California Water Service Group Q2 FY2020 Earnings Call

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the California Water Service Group Second Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Mr. David Healey, Vice President and Corporate Controller. Please go ahead, sir.

Thank you, Lisa. Welcome everyone to the 2020 second quarter results call for California Water Service Group. With me today are Martin Kropelnicki, our President and CEO; and Thomas Smegal, our Vice President, Chief Financial Officer. Replay dial-in information for this call can be found in our second quarter results release, which was issued earlier today. The replay will be available until September 30, 2020. As a reminder, before we begin, the company has a slide deck to accompany the earnings call this quarter. This 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 the second quarter results, we would like to take a few moments to cover the 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 am going to pass it over to Tom to begin.

Thanks, Dave, and welcome, everyone, to our second quarter earnings call. As a preliminary note, I believe most of you are aware that the key issue for the company this quarter is the same as it was in the first quarter: we have yet to receive either a proposed decision or a decision on our California General Rate Case, which we expected before January 1, 2020. I'll start our discussion of the results on slide eight, where I will provide an overview of the quarter and the year-to-date performance. For the second quarter, our net income decreased by $11.7 million, totaling $5.3 million, compared to a $0.35 gain in the second quarter of 2019 versus a $0.11 gain in the second quarter of 2020. The primary issue is that we did not obtain rate relief from the California Commission. We estimate that, had rate relief been granted, two major factors would have positively impacted our pre-tax income by a total of $29.1 million. Of this amount, $10.9 million is attributable to delays caused by the settlement agreement we filed with the consumer advocate back in October 2019, which is being monitored for future recovery in an interim rate memorandum account. The remaining $18.2 million relates to income from our disputed cost recovery regulatory mechanisms, which have been in place for many years to decouple our sales from revenue, and manage our pension and healthcare balancing accounts. Since these items are in dispute, we did not record them as we typically would have, and we estimate that had we recorded them, it would have resulted in an additional revenue of $18.2 million for the quarter. These regulatory mechanisms correspond to some of the cost increases we experienced this quarter, including $6.5 million in higher water production expenses, with $5.7 million potentially offset by those mechanisms, along with $2.1 million in increased pension benefit expenses, which would have also been offset. Furthermore, we experienced an improvement in our unrealized benefit plan investment performance, showing $3 million more than in the second quarter of 2019. Another common occurrence for a utility like us, our depreciation expenses rose by $2.2 million in the second quarter due to increased plant investments from 2019, and we also saw a $1 million increase in maintenance costs. Moving to slide nine, the year-to-date situation mirrors the quarter’s challenges although the figures differ. Our net income decreased by $24.4 million, resulting in a loss of $15 million year-to-date. Earnings per share reflect a loss of $0.31 year-to-date, compared to a gain of $0.19 in 2019. Again, two factors concerning the rate case influenced this, including $19.8 million attributed to the settlement agreement delays and $26 million from our regulatory balancing accounts. Our unrealized benefit plan investment performance was $4 million lower than in the first half of 2019 due to stronger market conditions during the same period last year. Other year-to-date impacts show depreciation expenses increasing by $4.3 million and maintenance expenses up by $1.6 million. On slide 10, we present a similar estimate of the overall benefit from the California General Rate Case, which we still believe falls between $38.9 million and $42.2 million annually, expecting that once a decision is made, this will be the company’s benefit. Our sales forecast for 2020 remains about 7% lower than the adopted sales figures from 2019. In discussions regarding the WRAM and MCBA, we believe that we are more likely to align with adopted sales figures compared to 2019. As previously mentioned, had the settlement been approved, we could have recorded additional revenue between $5.6 million and $10.9 million in the second quarter, with the lower end linked to a $5.2 million reduction in depreciation expenses. On slide 11, I want to elaborate on the disputed General Rate Case items, noting that for the second quarter, we estimate approximately $14.9 million that would have been recorded in the WRAM and MCBA accounts, with the pension and medical cost balancing accounts totaling $3.3 million. We remain highly confident that amounts recorded in these accounts are recoverable, regardless of the Commission’s future decisions regarding our current General Rate Case. The slides have halted functioning, so I’ll skip the EPS bridges and allow Marty to provide an update on COVID-19.

Good morning, everyone. Thanks, Tommy. 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, over 90% 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 masks and other PPE for all of our employees. As you have 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 have seen a handful of employees also contract the virus outside of work. So in cases like that, we have 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 have been successful in doing so. Our Customer Centers in all four states have remained closed and will remain closed until further notice. We have suspended all collection activities in an effort to keep people supplied with water. In addition, we have 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. That’s proven to be, I think, beneficial, and more importantly, I have received a lot of letters from customers who appreciate the fact that we were helping them out. To date, we have had no disruption of service despite COVID-19, in addition to some of the rioting and other events that we saw in Southern California at the end of May and in early June. 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?

Sure. Thanks, Marty. 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 is now a 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 for more than 90 days, those are the bills that would normally have been sent to collection; those bills increased to $3.4 million. In the past, when we have had those bills sent to collection, only a portion of those amounts are typically uncollectible. So we have 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 a decline in sales that we are observing in resort areas in Hawaii in particular. 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. 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 and a memorandum account, as you will recall, is not something that we typically book 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 are 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, do 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 that 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 hope that we can get that wrapped up. As Tom pointed out earlier, we are 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 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 will 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 this July 3rd proposed decision, if adopted, would require Cal Water and other water utilities that are regulated by the CPUC to propose removing its 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. There were only two hours of workshops provided in conjunction with this rule-making. We think it’s just a bad decision and it also goes against the state’s goals of making conservation a way of life. We have aggressively gone after decoupling and conservation early on, as prescribed by the Water Action Plan. We are very much involved and talking to the Commission last week and this week about this proposed decision, and we find it is 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 an agricultural business worth over $60 billion. It’s the largest agricultural state in the union, and we are growing in population from almost 40 million to 45 million over the next decade. The idea of getting rid of decoupling essentially increases rates for most customers, including low-income customers, so we are firmly against it, and we are lobbying against it. It’s also unclear what the effect of this policy decision could have on the current proposed decision that we are waiting for. Legally, it should push into the next rate case cycle, but we are looking into that and digging into that right now. So there will be more to come on this proposed decision 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 been available for the last 12 years of decoupling. We believe that the Commission would come 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 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 have seen things like our main replacement program being able to accelerate. 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 are any more pending shutdowns that could affect our overall ability to get capital invested and put into the ground. Additionally, we have added an incremental $5 million in capital investment for our Rainier View acquisition that closed during the second quarter. 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. We have also filed applications in Hawaii with regulators for approval of our Kalaeloa system in O’ahu and our Kapalua system in Maui for the change in control. We anticipate those closing hopefully by the end of the first quarter of 2021. You will see in the slides that Rainier View added approximately 18,500 customers, the Kalaeloa system will add about 200 customers for the history of us, that the former Barbers Point air base on O’ahu will be redeveloped into residential and commercial properties. 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. Adding those up, closing out the two in Hawaii 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 have been dealing with the pandemic and everything else. Our business development team has continued to be busy and continue to do good work. Tom, do you want to go through the next couple of slides?

Sure. Thanks, Marty. On the capital investment history slide, we've updated our 2021 projection to include an additional $5 million investment in former Rainier View Water, which shows a slight increase. If you look at the next slide, our regulated rate base now reflects the estimated increased rate base for 2020 along with capital investments in 2021 for Rainier View, resulting in a small rise in those figures. This is significantly smaller than our California operations and does not alter the overall trends, but the numbers have been updated. As Marty mentioned, we are still on track, and we expect these numbers to hold, assuming the Commission adopts the settlement. I should note, although it's not in the presentation, slide 20 includes a line for advice letters related to the California settlement amounting to about $150 million. Yesterday, we submitted an advice letter to the Commission to initiate the recovery for our Palos Verdes Water Reliability Project. This project has an authorized advice letter of approximately $96 million, making it the largest project in the company's history. We have filed this advice letter, which will undergo a review process, but we do not expect it to be approved soon; we are aiming for early 2021 for that approval. For those observing the rate base, the light green section in that chart reflects that most of this has already been filed. Marty, I will pass it back to you for the wrap-up.

Great. Thanks, Tom. Well, you should get the sense that there are probably three or four main things we are 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’ve probably had in at least the last decade. So we are anxious to get that wrapped up with the Commission and put to bed. Additionally, the COVID response seems to change every day, and CDC requirements keep moving around, and we have to show up to work every day. We are 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. Lastly, and this may become one of the more important items as we move later into the third quarter, we are moving into wildfire season and the real possibility of continued public safety power shutdowns. 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. With that, Lisa, we will open it up for questions, please.

Your first question comes from the line of Durgesh Chopra with Evercore ISI.

Hey, guys. Good morning and thank you for taking my question.

Good morning, Durgesh.

Good morning.

Look, before I ask, I just want to say that I truly appreciate all the work here and all your transparency. Clearly, these are very challenging times for you, but you've kept the investment community informed about everything that's been happening. So kudos to you for that. I wanted to ask about the proposed decision, just a quick clarification. If I refer back to slide 11, is the proposed decision applicable to the WRAM and MCBA decoupling mechanism, which is the second bullet, or does it also include pension and medical costs? I just wanted to get some clarification on that.

Sure. The proposed policy decision of the Commission, this low income docket is focused only on the WRAM and MCBA mechanisms. Again, as Marty said, the way that the proposed decision is written, it would impact the company in the next rate case cycle. So it would be the 2021 filing, if that proposed decision were adopted without any changes, and so it wouldn’t affect either of those things in the interim period. However, you should know that the ratepayer advocate obviously litigated that issue and the WRAM issue with us here in this rate case, and they have supplied comments to the Commission in the rulemaking that suggests, why wait? Let’s get this over with for Cal Water. So, it’s certainly something that we need to be wary of. We need to continue to fight against and make sure that the Commission understands that it’s not just flipping a switch to go from being a decoupled water utility to not being decoupled. There are some severe rate design changes that have to take place. What the decoupling did back in 2008, just to remind everyone, it allowed the company to adopt an incredibly risky rate design. You have seen that in the WRAM balances that we have had over the years. But the rate design is such that more of our costs are being recovered through quantity rates rather than fixed charges, and more of those quantity rates are being recovered through the top tier. So it’s an accelerating cost recovery. It focuses our fixed cost recovery on those customers who are using a lot of water. If you look at companies who don’t have decoupling, those companies that have the MRAM price adjustment mechanism, you will see that they recover far more of their revenues through fixed costs, and they have much flatter rate designs. It would be premature and really discouraging if the Commission were to take the WRAM out of play for us in the current rate case without changing the rate design. That’s the one good thing in the proposed decision; there is a sea of bad in that proposed decision, but the one good thing is that it recognizes there is a great deal of effort that needs to take place to change the rate design and other factors to get rid of a WRAM mechanism. We hope that at least that language is persuasive on the Commission in our current case. I hope that helps, Durgesh.

Understood, Tom. That's very helpful. Regarding the EPS bridge on slide 12, am I understanding this correctly? The $14.9 million that appears in the water production cost bar chart, is that the proper way to interpret it? Essentially, you are not receiving recovery for those higher than allowed water production costs, is that correct?

Yeah. So on the bar chart, you see the water production costs. That isn’t going to equal exactly the $14.9 million because part of that $14.9 million is the lower revenue that wasn’t achieved. I mentioned that water sales were about where we wanted them to be, I think they are about 96% of adopted. So there is a smaller component of the $14.9 million, which is actually the revenue loss from not having decoupling rather than just the water sales component.

Understood. That makes sense. Then just finally, any sort of color that you can share with us? Obviously, it seems from your commentary early on that you have met with the Commission a couple of times here in the past two weeks. What is your expectation going into August 6th? Do you think that the Commission actually rules on it or do you suspect that this will sort of be addressed in a future proceeding? Just any color that you can share with us would be appreciated.

Sure. We have divided up the meetings; I handled the first few, and Tom will take one or two this week as well. It's a relevant question to consider low-income and underserved communities. However, we believe it’s a considerable leap from discussing the consistency of low-income ratepayer assistance programs to suggesting the elimination of decoupling. That has been our message to the Commission. The opinions vary among the commissioners. One commissioner questioned the notion of eliminating ablation and suggested removing increasing block rates and reducing the number of tiers. The issue with that is it conflicts with the goal of promoting equity for underserved communities and low-income ratepayers. This would raise rates for nearly all customer classes, essentially rewarding high water users while penalizing low water users. Our stance has been straightforward; we advocate for at least a pause and a thorough examination of all data and facts, rather than focusing solely on a limited set of information that we believe the advocates have compiled. We need to have a comprehensive discussion about this significant policy change. On one side, the State Water Resources Control Board has worked hard to make conservation a way of life. We need to figure out how to foster economic growth amid an expanding agricultural sector and a rising population while maintaining a conservation ethos. Yet, a proposed decision is emerging that seeks to reverse all that progress. There exists a crucial disconnect between state policy and what the CPUC is attempting to implement. We are highlighting these inconsistencies because they matter. When we rolled out a WRAM, we initially faced criticism from Wall Street for relinquishing the chance to earn more as water sales rose. We argued back then that it was the right policy choice for both the state and the company as we aim to fervently encourage conservation. We are presenting our case. Conversations with commissioners' staff tend to be guarded, and the policy advisors are also relatively reticent. They raise pertinent questions regarding our views and the data we utilize. We request at least a hold, if not an alternative approach, essentially rejecting the proposed decision. It is set to be discussed on August 6th, and we will have to see how things unfold. Any commissioner could impose a hold or stay; similarly, another commissioner could draft an alternate proposal.

Understood. Thank you. And just one last one quickly, and I appreciate you answering all my questions. Will you be issuing sort of a release on August 6th or an 8-K like regardless of where this thing goes, given that it’s a pretty material event for you or not ready to say that at this time?

We will keep everyone updated. I think if there is a hold, just a plain hold on August 6th that may not result in an 8-K, but any actual decision or indication of an ultimate proposed decision being published, that’s going to result in an official communication. So I think if you don’t see...

I think if you don’t see something, it means that it was held, because you will see something in any other case.

Okay. Perfect. Thanks guys.

Great. Thanks. Good morning.

Good morning, Ryan.

Good morning.

I would like to continue the discussion on decoupling and perhaps challenge your perspective that this new proposal is bad policy. You mentioned facing criticism from the market. We might have contributed to that criticism as well. The reason is that we believe one of the factors contributing to the low return on equity in California is linked to your comments about the riskiness of the rate structure. They have argued that the decoupling mechanism reduces the inherent risk in the business, and it appears they have been effective in driving down return on equity. My question is, let’s imagine for a moment that you don't achieve your desired outcome and this proposal goes forward; could there potentially be a positive outcome in that it limits their ability to make the arguments they've been making? Might we actually see some relief on the return on equity side in the next few years if that were to occur?

Ryan, those are very good points. I think that the fact pattern though, to keep in mind is remember that our cost of capital is a group effort that is four companies, three of whom have the WRAM mechanism, and the fourth being San Jose Water. If you go back to all those proceedings, there’s never been a recognition of any difference in the allowed ROE between the three WRAM companies and San Jose Water with respect to the cost of capital and the riskiness there. I am not sure that we can put a lot of faith in the idea that removing a WRAM mechanism would cause there to be an increase to our ROE. I am hopeful that you are right, but at the same time, I am a little bit doubtful that that might actually take place. I will just leave that there; we will have to wait and see. And obviously, for those of you who don’t recall, we will be filing for a new cost of capital next March that would be theoretically effective on January 1, 2022, and that’s the standard process with the Commission. Marty, do you have anything to add there?

I believe that's correct. If the decoupling had effectively reduced the risk, we would be meeting our return on equity every year, which hasn’t happened over the past decade. It helps eliminate the barrier to promoting water sales because it secures the margin. However, as you mentioned, if the situation changes, that could impact our cost of capital. We would assess this with our economists who assist in drafting our testimony, looking at both qualitative and quantitative aspects. Fundamentally, it comes down to straightforward math and the state’s policy decision, considering that California is vast and lacks new water sources. Desalination has a significant carbon footprint and is costly. The most cost-effective alternative remains conservation, supported by 40 years of case studies in California on electric and gas sectors showing decoupling is effective. I see it as a short-sighted move by a limited group within the commission, and their reasoning appears flawed. If they choose to reverse it, we could possibly leverage that argument regarding our cost of capital. It could be a reasonable point, although I’m not sure it will resonate; discussions around cost of capital are typically challenging, but we would certainly make that attempt.

Got it. Okay. Now, I think you have covered a lot of the big picture or excuse me the tactical issues pretty well. My last question was just more big picture, a very big picture in nature. If you look at the COVID situation, on the surface, it seems like regulated utilities have not really been treated that well from a policy and a stimulus standpoint. I mean on the one hand, you are deemed essential and you have got to keep operating which just costs money. But then you are required to give the product away if that’s what your customers are saying they need, even though we’ve got massive stimulus coming out of the federal government for households in terms of unemployment benefits and stimulus checks. I guess my question is, how do we get there and are there any efforts underway industry-wide to lobby for better treatment as we move forward into these next rounds of stimulus to say, hey, if we are going to see some of these checks out, can we require, at some level, some kind of audit to make sure that people are taking care of their basics, water, electric, etc., before they are doing more discretionary things? It just seems like the utilities are kind of caught in a bad spot here in terms of how this is playing out; any thoughts on that?

I will start, Tom, and then you can add to it. As you know, we brought Rob Powelson on board. The government affairs team has been actively monitoring and gathering input on the bills. The challenge with any current stimulus bill is highlighted by today’s GDP contraction, as we are discussing basic survival for those who have not been working. We are fortunate to have the catastrophic COVID memo account, which helps us track extra costs incurred due to the pandemic, and these costs may be recoverable once we complete our claims process. More interestingly, I received several letters this week from customers I haven’t met, expressing gratitude for the grant program. The letters mainly say thank you for the assistance; they acknowledge they fell behind but are on a payment plan and intend to pay back the company, suggesting that any funds should be allocated elsewhere in the community for those in greater need. Despite the global situation, it’s encouraging to see people who care and act responsibly. There is still uncertainty ahead. During my lunch break, I noticed the West Coast remains largely shut down: restaurants and hotels are closed, and the economic fallout from this downturn will be significant. It is challenging for utilities to push for their agenda at the federal level while aid packages are being considered. I’m more focused on whether there will be a capital improvement or spending program that ensures fair treatment for water utilities in any allocated funds for capital projects currently under discussion. Michael and Rob Powelson are heavily involved in that effort. Tom, do you have anything to add?

No. I think that’s great, Marty.

Great. Well, hey, thanks for your time this morning.

Thanks, Ryan.

Thanks.

Good morning. Do you think there’s been a need for some resolution in the low income ratepayer docket PD before you get GRC proposed decision given the WRAM uncertainty?

I don’t know the answer to that, Jonathan. I think that could be an issue in the GRC. I’m uncertain if it is or isn’t. The way the PD and low income are written doesn’t seem to affect our GRC, but I can’t speak for the individuals working on our current GRC case. That’s certainly a possibility.

From my perspective, it seems that unless the CPUC completely removes the WRAM MCBA issue and initiates a separate investigation into it, the proposed decision for the GRC should rely on the outcome of this docket.

I think the difference is that there has been a proposed settlement on the GRC since October. From a case law perspective, these are two separate proceedings, while ours was meant to be concluded by the end of 2019. I have been reflecting on my years with Cal Water and Pacific Gas and Electric, and I can't recall any retroactive rate-making rulings from the PUC. The case law seems to support our position. However, it's difficult to understand the outcome of this proposed decision, especially given its very limited data set. We are trying to make sense of it. I believe the arguments and case law are in our favor, but I would caution that we should never underestimate possibilities because the outcome is uncertain.

Let me provide you with two additional data points, Jonathan. First, state law prohibits the commissioners from discussing these cases with each other. Our General Rate Case is with Commissioner Randolph, and we understand that she has not communicated with Commissioner Guzman Aceves regarding her policy decision. Any delay in our rate case up to July 3rd was unrelated to the policy decision Guzman Aceves was working on, at least legally speaking. Commissioner Randolph upholds good government principles, so I don't believe any improper communication occurred. Therefore, the delay in our rate case prior to July 3rd did not relate to the policy decision. Additionally, although it may not be familiar to many of you, Liberty Water Utilities in California has a recent proposed decision that addresses similar issues concerning the WRAM and other balancing accounts. This proposed decision was released either last Friday or Monday and does not align with the policy proposal. It states that the WRAM is performing well and recommends that Park Water and Apple Valley continue their WRAM mechanisms and pension balancing accounts. This indicates a lack of coordination in efforts. However, we'll have to await the final outcome.

Right. I mean, I guess, what I am just trying to think of is, is there any scenario where this proposed decision, the low income ratepayer docket now with different investigation, but then your proposed decision in the rate case still come out and says, no, if you can have the WRAM/MCBA? That doesn’t seem to make sense that it gets pulled away in one docket, while the broader policy discussion is going on still, or then conversely, if I guess the PD has adopted in its current form in the low-income ratepayer docket, and it says, okay, it’s going to get rid of it and the next rate case, so not in this current one. You would think then by the fact so the next, this current GRC proposed decision should include continuation of it versus, I guess, Public Advocates’ position that get rid of it right away. I mean, I see it in a different way. This decision being intertwined, and I get that one shouldn’t have an influence in the other or under land proposed decision on your General Rate Case, but now they are intertwined, it would appear.

Yeah. No. I see what you’re saying, Jonathan. I think if the PD and the low income case were adopted as it was originally written, it would be very difficult for the Commission to concurrently come out and say, Cal Water should get rid of their WRAM mechanisms in the case that they filed in 2018. I totally agree with you there, and so I guess that’s a potential silver lining. I did point out earlier the comments, obviously from the Ratepayer Advocate that let’s get this over with kind of comments. So that could potentially result in a change to that proposed decision in the policy gate. We are very hopeful that is not the case, but you are right from that standpoint; I think they wouldn’t want to have two decisions in conflict with one another.

Yeah. No. Thanks for mentioning that about the Liberty Utilities. I wasn’t aware of that. That’s interesting too. I guess, with all of this in mind, how would you handicap the chances that CPUC decides the low income ratepayer docket at this August 6th meeting? Last I saw, I think it was on the consent agenda for approval?

That’s typically where it starts, Jonathan. Until someone pulls it off consent or puts a hold out, that’s the usual pattern; it begins as an agenda decision and then moves to consent. It really depends on the commissioners and their offices deciding that the comments we have made and the efforts we have been putting into educating people on this issue are significant enough to delay the proposed decision or possibly to draft an alternate decision. So far, there hasn’t been a specific response from any commissioner regarding holding the proposed decision or suggesting changes, and it may not be standard for them to make such announcements. These are generally last-minute matters. Unfortunately, I believe we will have to wait even as meetings continue, not only for Cal Water but also for other parties involved in the case and other interested parties that are still meeting. I don’t believe you will hear about a hold or a potential alternate until very close to next Thursday’s meeting.

Okay. Really appreciate the additional color and good luck your way through all these complications.

Yeah. Thanks, Jonathan.

Thanks, Jonathan.

Hi, how are you? I'm not going to ask anything about the WRAM since there's a lack of clarity on that. However, my other question is regarding the catastrophic memorandum accounts for COVID-related expenses. I want to confirm that when you report earnings, the adjusted earnings do not include those costs because you are deferring them to this memorandum account, is that correct?

So actually, that’s not correct. The catastrophic event account is a memorandum account, and our accounting policy states that we will recognize regulatory assets and liabilities from balancing accounts. A memorandum account includes a reasonableness check, which takes place at the end of the filing process. I mentioned the $600,000 in the quarter that we booked to the memorandum account. That amount is recorded in the P&L as an expense, and in a future period, we will file for recovery from the Commission and be able to recognize revenue related to that once we receive approval from the Commission.

Okay. Because you are pretty much the only California utility that I can think of and I cover electric, gas, and water, that still flows those expenses through the P&L.

Okay.

I think everybody else assumes that there is an assumption of recovery, and as such, those are not expenses.

I will connect you with our auditors to start working on that. This has been our revenue recognition policy for a long time, so we are confident about the difference between balancing accounts and memorandum accounts. Our trigger is when the Commission gives us an order to recover something, at which point we will record it as a regulatory asset and recognize it as revenue.

So similarly, any types of backup power expenses for PSPS events that also will be flowing through the P&L?

Correct. And that, if you will recall, I believe last year we did have an amount of expense. I don’t have that in front of me, but we have a different memorandum account for PSPS, and we do expect to file for recovery on that. It’s in our financial statements from last year. I don’t have that in front of me to give you the number, but that did flow through the P&L and is expected future recovery once we make that filing.

Okay. Thank you.

Thanks.

And there are no further questions at this time.

Great.

Great. Well…

Marty?

... everyone, thank you. Obviously, there will be a lot happening during the third quarter, as Tom said, as we get through the proposed decision on affordability. If there are any major things there, we would be doing a filing on that, and we are working on the rate case and getting through COVID. We look forward to talking to everyone at the end of Q3. Thank you for your questions today and for being here, and we hope everyone is safe, and we will talk to you soon. Thanks, everybody.

This concludes today's conference. You may now disconnect.