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Good day, ladies and gentlemen. And welcome to the California Water Service Group Third Quarter 2018 Earnings Results Teleconference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference David Healy, Vice President and Corporate Controller. Please go ahead, sir.
Thank you, Chris. Welcome everyone to the 2018 third quarter earnings results call for California Water Service Group. With me today is Martin Kropelnicki, our President and CEO; and Thomas Smegal, our Vice President and Chief Financial Officer. Replay dial-in information for this call can be found in our year-end earnings release which was in our quarter -- earnings release, which was issued earlier today. The replay will be available until January 1, 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.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 the 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.
Thank you, Dave, and good morning, everyone. We are going to walk through the pages of our slide deck that we furnished this morning with the 8-K. And so I will refer to the page numbers -- Martin and I will both refer to the page numbers, which we are talking from.
I'll start with a quick a highlight of some of the financial numbers in the quarter. Our operating revenue was up. It was $219 million for the quarter. That’s up from $211.7 million in the third quarter of 2017. Our net income was up 1.6%, $34.4 million in the quarter versus $33.8 million in the same quarter in 2017. Earnings per share for the quarter were $0.72, as compared to $0.70 in the third quarter of 2017. Our CapEx for the quarter was $79 million. That is up from $71.7 million in the third quarter of 2017.
On a year-to-date basis, just highlighting a couple of those numbers, our net income is down $44.9 million versus $53.5 million in the year-to-date period last year, and our EPS is also down $0.93 versus $1.11 in the similar year-to-date period in 2017. However, our capital investments are up this year, $212.9 million so far, as compared to $180.4 million in the first nine months of 2017.
Financial highlights on Page 8 of our slide deck. The earnings increase is largely attributable to the revenue increases that we've received from the various commissions, particularly The California commission at the beginning of the year, the step rate increase. The net effect of that striking out the cost of capital decrease in California, which happened in March, is about a $4.4 million aggregate rate increase for the quarter, as compared to the same quarter in 2017. That is offset by increases in depreciation and amortization, employee wages and new business expense; I'll talk about that in a moment, as well as $1.7 million increase in interest expense.
So if you look at the depreciation and amortization and interest expense, those are largely to do with the increased capital, investment increase rate base in the company. Employee wage increases are as a result of standard union contract increases those are typical and those are effectively seen throughout the year. The $1.3 million increase in new business expenses has to do with the -- really the last month or two of the SJW pursued. That concluded in August and we have no charges on that pursuit after the month of August.
On a year-to-date basis, our earnings were impacted, as those who have been following us know, by the SJW pursuit. That was approximately $5 million of new business expense that was incurred in this year and hadn't been incurred in prior years, of course, and the cost of capital reduction for the year-to-date period ends up being about $4.7 million reduced revenue to us.
On a year-to-date basis, the company and developer funded capital investments were $212.9 million. As I mentioned, that’s an increase compared to 2017. And we are changing our estimate. We are now anticipating our capital investment for 2018 will hit between $240 million and $260 million. Couple of the reasons for that. First of all, the main replacement program in California, which we talk a lot about and the acceleration of that over the last few years. We have reached a settlement with the California Public Utilities Commission staff in the last rate case, the 2015 rate case, on a specific length of main to be replaced.
And what we’re finding is that replacing that main is more costly than anticipated, and in order to meet our obligation, with the commission to replace that for the domain, we've exceeded our target cost for that project and that's obviously very large project for us. We also have a few other large treatment projects, which are kind of ahead of schedule and ahead of spending schedule, so making good progress on those.
And finally, we've had a number of city street projects, lot of work here in California on city streets. And as you might know, if the city comes in and needs to repave a whole section of town, we're required by that city to go ahead and move our facilities to make sure they are out of the way of the new paving project. And so that has happened more this year than in the past.
On Slide 9 and 10, we have the EPS bridges, that gives pretty closely to what we issued in the press release, so I won’t go through those in any detail, but again, the big drivers up word are aggregate rate increases for the quarter as well as couple of smaller items in the quarter, an increase in our tax benefit due to the repairs deductions on so much Main work that we're doing and reduction has compared to 2017 to our unrecoverable capital costs in 2017, in the same period, we had a write-off in our Hawaii operation due to our rate case disallowance that went on there. So that did not recur here in 2018. And the negative effects on the quarter are the ones that I talked about earlier.
So with that, I'm going to flip to Slide 12, and Marty to take.
All right. Thanks, Tom. Good morning everyone. I want to give a quick update what's happening with the rate cases in the four states that we operate in, as well as talk about a couple of significant events during the quarter. Just as a general reminder, on July 2 of this year, we filed our 2018 General Rate Case, requesting $828 million of new capital for the period 2019 to 2021. The General Rate Case is in the discovery phase. Over the third quarter, we completed all of our site visits for the State of California. That's basically where we go out with the Division of Ratepayer Advocates and do tours of all our facilities, look at the capital projects that we've included in the General Rate Case, show them our facilities and help justify why we need the capital dollars to be approved in the rate case. So the visits are done. We still may have two municipalities who have intervened in the case so far. So that would be a total of three, because we have to deal with the Office of Ratepayer Advocates. So that's considerably less than the previous rate case where I believe we had about 18 intervening parties. And so far, the two municipalities have been very quiet in the process.
Going on Page 13, a couple other rate issues we have going on, we are in the final phases of wrapping up the Waikoloa rate case, which is for the Big Island of Hawaii, we requested $3.8 million in new revenue with the Hawaii Public Utilities Commission, that is wrapping up, and we anticipate that being concluded here before the end of the year. In addition, we filed a rate case on July 2 with the State of Washington requesting $1.6 million in new revenue in Washington. Washington does a very quick job on the rate cases. It's a historic test year. So we have to spend the money to get the recovery, but one thing that's really nice about the Washington Commission is they process rate cases very, very fast, and so we anticipate the Washington water rate case will wrap up before the end of the year as well.
Through October 31, we have completed $4.9 million of the authorized revenue associated with advice letter projects of $30 million. So we have a number of advice letter projects that we're working on now, some big ones; that will take us through the end of next year. And really the big note here and this gets to the point Tom was making earlier about the kind of stepped-up capital, so we will be filing here by November 15 for our step increase for 2019, that step increase has a cap on of about $16 million and based on the capital spending to date, we believe we will get the majority of that -- of that step increase. So last year, we achieved about 91% of the step increase when we filed for the escalation. This year, I believe we'll get a higher uptake than the 91% and so look for that to be filed here by the middle of November.
Going on to the next page, Slide 14, a couple of things to point out significant events during the quarter, it's fire season in California, and we had to deal with the Mendocino Complex fire, which is now the largest fire in the history of the State of California. So within Northern California, up around the Clear Lake area, we serve a small community up there called Lucerne, and we are the only water company that pumps water out of the lake on the east side of the lake, and so it was an interesting fire and that the fire started on the west side of lake, moved up around the lake, and it looked like it was going to completely missed our service territory and continue to blow out east, but then the wind shifted directions and brought it back in toward the city.
If you've been following any of the electrical grid discussions in the State of California, you know that some of the electric utilities have been cycling down parts of the grid during extreme winds and fires and so that made operating that plant a challenge, especially as the fire reversed directions and sort of coming straight toward the city. Being the only water producer on the east side of the lake, keeping our production facilities or our treatment plant in operations became absolutely critical. And I'm very pleased to report that our team did a superb job of keeping that plant in operations and keeping the hydrants flowing, which allowed the Fire Department to pour water out of the lakes through our system for fighting the fires in that area.
So we kept the EOC going for over two weeks 24/7, excellent coordination with the State of California with Pacific Gas and Electric Company and again I just want to acknowledge the outstanding work by the team to keep that plant in production. Over the last three years, we've actually opened up our Emergency Operation Center a total of 20x, since we've adopted this new methodology, which is very consistent with the FEMA methodology. We believe the methodology works very, very well in terms of risk mitigation, supporting the customers and better coordination with the state. And I think it's become a strong core competency of California Water Service Group and our subsidiary companies.
On top of Page 15, Tom, you want to talk about the $300 million of debt?
Yes. So we issued $300 million of 2-year first mortgage bonds in September. Those are a floating rate at LIBOR plus 70 basis points and we use that money to refinance our revolving credit facility at the Cal Water level at the operating company level. The reason for doing such a short-term refinancing there the two-year is because of the uncertainty related to the San Jose Water discussions that were going on at the time. Normally, we would do longer-term debt, and in the future, you should expect that the Company will use a combination of its revolving credit facilities, long-term debt and equity raises in order to finance the capital improvements and try and stay within the ranges that have been established for us at the various commissions, including the California Public Utilities Commission as far as cap structure goes. Marty?
In addition, a couple of weeks ago, we announced that we assumed operation and maintenance of the Keauhou system on the Big Island of Hawaii, that is south of our existing operations, just down the street from us. We're excited to be picking up operations of this system. It fits our profile very well. It's a wastewater system and serves approximately 1,500 connections, including residential, commercial and a large hotel. In addition, it provides recycled water for golf courses in the area, which has become a core competency for us in Hawaii to treat wastewater to a very, very high standard and repurpose that water. So it's right along the coast, on the Big Island of Hawaii, just down the street from our existing operations and we have taken over operations of that system on October 15, and so we welcome them to our family. Tom, Page 16.
Great. Quick update on our regulatory balancing accounts, particularly the WRAM/MCBA account. So, as you know, this account is affected by our water sales and our production costs. Our year-to-date water sales are 94% of what was adopted in California. That's a major improvement over last year. And part of that improvement has to do with the sales reconciliation mechanism, which allowed us on January 1, to change those sales forecasts in all of our districts for 2018, so that the adopted sales and the actual sales might better match up. So the current receivable balance, that is the amount that customers owe us, is $60.0 million that is down from $69.1 million at year-end 2017. We did begin billing surcharges to recover $50.1 million over 12 months to 18 months in those net WRAM receivables in April of 2018. So combination of the closer sales to actual target and also the recovery of past year's surcharges, that is impacting that account bringing it down further.
On Slide 17, that's just a graphical representation of that. And then we're including as usual on Slide 18, our capital investment history and projection. There have been no changes to the projection. The last three years represent what was asked for in the General Rate Case. We did update our year-to-date for 2018 and the projection of $250 million, which is the midpoint of our new projection for 2018.
And then finally, on Slide 19, the regulated rate base. This represents what we would anticipate to be the adopted rate base in combination of California and the other subsidiaries, and again, this has not changed since we last published the deck last quarter. And again, 2020 through 2022 represent the request that's in the California Rate Case as part of that calculation.
So I'll turn it over to Marty for final words.
Great. Thanks, Tom. Well, obviously, the next few weeks, we'll be busy getting our step increase filed. As Tom said, we're on track to invest $240 million, $260 million in our infrastructure this year that puts us in very good position for the step increase for 2019. And again, look for that to be filed by middle of November. In addition, we are continuing to stay focused on the California General Rate Case. We expect to get the ORA -- the Office of Ratepayers Advocates report sometime toward the end of Q1. In the meantime, now that the tours are finished, we're getting data requests and we're answering those data requests to the California Public Utilities Commission Office of ORA. But we anticipate the report to come out by the end of Q1. In addition, we're really focused on closing the rate cases in Washington and Hawaii. Although they're not as big as the one in California, they're still important for those subsidiary companies, and we anticipate wrapping those up before the end of the year.
And then lastly, we're going to continue to focus on the execution of our long-term capital plan. As Tom mentioned about our Main replacement program, making sure we stay on target with that. We have 6,000 plus miles of Main in the State of California that we are stepping up the replacement rate on so that long-term planning associated with that capital plan is really, really critical.
And so with that, Chris, we will open it up to questions please.
Thank you. [Operator Instructions] And our first question comes from Durgesh Chopra with Evercore ISI. Your line is now open.
Thanks for the update here. Two questions from me. First one is the, the increasing CapEx pretty significant. Am I following this correctly that basically the recovery of that CapEx is going to be -- through your step increase in 2019. Is that how this is going to work?
So there is two mechanisms for recovery, certainly that is helping us get the step rate increase and that step rate increase will support some of that CapEx. Some of the amounts that are spent are asked for a recovery in the 2018 rate case, because if we exceeded budget or if we exceed the emergency budget levels, we'll have to go reconcile that in the rate case. So there's this kind of two mechanisms there.
Got it. So, I mean, I guess that the numbers, the rate base numbers that you show in 2021-22, there is a potential that they're higher, right?
There is a little potential that they're higher. But remember, that's kind of the maximum number that -- that we've requested. And so, really you're probably looking at hopefully a better yield out of the rate case than you might otherwise have gotten.
I see. That makes sense. And then can you just talk about the -- so that the Hawaii contract, is that an O&M contract?
Yes. I'm sorry, go ahead.
No, I was just going to ask you if you could provide a little bit of color on what the nature of the contract is, and how should we think about, to the extent that you can comment on margins or accretion and things like that. How should we be modeling it really?
It's a new contract. It's an O&M contract. We're in the process of transferring the employees to become Hawaii Water Service Company employees. Outside of same, I can't really say much more on that right now. I think I'll be able to provide more color on that after the first of the year. I think the important thing is, it is a carbon copy footprint of our footprint in Hawaii where we spend a lot of -- done a lot of work in wastewater and recycled water, it's down the street from our existing locations, which means it's easy to service and it's providing wastewater and recycled water to the golf courses around that area. So it fits our footprint really well, it's something we've been in discussions with for a long time with the current owner. And this is the kind of the first step I think in the process that we're happy to be taking it over and welcome those employees to Cal Water. But I think I'll be able to provide more color on that after the first of the year.
Thank you. [Operator Instructions] And our next question comes from Jonathan Reeder with Wells Fargo. Your line is now open.
So just following up on Durgesh. The $40 million CapEx increase, I guess we should be thinking of it as you will be earning on that $40 million even though it didn't kind of add to the rate base, I guess projections you just think it will help get you a higher kind of authorized rate base in the rate case?
That's right. A lot of it is acceleration of projects or projects that we -- we know that the project is authorized by the Commission for instance, we've agreed to 1,000 feet a man in a particular district and the budget at the time was whatever that was $300,000 and it came in at $450,000 because of the cost of materials and labor and that sort of thing. We'll get that in the next rate case pretty -- pretty likely.
Okay. And then do you need to refine, I guess kind of that CapEx budget in your rate case for those higher costs or do you have to kind of account for that when you file …
I think they've been putting that into the rate case filing. So that's been a point of discussion for us over the last few months. They identified that the costs that had been targeted in the 2015 case for that, main replacement were not -- were not coming incorrectly. So I think there is good evidence in the case that the costs are higher than we had agreed to with the ORA staff at that time.
Okay. And then when you kind of think about Q4 of this year relative to the $0.29 you did last year, what sort of drivers should we be mindful of kind of year-over-year?
Sure. Appreciate that. So the big thing that is a variable factor for us every December is that unbilled revenue accrual. Remember, this is the amount that your customer owes you at the end of the month that you haven't billed them for, and that is going to vary every year based upon the weather, based upon the usage, based upon the average level of the bills, so including rate increases and that sort of thing. And then really the timing of the meter age schedule, how many days are unbilled, multiplied by how many -- how many customers that are there unbilled. At the end of 2017, that unbilled factor went up, we had a very dry December, people were still irrigating in California. And so that -- that is something that you need to watch very carefully. That was an uptick for the Company in 2017. And I would not imagine that it could get drier than the dry it was in December of '17. So we would look for that number to be more flat in 2018. But you never can tell. The rates are different, the days of unbilled -- the unbilled days maybe different as well. So that's the big thing that we watch for. The other thing is really just the tax rate and the tax deduction related to the sort of the repairs, and that's really dependent on how much main jobs -- how many main jobs we put in, so that's a little bit of a variable at the end of the year as well.
And then, I mean, obviously you have some rate relief since then. So maybe net-net, it might be maybe somewhat similar is what -- kind of -- sounding like depending on that …
I guess not to guide anyone, but I wouldn't expect that it would be greater than last year. I think that was really outstanding factor. Jonathan, as I was thinking about it, the one other thing is, we have -- we have a retirement, a set of retirement funds that we do a mark-to-market on every quarter. And if you'll recall the market in 2017 was high flying. And so, over the course of that year, we had tremendous success in this mark-to-market, that's been less so this year, and certainly the market fluctuations that happened in the last quarter, they have an impact on that as well. But we report that out in the Qs and you can identify that as a factor in 2018 so far. I don't know how much that factor is going to change in the fourth quarter.
Yes. I don't think -- I don't think -- volatility in the market is going away anytime soon based on everything that's going on. I think the other thing, Jonathan, you mentioned the rate relief. Keep in mind, as those rate cases come to conclusion, and the step increases get approved, that's all -- that all takes effect in the first quarter, not in the fourth quarter.
Correct. Yes. Okay. Yes. If you guys know which way the market's going. Let me know -- just take my geographic influence there. Thanks for the time today, guys.
All right. Thanks Jonathan.
Thanks Jonathan.
This concludes the question-and-answer session. I would now like to turn the call back to Marty for any further remarks.
Great. Well, I just want to thank everyone for your time this morning. I know its right in the middle of earnings week for all the analysts, so thank you for making time. Tom and I are around the office today to answer any questions if we didn't get to your question here today. Thank you for your continued support of Cal Water and we'll look forward to talking to everyone with our year-end results at the end of February.
End of February. Okay. Thanks.
Thanks, everyone. Bye-bye.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.