Hello, and welcome to the California Water Service Group Q1 2021 Results Conference Call. It is now my pleasure to turn today's call over to our host, David Healey, VP and Controller. Please go ahead..

Thank you, Lonnie. Welcome, everyone, to the 2021 First quarter results call for California Water Service Group. With me today are Martin Kropelnicki, our President and CEO; Thomas Smegal, our Vice President and Chief Financial Officer; and Paul Townsley, our Vice President of Corporate Development and Chief Regulatory Officer.

Replay dial-in information for this call can be found in our first quarter results release, which was issued earlier today. The replay will be available until June 30, 2021. As a reminder, before we begin, the company has a slide deck to accompany the earnings call this quarter.

The slide deck was furnished with an 8-K this morning and is also available at the company's website at ww.calwatergroup.com..

Thank you, Dave, and good morning, everybody. Welcome to our first quarter results call. I'm going to time my comments to the slide deck, and I'm going to start on Slide 5, which is the results table. And comparative 2020 to 2021.

Our operating revenue for the quarter was up to $147.7 million from $125.6 million in the first quarter of 2020, and we'll talk about the reasons for that in a moment. And our net loss decreased from $20.3 to $3 million as well as our earnings per share -- loss per share rather, went from $0.42 loss to a $0.06 loss for the quarter.

Capital investments, I'll point out on this slide that were up very slightly and according to our plan. And then switching to Slide 6, our financial highlights.

So as we mentioned -- as I mentioned a moment ago, the net loss decreased by $17.3 million, and that was primarily the result of the adoption of the California General Rate case late last year. So we had a couple of different factors associated with that, the freight increases associated with that that added $6.4 million of revenue.

In addition to that, if you'll recall back in the 2020 first quarter, we did not recognize our balancing mechanisms. That's the RAM and the MCBA, coupling mechanisms as well as our pension and healthcare balancing accounts.

And by recognizing them here in the first quarter of 2021 as they were continued and adopted in the rate case, we're adding $7.6 million of revenue associated with that.

We did have, as you'd expect, increases in our other operations, depreciation and associated costs and that offset somewhat the revenue increases from the rate case as well as the recognition of the mechanisms.

As we had mentioned at year-end, our AFUDC equity, that's the funds used during construction and equity funds used during construction is lower as a result of a lower amount of construction work in progress. During 2020, we had a significant capital project associated with the Palace Verdes Peninsula water reliability project.

And that was adding to our AFUDC equity all year. So we're expecting to see lower AFUDC equity throughout the year and in the quarter, it was down about $1 million..

Thanks, Paul. Good morning, everyone. I want to provide a quick update on our continued efforts in responding to the COVID-19 pandemic. First and foremost, let me start off by saying we have continued to see the incremental benefits of people being vaccinated in all 4 states that we operate in.

Currently, over 1/3 of our employees have been vaccinated, which is great news.

The vaccine rollout was a little bumpy at first, but we've seen those bumps kind of smooth out, and we continue to see daily increases in the number of employees that we've seen vaccinated as well as we have seen a steep decline in the number of cases of COVID found within the Cal Water family or from our employees, we only had 5 cases in the first quarter that we've seen where employees have become sick and then recovered..

Thank you, Marty. The business development effort at Cal Water has been very active and very successful. You will recall that last year, we closed upon 2 deals that was the Rainier View, Water System in Washington and the Kaho system -- I'm sorry, the Calea Loa system in Hawaii.

There are announced acquisitions that we are working on the first one, the capital water and wastewater system, we actually expect to close that here within the next few days. It's very exciting to be adding another system to the CAL Water or in this case, the Hawaii water family.

And the other items listed on this list of preserve at Millican Animas Valley, Skylonda and stores, you can see we have activity in all of our operating states, and we are working to get all of those closed as well. So they're announced a number of announced systems, a number of other systems still in the pipeline.

It is an exciting time for acquisitions with our company. And with that, Marty, I will give it back to you..

Actually, It goes over to Tom..

Yes. I'm going to grab it..

I'm sorry, Tom is going to in the next slide..

No worries, no worries. So we're on Slide 13, and this is our traditional graph of capital investment. Last quarter, we added a line for depreciation. So you can see the relationship between the CapEx that we're making and the depreciation that occurs every year in our systems.

And the point there being that we've been averaging about 3x our depreciation accrual every year for the last 5 years. And so this chart and projection only goes through this year, and our estimate there, $285 million is the midpoint between our window of $270 million to $300 million of CapEx during the year.

And we -- when we have our second quarter call and we released the details of our General Rate Case in California. I'll be updating this slide. So that you'll see the years 2022 through 2024 on here as well. Flipping to Slide 14.

This is our rate base line and similar comment here, which is that we will project rate base out from 2023 through 2025 on the basis of the rate case filing, and you'll see that in the second quarter slide decks. So not too much new on the rate base estimate on Slide 14 right now. Marty, I'll turn it over to you for the summary..

Great. Thanks, Tom. Just a couple of things to -- as we close out our call and get ready for Q&A. First and foremost, Q1 is the slowest quarter. It's always nice to get it done..

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

Yes. I saw that, too, Tom. I know there are a lot of earlier reports coming out today, which is the hard thing about earnings season..

Yes..

And we have a comment from the line of Ben Kallo with Baird..

You're the only California Water utilities utilities about me. I didn't push Star 1. That was a problem. So Marty, just on the last point, I hope you guys are all well. It's going to be your employees are well too. The last point about the drought I've been reading about 2 as a California native or bone there. Can I put my interest.

What is that -- what are you guys doing? I guess, it goes for you and Tom and Paul, what are the discussions like with the POCs? Because I know that there's been a difference in opinion about this kind of stuff, right?.

One, when the governor declares a dried emergency, it's probably the easiest path forward for us to get a memo account for that area. The governor clearly indicated in his comments earlier this week that he expects the drought to be kind of very regional-based on the regional water supply.

So for us, for Mendicino and Sonoma County, we don't have operations in those counties. If we did, we would apply for a drought memo account. Now having said that, we're also seeing some of the water agencies like East Bay Mud or the Northern Marin water district declare a stage 1 drought.

And so the Northern Marin water district, we do have 2 systems in Northern California that are affected by that. And at that point, Paul and his team will likely try to apply for a memo account based on the local agency reporting a drought emergency. So I think, Ben, what it means, we have to go through it and watch and see.

The difference between where we are right now and where we were in 2015 was we have 25% of our snowpack. If you remember back in 2015, Governor Brown did a famous press conference in the Meadow where they normally do a snowpack reading where he's normally -- where we would normally be standing on 7-feet of snow, and he was standing a green pasture.

So we do have some snowpack. The reservoirs are in decent shape. That's why the real issue here is going to be what happens in 2022. Notwithstanding, we do expect to see more local drought conditions being declared at the local level and maybe not necessarily statewide as of right now.

I don't know, Paul, anything you want to add on that?.

Yes. At the commission, it's been -- this is still early days. We've been getting inquiries from commission staff as to our preparation. And so we've been responding to some of those data requests.

The other aspect of the drought, of course, is higher potential for PSPS, and there's been a lot of ongoing attention with the commission on public safety power shutdowns.

And so we've been continuing to engage in those, but I don't think that the commission has really begun to focus yet on the drought, and we will see more of that as the year unfolds..

Great. Maybe for you, Tom. You guys kind of ran through different things as far as the regulatory -- the dates go. And just so I'd give kind of all clear.

Can you just walk through one more time for me, sorry, we should watch out for?.

Yes, absolutely. So this Monday, we're going to be filing our cost of capital application. And that -- we've outlined the parameters of that. So, that's filed around May 1 and expected to be adjudicated by the end of the year. That's the plan that's in the commissions model, if it doesn't get done..

That's for California, right?.

That's for California, correct. Yes. And then in addition to that, we have the General Rate Case that will be filed around July 1. And again, Paul mentioned that there's weekend days, and I think there's a little bit of load sometimes that gets filed even day after the 4th of July. Just because of the holidays and whatnot.

So, we'll see -- that will be early July, let's put it that way. And that is an 18-month process. So the California General Rate Case is not expected to produce a result until the effective date of January 1, 2023. And as we just found out -- or we just saw last year, that can get delayed and those have often been delayed.

2 of our last 3 general rate cases have been delayed more than 6 months. So we'll have to see about when that is effective. Both of these California filings are subject to interim rates if they're not decided on time. And so the effective data is essentially those effective dates.

We do also have a rate case that we're filing in Washington state as part of the Rainier View acquisition, we agreed with the commission to file a new rate case. For both our existing and the Rainier View Group this year. And so that will be done this year, but that will be a lot smaller..

Right. Got it.

And then just on the 10 point -- I think, 10.35% number versus your last number, how much interest -- do interest rates just tick up? Does that matter? Or -- so how much does it matter? Do you guys think when you create that?.

So Ben, it's pretty technical what goes into these -- the company applications. We have a metric economist witness who's looking at a lot of the standard models, DPF models, CapEx pricing models, et cetera, to come up with those recommended rates for return on equity. So I don't know that it's one point or another that's driving it to be higher.

I think we asked for more than that in the 2017 case, I'd have to go back and look. One thing that I wanted to point out, we haven't done that on the slide, is that in California, it's been unusual that the water utilities have had quite a bit lower ROE than the electric utilities.

And if you look at other states around the U.S., and you probably know this as well as we do. There is not a discount for water utilities. And in fact, we're smaller organizations than the electrics in almost every case. And so you'd assume that there's a bigger financial risk there.

But California has always had, for some reason, a discount on the ROE per waters. So the ROE that we're suggesting here, the 10.35% is actually more in line with the electric ROEs in California. So we'll see where that goes. I think that we have some good arguments for that. And I think our witness is strong, and we hope to prevail on it..

Yes, I agree with the front on California and the scale. Maybe the last thing, Marty, just on infrastructure, does any of that infrastructure package? I know there's a lot to be determined.

Does any of that impact you? Or how do you think of that impacting you guys?.

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

Our National Association, headed by Rob Paulson, former PERC Commissioner and former Head of the Pennsylvania PUC has been very involved with efforts on the hill, obviously, for allocations to the state revolving funds we want to make sure that we fight for access to those funds within the state when they get allocated.

But it can vary state-by-state as those funds get pushed down as it's mandated in the fit federal laws. The other big thing that's been talked about is as part of the Bat Bill, is there any dollars that are going to be available for rear rich management, and we have been involved in those.

In fact, we were at an event with 1 of the governors this week where we were emphasizing the point that any dollars that come from the Feds. That is for COVID relief, for customers with outstanding balances, investor on water utilities, their customers or taxpayers as well, and we shall have equal access to those dollars. So nothing is concrete yet.

It's a very gray area. The Department of Health Services has had dollars since the late fall, they haven't pushed down yet to the states. We're watching that.

We're involved in discussions with them about what happens when those dollars do get pushed out and trying to secure access for those dollars for our customers, but nothing has been finalized yet, Ben, but believe me, when I say we are all over it, we have our federal team working on it, we have our CWA teams, our California Water Association, teams working on it, and we have our local government affairs keep working and that's to be determined.

I expect to see some dollars flowing from the Feds down to the state, probably sometime here in the second quarter, but nothing has been determined about how the mechanics are actually going to work out, but discussions are underway..

There are no further questions at this time..

Great. Lonnie, thank you, everyone. Thanks for taking time for being us here today. I know there's a lot of conference calls happening concurrently. As Tom mentioned earlier, were around, if anyone has questions, if you get a chance, please read the ESG report, you'll see all the great stuff we're doing on the ESG side.

And we look forward to reporting on our progress with the General Rate Case and our cost of capital at the end of the second quarter. So everyone would be safe, be well, and we look forward to talking to everyone at the end of the next quarter on our next earnings call. Thanks, everybody. Have a great day. Lonnie, back to you..

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