you can't really talk about an open case, what the commissioner so.
We're starting to get a little bit more face time with some of the commissioners which is good.
But again, we're prohibited from talking about kind of the current open cases.
Okay, Alright, well good luck with getting reinstated I mean, it does seem like there's momentum from a lot of angles. So best of luck with that thanks for the thanks for the time today.
Jonathan Thank you Evan.
Once again for any questions Press Star one. Our next question is a follow up from the line of Andrew store Osinski with Seaport. Please go ahead.
Thank you and persistent today.
Anyway. So just a couple of a couple of other things. So unbilled revenue. So you mentioned that you think that there's going to be some catch up.
But before the end of the year so should.
Should I assume that there is.
<unk> four.
Benefits to fourth quarter earnings associated with those changes in the balance of Unbilled revenues.
Let me put it this way if you look at the fourth quarter of 2020.
One we had that enormous amount of unbilled revenue that had built up in the second and third quarter and that dropped off to a normal level at the end of the year and so in in this year, we have much less peak unbilled revenue and that that really hit us in the second quarter.
But we do continue to expect and we've stated that we expect the unbilled revenue to come back down to a normal level at the end of the year. So so.
I guess I'm trying to say that we would expect less of a decline in unbilled revenue in the fourth quarter of 2002 as compared to the fourth quarter of 'twenty. One. So I think the answer to your question is yes.
Okay.
Okay and then.
And not to be a stickler here that just going back to the.
The P&L, so I asked about.
Nonregulated sensitive, but instead I wanted to ask about the other components of net periodic benefit credits, which is up about $4 million.
Year to date year over year.
Could you explain to me what this is.
Yeah. So.
We use to value our defined pension plan, we use the spot rate method.
And the use of the spot rate method has resulted in an increase in this credit.
So with this is this there's the service cost of pension plans and the non service cost.
This is the change to the non service cost.
Just as important to reminder, that both the service and the non service cost of the California pension expense is tracked in a.
The balancing account in California, the bulk of our business and it doesn't affect.
It doesn't affect net income because theres, a theres a revenue offset associated with the balancing account right. So as I understood smaller part this out in California.
Okay, and then just just concluding on this cost of capital proceeding. So I understand that you are drawing some conclusions from that.
The cost of capital for 2022 for Electric's energy companies admittedly that was yes.
About the cost of capital adjustment mechanism as opposed to cost of capital with you, which is which in their cases on these 2023 and beyond.
So I'm.
I'm not quite sure if there was some nachos.
Great to hear and then secondly, you also mentioned that there is some uncertainty about the.
The step up that row step up on the back of the adjustment mechanism, which by all accounts. It was triggered for water utilities.
The end of September .
Especially on the ladder. So I understand that you guys have to file for this increase to happen I haven't seen the filing. So so talk to me about how that impacts when exactly this 50 bps step up would apply.
Sure so.
Let's go through a couple of things first of all as I understand it and I apologize if I'm incorrect about this but in the energy capital cases, not determinative, but it's just sort of an example of what the Commission's thinking are there are two decisions that are out there that is the administrative law judge decision and then theres. The alternate that's proposed by President.
President of rentals the alternate.
By President rental says what you what what you said, which is that it just waves the triggering of the mechanism.
But the important distinction that I see is that.
The difference between the two proposed decision as whether they would go back and have a full investigation of the 2022, our cost of capital and a full review.
So that's the open question I was talking about.
And President Reynolds alternate says we don't go back and so I thought that was interesting and it might be somewhat informative into our case it might not be obviously it might be a different decision that happens with energy and with water.
So with respect to triggering the difficulty is that we don't have a proposed decision and so we.
We cannot make a filing and based upon that.
No order in a decision that says we file for the adjustment because theres nothing to adjust from and there is no adopted order that says we make that filing I would expect that if the commission were to come out with a proposed decision and a final decision. That's a here's your cost of capital for 2022.
It would allow us to file for the adjustment for 2023 in that rate order and so that obviously would not be filed in October or November when it would normally be filed.
Because October November we will have passed by the time the commission issues a decision.
But typically in cases like that where they have have missed the deadline for a triggered advice letter filing they'll allow that filing to be made later and so you know.
You walk through a hypothetical and you say well if they set a cost of capital for 2022, and they do that on an.
January 15th or whatever those there's probably going to be in order in that final decision, which says in the companys shelf viral file for the triggered cost of capital for 2023.
In the same filing or subsequent to it.
So we would see that now keep in mind that a number of the analysts have suggested that the commission might take.
Take the information that it might have triggered and just give us a general change too.
The cost of equity and say that the both parties agreed to the adjustment.
We've essentially wave their hands and incorporate the adjustment into whatever they decide so that's why we're uncertain. We don't know how the commission is going to react to their own delay.
Marianna does that make sense.
The other adjustment kicks in well at least theoretically 123.
And the cost of capital review I E change to the all components of the cost of capital that was 122, eight so but I understand the point you're trying to make is that there is no certainty as to when exactly is.
Right. There is no certainty as to how the commission is going to react to the new information about change the changed economic environment.
The gist of it we just don't know what theyre going to stay in their decision and I don't mean to speak over Gregg I know greg's an expert on this as well so.
Greg If you had any other insights on this side I'm happy to happy to erode.
Tom Ive addressed all the issues.
I would've brought up the same points.
Okay. Thank you guys. Thank you okay.
And we have no further questions at this time I will turn the conference back over for any closing remarks.
Great well, thanks for joining us on this nice fall day, we'll look forward to communicated our year end results with you at the end of February in the meantime be safe and thank you have a good day.
Ladies and gentlemen that will conclude today's call. Thank you all for joining you may now disconnect.
[music].
Okay.