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Edited Transcript of CWT earnings conference call or presentation 1-Aug-19 3:00pm GMT

Q2 2019 California Water Service Group Earnings Call

SAN JOSE Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of California Water Service Group earnings conference call or presentation Thursday, August 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David B. Healey

California Water Service Group - VP, Corporate Controller, Assistant Treasurer & Principal Accounting Officer

* Martin A. Kropelnicki

California Water Service Group - President, CEO & Director

* Paul G. Townsley

California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer

* Thomas F. Smegal

California Water Service Group - VP, CFO & Treasurer

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Conference Call Participants

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* Benjamin Joseph Kallo

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Jonathan Garrett Reeder

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Ryan Michael Connors

Boenning and Scattergood, Inc., Research Division - Director of Research and Senior Analyst of Water & Environment

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the California Water Service Group Second Quarter 2019 Results Teleconference. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to you host, Mr. David Healey, Vice President and Corporate Controller. The floor is yours.

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David B. Healey, California Water Service Group - VP, Corporate Controller, Assistant Treasurer & Principal Accounting Officer [2]

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Thank you, Layla. Welcome everyone to the 2019 Second Quarter Earnings Results Call for California Water Service Group. With me today is Martin Kropelnicki, our President and Chief Executive Officer; Thomas Smegal, our Vice President, Chief Financial Officer; and Paul Townsley, our Vice President of Business Development and Chief Regulatory Officer. Replay dial-in information for this call can be found in our second quarter earnings release, which was issued earlier today. The replay will be available until October 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 would 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 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.

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Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [3]

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Great. Thanks, Dave, and good morning, everyone. I'm going to begin with the slide deck and I'll give you a summary of the earnings results for the quarter and for the year-to-date. And I'll start on Slide 6 of the slide deck.

Our results shown in a table here. Particularly, net income is up $2.2 million from $14.8 million to $17 million. The EPS is - a similar percentage increase obviously, $0.04 increase in EPS to $0.35 for the quarter.

Our capital investments, just to take note here, are relatively flat for the quarter. Second quarter was very similar to the second quarter of last year. And I'll explain that.

Relating to the first quarter -- if you turn over to Slide 7. I'll just start with the capital investments. For the year-to-date, we're down about $12 million on CapEx. That was largely in the first quarter due to weather, due to some delays related to the General Rate Case. But we've caught up a bit in the second quarter and we seem to be on a good run rate for CapEx.

In the year-to-date period, our net income is down $4.6 million, and that's about $0.10 on EPS basis. The big drivers for that are the unbilled revenue accrual that we talked about in the first quarter. I'll talk a little bit later in the deck about that issue.

So flipping to Slide 8. Just the highlights. Two big highlights here for the quarter. First is the reduction in our business development expenses. If you'll recall, last year we were in pursuit of an acquisition and we spent a considerable amount of money on that. We did not have that recur this year and so that's helping the quarter. That's $3.4 million.

We had some smaller items that affected the quarter. We had an increase in our equity AFUDC. That's related to our commission decision in California that allows us to capitalize the costs of our construction projects while they're in construction.

Generally speaking, we had rate increases. We had $5.1 million of rate increases, which were offset by normal operating expenses related to both capital and operations. So on the capital side, you think of depreciation expense, which went up due to more capital investment last year, also our interest cost is up relative to that same amount and property taxes are also up relative to the higher investment. And we did have higher wages and outside services costs.

The last -- the second big point, again, the unbilled revenue accrual. In the second quarter, our unbilled revenue accrual was largely the same as it was in the second quarter of last year, that's good. Except that in the first quarter, we had a substantial negative unbilled revenue accrual.

And we did not see a rebound like one might expect from that negative number to a much higher number in the second quarter. That is largely due to the fact that the weather continued to be cooler and wetter in California throughout the second quarter. We had snow in Sierra Nevada on Memorial Day weekend, which is extremely unusual for us. That is part of the time period which is used to evaluate our unbilled revenue accrual. So we didn't see the rebound there, but it did stabilize in the second quarter.

Just going to the EPS bridges very quickly. You can see the same factors playing out. The big positives for the quarter are the rate increases, the reduced business development expense and our AFUDC. And the negatives are these normal operating expenses, depreciation, interest, wages and outside services and other operations.

And then the bridge for the year-to-date. Again, rate increases is the big positive, reduced business development expenses, the AFUDC for the year-to-date period. And then the negatives for the year-to-date period that get us to our current EPS for the year-to-date: the change in unbilled, and then the factors from the quarter, which are depreciation and interest expense, your wages and your outside services, other operations cost.

So now I'm going to turn it over to Marty and talk a little more about the result.

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Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [4]

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Thanks, Tommy. Good morning, everyone. Thanks for joining us today as we wrap up our second quarter of 2019. As Tom mentioned, our year-to-date company and developer-funded capital investments were just shy of $122 million. They are down about 9% compared to the second quarter -- or the first 6 months of 2018.

As Tom mentioned, obviously weather was a big driver of that. The rainy season this year was the fourth wettest rainy season on record for the state of California. And as Tom mentioned, we had snow in the Sierras up through Labor Day weekend. In fact, I was talking to one of our Board members yesterday at a Board meeting, who was up hiking in the Sierras before she came down to our Board meeting, and she was talking about all the snow that's still on the trails up in the Sierras.

So it's still -- you still have a lot of run-up happening. The good news is it has warmed up. It's warmed up substantially from where we were a couple of months ago. So we're into the warm summer months.

In addition, one of the drags I think that's happened as well is we are in the middle of the General Rate Case and we've used up a lot of our hours of engineering services in the Rate Case settlement discussions that are currently ongoing. And then we have a new variable that we've been dealing with, which is called the Public Safety Power Shutdowns. And I'll talk about those in just a moment.

As we mention in the slides, the information that we show in the slides later on, we're using the full amount of the 2018 GRC submittal, which is the $828 million. That will get trued up as we get to some finality of the Rate Case that's currently in process. And settlement discussions are currently underway. So again, that's just a projection of what was filed and that number will get trued up later on in the year when we know the final outcome.

Another point worth noting as to the financing side of the business is that during the quarter Tom and his team have successfully refinanced $400 million of debt through a private placement bond offering. That consists of replacing $300 million of variable rate securities issued in 2018. That was really a bridge financing that the company did.

And then we had another $100 million of first mortgage bonds that were expiring, 10-year mortgage bonds that were expiring that were issued in 2019. So the average weighted life of 30 years is on the existing debt and the average cost of debt was 3.86%, which is substantially less than what the original debt was placed at. So that puts us in good shape on refinancing side.

I'm going to hand it over to Paul, who's going to give a quick update on what's happening with the General Rate Case in the state of California.

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Paul G. Townsley, California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer [5]

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Thank you, Marty. As Marty mentioned briefly, we are in the middle of our California General Rate Case process. We filed the Rate Case just over a year ago in July of 2018. We have been in settlement discussions and are working our way through the process as we speak. There are -- along with Cal Water, we have the-- California Public Advocates are involved in the case, and then we have 3 municipalities who've also become engaged in the Rate Case.

We had 2 days of evidentiary hearings in July. We have a couple of more days scheduled for early August. And I think we are making progress towards resolution of the case. But it's really all I have to report.

I'll turn it back to Martin.

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Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [6]

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Okay. Now to talk about -- spend a little more time talking about wildfires and Public Safety Power Shutoffs. About midterm in the quarter, the California Public Utilities Commission approved a plan that allowed electric companies in the state of California to shutoff power to various customers, including us, in an effort to help reduce wildfire risk or fire risk under certain circumstances.

California Utilities have advised all of us these outages can last anywhere from an hour or 2 or as long as 5, and in one of the disclosures, even up to 10 days, depending on a number of factors. The factors that they consider when approving a power shutdown or de-energization of the grid are a couple of things that are significant. One, if there's an existing fire in the system. If you remember, during the Mendocino Complex Fire, we talked about the fact they shut off the grid a couple of times, which had an effect on our ability to pump water, which is critical in the fire zone. So we had to fire up the plants with manual generators to keep the water flowing for firefighters.

Two, ultra-low humidity levels. This might be a new concept for everyone kind of back on the East Coast and Midwest, but in a lot of parts of California we get these very ultra-low humidity pockets where you have single digit humidity, which means in certain conditions a fire can spark and rapidly burn really fast. That's one of the things that triggers wildfires in the state of California.

Three, you get these high risk wind forecasts, where it's not uncommon to get gusts of wind 30, 40, 50 even 60 miles an hour at certain times during the summer months, especially in Northern California. And then in Southern California, you get what's called the Santa Ana winds, are called the easterly winds, which is a very warm eastern wind that blows in off the desert towards the coastline. Those are very bad conditions for fire and the Woolsey Fire that we had in Southern California in the Westlake District that was sparked during the Santa Ana winds that we had.

And then they have what's called the red flag warning, which is gusty offshore winds -- so winds blowing in from the west blowing east. You couple that with poor overnight moisture recoveries and then the ultra dry humidity and you really can start a tinderbox that can start a fire very, very quickly.

So under these conditions, electric companies have been authorized to de-energize the grid. And as a result, that's caused us to take pause and say, "Okay. What do we need to do? Because we know we cannot go for 5 days without water or 4 days without water or 3 days without water or even 2 days without water. We have to have the ability to pump."

So as a result of these PSPS processes that have been approved, we've gone back and we've updated our policies and procedures around weather warnings, what do you do to prepare the system when you're going into a red flag warning, for example. We've written a specific policy just for red flag warnings, especially for Southern California and how to manage those tanks during red flag warnings, how to prepare for red flag warnings.

We have done a lot of updating of our hydrant maintenance, making sure our hydrants are ready as we go into fire season this year. We've updated our policies and procedures and done the training on vegetation management. And we've spent a lot of time testing our current systems and doing readiness testing in preparation for fire season this year.

On the physical asset side, we have filed for a memorandum account for the PSPS program. We have also procured an additional 59 generators. Well, that might sound like a lot, but when you consider how large our service territory is, the number of wells that we operate and how much water we pump in a single day, it really isn't. Most of our major systems are already backed up with backup generation that can keep those systems pressurized during power outages. But some of the more smaller remote areas, that can be problematic.

In addition, for extended power outages, we need to have some backup capacity to swap out generators to make sure -- you can only run them so many hours before you have to do maintenance, et cetera. So we did procure 59 additional generators and booster pump type of equipments to help shore up our capabilities to deal with the PSPS situation over the summer and to keep the water flowing during a crisis.

So overall, I think the wildfire task force that we put in place internally to deal with this has done a very, very good job. But it has been a suck of resources for engineering, for the rates team, for operations management, but we felt we're in a position that we just had to be ready for wildfire season and take some additional steps to deal with the possibility of de-energization of the grid.

In addition to that, we've maintained our focus on liability legislation. Inverse condemnation continues to be a big deal in the state of California. The legislature -- despite recommendations made in the Wildfire Commission report about fixing the inverse condemnation law, the legislature hasn't taken action on that. They did establish a liquidity pool that electric companies will pay into. And then they have 2 options: they can directly pay into it or they can use it -- pay into it like an insurance policy, depending on which path they go down.

In either case, that fund is used for electric companies to pay claims stemming from liability associated with wildfire.

So the estimates are that this will create a $21 billion fund that will provide liquidity for the electric companies. And then as the Commission goes through its review process and assuming there's no negligence on part -- on the part of electric company, they will be allowed to capitalize those costs and raise debt to those costs and pay back the fund.

So there'll be more to come on this as we get into the fall. We've built a broad coalition of water supplier in cities and a lot of people in legislature who have supported us in the proposal of limiting liability for water companies for fires not caused by us. As we say: "We're kind of like the firefighters. We're the good guys here. We shouldn't be held accountable for fires that we don't start."

And as I mentioned, the operational training, the readiness training, that's been going very well up to and including extra coordination with the local authorities. And we've taken big steps to communicate and coordinate with SoCal Edison and Pacific Gas and Electric Company.

So as we go into kind of peak wildfire season here in the third quarter and part of the fourth quarter, rest assured we've done everything that we can to be ready for wildfire season this year, including taking additional steps to harden our system to be ready to deal with everything that needs to come up, including the de-energization of the grid.

So having said all that, I'm going to let Paul talk about Travis Air Force Base, which is some good news as we've taken over operations.

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Paul G. Townsley, California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer [7]

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Thank you, Marty. So we've just finished our first full month of operation of the Travis Air Force Base. For those of you that don't know, Travis is a very large Air Force base located in Fairfield -- adjacent to Fairfield, California, right near a number of our service areas. So we began a 50-year contract to own and operate the Travis Air Force Base water system. That was approved by the California Public Utilities Commission. And we are operating it under what's known as the regulated utility model.

So we really think of Travis as simply another district out of our many districts and we've been -- we've completed the transition period and are fully in place operating the system and I believe operating it very well.

And with that, I will turn it back to Tom Smegal.

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Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [8]

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Great. A quick update on our decoupling balancing account, the WRAM and the MCBA as we call them. So as I mentioned at the top of the call, we did have lower sales in the second quarter due to weather. We had about 83% of our adopted sales. That's driven up the WRAM balance a bit. It's currently at $61.3 million, up from about $56 million at the year-end -- 2018 year-end.

The good news here is that we still have the effect of the sales reconciliation mechanism. That allowed us to change our adopted sales to take into account the sales from last year. Had that not been in place, we would have seen a receivable balance in the WRAM/MCBA that would be almost $6 million higher at this point. So that is a good regulatory mechanism and it's been working well for the company. And the bar chart on the next slide just reflects that as well.

Now I'm going to turn it back to Marty to talk about our outlook for the remainder of the year.

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Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [9]

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Great. Thanks, Tom. Well, as you've heard us all mention, we're in the middle and the deep throes of settlement discussions currently right now with the California Public Utilities Commission. I would say both sides are working in good faith to try to bring settlement on the 2018 General Rate Case. So we're hopeful that we can get through settlement talks and come to a successful resolution and then move on to getting the capital on the ground.

In addition, we did open our first regional call center in Southern California during the second quarter. We noticed that we had an immediate and fairly significant step up in service levels when we opened up that first call center. So we have announced to our employees in the state of California that we're going to share with them the blueprint, open up 3 more regional call centers. So we're essentially going from a 20-plus call center model down to 4 regional call centers.

So there's one in Southern California that's open now. The next one will be opened up in the Central Valley. That will take care of Bakersfield, Visalia, Selma. Then we'll be opening up in 2020 2 other ones: one in Northern California in the Bay Area that will service all of our Bay districts and then one up in Northern California.

The significance of the regional call centers is: one, it allows us to expand our service hours for customers; two, everyone has a smartphone now, everyone has an app, everyone likes to communicate through different electronic means. It allows us to offer -- expand our service offering for how we communicate with customers and when we communicate with customers. So you'll see this model expand as we move into 2020 and it's off to a very, very good start.

And as I mentioned earlier, wildfire response planning and training is well underway. We expect to incur a lease expense for $2 million to $3 million on the 59 generators that we have procured here in the second quarter. Plus, there'll be incremental capital investments for the remainder of this year, going into next year. I would expect the capital improvements that we'll seek recovery for will probably be around $10 million, a rough estimate, back in the envelope, as we go through this process. So there will be an expense piece, which is the lease cost, $2 million to $3 million this year. And probably an additional $10 million of capital in 2020 that will work to continue to harden our system.

And in closing, all hands are on deck and they're ready for wildfire season. Last year was just a heck of a year for us with 4 major fires in the state of California. And given our broad footprint, we got to be ready to deal with circumstances like that again this year. And I'll just say the team has just done an excellent job, rapidly employing changes to deal with the PSPS program, and they'll be ready for wildfire season this year.

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Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [10]

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Marty, just the next 2 slides are really a repeat that we've done every quarter. We haven't yet changed our projections due to the Rate Case. So the capital investment projection is still the same that you've seen for the last few quarters. It just reflects an update on how much we've spent on an year-to-date basis. And the following slide has not changed at all, which is the projection of rate base of Rate Case. Again, that is based upon the Rate Case filing.

So Martin, do you want to wrap up?

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Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [11]

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So just in closing. Again, all hands on the Rate Case and getting that settlement hopefully taken care of and moving on with our business. Staying focused on the 3 prong approach for dealing with wildfire risk: one, staying focused in Sacramento on the legislative process; two, making sure we stay focused on operational readiness and changes we need to make in policies and procedures to deal with changes made at the California Public Utilities Commission, in particular the PSPS program; and three, what infrastructure improvements can we make to make sure that we're ready and we can keep the water flowing during a crisis for our customers.

So we like to tell people it's the third year of Rate Case for us, so it's the period where we feel the most amount of regulatory lag in the 3-year cycle. So we never get too excited about the third year of a Rate Case other than let's get the Rate Case done and move forward.

And as Tom said, and I think it is fairly significant, that the extended period of wetter, cooler weather certainly slowed down the capital program in the first half of the year, but also had an effect on the unbilled revenue for the quarter, which is a little rare that it doesn't all flip out in the second quarter. And so now that we moved into the warm summer months, we'll see what happens in the third quarter with that revenue accrual.

So with that, Layla, we will open it up for questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Ben Kallo from Baird.

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Benjamin Joseph Kallo, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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Maybe just on the last point, Marty, about -- and Tom, I'm sure you could help here too -- just the cadence of the CapEx for the year and if you guys think that you can still meet your targets. I think it was a little lighter in the first half of the year versus what you need to do in the second half, and how that weaves in -- I guess since the wildfire topic was upfront, how that weaves in with the season there to?

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Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [3]

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Yes. Ben, unfortunately it's still a bit of a moving target with the settlement negotiations. The difficulty there is that's it's a confidential settlement. We can't really talk about what the negotiations are over or how close or far apart the parties are. Again, we're hopeful there.

And so part of what's been the lag in the first half of the year I think is some hesitancy on controversial projects where there was a negative recommendation to go forward with that project. And as you may know, when you do a capital project, the bulk of the cost is in the construction of that project. And so that -- once you decide to start on a project, you're not going to be spending money on it until several months later in the case of a short project or 6 months or 8 months later in the case of a longer project. So that delay has maybe pushed some things out.

We do have the additional cost of the PSPS capital that's going to get factored in. We'd really like to wait until the third quarter and give you kind of a more firm number. I think with the third quarter, there's a reasonable likelihood that it will at least have a position statement in the Rate Case, and whether or not there's a settlement, we'll at least know what the balance are and maybe be able to give you kind of a closer wedge of where we're going to be.

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Paul G. Townsley, California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer [4]

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And I think -- the other thing I would add to that is really while we do report and disclose capital expense on a quarter-by-quarter basis and annual basis, it's really that 3-year target, the Rate Case target that's really what matters here. So if we do lose a little momentum in the first year of the Rate Case cycle, I'm not too worried about it, because it's the first year of the Rate Case and we'll regain some of that ground in the second and third year.

And if you remember, we did a strategic shift in the way we did capital in this last 3-year cycle. We used to stretch the capital out kind of period-by-period and try to keep it balanced and have kind of incremental growth kind of year-to-year. This last cycle, we pulled a lot of capital up to the front side of the cycle because that allows us to maximize the value of our step increases in the second and third year of the cycle.

So part of the message that we've tried weave in on that is really stay focused on that 3-year capital budget number, not necessarily the year-to-year capital number. And remember, in California, we are at prospective rate making year. So getting capital on the ground is important. But it's not like it's necessarily a missed opportunity because it's forecast to capital versus -- in some of the other states we operate in, it works as a historical test year. You don't get recovery for it until it's in the ground and you have to apply for it.

So we're in a pretty good spot in the state of California to deal with some of these ebb and flow issues that pop up like PSPS or Rate Case settlement discussions. To me the hardest thing is that in this case both the PSPS program and the detailed Rate Case settlement discussions eat up a lot of engineering services hours and it takes them away from the capital projects of getting the stuff on the ground because they're helping with the settlement or they're helping with some design changes we've got to make to deal with wildfires. But I'm fairly confident that in any 3-year window we'll hit our targets. It's just we got to deal with the ebb and flow of the weather pattern and some emergencies will pop up.

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Benjamin Joseph Kallo, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [5]

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Okay. That's great. And then you talked about the reduced expense upfront. But could you just talk about the kind of -- what the approach to M&A is? Then also I guess with all the talk around the California regulatory environment, do you want to reach out outside of California now? Does that make it harder to operate there, so you're less likely to do acquisitions? So just maybe an update there.

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Paul G. Townsley, California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer [6]

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Ben, this is Paul Townsley. So we are very active in the business development front. We are obviously looking in California because that's where most of our business is today. But we also operate in Hawaii and New Mexico and Washington. So as far as we're concerned, our hunting grounds are California and beyond California. We've just hired a new Director of Business Development, who's just been with us a couple of weeks. And I think we have a very sound and robust program that we're working on. But obviously, with business development, I can't announce anything until we're ready to announce it. But do stay tuned.

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Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [7]

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Yes, I think one of the things -- when I asked Paul to take over the business development process, Paul took about a year to kind of retool the way we hunt. Water M&A tends to have very, very long lead times and can be very, very lumpy. So the process by which you prospect and track leads and follow up on deals can help make or break the deal frankly, because it's not a -- that's usually not a quick win type of M&A environment like you might see in some other industries.

So overall, I think Paul has done a good job kind of filling up the pipeline, monitoring the pipeline. The new person that Paul has recruited I think is very, very good. He comes from the industry with a lot of years of experience. And the trick is you got to cover the ground and just be out there and let people know who you are and always be looking for opportunities. And I think we've positioned that very well.

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Paul G. Townsley, California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer [8]

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And we're also pursuing small tuck-in opportunities adjacent to and near our existing systems, but we also don't shy away from big opportunities like the opportunity that we chased last year. So we're really reaching across all of what we think are good potentials in our sphere of influence.

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Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [9]

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And Ben, last -- a extra thought on that. I know you kind of professed about the California regulatory environment. We've been a regulated utility in California for almost 100 years. We have a good working relationship with the staff of the Commission. We know a lot of the commissioners. We feel that we can work in that environment constructively and have constructive outcomes on the California regulatory side. So we're unafraid of expanding in California and I want to make that clear too.

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Operator [10]

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Your next question comes from the line of Ryan Connors from Boenning and Scattergood.

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Ryan Michael Connors, Boenning and Scattergood, Inc., Research Division - Director of Research and Senior Analyst of Water & Environment [11]

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On the issue of this PSPS investments, I know you can't get into the nitty-gritty of the discussions. But just conceptually, I assume there is already some kind of requirement or at least guidelines that you have some redundancies built in for power loss, especially given earthquakes and what not in California. So how do we think the PUC and interveners will look at that? Will try to argue that you should already have some of this stuff in place and therefore try to not give you credit? Just curious how -- what the current redundancy requirements are if any and what the incremental -- how that plays out?

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Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [12]

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Sure. Well, like I mentioned, most of our major systems are already backed up. I think that the company generally has done a very good job in the ordinary course of business planning for things like earthquakes, things like that. Where some of the problem starts to come in is when you think about de-energizing a whole quadrant of the grid that might affect 2 service areas or 3 service areas or it might affect a more remote part of the service area, where sometimes you can just open up a tie in from one system to the other and flow water in. But if that whole section is out of power and one section, say, our system is energized, but the system next to ours isn't and they need water, you still have to pressurize that system.

I think that the real big factor here is just the concept or the notion that customers have been told -- like the notice I received at my house said we need to be ready as the consumer to go up to 10 days without power. That's a long time. And then some of the other communications -- Edison has said up to 5 days without power and PG&E, Pacific Gas and Electric, has changed theirs and now they're saying 48 hours or more.

So the concept of being without power for an hour, 2 or 3 or 4 generally not a problem anywhere in our system, but when you start looking at kind of multiple days without power in a large section of the grid that might affect multiple service areas, you got to build in some more redundancy.

And generally speaking, again, 6,000 miles of main, 750 wells. We have procured 59 more generators. It's really not that much compared to the amount of assets that we operate. But we've been focused on making sure we can pump and continue to pump water without interruption during a disaster for the parameters of 5 to 10 days or longer. Paul, you've been working on the memo account.

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Paul G. Townsley, California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer [13]

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Yes. I will just add that when we filed the memo account earlier last month, the California -- the consumer advocate, public advocate is not opposing the establishment of the memo account. So they understand the need to establish this. They are just looking for more clarifications and clarity on the memo account, but they're not opposing it. So we will address these issues in the future when the time is right, but I don't think that we are going to have an extraordinary regulatory lift when it comes to recovering our costs.

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Ryan Michael Connors, Boenning and Scattergood, Inc., Research Division - Director of Research and Senior Analyst of Water & Environment [14]

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Got it. No, that makes a ton of sense. You articulate that well. My second question was just -- so mentioned you're late in the Rate Case cycle, but there's a separate -- obviously, cost of capital. And now we've got the Fed raising rates again. So can you just kind of update us on the timing for the cost of capital reset and what the key variables will be there now that we do have rates ticking upwards -- or, excuse me, downwards again? And the indexed, reset of rates and all that stuff, how you see all that playing out?

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Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [15]

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Well, there has been a lot of changes in interest rates, so I think it's a little premature to try to forecast what we would be doing. Our filing is due next March, so that is about, if my thinking is right, about 9 months from now. Honestly, at the moment, we are focused on our General Rate Case. All hands on deck on the General Rate Case. As we get towards the end of the year, get the Rate Case behind us, start focusing on our cost of capital case, then we'll be able to really take a look at what the forecast for the cost of capital would be at that point.

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Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [16]

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Ryan, 2 more items there. One data point, which is the energy companies obviously have filed for cost of capital this year and so we are interested to see what happens with that case. I know they initially asked for additional risk premium related to the wildfires and obviously we talk a little bit about some risk to the water utilities. It's unclear as to whether that would be incorporated into a cost of capital at this point or not, whether there's an additional legislative fix for the water utilities. But that's kind of hovering out there as a possibility.

The second thing is, as Marty mentioned earlier, we've refinanced $400 million of long-term debt. And actually, when we go in for this March case, we will have a substantially lower cost of debt than we -- on a weighted average basis that we did last time. So Cal Water as a company has really aggressively pursued lower cost of debt, much more so than the other utilities in California. And so we're really proud of that effort. We're going to really be in a good stead when we go in front of the Commission for the overall weighted cost of capital. So just to keep that in mind as well.

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Operator [17]

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(Operator Instructions) Your next question comes from the line of Jonathan Reeder from Wells Fargo.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [18]

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I don't know if you can really get into this based on earlier comments, but what are the biggest areas of disagreements in the GRC right now? Is it related to the capital budget? Or are there meaningful expense items kind of too that you're having to kind of hash out?

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Paul G. Townsley, California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer [19]

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Jonathan, this is Paul Townsley calling. And I'm afraid I'm going to have to take a pass. These are confidential settlement negotiations. We may be able to settle the case. We may be able to settle a part of the case. We may be able settle none of the case. But I can't disclose any of that until the settlement discussions are completed, until hearings are completed and briefs are filed. And we'll be expecting -- we'll be filing briefs here in the next couple of months. So I really have to ask for you to give us a little bit more time before we can disclose that.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [20]

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Is there is a drop dead date, Paul, like that you have to reach a settlement by, where it is like, "Hey, we just have to go this partial settlement versus a full settlement," in order to keep the thing on track? Or anything like that?

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Paul G. Townsley, California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer [21]

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Typically, the window closes on all of this when briefs are filed with the PUC. And I don't have the calendar in front of me, but it is in September that we filed a brief. So that really is the end of the window. We can continue up until -- really the day before briefs are filed we can continue to work with the other parties on settlement. And as Marty said earlier, all parties are working in good faith. And so I just think we -- there are -- as with all settlements, there's give and take and there's uncertainty until you get to the end of the road. So I think we will know a whole lot more in about 30 to 45 days’ time.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [22]

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Okay. And then, Paul, do you think the case is still tracking on schedule, where you could get a decision by year-end? Or if you do reach a settlement late in that process -- we've seen with some other cases the Commission has taken quite some time to actually parse through and approve the settlement agreement -- might it slip into 2020?

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Paul G. Townsley, California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer [23]

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Jonathan, in our last case, the 2015 case, we had a decision, a Commission decision in December and rates went into effect January 1. I still believe that's our schedule for this case. That's been the schedule that the PUC has laid forward. I don't have any reason to believe that's not going to be the case.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [24]

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Okay. And then on to memo accounting (inaudible), Paul. Did I hear you correct that basically it's going to track the expenses including like the cost of leases, but then the $10 million of capital that you decided would it essentially just go through like the GRC for recovery purposes?

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Paul G. Townsley, California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer [25]

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No, that's not quite right. The memo account would track both expenses such as rentals of generators and fuel and things like other expenses that are not in our current Rate Case. The memo account would also track the revenue requirement of capital investments that we have made in response to PSPS until they are filed in the next case. So there will be a revenue requirement component and an expense component.

Now as with all memo accounts, the determination of recoverability is made down the road, but the memo account enables us to track those costs for later application of recovery.

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Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [26]

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Yes. And that can…

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [27]

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Okay. Then can you -- go ahead. Sorry.

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Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [28]

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Sorry, Jonathan. Just to remind everyone that the accounting of this, the way this works is we're not going to recognize a receivable from a memorandum account until the Commission authorizes recovery of that. So when Marty talked about $2 million to $3 million of expense for the remainder of the year, that's going to be an -- that's potentially going to be an expense that doesn't have a revenue component to it this year. But our expectation would be that we make a filing with the Commission and get that revenue component whether it be next year sometime or when we make that filing. So it would be an offset in a future period.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [29]

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Okay. But the $2 million to $3 million will flow through to the bottom line essentially this year you're saying?

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Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [30]

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That's our expectation at this point, yes. And obviously, that can change depending on the length of fire season, whether there are incidents that occur. And we have to deal with the operating expenses of running a system for 4 or 5 days on generators. So we'll just have to see. There is some variability in those numbers.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [31]

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Okay. Yes, I understand the possibility there. And then, Marty, you mentioned the electric utilities didn't get a true IC fix. What would be kind of an acceptable solution to the inverse commendation problem as it relates to water utilities? Or what types of solutions are being kicked around right now?

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Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [32]

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Yes. Well, again, I would call your attention to the Wildfire Commission report. And I'm very, very proud and happy with the performance of our team we have up in Sacramento. What we found when we were working on this issue is there was little to no knowledge in lawmakers that inverse condemnation is directly applicable to water utilities. In fact, many of them said: "Well, you guys are like firefighters. That doesn't make a whole lot of sense." And our response was: "That's why we're here talking to you."

In that Wildfire Commission report, it gave 3 recommendations. And one of those recommendations specifically said "going to a fault-based standard for water utilities who don't cause the fire." And that's the type of language I like to see us go to. California is one of 2 states that has this inverse condemnation law on the books. You can broadly paint inverse condemnation under a whole bunch of liability scenarios, not necessarily wildfire, which is why it's kind of a plaintiff's dream type of law.

But there's a reason why all the other states don't have it that way. They've adopted a fault-based standard. And no one in the water industry isn't saying "hold us accountable," but we don't want to be subject to frivolous lawsuits. Or if we don't cause a fire in a pump station -- our pump station burns up and all this equipment we're buying to be ready for wildfire season if it goes up in smoke because of a fire we don't cause, we can still get sued.

And so I don't think it's in the customer's best interest that we get hung out there to dry when we're a part of the solution. And I think the best example of this I can give is when we had the Mendocino Complex fire. PG&E shut off the grid. They gave us no notice. We were providing water 24 hours a day to hundreds of firefighting vehicles. When that power went down, our plant went down. We're the only pumper on the east side of that lake up in Clearlake. And so our crews went in and we had backup generation, but we had to manually fire it up and we kept that system pressurized while the power was out and we continued to pump water. If we didn't pump that water, where would those crews go to get water?

So it just -- there's a liability issue that needs to get flushed out. I like to see the state adopt a fault-based standard for all utilities, not just water utilities. But right now, I'm concerned about water utilities.

And if you look at the coalition that we started, we have a lot of names on the coalition. A lot of people signed up and supported it. Our unions have signed up and supported it. And we've got a pretty good movement going right now.

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Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [33]

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And Jonathan, let me just give you that URL in case anybody is interested in following up on the policy, principles that are there. It's firesafecalifornia -- that's all one string of letters -- dot org. And that contains a list of all the organizations that have signed on to sponsor the cities and the water districts and water companies that have signed on to that and the policy, principles that we're looking at in terms of the legislative fixes for that. And one more time, that's firesafecalifornia.org.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [34]

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Okay. And Marty, so if you can get it corrected to fault-based standard and even if it's just kind of a carve out, if you would, for the water utilities, does that then -- it's got to be like the 2/3 approval? And is it a constitutional amendment and all that stuff that makes it a little bit of a heavier lift?

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Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [35]

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That a good question, Jonathan. I'd have to do a little research. If it's a modification to the constitution, it has to get approval, 2/3 approval. But also under executive privilege -- the governor can put laws into place under executive privilege like he did with the drought a couple years ago when he declared a drought emergency and bypassed that process at least in a short-term basis.

In all of our discussions with legislators, no one is opposed to a fault-based standard for water companies. The issue is you have one electric company that's been looped into the cause of a lot of fires. And I would say there's not a lot of love for electric utilities in Sacramento right now.

So part of the resistance that -- the only resistance we really found with that issue is: "We don't want to bail out the electric industry. Yes, we understand" -- "we were surprised this is applicable to you." But we found an audience that was willing to listen up to and including advisers -- key advisers for the governor.

So I think we're in a good position as they go into the next legislative session to potentially get a fix. But it's legal based and it's subject to determination based on the governor and the staff and some constitutional attorneys for the state of California.

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Operator [36]

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(Operator Instructions) I am showing no further question at this time. I would now like to turn the conference back to Mr. Smegal.

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Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [37]

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Great. Thank you very much. So Marty and Paul and Dave and I would like to thank you all for your participation in the call, for good questions and your interest in the company. And we look forward to talking to you at the end of the third quarter -- I guess that's the end of October. So have a good rest of the summer, everybody, and we'll talk to you all soon.

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Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [38]

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Thank you.

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Operator [39]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.