Ladies and gentlemen, thank you for standing by. Welcome to the Water Service Group First Quarter 2020 Earnings Results Teleconference Call. [Operator Instructions]. I'd now like to hand the conference over to your speaker today, Mr. David Healey, Vice President and Corporate Controller. Thank you. Please go ahead.

Thank you, Jimmy. Welcome, everyone, to the 2020 first quarter results call for California Water Service Group. With me today, Martin Kropelnicki, our President and CEO; and Thomas Smegal, our Vice President and Chief Financial Officer. Replay dial-in information for this call be found in our first quarter results release, which was issued earlier today. The replay will be available until June 30, 2020.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 on the company's website at ww.calwatergroup.com.Before looking at the first quarter results, we'd like to take a few moments to cover forward-looking statements. During the course of the call, the company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from the company's current expectations. Because of this, the company strongly advises all current shareholders as well as interested parties to carefully read and understand the company's disclosures on risk and uncertainties found in our Form 10-K Form 10-Q, press releases and other reports filed from time to time with the Securities and Exchange Commission.Now I'm going to pass it over to Tom to begin.

Thank you, Dave, and good morning, everyone. I'm going to start the presentation going through the slide deck. And so if you can find that on our website or attached to the press release this morning, that will be helpful to you. And I'm going to start on Slide 6, where we have a table of our financial results for the first quarter. As you probably have seen already, our net loss for the quarter was $20.3 million or $0.42, and that is a larger net loss than in the same quarter last year. Where the loss was $7.6 million or $0.16 per share.We had flat operating revenue and our operating expenses were up. One note here, and we'll talk about this in greater detail later, is our capital improvements were better than they were in the first quarter of 2019.Flipping to Slide 7, our Q1 financial highlights. And really what we're mainly going to be talking about today is the effect on the quarter of the California General Rate Case, which as we've talked about before, the decision has been delayed. And that delay has meant that we cannot record the rate increase that we expect due to the settlement, and we cannot determine whether the commission will grant us regulatory mechanisms that we have had for many years, but which have been litigated in this case and were not part of the settlement.So we estimate that $15.4 million of pretax income would have resulted from a timely favorable resolution of the California GRC, and that breaks down as follows: $7.9 million represents delayed pretax income that would result from the approval of the settlement and would be accruing to the benefit of the company regardless whether the disputed items were granted in the company's favor. And then in…

All right. Thanks, Tom. Good morning, everyone. Thanks for joining us during these unprecedented times. I'll just take a moment to call everyone's attention to our logo on the front page of the slides and solidarity with our customers who are sheltering in place. We've changed our logo where the states have been solid states. We've broken those into dots with a note that says, even though we're 6 feet apart, we are all on this together. So - and I think that is kind of the moral of the story with this first quarter.I want to talk about our pandemic response. As many of you know, Washington started off as the early kind of epicenter for COVID. And as a result, California and Washington took steps early on to limit public activity to help call - what they call blunt the curve. We had planned for pandemics, among other things, and part of our emergency response protocols that we follow. In fact, in 2016, we published our emergency response manuals, that every employee has a copy of and in that manual as a full section on pandemics and how to handle pandemics and flu outbreaks. So we continue with that. We actually did all of our updated pandemic training in the last week of January and early February. And we formed a task force in early February to monitor and figure out our next steps with the coronavirus. We also opened up our emergency operations center, and it's been in operation since March 9.So we were at - we think, a little bit ahead of the game in terms of preparing for our response. Our primary objectives were really simple, keep our employees healthy and provide uninterrupted water supply to our customers. And so far, we've only had two…

Thanks, Marty. So just a couple of other quick updates related to the General Rate Case, which I talked about extensively at the top of the call. But from a procedural standpoint, parties, and that would be Cal Water and the Public Advocates Office, jointly met on April 9 with the assigned commissioner's office and asked them to expedite the processing of the General Rate Case at that time. And we think that there are benefits both for customers and for the company from getting a resolution of the rate case. As you probably saw in a press release yesterday, on Monday, we issued a motion in the case, actually a combination and series of motions, which asked the commission to delay the rate increase component of the rate case until January 1, 2021.And we believe that we are covered by the interim rate memorandum account, which means that we're tracking the lost revenue that would be associated with the rate case for 2020, and that we don't want the commission to be raising rates during 2020. And so that's why we ask for that delay. As a reminder, that cash, if you will, is estimated at between $12 million and negative $12 million in terms of the overall rate increase that would accrue to the company. But within that, there are big differences in certain customer classes and different types of customers. And that's because we're kind of changing our rate design a little bit to better enhance conservation. And so really, we don't want that surprise from any customers saying, why is my bill gone up 10%? Or why is my bill changing during this crisis? And so we elected to make that motion to the commission. We do have the support of the ratepayer advocate in making…

Thanks, Tom. As you saw in the press release, our investments in the first quarter increased 9% from the first quarter of 2019. So we completed $65.3 million of capital in the first quarter. Really, one of the big things that was working to our advantage is the rather mild winter that we experienced in California that allowed us to continue working on projects that may have been shut down in different weather conditions if we had a lot of bad weather. As we previously announced, we think our range is $260 million to $290 million in 2020 that may move around a little bit based on the current pandemic that we're going through. And there's good and bad and associated with that, first and foremost, water employees are deemed as essential services employees. And so that's enabled us to continue working on things like our main replacement projects as we get ready for fire season, things that improve fire flows, et cetera, we've been able to continue to move forward on.In fact, we completed 28,000 feet of main in that first quarter, which is about 5.3 miles in domain in the first quarter. We may have to shift some of the work around, again, to deal with water supply for people that are at home sheltering in place, obviously, with the pandemic and the need to constantly be washing your hands, your clothes, et cetera. We do not want to have any of our customers go without water at home. We've had to adjust some of our processes on our construction projects to deal with social distancing and the increased use of PP&E. And again, big kudos for the union for helping us with that. And some cities just flat out on closed down. So some of the permits…

Great. Thanks, Marty. So these are, again, relatively unchanged charts on Slide 16, which is our capital investment history. It's just marking the CapEx that we've done in the quarter and the midpoint of our estimate of $275 million for the year. And the regulated rate base has not changed. And again, the uncertainty with respect to the rate case is still there, and we should hopefully get some resolution on that soon.And with that, I'll turn it over to Marty for wrap up.

Great. Thanks, Tom. In closing, I just want to take a minute to recognize the unprecedented times that we're living in, and particularly the role that we play as an essential service employee - excuse me as essential in service utility with essential service employees. While the regulatory contact is never perfect in the short run, we know that the process does correct itself, and I have confidence that in the intermediate and long run, the process works. Given the pandemic crisis we're currently facing, staying focused on our customers now more than ever is the right thing to do, and I'm certain our regulators would agree with that. As we move into the second quarter, we look forward to helping our customers transition from a shelter in place order back to work and hopefully back to somewhat of a normal life. Likewise, we look forward to working with the California Public Utilities Commission on wrapping up our General Rate Case and moving forward with our infrastructure improvement plans and getting ready for fire season.So this, coupled with closing Rainer View is going to be our focus of the quarter, for the second quarter.And with that, Jimmy, we're going to hand it over to you to start Q&A, please.

[Operator Instructions]. And our first question comes from Durgesh Chopra with Evercore ISI.

Thanks for all the color today. I appreciate it. I just wanted to - I have a couple of questions, and I wanted to start with just a quick clarification. Do you guys - as it relates to your deferral filing and do you guys have interim rates in place in the first quarter or no?

So we do technically have interim rates in place, but the interim rates are set as the existing rates. So there is - there was no actual increase upon filing for interim rates.

Got it. Got it. That makes sense. Perfect. And then maybe, obviously, this - the [indiscernible] dispute is a big one, pretty material. And the rate case timing is uncertain here. So in light of those elements, can you comment on your capital markets needs for this year? How are you thinking about your liquidity position? And then your capital markets need for 2020?

Certainly. So we have a great team in finance, customer service, IT and accounting that is looking very carefully at any changes to our customer collections and cash position. We're looking at that on a very regular basis. Probably to some extent every day as we see the cash collections coming in and we monitor delinquencies. We currently don't anticipate a critical need for new capital for the company. The lines of credit are adequate to meet the need, even with a decline in our cash collections. If that cash collection need gets more severe, then obviously, we'll take additional actions. But from what we're seeing right now, we don't anticipate that being a need. As far as a long-term financing, I think there's an expectation that with the capital program that we have, and a remainder of about $275 million this year and about $285 million next year. There is going to be a need for additional capital to support the capital program, and that's regardless of the COVID pandemic and other things going on. So we do expect - we're currently running the ATM program, and we currently expect to have a debt offering sometime in the period. The timing of which is uncertain at this point.

Got it. And then just in terms of - and this is my last question. In terms of timing? I know and you said you were communicating with the commission, but what is it - could we see a decision sometime here in the second or third quarter this year as it relates to the General Rate Case and some of the disputed items? Or any color that you can share with us on timing would be helpful. And I understand you probably don't have all the answers, but I appreciate any color.

Yes. We're going to find out when everyone else finds out exactly when that proposed decision comes out in public. Our communication with the commission is, frankly, that they have set for themselves the July 1 deadline. That's the statutory deadline, which they extended late last year to July 1. There's, I think, some indications that they're working on it. I think we're feeling though as though they are writing that decision. And so it's not as though it's on a back burner or that the people working on it are not working because of the COVID pandemic. It's definitely being worked on. I just don't think we have a good sense. I think we would love to see a proposed decision in the second quarter. And that would certainly give us a lot more confidence in understanding where the commission is going with the regulatory mechanisms and the disputed items. But no guarantees at this point, obviously.

Got it. And that is July 1, 2020, the date that you just mentioned?

Yes. Correct. Correct. Yes.

And our next question comes from David Katter with Baird.

So I guess, first of all, a clarification question. Do you guys see the delay in the rate case is primarily related to the disputed items that you outlined? Or is your sense there's something else kind of driving the slow decision?

I think that if you go back and look at the way that California has been regulating the water utilities, our case that we got the 2015 General Rate Case, which had a decision at the very end of 2016. It was about the only on time decision that the commission has rendered in a water utility case. Maybe there's been 1 or 2 others. Generally speaking, even though these cases are largely settled, the commission is taking extra time to finalize the work on proposed decisions and decisions in these cases. Obviously, if we'd had a complete full settlement in the case, that would have made it considerably easier for the judge. We did indicate to the judge what the disputed issues were in September of 2019. And we filed the settlement in October of 2019. So there's a lot of processes that go on behind the scenes there, and I don't want to throw anyone under the bus, so to speak, but there's administrative process that it could be held up in a variety of places within the commission's administrative framework. So that's the judge, the people that review the judge's work in that area, the commissioner's offices, the industry divisions, the California Commission is about 1,000 people. And so they do have a bureaucracy there that really checks their work, I guess, I'd say. And they're not always known for being the speediest.

Understood. And maybe a little bit related. You touched on this in your comments, but why do you think kind of the RAM and other accounts issues are at dispute now when they weren't historically. Do you have any sense of what's kind of changing in the attitude there?

There's probably a book to write about that. But to be honest, the ratepayer advocate has been taking the position really since a few months after their settlement with us in 2008. That they didn't like the decoupling mechanisms that they had agreed with us that we should be putting in place to promote conservation. And so ever since then, they've been taking a negative position on those items in our rate cases. It just happens that we were able to settle with them for a variety of reasons. And settlements are confidential, of course, and they're involved, give or take, of a lot of different items. In this case, we were unable to reach a settlement with them. If you look to other cases for other water utilities with decoupling mechanisms, even in the last couple of years. We have found, in some cases, they had no dispute with that company at all. In other cases, the commission said that it was not a - it was not - shouldn't be the subject of a General Rate Case.So in California Americans most recent rate case, the judge and the assigned commissioner actually threw that issue out of the case and said that would be something that the commission should decide on an industry basis. But at the same time, one of our peers, which does not have a full decoupling mechanism has been asking several times over the course of the last several years for a decoupling mechanism. And there's been actually commission rulings against them. And so maybe changing the attitude of the rate care advocate or maybe they're just weren't enough things to trade in the rate case to get to that. But they've been opposed to it for some time. And again, they've not been winning on that issue for some time.

Yes, David, it's probably noteworthy too, that decoupling has been around since the '70s in California, and it's been very effective on the electric and gas side. And likewise, I think we'd argue it has been very effective on the water side. In terms of promoting conservation. And even with the mild winter this year, you're starting to see publications talking about drought conditions in California, et cetera. So from a policy standpoint and price signal standpoint, we feel pretty strongly it's the right policy for the state of California because you got almost 40 million people in the state, and it's growing. And water is a very scarce supply. Likewise, we also know when - for properly recorded balances, and balancing accounts. There's never been a problem in the state of California with the recovery of those items historically. So it's really kind of a policy decision on the front side with the advocate. But we think from a drought preparedness, conservation management, it's the right thing to do. And the State Water Resources Control Board has been doing a lot of work on drought preparedness. And everything that they're doing it lines up quite well with what decoupling does in terms of price signals. So it's a pretty interesting debate between the advocates and us. So we all just have to wait and see now how the commission is going to rule on it.

And our next question comes from Jonathan Reeder with Wells Fargo.

I just wanted to make sure the catastrophic event memorandum account. So that covers the bad - like any bad debt expense increase above that 0.25% that's embedded in your rates, right?

Correct.

Okay. And then as well as those other items. So what are you kind of expect in the full year 2020 headwind might be from - [indiscernible] I know a lot of unknown, but just wondering if you're able to kind of ball park it at all because I'm assuming you aren't going to be filing for recovery until 2021?

Right. Marty has been leading the emergency response team. Marty, I don't know if you have a sense yet of the cost of the extra PPE and the extra sort of safety precautions that we've been taking, that would probably be the biggest driver at this point. As I mentioned earlier, the - I think as Marty mentioned earlier, the uncollectible expense is really hard to tell at this point. We're just about 6 weeks into it in terms of customers' billing cycle. So it's very difficult to predict where that's going. And obviously, something doesn't necessarily become uncollectible even if it's a delayed payment because the customers might pay later. So that's something to factor in as well.

Yes. I think what I would add, Tom, is from a preparedness standpoint, the company was very well prepared. We had plenty of PPE, we had plenty of sanitizer, we had plenty of wipes. We had - the training was all done early in the process. We have - I think some of you know, we have an outstanding Vice President of Emergency preparedness and emergency response, Gerald Simon, who was a fire Chief for his whole career until he retired and joined us. So from a base stock perspective, we are very well prepared. It gets a little more challenging when you have to replenish that stock given the surge in demand that you've seen for PPE. Now again, we had very healthy supply stocks built up from our lessons learned during the fires. So we have not run out of PPE, but I think as we get in the summer months, and we have to replenish that PPE, that's where we'll start seeing those costs. And from what we're seeing or from what we've had with discussions with FEMA, you're seeing more PPE supply stock start to roll in. So that should bring the prices down. But you clearly had a price shock happened for like N95 masks. And luckily, we didn't have to participate in any of that because we had plenty of supply stock on hand of N95 masks.

I see. I appreciate the good commentary and all that. But in terms of like trying to quantify it, there's really no way for to kind of do it at this juncture? I mean I know you based on the financial crisis, the spike in the bad debt expense was really relatively modest. I mean, I think it's kind of $0.02 to $0.03 potential headwind there, but there's just really no way on your end to even kind of to frame it at this juncture?

No. Jonathan, I apologize. It's just too early to know that. Again, we haven't really recorded those costs much in March. We'll definitely have a lot more information at the end of the second quarter. I know that doesn't help right now.

Do you think Tom that be offsetting O&M expenses to potentially cancel out that headwind? I know a lot of companies with employees working on home, all kind of stuff like that. They're seeing some areas there as well as searching to find some other areas in the budgets, where they may be able to flex it to kind of offset that is. Is that than that Cal Water is going through too?

I think you'll see that as well. I know that we canceled all travel really very early in the pandemic crisis. And I normally would have traveled a bit as well as many others. So I suspect that will have some difference, but I guess I just don't know the relative magnitude. You'll probably see deferred training costs, for example, because if we had planned to have people come on-site and do training, that's not happened. We've had to do virtual training and things like that. Our bill for Zoom, I imagine, is a bit higher, but I think Zoom is pretty cost effective.

So it is - I think it's also worthy, Jonathan, that 90-plus percent of our employees are actively working every day. So while we have some corporate employees that can work remotely and some engineering staff that can work remotely, all of our front-line employees are at work every day, and they're incurring their costs they would normally incur in the ordinary course of business. Which is what we want, keep the water flowing at all costs to keep people healthy. So as Tom said, we'll have more visibility in the second quarter on that as some of these costs start to roll in.

I'm showing no further questions in the queue at this time. I'd like to turn the call back to Marty Kropelnicki for any closing remarks.

Okay. Thanks, Jimmy. Thanks, everyone, for going through our results for the quarter. First quarter for us typically is not a quarter we get too excited about. And typically, we do have a loss in the first quarter. Obviously, that was compounded by the delay in the General Rate Case. But we're working our way through that and staying focused on the customer and getting through the pandemic. And again, right now, the most important thing we can do is help our customers out as we get through these unprecedented times. And if we're successful at doing that, we think the regulator will be successful at getting the rate case wrapped up to a fair and equitable position for all parties involved. So with that, we're going to wrap it up. Thank you for your support during the quarter, and we'll look forward to talking to you in July. Thanks, everyone.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.