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Hello, and welcome to the California Water Service Group Q1 2021 Results Conference Call.
[Operator Instructions]
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.
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 commissions. I'm going to pass it over to Tom to begin.
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.
Our capital spending, I mentioned, is up slightly. We believe we're on target for capital for the year. And then 2 other items that are outside of our general control, but I did want to mention because they're fairly significant in the quarter. The market value of certain of our retirement plan assets was -- so the market value increased $0.3 million as compared to a loss of $4.7 million in the first quarter of 2020 so kind of a return to normal for that item. It was a basically [indiscernible] in the first quarter of 2020. And then our unbilled revenue, very similar. We had a $100,000 loss on unbilled revenue, very small and probably more typical as compared to a negative $3.7 million in 2020, which was a sort of a atypical drop in that unbilled revenue accrual.
And so those two items, I'd say, are a little bit more normal compared to the abnormal amount that we're in the last year.
Flipping to Slide 7. I won't talk in detail about this, but this is our waterfall EPS bridge chart that covers those same topics.
Next on Slide 8, I'll just make a brief comment about the tax rate as some of the analysts look at the effective tax rate of the company. I just wanted to remind everyone that during 2021, we are refunding to customers in rates, $19 million of excess deferreds associated with the change in tax rate for the tax cut and Jobs Act. And that drives down the effective income tax rate to 6%, so there's a -- the revenue is down and the tax rate is down. And so we aren't making any money on that. But just when you see the headline tax rate, it's very low.
The second thing, there was a big benefit at the end of 2020 related to our mains and services, repairs, investments and the state tax deduction that we're allowed to take there. And just to update you on the estimate. In 2020, we had $160 million of deductible mains and services repair investments. And our current estimate for 2021 is that we will have $60 million that qualifies for that tax treatment. And so that's going to be a factor that's going to be a little bit lower for the year 2021.
Capital spending is still anticipated to be between $270 million and $300 million. That hasn't changed, but it's just the timing of the close of certain projects that is going to change that tax qualification.
Next, I'm going to turn it over to Paul Townsley to give a regulatory update.
Paul Townsley
Thank you, Tom. I will touch on 2 items this morning, regulatory items in California this morning. So the first one is our cost of capital filing the cost of capital, if you will remember, is filed once every 3 years. Our last one was in 2017 because we had a 1-year extension. We will be filing that cost of capital application on Monday, May 3.
And in our application that we will be filing with the commission, we are requesting a return on equity of 10.35%, that is up from the currently approved 9.2% cost of equity. We also will be taking advantage of refinancings and new debt issuances so that our embedded cost of debt is going down 128 basis points from the previously authorized 5.51% cost of debt to a new cost of debt of 4.23%.
Coupling those 2 together, the increase in cost of equity and the decreased cost of debt means that our rate of return -- authorized rate of return that we're requesting will go up just slightly from 7.48% to 7.5%. And what that really means from a customer perspective is that the median bill increase would be about $0.34 a month.
So really not a big change on a customer's bill at all. Now you recall that the cost of capital filing will be reviewed by the commission and would be approved for -- to be effective in January 2022. I might also point out that our capital structure, which is about 53% equity and 47 -- 47% debt will remain unchanged in this particular application. Not only are we refinancing existing debt with new lower-cost debt, but because we've been investing so much capital and have been obtaining new debt at a lower cost that is really what's helping drive our overall cost of debt down, which is a benefit to our customers.
The second item I'll talk about just briefly is our 3-year General Rate Case filing. That will be filed in -- on July 1, actually, July 3 because the 1st is the weekend. We are working on that right now, and we will provide more information to you all when we get to our next quarterly conference call.
With that, I'll turn it over to Marty.
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.
To date, we've had no -- we've sustained a loss of the life with kind of water voice for which we're very grateful for. In terms of supporting our customers, we have maintained a suspension of all collection activities in all 4 states. You're starting to see that lifted in different states around the U.S. in the 4 states that we operate in our suspension of collection activities is still in full force.
We have seen and continue to see an increase in customer account aging from suspension of collection activities that builds currently over $90 million or about $11.6 million, and we adjust for our bad debt reserve, an additional $0.5 million from $5.2 million to $5.7 million.
And I'll talk more about some greater things we're doing and working with the commission a little bit later on collection activities. The incremental expenses associated with our COVID response was approximately $300,000 that gets recorded in a memo account for a potential recovery at later dates in Hawaii and California. Interesting to note that water sales have been 105% have adopted, really driven by the fact the residential demand has been higher, and that's been offset by lower business and industrial use. And so as we start to see business use kind of pick back up and things get back to normal, we'll expect to see that the business and industrial sales pick up.
Liquidity has remained strong. We had $84.4 million of cash and additional capacity about $115 million on lines of credit, subject to some borrowing conditions. So I think we weathered the worst of the COVID storm, and we're starting to come out of it.
California, which is the largest entity that we operate in, it is scheduled to be fully opened back up for business here on June 15.
Going on to the next slide, I want to just take a moment to talk about our recently published ESG report. Our report was published a few weeks ago that aligns with SASB and referencing GRI is now available. There's a link in the deck that will take you through the report. Additionally, for those of you that get the hard copy of the annual report and proxy, there's a summary ESG report that's included in our annual report. A lot of hard work went end up producing our first ESG report.
We're very, very proud of it and we're very proud of the work we're doing on the ESG frontier, and I look forward to reporting more on this as we work on our ESG-related projects throughout 2021.
I'm going to hand it back over to Paul to give a quick update on acquisitions. Paul?
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, [indiscernible] 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 [ph] 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.
Administratively, it's a very heavy quarter because we have our year-end audit, get the annual report done. And in this year, we got the ESG report done. That takes us into a very, very busy Q2 administratively with the filing of our cost to apple proceeding that Paul talked about, where we're requesting a slight increase as well as filing our 2021 general rate case, and our 2021 generic case is voluminous. There's tens of thousands of pages that gets filed here with the commission this quarter and a lot of effort go into pulling that rate case up. So we look forward to getting that on file and moving forward.
And as Tom said, we'll update everyone during our second quarter earnings call on where our request came in at for the 2021 General Rate case. Additionally, and this is more kind of late-breaking news. Some of you may have seen in the press, the last 24 to 48 hours. A few parts of the state of California have declared drought emergencies. In particular, Governor Gaba Newsom in the state of California declared a drought emergency for Sonoma and Mendocino counties in Northern California.
Given that the very mild winter season that we have this year, coupled with the fact that our snowpack as of earlier this week was only 25% of normal, we fully expect to see more drought declarations at the local level happen throughout 2021.
For those of you that know, we spend -- remember, we spent a lot of time on our emergency preparedness and emergency planning. Likewise, as part of the rate case process, we are updating our water supply master plans, which also include drought contingency master plans. What does that mean at a 25,000 foot level? The reservoirs in California currently, they're in decent shape. I wouldn't say they're in great shape, but they're in decent shape going into the summer months. The real issue from a drought perspective is what is winter going to look like this year.
And if it's a light winter again, what happens in 2022. So that will be something to watch as we move into what is potentially a more disruptive fire season. And a more disruptive public safety power shutdown season, given the fact it's been such a dry winter for us.
As we think about fire season and PSPS season, as we point out in our ESG report, despite the many challenges of operating the COVID environment, over 97% of our employees have completed their emergency response during this year, and our efforts are well underway to be prepared for an early fire season and the various PSPS events that could happen throughout the state. As you may recall, last year, despite a number of PSPS events throughout the state that went on in some cases for 2, 3, 4 days, none of our customers went without water due to a successful plan and by the company contingency planning in the ability to move resources up and down the state to make sure we kept our systems pressurized and our pumps running.
As we get into kind of, hopefully, what will be the final throws here of COVID-19, and we are seeing things improve. And as I mentioned earlier, June 15 is the official date declared by the California government at the state will officially reopen back to some amount of normal, and that's to be defined. We continue to work with the commission on creative solutions for customers that have been impacted by COVID, in particular, as part of the low-income OIR Phase II, we did propose a program for rear edge management, similar to what the electric utilities got approved recently. And as part of our proposal, we propose that people who have past due balances due to COVID as long as they keep paying their water bill that we would give them a credit equal to 1/12 [ph] of the outstanding balance. Provided they keep making their payments until they are paid in full and current.
And then that credit that gets issued every month would go into a balance and account for recovery at a later date.
This program for the water industry has not been approved yet, but it has been approved for the electric industry. So we're waiting to see what the commission does with that. Obviously, we'd like to see those past due balances get paid down as we get back to a more normal operating environment. Having said all that, it is very nice to get Q1 done. It's very nice to see the light, hopefully, at the end of the tunnel of COVID and seeing employees get vaccinated and starting to get back to what is a normal environment.
We do not have all our of employees back in the office yet. 90% of our employees have been at work every day because they are field employees. Our corporate employees are the ones that our corporate offices have been the ones that have been working more remotely, and we are in the process of finalizing our back to work plans, and we'll continue to monitor the local jurisdictional requirements to bring people back to work. So that can vary kind of county by county in the state of California, but our plans are developed and we're ready to roll once we get the green light to bring people back to work.
So with that, Lonnie, we will officially wrap up our prepared comments for the first quarter of 2021, and we will open it up for questions, please.
[Operator Instructions]
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 [indiscernible] 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?
Yes. I'll take the first steps. And then Paul, I'll let you jump in on the commission side. Let me start off by saying we've never officially gone out of a stage 1 drought at Cal Water. We have -- well, coming out of the last drought, the mandatory restrictions were taken away.
We may -- we hit our targets, our conservation targets, which was good, and we were as strong as the kits were saying, we need to keep these restrictions pretty tight because we're hitting goals and getting consumption down. 2 things happen, 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 [indiscernible] 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.
[Operator Instructions] 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.