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Text: As a reminder, before we begin, the Company has a slide deck to accompany the earnings call this quarter.
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.
I'm going to pass it over to Tom to begin.
Just as a preface, I think most of you who're on the call are aware that the major factor for the Company in this quarter is the -- really the same as it was in the first quarter and that is that we have not received either a proposed decision or a decision on our California General Rate Case, which was expected prior to January 1st of 2020.
I'm going to begin the results discussion on Slide 8 of the deck and talk a little bit about the quarter, and then on the year-to-date basis and then go on from there.
For the second quarter, I'll start at Slide 8, our net income decreased by $11.7 million to $5.3 million and that is a difference from a $0.35 gain in the second quarter of 2019 to an $0.11 gain in the second quarter of 2020, is that we had no rate relief from the California Commission.
And we estimate that if the rate relief would come in, there is two big factors here and it's the same two factors we talked about on the first quarter call.
There is a total of $29.1 million that we believe would have been achieved versus additional pre-tax income if the Commission has rendered a decision on a favorable basis to the Company.
And of that, for the second quarter, $10.9 million represents the pure delay of -- resulting from the settlement agreement that the Company filed with the consumer advocate back in October of 2019.
And so that is being tracked in an interim rate memorandum account for future recovery.
And then $18.2 million, which represents income from our disputed cost recovery regulatory mechanisms and those, remember, are mechanisms that we've had for many years, first of all, to decouple our sales from revenue.
We'll talk quite a bit more about that later in the call.
And then secondly, our regulatory mechanism for the pension and healthcare balancing accounts.
Because those are in dispute in the case, we didn't record them as we would normally have.
And had we recorded them in the quarter, we estimate an additional revenue of -- would have been $18.2 million.
Those regulatory mechanisms match up to some cost increases that we had in the quarter.
We had $6.5 million of increased water production expenses, of which $5.7 million would have been offset by those regulatory mechanisms and we had $2.1 million of increased pension benefit expenses which also would have been offset by those regulatory mechanisms, had they have been in place.
Other factors for the quarter, we saw a rebound in our unrealized benefit plan investment performance that was $3 million higher than in the second quarter of 2019.
And other things that happened which would be typical of a utility company in our situation, our depreciation expense went up very similar to the first quarter.
So it was up $2.2 million in the second quarter and that's related to increased plant investments in 2019, and we did have an increase in our maintenance costs of about $1 million.
Turning to Slide 9, on a year-to-date basis, very similar story and very similar explanation.
The numbers are different, but the explanation is the same.
So, our net income decreased by $24.4 million to a loss of $15 million on a year-to-date basis.
In terms of earnings per share, we have a loss of $0.31 per year to date as compared to a gain of $0.19 in 2019.
But, again, the two factors related to the rate case, we believe that had a rate case been adopted and it was favorable to the Company on these matters, the $19.8 million representing the delay of the settlement agreement amounts and $26 million related to our regulatory balancing accounts that we've been discussing.
For the year-to-date basis, our unrealized benefit plan investment performance was $4 million lower than in the first half of 2019 and that's really due to a comparatively strong market conditions in the first quarter of 2019.
And other impacts on a year-to-date basis, again, very similar.
We see depreciation expense increase $4.3 million and maintenance expense increase $1.6 million.
On Slide 10, this is a very similar slide to what we gave you in the first quarter earnings deck.
Our opinion of the estimated benefit from -- on a full year basis, from the California GRC has not changed.
As shown in the table on that chart, we believe the benefit is between $38.9 million at $42.2 million on an annual basis.
And so we continue to expect that when we get a decision in the case that that will be the benefit to the Company.
Our 2020 sales forecast, as we mentioned in last quarter, are about 7% lower than the 2019 adopted sales.
So in discussion of the WRAM and the MCBA, we believe that we're much more likely to be closer to adopted sales than we were in 2019.
And, as I mentioned earlier, we would have been allowed to record additional revenue of $5.6 million to $10.9 million in the second quarter if the settlement had have been adopted, with the low end of the revenue range linked with $5.2 million reduction in depreciation expense.
So, getting a little bit more granular on Slide 11 on the disputed GRC items.
I just wanted to point out that -- the two things that are the WRAM and the MCBA, we believe that on the -- in the second quarter, that's about $14.9 million that would have been recorded in those balancing accounts and the pension and medical cost balancing accounts, we believe, would have been $3.3 million.
And again, we're highly confident that past amounts that are recorded in those accounts are recoverable, regardless of the Commission's decision on a go-forward basis in our current General Rate Case.
And the other disputed items in the rate case, we don't believe are major factors in either the second quarter or the year-to-date results.
It certainly has been an interesting second quarter dealing with the COVID-19 pandemic as, I think most people know, utility workers are considered essential workers, and therefore, most of our employees, 90%-plus of our employees have been at work, in the field every day.
Accordingly, that makes protecting those employees as well as protecting our customers very, very important.
We are complying with all local regulations in our service areas, as well as we were an early mandator of mask and other PPE for all of our employees.
As you've probably seen in the press, California, and specifically, Southern California, LA counties and Kern counties have seen a surge in cases and we have seen increasing caseloads and hospitalizations in the past few weeks, as well as we've seen a handful of employees also contract the virus outside of work.
So in cases like that, we've been able to minimize any disruption of service.
Obviously, we isolate any employee that has any type of exposure, in order to keep them from getting other employees sick and we've have been successful in doing so.
Our Customer Centers in all four states have remain closed and will remain closed until further notice.
And we have suspended all collection activities in an effort to keep people supplied with water.
In addition, we've offered additional help through a direct grant program.
As you may recall, the Company allocated $0.5 million for charitable contributions.
Some of that went to work in local food banks and local food pantries throughout their service areas.
Another part of that grant went to what we called a direct aid or direct grant for customers who were struggling to pay their bills.
And so that's proven to be, I think, beneficial, and more importantly, I've received a lot of letters from customers who appreciate the fact that we were helping them out.
To date, we've had no disruption of service despite COVID-19 in addition to some of the rioting and stuff that we saw in Southern California at the end of May and in early June and so we have continued on track doing what we do best, which is providing clean drinking water for our customers.
Tommy, do you want to go through the business impacts of the pandemic?
So we have seen increased customer account aging.
And remember, this is due in part to the increased unemployment rate and also in part to the regulatory commissions telling us that we can't have collection activity.
The Company, I think as Marty may have noted last quarter, we voluntarily suspended collection activity before our state regulatory commissions required us to do that.
But nevertheless, there are now regulatory mandate to suspend collection activity.
And in California, that mandate, at this point, goes through April of 2021.
So it's going to be a long-term suspension of collection activity.
Our bills that are outstanding more than 90 days and those are the bills that would normally have been sent to collection, those bills increased to $3.4 million.
And in the past, when we've had those bills sent to collection only a portion of those amounts are typically uncollectible.
So we've raised our estimate on the balance sheet.
This is the bad debt reserve balance for doubtful accounts from $0.8 million to $1.6 million as of the end of the second quarter.
Our water sales have continued strong, particularly on the residential side.
That is offsetting a drag on sales in business, industrial, and public authority sales.
That last bit, I think, was school closures, for example, in the late spring.
We do see in resort areas in Hawaii, in particular, a decline in sales that we're observing there.
The California utility Cal Water, as we mentioned in the first quarter, activated the catastrophic event memorandum account that allows us to track costs associated with COVID.
And in the second quarter, we recorded approximately $600,000 of incremental operating expenses to the memorandum account.
Those are amounts that we will seek to recover in a later filing from the commission.
Memorandum account, as you'll recall, is not something that we typically book the revenue from until there is an authorization to recover that revenue.
In addition to the $600,000 of incremental operating expenses, when we do have bad debts and those do go to collection at the end of this period that will be included in our request to the Commission for recovery.
Hawaii has a very similar mechanism that we're working to put in place.
There has been a filing with the Hawaii Public Utilities Commission as well there.
Our liquidity is strong.
At the end of June, at the end of the quarter, we had $114 million in cash and additional current capacity on our lines of credit of more than $170 million.
Marty, you want to talk to us about all the fun stuff in California?
Boy, there is a lot going on in California.
Starting off with, some of you may have seen the CPUC, the California Public Utilities Commission extended its deadline for considering and concluding on our 2018 General Rate Case to September 30th.
That means, in order to meet that deadline, the Commission must issue a proposed decision no later than August 25th.
So we continue to monitor that and hopes that we can get that wrapped up.
As Tom pointed out earlier, we're feeling the financial consequences of not having rate relief and it gets pretty confusing each quarter to talk about our results with and without rate relief.
So we hope to get that wrapped up in the third quarter.
Perhaps more importantly, from a policy perspective, on June -- excuse me July 3rd, the CPUC issued an unexpected proposal in an unrelated case and I want to read to you the full name of this OIR and I'll come back and talk about it.
The full name is called, Evaluating the Commission's 2010 Water Action Plan Objective of Achieving Consistency between Class A Water Utilities' Low-Income Rate Assistance Programs, Providing Rate Assistance to All Low Income Customers of Investor-Owned Water Utilities, and Affordability.
So it was an OIR looking at the consistency and the goals of achieving consistency of low income in rate assistance programs.
So this July 3rd proposed decision that kind of came out of [Indecipherable], if adopted would require Cal Water and other water utilities that are regulated by the CPUC to propose removing it's decoupling mechanism in the next General Rate Case.
This decision is troubling for a number of reasons.
First and foremost, it draws conclusions on a very, very limited set of data and evidence.
In fact we don't even know what was used to construct the data tables used by the Commission to draw these conclusions.
So we're very much involved and talking to the Commission last week and this week about this proposed decision and find it going in the wrong direction of the State's policy in support of conservation and the conservation goals of the state.
Just to remind everyone, California has Ag business that's over $60 billion.
It's the largest Ag state in the Union and we're growing in population from almost 40 million to 45 million over the next decade.
So the idea of getting rid of decoupling and basically implementing what's in this OIR essentially increases rates for most of the customers, including low income customers.
So we are just flat out against it and we're lobbying against it.
It's also unclear what the effect of this policy [Phonetic] decision could have on the current proposed decision that we're waiting for.
So legally, it should push into the next rate case cycle.
But we're looking into that and digging into that right now.
So, there'll be more to come on this -- on this PD that was issued here in early August.
We have a lot of efforts focused on basically asking for a halt to get more evidence on the record and to have a full examination of all the data that's available for the last 12 years of decoupling.
And we believe that the Commission would get to a different conclusion if they had all the evidence on the table.
Looking at the capital investments for the quarter, and this, frankly, was a highlight with everything going on that's been kind of negative news, it's nice to see that our capital program was up 9.5% compared to the same period last year.
So we had $133.5 million invested in the first half of 2020.
The Company previously estimated it would spend between $260 million and $290 million in capital during 2020.
While the Company has experienced some individual project slowdowns, we've seen other things like our main replacement program, being able to accelerate.
And so, overall, we have remained on track at least as of right now mid-year 2020.
Of course, that could change depending on how things go with the virus and if there is any more pending shutdowns that could affect our overall ability to get capital invested and put into the ground.
In addition, we've added an incremental $5 million in capital investment for our Rainier View acquisition that closed during the second quarter.
And if you turn the page, I want to talk about business development, which includes Rainier View.
The Washington Water Service Company and the Washington UTC, which is the Commission in Washington, approved our acquisition and we closed on that acquisition in June, which now makes Washington Water Service Company the largest investor-owned rate-regulated utility by the UTC in the state of Washington.
In addition, we have filed applications in Hawaii with the regulators for approval of our Kalaeloa system in O'ahu and our Kapalua system in Maui for the change in control and we anticipate those closing, hopefully, by the end of the first quarter 2021.
You'll see -- you see in the slides that Rainier View added approximately 18,500 customers, the Kalaeloa system will add about 200 customers, and per the history of us [Phonetic], that's the -- a former Barbers Point air base on O'ahu that's going to be redeveloped into residential and commercial properties.
And in the Kapalua Water & Wastewater System, which is just north of our Ka'anapali system on the island of Maui, which has a couple of large hotels, golf courses and developments.
So, you add those up, closing out the two in Hawaii, that would add just under 4% to our total customer connection count for the year of 2020 which we think is very healthy, given all we've been dealing with the pandemic and everything else.
So our business development team has continue to be busy and continue to do good work.
Tom, you want to go through the next couple of slides?
So on the capital investment history slide, which is Slide 19, we did update our 2021 projection to include an additional $5 million of investment in former Rainier View Water.
So you'll see a little bit of a bump there.
And if you flip to Slide 20, which is our regulated rate base.
We have now included the estimated increased rate base in 2020 as well as capital investments in 2021 for Rainier View.
And so those numbers have gone up just a little bit.
Obviously that's much smaller than our California operations and it doesn't change the shape of those curves, but we have updated those numbers.
As you can see, we continue to be on track, as Marty mentioned, and our expectation is that these are still the numbers, assuming the settlement gets adopted by the Commission.
I will add and apologies that it's not in the deck, but you'll notice on Slide 20, we have -- the third row is called advice letters included in the settlement of about $150 million that's the California settlement.
Yesterday, the Company filed with the Commission an advice letter to begin the recovery process on its Palos Verdes Water Reliability Project.
This is a 96 point -- I think it's a $96 million authorized advice letter for that very large project -- the largest project in the Company's history, and we did make that advice letter filings.
It is subject to a review process and we don't anticipate that that advice letter will be approved anytime soon.
We're targeting early 2021 for the approval of that advice letter, but for -- just for those of you who are looking at the rate base, and that the light green area, if you will, on that chart, the good news is that most of that has already now been filed for.
Well, you should get the sense there's probably three or four main things we're focused on in the third quarter.
First, the PD, the proposed decision on affordability and low-income assistance, staying focused on that, as well as our efforts to conclude on our 2018 General Rate Case.
This is one of the longest delayed rate cases, I think, we probably had in at least the last decades.
So we're anxious to get that wrapped up with the Commission and get put to bed.
Additionally, the COVID response, it seems to change every day and CDC requirements keep moving around, and we have to show up to work every day.
We're not a company that has a lot of employees sheltering in place.
We have to show up and continue to produce and provide water for our customers.
So making sure we continue to take every step possible to protect our employees and our customers as we deal with COVID and we go into the fall season, which includes going into the flu season.
And lastly, and this may become one of the more important items as we move later into the third quarter, we're moving into wildfire season and the real possibility of continued public safety power shut downs, and as we know, the power may go out, but people still need water.
And so the operations team has done a very good job preparing for wildfire and the PSPS season and we are well ready to handle any challenges that come our way.
So Q3 looks to be a very busy quarter for us and we look forward to sharing our results with you as we wrap up the quarter and report our results at the end of October.

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compname posts q2 earnings per share $0.11.
q2 earnings per share $0.11.
due to an expected decrease in customer collections, has increased its estimate for future credit losses.

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