California Water Service Group

Ladies and gentlemen, thank you for standing by. And welcome to the California Water Service Group first quarter 2020 earning results teleconference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. And I'd like to hand the conference over to your speaker today, Mr. David Healy, Vice President, Corporate Controller. Thank you. Please go ahead.

Thank you, Jimmy. Welcome, everyone, to the 2020 First Quarter Results Call for California Water Service Group. With me today, Martin Kropelnicki, our President and CEO, and Thomas Smagle, our Vice President and Chief Financial Officer. Replay dial-in information for this call can be found in our First Quarter Results Release, which was issued earlier today. The replay will be available until June 30th, 2020. 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 AK this morning and is also available on the company's website at www.calwatergroup.com. Before looking at the first quarter results, we'd like to take a few moments to cover forward-looking statements. During the course of the call, the company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from the company's current expectations. 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 risk and uncertainties found in our Form 10-K, Form 10-Q, press releases, and other reports filed from time to time with the Securities and Exchange Commission. Now I'm going to pass it over to Tom to begin.

Thank you, Dave, and good morning, everyone. I'm going to start the presentation going through the slide deck, and so if you can find that on our website or attached to the the press release this morning, that will be helpful to you. And I'm going to start on slide six, where we have a table of our financial results for the first quarter. As you probably have seen already, our net loss for the quarter was 20.3 million or 42 cents. And that is a larger net loss than in the same quarter last year, where the loss was 7.6 million or 16 cents per share. We had flat operating revenue and our operating expenses were up. One note here, and we'll talk about this in greater detail later, is our capital improvements were better than they were in the first quarter of 2019. Flipping to slide seven, our Q1 financial highlights, and really what we're mainly going to be talking about today is the effect on the quarter of the California general rate case, which as we've talked about before, the decision has been delayed. And that delay is meant that we cannot record the rate increase that we expect due to the settlement. And we cannot determine whether the commission will grant us regulatory mechanisms that we have had for many years, but which have been litigated in this case, and we're not part of the settlement. So we estimate that $15.4 million of pre-tax income would have resulted from a timely, favorable resolution of the California GRC. And that breaks down as follows. $7.9 million represents delayed pre-tax income that would result from the approval of the settlement and would be accruing to the benefit of the company regardless of whether the disputed items were granted in the company's favor. And then in addition to that, $7.5 million in the quarter represents income that would have been booked had the regulatory mechanisms been active in the quarter. And as I mentioned, we're not booking the regulatory mechanisms as we have in past years. The other things that are affecting the quarter, one other large one is that our benefit plan investments, these are the non-qualified benefit plans. We had a loss in the quarter due to the stock market, and that was a $7 million lower result than in the first quarter of 2019. A couple of other points, we had an increase in our unbilled revenue accrual. That's largely because that was a very negative number in 2019. It came kind of back to normal due to dry weather, increased demand, and then more general increases in cost depreciation expense and maintenance expense and 1.1 million decrease to our operating income from deferral of RAM revenues, which I think we'll talk about in detail in a little bit. So flipping to slide eight, I'm going to take a pause on the quarter just to give everyone a full update on the expectations for the general rate case for the year. That is the top bullet on this slide. And there's a table there that shows if the settlement is adopted, which the company anticipates that the settlement will be adopted, what we see is an increase in top line revenue, which is not very large. about $12 million in the best case and minus $12 million in the worst case, and in the lower case, rather. And the reason that the company feels that the rate case is successful, even though this top line revenue growth is not very large, is that it represents a reduction in water sales quantity estimated. And so you see a large reduction in the adopted production cost. And You also see that the rates in the rate case incorporate the give back of the excess deferred tax as a result from the tax cuts and job act. And so that 9.4 million is in the top line rate to the customer and then is also backed out as a reduction in expense. And so if you look at the bottom of the table on page eight, you'll see that we anticipate that if the settlement is adopted, the net increase to 2020 pre-tax operating income is about 40 million in either the high scenario or the low scenario. And the difference between the high scenario and the low scenario is primarily a dispute over depreciation expense. And so you get lower revenue with lower depreciation and those wash one another out. The result is the impact on the first quarter. And so we estimate in the first quarter, as we said before, that the revenue gain in the first quarter would be $7.9 million in the high case, $3.5 million in the low case. But remember, in the low case, we're getting a lower depreciation expense. So those neutralize one another. Looking to slide nine and talking in detail about the disputed GRC items. As we mentioned above, the depreciation is a pass-through. That's a disputed item. We do have a dispute over the decoupling mechanism, which we call the RAM and the MCBA. And just as a reminder, this mechanism is designed to make the company indifferent to water sales. And that allows the company to promote water conservation. It's been a really favorable mechanism for the state's policy goals the last 11 years that the company has had it. And we do anticipate that that that continues to be needed. In other words, the state still has conservation policy goals and we really hope that the commission continues to adopt that mechanism. In the quarter, the recognition of the RAM and the MCBA would have added about 4.5 million of additional revenue. The third bullet here on slide nine has to do with the pension and medical cost balancing accounts. And there's approximately $3 million that would have been credited here if we'd recognized these accounts. Our pension costs were higher because the discount rate used to value the future liabilities of the pension was quite a bit lower as measured this year. And our medical costs actually were down. So they offset one another slightly. And again, these balancing account mechanisms have been in place for the company for three rate case cycles, and they're very standard across the industry. And again, we're very hopeful that the commission adopts these. But in both of these cases, we did not feel that we met the criteria for booking these regulatory assets and liabilities at the present time. The company is highly confident that past amounts Properly recorded and balancing accounts continue to be recoverable from customers. And so that's the RAM balance that we have from prior periods and the other balances that we have in the other balancing accounts. Our other disputed items from the rate case include a small number of capital projects, construction financing costs, and working capital requirements. We don't believe those would have had a significant impact in the quarter, regardless of the direction that the commission takes in those disputes. On slide 10 is just a summary earnings per share bridge, which you can see, and those are the factors that we've been talking about. And I'm going to turn it over to Marty to talk about COVID.