California Water Service Group

Ladies and gentlemen, thank you for standing by and welcome to the California Water 2020 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's call is being recorded. If you require any further assistance, please press star 0 and an operator will be happy to assist you. I would now like to hand the conference over to David Healy, Vice President and Corporate Controller. Thank you, and please go ahead, sir.

Thank you, Bridget. Welcome, everyone, to the 2020 Third Quarter Earnings Results Call for California Water Service Group. With me today is Martin Kropelnicki, our President and CEO, Thomas Magel, our Vice President and 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 third quarter earnings release, which was issued earlier today. The replay will be available until February 5, 2021. As a reminder, before we begin, the company has a slide deck to accompany the earnings call this quarter. The slide deck was furnished with an 8K this morning and is also available at the company's website at www.calwatergroup.com. Before looking at this quarter's 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. I'm going to pass it over to Tom to begin.

Thank you, Dave, and good morning, everyone. It's a pretty exciting quarter here for us at California Water Service Group. We get to talk quite a bit about our California general rate case and some of the other things that are going on in the quarter. I'm going to go through the slide deck, as Dave mentioned, and I'll refer to slide numbers as we go through the presentation, as will the other speakers. And I'm going to begin on slide six, which is a slide about the recognition of the 2018 California general rate case. So as most everyone knows at this point, on October 14, the California Public Utilities Commission published a proposed decision in our California GRC, that's a delayed GRC that should have been effective on January 1st of 2020. And the proposed decision approved the settlement that we had announced back in October of 2019. And it also proposed to adopt Cal Water's positions on the disputed financial matters in the case. And for the first two quarters of the year, we had been reluctant to record regulatory assets for some of our continuing balancing account mechanisms. such as the RAM and the MCBA decoupling mechanism, as well as our pension and medical cost balancing accounts, because those accounts, we did not know whether they were probable for recovery. We have concluded, based upon the proposed decision and a couple of things subsequent to that, that the GRC decision is very probable to award us those accounts on a continuing basis. And so we are recognizing the regulatory assets associated with the water revenue adjustment mechanism, modified cost balancing account, and the pension medical cost balancing account regulatory assets. And those add significantly to our revenue for the quarter and for the year to date. In addition, the commission will grant us interim rate recovery. And since we now know the proposed decisions take on the revenue requirement, we're able to calculate what is in the interim rate memorandum account. And so we've also booked a regulatory asset for the interim rate memorandum account. I did want to talk briefly about the subsequent event that is giving us further confidence in the general rate case. And that is that on Tuesday, among other things that happened on Tuesday in the United States, The Cal PA, the Public Advocates Office, issued their comments on the proposed decision. And while they gave extensive comments on a variety of areas, they did not comment on the three major areas that we're recovering here. In other words, their comments do not take issue with the proposed decisions granting of a continued water revenue adjustment mechanism, modified cost balancing account, or pension medical cost balancing account. And so we feel very strongly that the final decision, which can be rendered by the commission earlier than November 19th, is going to allow those balancing accounts for us. And so that's very good news for the company. In addition to those three items, I would mention that as part of this rate case, we are refunding to customers the excess deferred tax associated with the Tax Cut Job Act reduction in the federal income tax rate. And that refund is being applied. It's applied to the customer rates and it's shown up in our income statement as a reduction to our effective tax rate. And so you'll see a lower effective tax rate for the company on a go forward basis as we refund those excess deferred taxes. I do want to emphasize that these assessments of probability do have some risk associated with them. We are dependent upon the CPUC adopting the proposed decision with no material changes. But as I say, given the evidence that we have right now, we think that is likely. And that's why we've gone ahead and included these in our third quarter estimates, or rather third quarter earnings results, not estimates. And so turning to slide seven, the result of that determination means that we have a very significant increase In our net income for the third quarter, that is going from $42.4 million to $96.4 million as compared to 2019. Earnings per share, $1.94 for the third quarter as compared to $0.88 in the third quarter of 2019. On a year-to-date basis, on slide eight, The net income is up, it's up about 30 million, so it's 81.3 million up from 51.8 million in the year-to-date period of 2019. And that means our earnings per share is $1.66 on a year-to-date basis as compared to $1.08 on a year-to-date basis in 2019. And then going through slide nine and slide 10, I'll go through very quickly Just the other changes that we have to earnings, revenues, and expenses are pretty standard for us, the things that we've talked about in prior quarters. So we've increased operating expenses for wages and other things that just generally increase depreciation amortization. We do have variations from time to time in our unbilled revenue accruals, and you'll see that on a couple of these slides, as well as the mark-to-market adjustment that we have on some of our retirement plan assets. So there's nothing major either in the quarter or in the year-to-date period in those areas, but those do end up affecting earnings. I do want to focus very briefly on slide 11, the earnings bridge, to emphasize a point about the third quarter earnings. And if you're there on slide 11, you'll notice the first bar of change is 80 cents, which is titled delayed recording earnings. of Q1 and Q2 regulatory assets. And because we're recording the effect of the general rate case through the third quarter, in the third quarter, that 80 cents that's in the first bar represents earnings that would have been achieved in the first two quarters of the year had the rate case been adopted on time. And so we're putting this, just highlighting this for you so that when we get to the third quarter of 2021, there's a recognition that we're probably not going to earn $1.94 again per share in the third quarter of 2021, although obviously that would be nice if we could. And then I do want to focus on slide 13. I think just to run through this again as a basis of calculation for analysts and others thinking about the company stock, The earnings power of the company, and again, we're a predominantly regulated utility in all four states, and that drives most of our revenues and net income. The California rate case, if the proposed decision is adopted, actually allows for a specific net income of about $76 million in test year 2020, and that reflects the authorized equity return on the equity portion of $1.5 billion in rate base. In addition to California, we have about $110 million of rate base in other states that should earn a similar equity return, again, on a normalized test year kind of basis. But do remember that our equity returns on the regulated businesses are dependent on our costs being in line with adopted costs. And also, in particular, in the other three states, in New Mexico, Washington, and Hawaii, our returns are also affected by our water sales. And as Paul will talk about in a minute, beginning in 2023, we expect the earnings in California will also be affected by water sales. And another point for the quarter and the year to date is to make sure that everyone understands that On an annual basis, we do not anticipate a net income effect from changes in our unbilled revenue rules or unrealized changes in the value of retirement assets, the mark to market that we talk about from time to time. Those factors through the third quarter are adding about $9.6 million to our year-to-date net income. And so just be cognizant of that as we go toward the end of the year. that we expect particularly the unbilled to drop back down to where it was at the end of 2019. And then finally, there are a couple of other factors that cause our earnings to be a bit higher than the otherwise core regulated earnings, and those are unregulated activities, operation maintenance contracts, the antenna leases for various cellular antennas on our facilities, the regulatory asset that we book associated with the equity portion of construction funding, the APDC, if you will, and then state tax timing differences can play a factor there. And so just wanted everybody to be aware of that, happy to take questions on that as well. Marty, I'm going to turn it over to you to talk about COVID-19.