Q2 2019 Earnings Call
Ladies and gentlemen, please standby.
Yes, California water service group second quarter, 2019, or any Spiegel, Saudi conference will begin momentarily.
Again, please stand by the conference call will be getting into me. Thank you.
Good morning, ladies and gentlemen, and welcome to the California Water Service group second quarter 2019 up results teleconference.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should be quite assistance. During the conference. Please press Star then zero on it that stone telephone as a reminder, this call is being recorded.
I would now like to turn the conference over to your host Mr., David Healy, Vice President and corporate controller deploy sea lice.
Thank you Lisa welcome everyone to the 2019 second quarter earnings results call for California Water Service group.
With me today is Martin Kropelnicki, our president.
She thinks and Chief Executive Officer.
Thomas Smegal, our Vice President Chief Financial Officer, and Paul Townsley, Our Vice President of business development, and Chief regulatory Officer.
Replay dial in information for this call can be found in our second quarter earnings release, which was issued earlier today.
The replay will be available until October 1st 2019.
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 Www <unk> Cal water Dot group.
Oh come what her group dotcom.
Before looking at this quarters 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 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.
Great Thanks, Dave and good morning, everyone.
I'm going to begin with the slide deck and not give you a summary of the earnings results for the quarter and for the year to date and I'll start on slide six of the slide deck. Our results shown in the table here, particularly net income is up 2.2 million from 14.8 million to 17 million. The Es is similar similar percentage increase obviously, a four cents increase in EPS to 35 cents for the quarter our capital investments just to take note here are relatively flat for the quarter second quarter was very similar to the second quarter last year.
And explain that [noise] relating to the first first quarter, if you turn over to slide seven.
I'll just start with the capital investments for the year to date were down about 12 million on Capex that was largely in the first quarter due to weather.
Due to some delays related to the general rate case, we've caught up a bit in the second quarter and we seem to be on a good run rate for capex.
In the year to date period, our net income is down $4.6 million and that's about 10 cents on an EPS basis.
The big Big drivers for for that are the Unbilled revenue accrual that we talked about in the first quarter I'll talk a little bit later in the deck house that issue.
[noise], so flipping to slide eight just the highlights two big highlights here for the quarter first is the reduction in our business development expenses, if you'll recall last year, we were in pursuit of an acquisition and we spent a considerable amount of money on that we did not have that recur this year and so that's helping the quarter.
That's 3.4 million.
We had some smaller items that affected the quarter, we had an increase in our equity or if you see Oh, that's related to our commission decision in California. It allows us to capitalize the costs of our construction projects while they are in construction.
Generally speaking we had rate increases we had $5.1 million of rate increases, which were offset by normal operating expenses related to both capital and operations. So on the capital side do you think of depreciation expense, which went up due to more capital investment last year also our interest cost is up relative to that same amount and property taxes are also up.
Relative to the higher investment.
We did have higher wages and outside services costs.
The last the second Big point again, the Unbilled revenue accrual in the second quarter. Our Unbilled revenue accrual was largely the same as it was in the second quarter of last year. That's good.
Except that in the first quarter, we had a substantial negative unbilled unbilled revenue accrual and we did not see a rebound like one might expect from that negative number to a much higher number in the second quarter that is largely due to the fact that the weather continued to be cooler and wetter in California.
Throughout the second quarter, we had snow in this year and the data on Memorial day weekend, which is extremely unusual for us.
That that as part of the time period, which is used to evaluate our unbilled revenue accrual.
So we didn't see the rebound there, but it did stabilize in the second quarter.
I'm just going to the EPS bridge is very quickly.
You can see these same factors playing out the big positives for the quarter or the rate increases the reduced business development expense and our ABDC and the negatives are these normal operating expenses depreciation interest.
Wages and outside services and other operations.
And then the bridge for the year to date.
Again rate increases is a big positive.
Reduce business development expenses ABDC for that year to date period.
And then the the negatives for the year to date period that get us to our.
Our current EPS for the year to date the change in Unbilled and then the factors from the quarter, which are depreciation and interest expense your wages and your outside services. Other operations cost. So now I'm going to turn it over to Marty and talk a little bit.
Thanks, Tom and good morning, everyone. Thanks for joining us today as we wrap up our second quarter of 2019.
As Tom mentioned, our year to date company in developer funded capital investments or were up just shy of a $122 million or down about 9% compared to the second quarter.
Are the first six months of 2018.
As Tom mentioned, obviously, whether it was it was a big driver of that.
The rainy season. This year was the fourth wettest rainy season on record for the state of California.
And as Tom mentioned, we had snow in the Sierra as.
Up through Labor day weekend in fact, I was talking to one of our board members yesterday, the board meeting and was up hiking.
And on the Crs before she came down to our board and she was talking to all the snow Thats still on the trails up in the CRM. So.
It's still you still have a lot of runoff happening.
The good news is it has warmed up it's warmed up substantially.
From where we were a couple of months ago. So we're into the warm summer months.
In addition, one of the drags I think thats happened as well as we are in the middle of the general rate case, and we've used up a lot of our hours of engineering services in the rate case settlement discussions that are currently ongoing.
And then we have a new variable that we've been dealing with which is called the public.
Safety power shutdowns and I'll talk about those in just a moment.
As we mentioned in the slides the information that we show in the slides later on were used in the full amount of the.
2018, GRC, some metal, which is the $828 million that will get trued up as we get to some.
Finality of the rate case, that's currently in process in settlement discussions are currently underway. So again thats just a projection of what was filed and that number will get trued up later on in the year when we know the final outcome.
And another point worth, noting and estimate that the financing side of the business is that during during the quarter.
Tom This team has successfully refinanced $400 million in debt through a private placement bond offering.
That consist of replacing $300 million of variable rate Securities issued in 2018 that was really a bridge financing that the company did and then we had another $100 million of.
First mortgage bonds that were expiring tenure mortgage bonds that were expiring that were issued in 2019. So the average weighted life of 30 years is on the existing debt and the average cost of debt was 3.86, which is substantially less than what the original debt was placed at so that puts us in good shape on the refinancing side.
I'm going to hand over to Paul who is going to give a quick update on what's happening with the general rate case, and the state of California. Thank you Marty.
As Marty mentioned briefly we are in the middle of our California General rate case process, we filed the rate case.
Just over a year ago in July of 2018.
We have been in settlement discussions and are working our way through the process.
As we speak there are.
Along with.
Cal water, we have the California public advocates are involved in the case and then we have three municipalities who have also become engaged in the rate case.
We had two days.
Evidentiary hearings in July we have a couple more days scheduled for early August and I think we are making progress towards resolution of the case, that's really all I have to report.
I will turn it back to Mark.
Okay now to talk about.
And a little more time talking about wildfires and public safety power shut offs.
Okay bout mid term in the quarter, the California Public Utilities Commission approved a plan that allowed electric companies in the state of California had to shut off power to various customers including us.
In an effort to help reduce wildfire risk our fire rest under certain circumstances.
California utilities Bob.
Have advised all of US these outages can last anywhere from our two are as long as five and one of the disclosure is either even up to 10 days, depending on a number of factors.
The factors that they consider when.
Proving up power shutdown Rgs energy conservation of the grid.
A couple of things that are significant one.
Exit if theres, an existing supplier and the system if you remember.
During the Mendocino complex fire, we talked about the fact, they shut off the grid a couple of times, which had an effect on our ability to pump water, which is critical in the fire zone. So we had to fire up the plants with that with manual generators and keep the water flowing for firefighters.
To ultra low humidity levels.
This might be a new concept for everyone kind of back on the east coast and Midwest, but and a lot of parts of California. We get these very ultra low humidity pockets, where you have single digit humidity, which means and certain conditions fire can spark and rapidly burn really fast thats one of the things that triggers wildfires in the state of California.
Three you get these high risk when forecasts, where it's not uncommon to get gusts of wind 30, 40, 50, even 60 miles an hour and certain times during the summer months, especially in northern California, and Southern California get what's called the Santa Ana winds are called easterly winds, which is a very warm eastern when that blows not the desert towards the coast line.
Those are very bad conditions for fire and the walls. The fire that we had in southern California, The Westlake District.
That was sparks during the Santa Ana winds that we had.
And then they have what's called a red flag warning, which is gusty offshore wins, so winds blowing in from the west flowing east.
You couple that with poor overnight and moisture recoveries and then the ultra dry humidity and you really can start at Tinder box that can start a fire very very quickly. So under these conditions electric companies have been authorized to energize the grid and as a result that that's caused us to take pause and say, okay. What do we need to do because we know we cannot go.
For five days of that water or fortys without water three days of that water. Even two days of that water, we have to have the ability to pump.
So as a result of these psps.
Uh huh.
Processes that have been approved we've gone back and we've updated our policies and procedures around weather warnings. What do you do to prepare the system when you're going into a red flag warning for example.
We've written a specific policy just for Red flag warnings, especially for southern California, and how to manage those tanks during red flag warnings how to prepare for red flag warnings.
We have done a lot of updating of our hydrant maintenance, making sure. Our hydrants are ready as we go into fire season. This year, we've updated our policies and procedures.
And on the training on vegetation management, and we spent a lot of time testing our current systems and doing a readiness testing in preparation for fire season. This year.
On on the physical assets side, we have filed for a memorandum account for the Psps program.
We've also procured an additional 59 generators, while that might sound like a lot, but when you consider how large our service territory is the number of wells that we operate and how many how much water we pump in a single day. It really isn't most of our major systems are already backed up with with.
Backup generation that can keep the systems pressurized during power outages, but some of the more smaller remote areas that can be problematic.
In addition for extended power outages, we need to have some backup capacity to swap out generators to make sure you can only run them. So many hours before you have to maintenance et cetera. So we did procure 59 additional generators and booster pump type of equipments to help sharper capabilities to deal with the psps situation over the summer and to keep the water flowing during during the crisis. So overall I think the the wildfire task force that we put in place internally to deal with US has done a very very good job, but it has been a psoc of resources for engineering for the rates team for operations management, but we felt were in a position that we just had to be ready for wildfire season, and take some additional steps to deal with it the possibility of decentralization of the grid. In addition to that we maintained our focus on on liability legislation inverse condemnation continues to be a big deal in the state of California The legislature.
Right sure. Despite recommendations made in the Wildfire Commission report about fixing the inverse condemnation law the legislature hasn't taken action on that they did establish a liquidity pool.
That electric companies will pay into and then they have two options they can directly pay into it.
Are they can use it and pay until like an insurance policy, depending on which path. They go down in either case that funds used for electric companies to play to pay claims.
Stemming from liability associated with wildfire so.
The estimates are that this will create a 21 billion dollar fund that will provide liquidity for the electric companies and then as the commission goes through its review process and assuming there is no.
Negligence on part on the part of electric company, they will be allowed to capitalize those costs and raise debt issuance cost and payback to fund.
So there will be more to come on this as we get we get into the fall. We built a broad coalition of water supplier cities and a lot of people in legislature, who have supported.
Yes in the proposal of Lebanese liability for water companies not because we're not profires not caused by us as we say we're kind of like the firefighters are the good guys here.
We shouldn't be held accountable for fires that would that we don't start as I mentioned, the operational training readiness training, that's been going very well up to and including extra coordination with the local authorities and we've taken big steps to communicate important coordinate with so Cal Edison and Pacific gas and electric company. So as we go into kind of peak wildfire season here in the third quarter and part of the fourth quarter.
Rest assured we've done everything that we can to be ready for wildfire season, this year, including taken additional steps to harden our system to be ready to deal with everything that needs to come up including the decentralization of the grid.
So having said all that I mean, let Paul talk about Travis Air Force base, which is some good news since we've taken over operations. Thank you Marty. So we've just finished our first full month of operation.
Of the Travis Air Force base.
For those of you that don't know Travis is a very large air force base located in Fairfield adjacent to Fairfield Calif Rightmyer.
A number of our service areas. So we've begun that a 50 year.
Contract to own and operate the Travis Air Force base water system that was approved by the California Public Utilities Commission.
And we are.
Operating it under what's known as the regulated utility model. So we we really think of Travis as simply another district, one of our many districts and we've we've been.
We've completed the transition period and are fully in place operating the system and I believe operating it very well.
And with that I will turn it back to Tom Smegal.
Great a quick update on our decoupling balancing account the Ram and the MCV as we call them.
So as I mentioned at the top of the call. We did have lower sales in the second quarter due to weather.
We had about 83% of our adopted sales that's driven up the WRAM balance a bit. It's currently at $61.3 million up from about 56 million at the year end 2018 year end.
The good news here is that we still have the effect of the sales reconciliation mechanism that allowed us to change our adopted.
Sales to take into account the sales from last year had that not been in place we would have seen our.
Receivable balance in the Ram MCV, a that would be almost $6 million higher at this point. So that is a good regulatory mechanism and its been working well for for the company.
And the Bar chart on the next.
Next slide just reflects that as well.
Now I'm going to turn it back to Marty to talk about our outlook for the remainder of the year.
Thanks, Tom.
Well as you've heard US all mentioned were in the middle or and the deep throws of settlement discussions currently right now with the California Public Utilities Commission.
I would say both sides are working in good faith to try to bring settlement on the 2018 general rate case so.
We're hopeful that we can get through settlement talks and come to come to a successful resolution and then move on to getting the capital in the ground.
In addition, we did open our first regional call center in Southern California.
During the second quarter, we notice that we had an immediate and fairly significant step up in service levels. When we open up that first call center. So we have announced to our employees and the state of California that win share within the blueprint open up three more regional call centers.
We're essentially going from a 20 plus call center model down to four regional call centers, So that Theres one in southern California. It's open now the next one will be opened up in the Central Valley that will take care of Bakersfield Visalia. Selma then we'll be opening up the 2022 other ones one in northern California. The Bay area that will service all of our Bay districts, and then went up in northern California. The significance of the regional call centers is one it allows us to expand our service hours for customers too.
Everyone has a smartphone now everyone has an app everyone likes to communicate on through different electronic means that allows us to offer and expand our service offering for how we communicate with customers.
And when we communicate with customers. So you will see this model expand.
As we move into 2020, and it's off to a very very good start.
And as I mentioned earlier.
Wildfire response planning and training is well underway, we expect to incur lease.
Expense for $2 million to $3 million on on the 59 generators that that we have procured here in the second quarter, plus there'll be incremental capital investments for the remainder of this year going into next year I would expect the capital improvements that will seek recovery for it'd probably be around $10 million rough estimate back in the envelope as we go through this process so that being the expense piece, which is the lease cost two to 3 million this year and probably an additional $10 million of capital.
In 2020 that will work to continue to harden our system.
And in closing I get all hands are on deck. It anyway for wildfire season last year was just a heck of a year for us with four major fires in the state of California, and given our broad footprint, we've got to be ready to deal with if circumstances like that again this year and I'd just say the team has just done an excellent job.
Rapidly employee changes to deal with the with the Psps program and to be ready for wildfire season. This year.
Marty just the next two slides are really a repeat that we've done every quarter, we haven't yet changed our projections due to the rate case.
So the capital investment projection is still the same that you've seen over the last few quarters.
Just reflects an update on how much we've spent on a year to date basis in the following slide has not changed at all which is the projection of rate base.
And again that is based upon the rate case filing.
So mark you want to wrap up.
So just in closing again.
All hands on on the rate case, and getting that settlement, hopefully taking care of and moving on with our business.
Staying focused on the three prong approach for dealing with wildfire risk one staying focused and Sacramento on the legislative legislative process to making sure. We stay focused on rental operational readiness and changes, we need to make and policies and procedures to deal with changes made at the California Public Utilities Commission.
In particular, the Psps program and three what infrastructure improvements, we make to make sure that we are ready and we can keep the water flow in during the crisis for our customers as we like to tell people. It's the third year of a rate case for us. So it's the period, where we feel the most amount of regulatory lag in the three year cycle. So we never get too excited about our third you ever have a rate case, then let's get the rate case done and move forward.
And as Tom said and I think it is fairly significant that the extended period of a wetter cooler weather.
Certainly slow down the capital program in the first half of the year, but also had an effect on the unbilled revenue for the quarter, which is a little rare that it doesn't all flip out in the second quarter. So now that we moved into the warm summer months, we'll see what happens in the third quarter with that revenue accrual. So what that Layla, we will open it up for questions. Please.
Ladies and gentlemen, if you have a question at this time please press the star and the number one key on your Touchtone silo. So if your question has been answered are you wish to remove yourself from Vicky we pressed the pads.
Your first question comes from the line line of Ben Kallo from Baird. Your line is open.
Good morning, Ben Thanks for taking my question.
Thanks for all the detail there so maybe just sort of west point Mardi about.
Tom I'm sure you could help your two just the cadence of the Capex for the year.
Are you guys thinking that you could still meet your target. So I think it's a little little wider in the first half because you're off versus what you need to do in the second half.
How that we've seen I guess since.
Wildfire tough it was.
Hello.
With the season or two.
Yes.
Been unfortunately, it's still a bit of a moving target with the settlement negotiations.
The difficulty there is that's a confidential settlement, we can't really talk about what the negotiations are over and or how close are far apart. The parties are again were hopeful there and.
So part of it part of what's been the lag in the first half of the year I think is some hesitancy on controversial projects, where there was a negative recommendation.
To go forward with that project.
Excuse me as you as you May know when you do a capital project the.
Later in the case of a shore project or six or eight months later in the case a longer project. So so that delay as maybe a push some push some things out.
We do have the additional cost of the Sps capital that's going to get factored in.
I'd really like to wait until the third quarter and give you kind of a more firm number I think I think with the third quarter. There is a reasonable likelihood that we'll at least have a physician statement in the rate case, and whether or not there's a settlement. We'll at least know what the bounds are and maybe be able to give you kind of a kind of a.
A closer wedge of where we're going to be and I think okay.
The other thing I would add to that as is really well we do.
Report and disclosed capital expense on a quarter by quarter basis, an annual basis, it's really that three year target the rate case target that's really what matters here. So if we do lose a little momentum in this first year of the rate case cycle I'm not too worried about it because it's the first year of the rate case, and we'll re grain will regain some of that ground in the second and third year.
And if you remember we did a strategic shift in the way we did capital and this last three year cycle, we used to stretch the capital out kind of period by period and try to keep a balanced and and have kind of incremental growth kind of year to year. This last cycle, we pulled a lot of capital up to the front side of the cycle because that allows us to maximize the value of our step increases in the second and third year of the cycle. So.
Part of the message that we've tried to we've been on that is really stay focused on that three year capital budget number not necessarily a year than the year to year capital number and remember in California.
Getting capital in the ground is important.
But it's not like it's actually a missed opportunity because its forecast of capital versus.
Some of the other states, we operate in and where it's a historical test year, you don't get recovery of four it and tell us in the ground and you have to apply for it. So we're in a pretty good spot in the state of California to deal with some of these ebb and flow issues that pop up like Psps or no rate case settlement discussions to me the hardest thing as that.
In this case, both the Psps program and the detailed rate case settlement discussions eat up a lot of engineering services hours and it takes them away from the capital projects of getting that stuff in the ground because it helped with the settlement there helping with some design changes we've got to make to deal with wildfires, but.
I'm fairly confident that any three year window will hit our targets. It's just we've got to deal with the ebb and flow the weather pattern and some emergency is a pop up.
Okay, that's great and then.
You talked about the reduce expenses as the truck, but could you just spoke about.
Good good approach to.
But also I guess with the all the talk around the world.
The California regulatory bar goods.
Do you want to reach outside of California, Dallas harder to operate there so less likely to do acquisitions. There. So maybe an update there. Thanks.
Hi, Ben Paul Townsley, So we are very active and the business development front.
We.
Are obviously looking in California, because that's where most of our businesses today, but you know we also operate in Hawaii, and New Mexico, and Washington So.
As far as were concerned.
Our hunting grounds are our California and beyond California.
We've just hired a new director of business development, who has just been with us.
Couple of weeks.
And I think we have.
Okay, very sound and robust program that we're working on but obviously with business development I can't announce anything until we're ready to announce it but do stay tuned.
Yes, I think one other things when when I ask Paul to take over the business development process.
Paul took about a year to kind of retool the way we hunt.
Water M&A tends to have very very long lead times and can be very very lumpy. So the process by which you prospect and track leads and follow up on deals.
Can help make or break the deal frankly, because it's not it's usually not a quick win type of M&A environment like you might see in some other industries. So overall I think Paul has done I've done a good job kind of filling up the pipeline monitoring the pipeline.
The new person that pulls recruited I think is very very good he comes from industry with a lot of years experience and the trick is you've got to cover the ground and just be out there and let people know who you are always be looking for opportunities and I think we position that very well and we're also pursuing small tuck in.
Opportunities in adjacent to or near our existing systems, but we also don't shy away from big opportunities like that the opportunity that we chase last year. So we are really reaching across all of what we think are good potentials in our in our sphere of influence.
Great. Thanks, guys.
And bid been lasted less extra thought on that I know, you've kind of preface yours about the California regulatory environment, we've been regulated utility in California for almost 100 years, we have a good working relationship with the staff of the commission. We know a lot of the commissioners. We've we feel that we can work in that environment constructively and have constructive outcomes on the California regulatory side, so were unafraid of expanding in California.
I want to make that clear too.
Your next question comes from the line of Ryan Connors from Boenning and Scattergood. Your line is open.
Great. Thanks for taking my question today.
Good morning.
The unused to issue of this PS PS investments I know you can't get into the Nitty gritty of the discussions, but just conceptually I assume there is already some kind of requirement.
Or at least guidelines that you have some redundancies built in for power loss.
Especially given earthquakes and what not in California. So how do we think the PC and the Interveners will look at that will they try to argue that you should already have some of this stuff.
In place and that therefore trying to not give you credit or.
Just curious how what the current redundancy requirements are if any and.
What the incremental.
How that plays out.
Sure well like I mentioned most of our major systems are already backed up I think that the company generally has done a very good job.
In the ordinary course of business planning for things like earthquakes things like that where where some of the problems start to come in is when you think about.
The energizing a whole quadrant of the grid that might affect to service areas. The three service areas are might affect them more remote part of the service area.
Where.
Sometimes you can you can just open up at high end.
From one one system the other inflow water end, but if that whole sections out of power and one section say our systems and our guys, but the system nexstars isn't than they need water you start the pressurized.
I think the real Big factor here is just the concept or the notion that customers have been told by been noticed I received at my house that we need to be ready as the consumer to go up to 10 days that power.
That's a long time.
And then some of the other communications Edison is set up to up to five days without power than PGT Pacific gas like this has changed there is and then now they've saying 48 hours or more so.
The concept that being without power for our two or three or four generally not a problem anywhere in our system, but when you start looking at kind of multiple days without power and a large section of the grid that might affect multiple service areas, you've got to build and some more redundancy and generally speaking.
Again 6000 miles of main 750 wells.
We have procured 59 more generators, it's really not that much compared to the amount of assets that we operate but we've been focused on making sure. We can pump and continue to pump water without interruption during a disaster for the parameters the five to 10 days or longer Paul and you've been working on them. The memo account, yes, and I will just add that when we file the memo account earlier last month.
California, the consumer advocate public advocates.
Is not opposing the establishment of the memo account. So they are they understand the need to establish that they're just looking for more clarifications and clarity on the memo account, but they're not opposing it. So we will address these issues in the future. When the time is right, but I I don't think that we're going to have an extraordinary regulatory lift when it comes to recovering our costs.
Got it now that makes a ton of sense, you articulate that well.
And my second question was just so.
You mentioned your late in the in the rate case cycle with US there is a separate obviously cost of capital and now we've got the fed raising rates again. So can you just kind of update us on the timing for the cost of capital reset and what the key variables variables will be there.
Now that we do have rates ticking upward.
Or excuse me downwards again.
And in the index reset of rates and all that stuff, how you see that all playing out.
Well there has been a lot of changes in interest rates. So it's I think it's a little premature to try to forecast what we will be doing our filing is due next march.
That is about.
Mike thinking is right about nine months from now.
Honestly at the moment, we are focused on our general rate case, all hands on deck on the general rate case, as we get towards the end of the year get the rate case behind us start focusing on our cost to capital case.
And we will be able to really take a look at what the forecast for the cost of capital would be at that point.
Ryan to two more items there one data point, which is the energy companies, obviously have filed for cost of capital. This year and so we are interested to see what happens with that case.
I know they initially asked for additional risk premium related to the wildfires and obviously, we've talked a little bit about some risk to the water utilities.
It's unclear as to whether that would be incorporated into cost of capital at this point or not whether theres, an additional legislative fix for the water utilities, but thats kind of harboring out there as a possibility that the second thing is as Marty mentioned earlier, we refinanced $400 million of.
Long term debt and actually when we go in for this March case, we will have a substantially lower cost of debt than we on a weighted average basis than we did last time, so cal water as a key.
Really.
Aggressively pursued.
Lower cost of debt meant much more so than any other utilities in California, and so we're really proud of that effort, we're going to really be in a good in a good stead. When we go in front of the commission for the overall weighted cost of capital.
So just to keep that in mind as well.
Okay, Okay, great well thanks for your time this morning.
Thanks, Rob.
Again, ladies and gentlemen, if you have a question at this time. Please press Star then the number one key unattached don't telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Your next question comes from the line of Jonathan Reeder from Wells Fargo. Your line is open.
Hey, good morning, gentlemen.
I hope you all are doing well.
Yes, yes.
I don't know if you can really get into this space on an earlier comment but.
What are the biggest areas of disagreement in the DRC right now is that related to the capital budget or.
Are there meaningful expense item.
You know kind of to that you're having to kind of hash out.
Jonathan This is Paul Townsley call and I'm afraid I'm going to have to take a pass.
These are confidential settlement negotiations, we may be able to settle the case, we may be able to settle part of the case, we may be able to settle none of the case, but I can't disclose any of that until.
The settlement discussions are completed until hearings are completed and.
Briefs are filed and we are we will be expecting we will be filing briefs here.
In the next couple of months, so I really have to.
Ask for you to give us a little bit more time before we can disclose that.
I was hearing drop dead date, Paul like that you have to reach a settlement by where think hey, we just have to go to this partial settlement versus a full settlement.
In order to keep the thing on Frac typically the the window closes on on.
On all of this win win briefs are filed with the PVC and I don't have the calendar in front of me, but it is a in September that we filed a brief so that really is the the end of the window. We can continue up until really the day before breach or file we can continue to work with the other parties on settlement.
And you know as Marty said earlier all parties are working in good faith and so I just think we there are as with all settlements others. Given taken there is uncertainty until you get to the end of the end of the road. So.
I think we will know a whole lot more in about 30 to 45 days time.
Okay, and then Paul you pick the case is still tracking on schedule, where did you get a decision by year end or.
If you do reach a settlement leap.
In that process.
We've seen with some other cases, the commission's taken quite some time to actually you know parse through an approved the settlement agreement.
Mike might slip into the into 2020.
Hi, Scott Johnson in our in our last case.
The 2015 case, we had a decision.
A commission decision in December and rates went into effect January onest.
I still believe Thats our schedule for this case.
That's been the sort of.
The schedule that the PC as late forward.
I don't have any reason to believe that's not going to be the case.
Okay, and then on the National account I guess, you're still within your ball.
Did I hear you correctly basically going to track.
The expenses, including like the cost of leases, but then the 10 million of capital that you know you'd cited would essentially just go through like the GRC for recovery purposes.
No that's not quite right the memo account with it which rack both expenses such as.
Rentals of generators and fuel and.
Things like other expenses that are not in our current rate case.
The memo account would also track the revenue requirement.
Of capital investment that we have made.
In response, the Psps until they are filed in the next case, so there will be a revenue requirement component and an expense component.
Now with all as with all memo accounts of the determination of Recoverability is made down the road, but the memo account enables us to track.
Those costs for later.
Later application of recovery.
Yes, that's correct.
Go ahead, sorry, sorry, Jonathan.
Just just to remind everyone that the.
The accounting of this the way. This works is we're not going to recognize a receivable from a memorandum account until the commission authorized recovery of that so when Marty talked about $2 million to $3 million of expense for them or in the remainder of the year, that's going to be an issue that's potentially going to be an expense that doesn't have a revenue component to it this year.
But our expectation would be that we buy and make a filing with the commission and get that revenue component, whether it'd be next year at some time or when we make that filing so.
An offset in a future period.
Okay, the two to 3 million.
Will flow through to the bottom line. After this year, you're saying that that's our expectation at this point.
And obviously that can change depending on the length the fire season.
Whether there are incidents that occur.
And we have to deal with the operating expenses of running a system for four or five days.
On generators. So we'll just have to see theres some variability in those numbers.
Okay, Yes, I understand.
Are there and then.
Marty you mentioned.
Electric Youve done.
Get a true I see fixed.
What would be kind of an acceptable solution to the inverse condemnation.
No problem as it relates to water utilities.
The solution.
Our being kicked around right now.
Yes, well again and I would I would call your attention to the Wildfire Commission report and that and.
I am very ray.
Proud and happy with the performance of our team we have up in Sacramento.
What we found one way or work on this issue is there was there was a.
Little to no knowledge and lawmakers that inverse condemnation is directly applicable to water utilities.
On the fact that it was that what you guys are going like firefighters that doesn't make a whole lot of sense in our responses and that's why we're here talking to you.
And that Wildfire Commission report it gave it gave three recommendations and one of those recommendations.
Specific we've said.
Going to a fault base standard for water utilities, who don't caused the fire.
And.
That's the type of language I'd like to see US go to California is one of two states. It as this inverse condemnation law on the books.
You can broadly paint inverse condemnation under a whole bunch of liability scenarios not initially wildfire, which is why it's kind of a plane upstream type of law, but there's a reason why all the other states don't have it that way they adopt the default based standard and no one in the water industry insane hold us accountable.
But we don't we don't want to be subject to frivolous lawsuits are if we don't caused the fire and a pump station our pump station Burns up and all this equipment were buying to be to be ready for wildfire season. If it goes up in smoke because of the fire. We don't cause we can still get sued.
And so I don't think its in the customers' best interest that we get hung out there to drive when were part of the solution and I think the Best example of this I can give is when we had the Mendocino complex fire PGT shut off the grid. They gave US notice we are per flight, we were providing water 24 hours a day to hundreds of firefighting vehicles.
When that power went down our plant went down where the only pump or on the east side of that Lake.
Up in clear Lake and so our crews went in and we add back of generation, but we had to manually fired up and we kept that system pressurized.
Well the power was out and we continue to pump water, if we didnt pump that water where were those crews go to get water.
So.
It just there is that theres, a liability issue that needs to get flushed out I'd like to see.
The state adopt default base standard for all utilities, not just water utilities, but I'm really not concerned about water utilities and if you look at the coalition that we started we have a lot of a lot of names on the coalition a lot of people have signed up in support of it our unions have signed up in support of that and we got it we got a pretty good movement going right now and Jonathan Let me just give you that youre still in case anybody is interested in following up on the policy principles that are there its fire safe, California. That's all one one string of letters Dot, Oregon and that contains a list of all the organizations that have signed on to sponsor the cities in the water districts in water companies that have signed on to that and the policy principles that we're looking at in terms of the legislative fixes for that.
And one more time that fire safe, California Dot work.
Hey, and Marty So if you can get it corrected the bulk based standard and even if it's just.
Kind of a carve out if you would for the water utilities.
Does that then it's got to be like the two thirds approval and the constitutional Amendment Panna.
All that stuff that makes it a little bit of a heavier lift.
Yes, Thats a good question, Jonathan I'd have to do a little research if it's a modification to the constitution.
It has to get it has to get approval two thirds two thirds approval.
But also under executive privilege. The governor can can put laws into place under executive privilege I can deal with the drought a couple of years ago, when we declared a drought emergency.
And bypass that process at least in a short term basis.
And all of our discussions with legislators no one's opposed to a fault base standard for water companies.
The issue is you just you have 111 electric company Thats been moved into the causal modifiers and.
I would say there is not a lot of love for electric utilities in Sacramento right now.
So part of the resistance that with the only resistance. We really found was that issue is we don't want to build off the electric industry. Yeah. We understand you guys who were surprises the applicable to you.
But we found an audience that was willing to listen up to and including.
Advisers key advisors for the governor so.
I think we're in a good position as they go into the next legislative session to potentially get effects, but its legal based and its subjected to determination based on.
The governor and staff and some constitutional attorneys for the state of California.
Okay, Thanks for that and I appreciate it.
You bet.
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Great. Thank you very much so.
Marty and Paul and.
David I would like to thank you all for your.
Participation in the call the good questions and your interest in the company and we look forward to talking to you at the end of the.
Third quarter I guess at the end of October so have a good rest of the summer everybody and we'll talk to you all soon.
Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.