California Water Service Group

NYSE:CWT

Earnings Call Transcript 2019-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the California Water Service Group First Quarter Earnings Results Teleconference. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. David Healy, Vice President and Corporate Controller. Sir, you may begin.

[David Healy, Vice President and Corporate Controller]

Thank you, Joel. Welcome everyone to the 2019 first quarter results call for California Water Service Group. With me today is Martin Kropelnicki, our President and Chief Executive Officer; and Thomas Smegal, our Vice President, Chief Financial Officer.

Replay dial-in information for this call can be found in our year-end earnings release, which was issued in our quarter end earnings release which was issued earlier today. The replay will be available until June 25, 2019. As a reminder, before we begin, the company has a slide deck to accompany the earnings call this year-end and quarter. The slide deck was furnished with an 8-K this morning and is available at the Company's website at www.calwatergroup.com.

Before looking at this quarter’s results, we’d like to take a few moments to cover forward-looking statements.

During the course of the call, the company may make certain forward-looking statements. Because these statements deal with 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.

[Thomas Smegal, Vice President and Chief Financial Officer]

Thanks, Dave. Good morning everybody. I am going to go through the deck and I will page numbers for the slides that I’m referencing. And I’m going to start on Slide 6, which is the summary of the financial results for the first quarter. The operating revenue for the quarter is down $8.5 million. We'll discuss that, but that is mostly due to our unbilled revenue accrual. Our operating expenses are up $0.9 million related to purchase water costs coming down, but other costs of the company going up.

Our net interest expense is up due to more borrowing and higher interest on variable rate borrowing of $.5 million. And our net loss for the quarter is $7.6 million as compared to a net loss of $800,000 in the first quarter of 2018.

Earnings per share impact of that is a $0.14 increase loss, so $0.16 loss versus a $0.02 cent loss in the first quarter of 2018.

Our capital investments were about $60 million, that's down from about $70 million in the first quarter of 2018. We'll talk about that a little bit later on the call.

So flipping to Slide 7, our financial highlights there's really two big stories, for the quarter, that create the larger loss than we had in the past. The first is the net loss due to our weather and that's primarily due to our unbilled revenue accrual. So we had wet weather in the quarter and actually through the end of the quarter. That impacts how we calculate the accounts receivable for unbilled revenue. Remember that as a utility company, we bill our customers on a daily basis. And so for those customers that we bill early in the month of March, were accruing an estimated a component of the bill for the remainder of the month. That is not included in our WRAM decoupling mechanism. And for those of you who've been following us for a long time that can cause swings in our revenue, particularly in the first quarter when we don't know when the rainy season is going to end. And sometimes in the fall when the hot weather either is extended or ends really California. And so the unbilled revenue accrual was down pretty significantly this quarter. We don't see it a major issue with it for the total year, it's just a seasonal effect.

The second thing that impacts the quarter is that our operating expenses were up, employee wages were up $1.9 million, depreciation and amortization was up $1.7 million, interest expense up $1.5 million, maintenance $1 million, outside services expense $1 million and our property taxes were up $600,000. And while we do have a pretty good revenue increases for the year related to the California Steps’ escalation rate increase that we received in January, as well as the impact of rate increases in Hawaii, and Washington and purchased a rather a rate-based offset in California. What we see is that the fixed costs of operating the utility are going to occur in every quarter, but our revenue is really focused on the hotter summer months. And that's because we have volumetric rate design, and particularly tiered rate volumetric rate design for California, where we're going to get the bulk of our revenue in the second and third quarter.

And so that creates a sort of a seasonal disconnect. As we grow rate base, we're going to see interest costs go up, we're going to see depreciation, amortization and property taxes go up and they may not match on a quarter-to-quarter basis. So we may continue to see difficulty in our first quarter achieving enough revenue to cover the increased costs. And so that's another thing that we're seeing. It's a bit of a long-term issue for us. We do end up recovering that as we go through the year, but it does make the quarters look a little odd. And the third factor for the quarter, which is actually a good thing is that we did achieve a $3.4 million increase in unrealized gain of our benefit plan investments. That's an offset to all of these other factors.

Switching to Slide 8, I think, I kind of said some of these things already. The key thing for us is the bottom bullet point on the earnings seasonality actually made a filing in our rate case, the 2018 California rate case that asked to change the rate design so that we can recover more of our costs and our service charges. And currently the target that we have is 30% cost recovery in our service charges, we're trying to move that up to 40%. That's based on a commission California PUC general decision, which said that the company should do that to stabilize their earnings and to reuse their WRAM balances. However, as an individual decision in each rate case is to how to design rates, so we're hoping to push that forward in this case and we'll find out later in the summer whether that's been successful.

Marty, you want to talk a little bit about the revenue curve specifically.

[Martin Kropelnicki, President and Chief Executive Officer]

Sure, so looking at that Page 9, we included what our adopted revenue curve is for the quarter. So this is what's part of our rate case document and it shows how our revenue, our adopted revenue is distributed throughout the year. And then of course there's true ups and true downs based on seasonality, as Tom mentioned.

So as you can see in Q1 it's always our leanest quarter. We always tell people we don't expect much in the first quarter. And then especially in the third year of a rate case what's interesting this year is you add the effects of the weather and what happened with the weather. And I think there's a couple interesting things to point out to the weather. If you ever study atmospheric rivers, we've had 30 atmospheric river storms that hit the west coast so far this year. So atmospheric rivers basically are very intense, narrow bands of moisture that start building up around the equator and right around the Philippines. And as they move through the various high low systems, and while the jet stream may pick up more moisture and more content of water, and they pick up speed. And then, the jet stream kind of moves up and down the West Coast, almost like a barrel of the gun shooting in a target. And wherever it shoots that atmospheric river, it is very intense periods of rain and snow and storms. And so we've had 30 atmospheric river storms in the first quarter of this year, as a result, that it's the fourth wettest year on record for the state of California. Currently the snow packs in great shape, we're at 162% of our average and in the month of February alone we had six atmospheric rivers storms.

And when you look at the snow pack equivalents, which is theoretically if you took all the snow pack and melted it all at once, how much water do you have? The snow pack equivalents tripled in the month of February. So Q1 is always a tough quarter for us. But when you factor in kind of the intense weather that we saw and the amount of rain, it's certainly had an effect. But as Tom said, we don't anticipate that will affect the results for the year. It really creates the timing difference for us in the regulatory model.

[Thomas Smegal, Vice President and Chief Financial Officer]

Thanks, Marty. So just flipping to Slide 10, the EPS bridge, these are the factors that we discussed earlier, individual expense components that driving us up and down and show the bridge from a $0.02 loss to a $0.16 loss. I won't go into great detail on that, but happy to take questions later on that.

Flipping to Slide 11. Marty, you want to talk about CapEx?

[Martin Kropelnicki, President and Chief Executive Officer]

Sure. Yes. CapEx for the quarter, consistent with the weather effect was down. We had just shy of $60 million of capital investment for the quarter. That's down about 15% from the first quarter of last year. And this is primary due weather days. Again, looking at 90 days in the quarter, we had parts of our service territory throughout the state that had up to 41 days of what we'd call, rain delay days. So it's too wet to have the crews that are working in that open trench, putting that pipe in the ground, et cetera.

So, that certainly had an effect on our capital investment for the quarter. But again, we went from rain – this week, we wish to shift the gears to record heat. We've been in the mid 90's here, so far this week. So it's been pretty intense going from what's been cold kind of winter weather to all of a sudden it being pretty darn hot here in the state of California. So that warm weather means, we will be able to ramp up our capital program and regain some of the ground that we lost during the first quarter.

Just as a reminder, our projections for CapEx that we show in the slide deck farther back, is for $828 million is the three year total that's going to change based on the final outcome of the General Rate Case, which we'll talk about in just a minute. So for right now, it's really kind of a rough estimate and we'll have more clarity about 2019 as we go through the settlement process with the commission, we hope to communicate that later on the year, possibly by the end of July.

If you go to Slide 12, a little update on the General Rate Case. We did file on time our rebuttal testimony. We received the consumer advocate's report on February 22. We have two months at that point to provide our rebuttal to their comments. So on April 23, we filed a little over 2000 pages of rebuttal testimony, it's been filed with the commission. Now, starting right around May 6, we will go into settlement discussions, mandatory settlement discussions and ADR with the state and then go to that process to see where we would come out. So it's the first step to see if we can get to a point where we can settle the rate case or we end up litigating anything. So, right now we're still focused on getting ready for the settlement discussions and seeing where they take us.

On Page 13, we mentioned a couple of other regulatory items. One in February, we filed for the Kona Service Area, the Kukio water system specifically rate case requesting $600,000 of new water and wastewater revenue. That's been filed with the Hawaii Commission. And we anticipate that we'll get a decision on this by the end of this year with rates effective in the first quarter of 2020.

Going down to the next bullet point. We mentioned this on the year end conference call. We've gotten approval on about $7 million of advice letter projects. So these are projects that timing wasn't certain. So you get in the rate case, we get a certain amount of capital and then we had a number of advice letter projects, were timing was uncertain. So the commission says, these advice letter projects, once they're completed you can file for rate recovery. So of the $30 million of advice letters that we had for this three rate case cycle, we've completed about $7 million of those and we filed for a rate relief associate the $7 million. We don't anticipate a whole lot of other projects until the end of this year being filed with the commission. So I don't think we'll be talking a whole lot about advice letter projects until we get to the end of the year.

In addition, there was an advice letter seeking $200,000 of increase that was filed in April and we're waiting to hear back. But again, we'll know more on a couple of these real large project we're working on as we get to the fourth quarter of this year. Tom on the finance.

[Thomas Smegal, Vice President and Chief Financial Officer]

Thanks. So just a couple of notes on financing. We renewed and extended our revolving credit lines, expanded the California Water Service Company, credit line to a limit of $400 million from $300 million. We use this for operating activities including short-term financing of some of the capital improvements, until we can get them close then rate base. And the commission as we've talked with some of you about has given us a two year financing opportunity under the lines of credit. And so that made it, so it was wise for us to expand the amount we could borrow. So that we don't hit that limit before the two year exploration of regulatory authority.

And then second bullet here is Standard and Poor's recently changed our outlook to stable, reaffirmed its A+ rating of the California Water Service Company. Marty, you want to cover the business dev?

[Martin Kropelnicki, President and Chief Executive Officer]

Sure. A couple of weeks ago, we announced our agreement to Kalaeoloa water system on Oahu. So this will get us on our third island in Hawaii. It's a water and wastewater system. And for those of you history buffs, it's the former Barbers' Point Naval Air Station, which is one of their air base that was bombed in World War II, when the Japanese attacked Pearl Harbor. It's about a 3,700 acre area that's been zoned for redevelopment. There's currently a 120 water customers and 80 wastewater customers in the location, in the water system itself. But there's zoning and permits being issued for 1000 new homes to be developed that they're getting the final entitlements on right now.

And we expect that that's going to move forward accordingly. Paul Townsley, who is our VP and Chief Regulatory Officer, he's in Hawaii right now. He met with the commission yesterday as we prepare to file our application to acquire the assets and we anticipate doing that next month. So that's a good news on the business development side. And we look forward to getting our office set up and our operations set up on the island of Oahu.

[Thomas Smegal, Vice President and Chief Financial Officer]

So the next page on Slide 16 and 17, talk a little bit about the decoupling balancing accounts. Again, as we had wet weather in the quarter our adopted sales were 83% – recorded sales were 83% of adopted, that leads to an increase in the WRAM receivable balance. At year end it was $56.1 million and it's now $60.8 million. We continue to benefit from having the sales reconciliation mechanism and we estimate that the balance would be $2.3 million higher actually, if we didn't have the SRM in place. This SRM triggers to review our water sales against adopted and adjust the adopted for the coming year. So we adjusted the adopted for 2019 to take advantage of the fact that we'd undersold in 2028.

And then Marty, I will turn it to you for outlook.

[Martin Kropelnicki, President and Chief Executive Officer]

Sure. So outlook for 2019, not much has changed this year end. A majority of our effort is going to be focused on the successful completion of the California General Rate Case. Again so far all the filings had been on time. As we move into settlement discussions here starting in May. I'm very happy to announce that earlier this week we launched our first Southern California regional call center and we're doing – we're starting to implement regional call centers really to address the growing need for multichannel communications with our customers.

Historically, our service centers have been open 08:00 to 5:00, but we recognize in today's world with technology and cell phones and smartphones, customers like to text, they like to call at different – all different hours and have different vehicles to communicate. So our first regional call center opened up in our East LA office and went live earlier this week. And we anticipate opening up a couple more regional call centers within the state of California over the next 18 months.

One of the probably most important things we've been working on and there are a lot of good lessons learned from fire season last year. If you recall, we had to deal with three major wildfires that affected our service areas, the Woolsey Fire in Southern California, the Mendocino Complex Fire which was around Lake Lucerne and then the Camp Fire in Northern California. So one of the things we've been doing for a number of years or what we call EOC drills, our emergency operation drills, we'd show up at a district unannounced and we do a disaster scenario and then they have to respond to that scenario.

So obviously with all the intense rain this year and the fact that it's been very wet through the end of April. A lot of the underbrush and that thick brush that grows on the ground, it's going to dry quickly and it becomes it helps fuel fire season and it can be very dangerous. So preparing for that and getting ready, that's really important. So far at a district we've had 10 EOC trainings of which five have been what we call community EOC or emergency operations training sessions where we do joint exercises with the local community. And that typically includes the Mayor, the Fire Department, the Police Department and just preparing for disasters. And so that'll be a focal point for us and it has been, will be and will continue to be a focal point for us as we go into fire season this year and making sure that all of our employees are ready.

Capital I mentioned earlier, we hope to have more guidance on capital later in the year as we get through the rate case settlement process. And rate increases in California, Hawaii and Washington offset by increased depreciation and interest cash should provide us the opportunity to regain some of the ground that we lost in the first quarter because of the wet weather. So the other significant point here is we refined our cash estimates for 2019. We've lowered them to be approximately 22% for the remainder of the year.

The next two slides are repeats and we will keep putting these and adjust them as necessary, but the capital investment projection for 2019, 2020 and 2021 represents the amount that we requested in the rate cases as Martin mentioned, we'll update that as we go forward and just shows what we’ve spent on a year-to-date basis. And slide 20, the regulated rate base, again that hasn't changed at all. It reflects the same thing that you saw at the end of the year.

So turning to page 21 just to recap, increased operating expenses were not offset by rate increases, they were due to the rate case, wet quarter, came in at a loss for the quarter. Unbilled revenue was even lower due to the wet weather and again, that's the weather, that's the revenue accrual. So if it's wet demands down your accruals going to follow that be lower. We're keenly focused on emergency preparedness, emergency response, especially going into fire season with the lessons learned from last year.

And we're looking forward to getting into the rate case settlement process with the commission and hopefully wrapping up this rate case on time with new rates effective January 1, 2020. And with that we will open it up for questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from David Katter with Baird. Your line is now open.

[David Katter, Baird]

Hi guys. Thank you for taking the question. First off, maybe I wanted to start digging into the rate case a little bit, I know everything's been on time so far, but you mentioned litigation and if you do progress to litigation, maybe what will someone be the key discussion points do you anticipate at this point?

[Martin Kropelnicki, President and Chief Executive Officer]

Yes, very difficult to say. We have a comprehensive report from the ratepayer advocate, we issued a comprehensive response in the form of a rebuttal testimony. The report doesn't necessarily indicate for us what are going to be their key points that they're unwilling to negotiate on. And we probably didn't tell them what our key points are that we're unwilling to negotiate on, although maybe the areas where we were at the most rebuttal testimony.

So I think it's very hard to determine what issues might get left out of settlement until you actually sit down and have a conversation about whether the parties recognize the value of the other party served decision and whether there can be some compromise there. As we mentioned on year-end, I think that the objections and comments that the ratepayer advocate staff had were routine.

That was not something there that was out of the ordinary. It was not, there were no positions there that they haven't taken in past cases and we have been able to settle past cases. So, I'm optimistic that we'll be able to reach settlement, but you never can tell what staff you have and how that's going to go. So, I will say that in our rebuttal testimony, I think we recognized few areas, where the updated information that they had probably led them to a better conclusion about certain costs than us. But again, whether they will be able to do that and whether that will be able to reach some compromise, this is really unknown at this point.

[David Katter, Baird]

Understood, that's helpful. Thank you. And along the same lines, I know that at this point CapEx is still a projection pending that rate case. In terms of financing that, will you be able to do that with kind of operating cash flow and the new agreement, you just – the credit facility or how should we think about the necessity of an external capital raise?

[Martin Kropelnicki, President and Chief Executive Officer]

I think we have very good liquidity right now. We don't have very much outstanding on the line of credit and so there's plenty of capacity there, Dave. I think at the end of the quarter we had, do you have the number – it’s in the document David, but there's plenty of room on the line to do something short-term there.

So, I don't think there's an imminent need for financing, but one thing I will say is that the company is dedicated to the idea that we need to match the capital structure that's been awarded us at the CPUC and so there will be an equity raise sometime in the next couple of years as we go forward just because the debt issuance that we had last year moved just a little bit out of sync with that CPUC authorization. And so we don't have the exact timing of that at this point, but we do expect a small equity raise to just balance that out.

[David Katter, Baird]

Understood. Well, thank you guys, appreciate it.

[Martin Kropelnicki, President and Chief Executive Officer]

Thanks David.

[David Katter, Baird]

Tom, I think also when you renegotiated, the new credit agreements that are put in place, I think you need to do to enhance the size of the line?

[Thomas Smegal, Vice President and Chief Financial Officer]

Yes, I mentioned that it’s a 400 million to 300 million. So that gives us some additional breathing room as well absolutely.

[Operator]

Thank you. And our next question comes from Durgesh Chopra. Your line is now open.

[Durgesh Chopra, Evercore ISI]

Hey guys.

[Martin Kropelnicki, President and Chief Executive Officer]

Durgesh, good morning.

[Durgesh Chopra, Evercore ISI]

How are you?

[Martin Kropelnicki, President and Chief Executive Officer]

Good.

[Durgesh Chopra, Evercore ISI]

Good. Hey, just to follow up on the first question one of my colleagues asked you, for us to like think about this rate case, ROE like, I mean obviously, ROE is a separate proceeding, so that's not being debated here for us to like basically flex the CapEx number that you’ve asked for. Is that the way – is that basically the way to think about what are the puts and takes in the rate base or are there particular expenses that you are seeking recoveries off that could materially move the needle as well?

[Thomas Smegal, Vice President and Chief Financial Officer]

I think that it’s a – there’s always going to be a movement in the expenses in certain areas that the greater evocate focus is on. So we often see them critical of executive compensation, for example. And we often have a debate that’s ultimately not a large number in the grand scheme of things. But important from a policy standpoint for us to get that right. We don’t see usually a lot of changes to the general operating expenses of the utility.

So we’re really focused on the capital and when Marty mentioned there’s 2,300 pages of rebuttal testimony, probably 80% of that, 95% is capital related, because they delve into details about specific projects. And then as much as we talk about going to a programmatic approach and trying to look at these capital investments that we make on a program basis. There’s still an interest on the other side to look at project-by-project.

And so that’s why you see really sometimes a lot of detail provided back and forth on that. So I’d say fundamentally, it’s a capital related ask and it’ll be a capital related adjustment when we get to a final. And again, the things – the expense items that they should do with our typical expense items that they take issue with.

[Martin Kropelnicki, President and Chief Executive Officer]

Yes, I think as we did our rate case planning, we’re not very keen on increasing overhead at corporate, unless it’s safety, it’s security, it’s water quality. So the core – because we operate on an integrated platform on the back office side, those corporate costs are pretty flat other than you have inflation for wages, things like that. And then your cost of your indirect, so your health care, your medical, et cetera, pension. But it really is a rate case that’s focused on capital.

And our last couple of rate cases have really been focused on capital and the capital delivery numbers. And so as Tom said, we do focus on kind of programmatic approaches, but behind that program we have to justify every dollar at capital and asked to be a justification for every single project. And that’s why when we go into settlement discussions, getting back to Dave it’s kind of first question, that’s really hard to say because there’s 3,000 or 4,000 projects that were submitted as part of the rate case.

And we go through these on a one-to-one basis during settlement discussions with the commission and so despite all the Hoop-Law about California and how electric and gas gets regulated, I can tell you the regulators in California do a good job on water and know our business inside and out and where we spend our money. And frankly, I think that was a great place for us to be in a given the current environment.

[Durgesh Chopra, Evercore ISI]

Awesome. That’s great color. And then just, I mean to extend, you can comment in this. Any thought on, I apologize if you’d answered this question in previous call because I think somebody might have asked you, but once this rate case gets out of the way, any thought on providing like a forward-looking EPS guidance? I mean, most of your I mean the utility – the electric and gas peers do that. You’re seeing obviously some of the water peers do it too. Any thoughts on providing forward-looking guidance after…

[Martin Kropelnicki, President and Chief Executive Officer]

Thanks for that question. I think for us the difficulty is that there are certain years where it’s more likely that we can provide that guidance and certain years in the rate case cycle where it’s really going to be impossible to do that. When you look at right now, I couldn’t give you a 2020 EPS estimate because frankly that’s a test year in the rate case and I have no idea how that rate case is going to come out.

If you ask me in 2020, what’s 2021 going to look like? I probably have a much better answer for that just because we’re locked in California, based on obviously the step rate increases and things like that. But – so it’s a bit cyclical and I don’t want to set up expectations that we’re going to be able to predict this for the year or the year out when in reality, we sometimes aren’t sure. And so, what we’ve done in place of that has been to give guidance on what our rate base is and what we expect the rate base to be and allow the analysts and the investor to look at that and understand that we are in a return on equity of the equity portion of that rate base and to back into those calculations themselves.

[Durgesh Chopra, Evercore ISI]

Understood.

[Martin Kropelnicki, President and Chief Executive Officer]

So that’s what we’ve been able to do and that’s what we’re comfortable with it.

[Durgesh Chopra, Evercore ISI]

Thank you. And can I ask one last follow-up question, on just financing. Obviously, you are inclined to keep the debt-to-equity ratio close to the allowed the regulatory levels, but some of your peers, obviously there is this corporate entity versus the regulated utility entity, right? And so you can structure it in a way that, there’s debt of the parent which would essentially fund the equity at the subsidiary level if you follow where I’m going with this. Any intention of like doing like some sort of a financing, which sort of – at the parent level, perhaps even a higher leverage than what’s approved, but keeping that the equity and debt ratio is intact to the utility level

{***Part – 27-33***}

{***Spart-033***} perhaps even a higher leverage than what's approved, but keeping the equity and debt ratios intact at the utility level.

[Martin Kropelnicki, President and Chief Executive Officer]

Yes, that's a good question. I know that that's a conversation that we have had a lot in the context of M&A and particularly last year when there was the San Jose offer out there, that's not our intention. We intend to have the equity at the operating company be equity of the holding company at this point. We’re happy with credit ratings don't feel entirely comfortable that California regulators wouldn't see through that. And so we want to be very conservative about that and that's always been our approach.

That could change circumstantially if we see a big opportunity, but generally speaking, our Board has given us the indication that they want the debts to be at the operating company.

[Durgesh Chopra, Evercore ISI]

Perfect, thanks. I appreciate you taking the time to answer my question.

[Martin Kropelnicki, President and Chief Executive Officer]

Okay thanks for that.

[Thomas Smegal, Vice President and Chief Financial Officer]

Thank you.

[Operator]

Thank you. And our next question comes from Hailey Sue [ph] with Macquarie. Your line is now open.

[Unidentified Analyst]

[Technical Difficult]

[Martin Kropelnicki, President and Chief Executive Officer]

Okay. Yes and your line are all crackly. But I think I got your question. Actually if you wouldn't mind muting your phone real quick while I answer and then you can come back with [indiscernible]. There we go.

So for the main replacement cycle, we were awarded in the last case a 200 of your main replacement cycle. If you look at our California peers at San José Water, at Golden State Water that's part of American states we look at California, American and others, we see them typically with a 100-year to 125-year main replacement cycle in their systems that have been awarded by the commission. And so we're very interested in pushing that. And part of the request in a rate case was to push it down to an average of about 135 years. Now there are different systems depending on the leak rates and the needs based upon a condition-based assessment that we do. But that was the goal in the rate case. And ultimately we like to convince the commission and our customers that we should have the 100-year to 125-year placement that’s really going to be required over the long-term.

[Thomas Smegal, Vice President and Chief Financial Officer]

And [indiscernible] on that point in the American Water Works Association, their recommended best practice is a 100-year main replacement program. So we have about 6,600 miles of main in the State of California, but we can't – this is time where the programmatic approach comes in. You can't just replace that in one rate case cycle. So having a long-term plan that lays out how we're going to replace that and when is really important. Also California is a drought State and the Governor's office is clearly sticking old. We need to do everything that we can right now to get ready for the next drought, including till we're not wasting water through leaky pipes.

And so all these things have to kind of come together for the rate case and then we have to kind of prove our position in the rate case. But we were successful from going from the 300 year main replacement cycles, the 200 year main replacement cycle. We think the industry benchmarks to our favour and the fact that we have a largest distribution system in the State helps us support why we need to speed that process up.

[Unidentified Analyst]

[Technical Difficult]

[Martin Kropelnicki, President and Chief Executive Officer]

Yes, that’s a fair question. I think we have talked on these calls from last five, six years about unbilled revenue from time-to-time, that’s certainly something that is different from between Cal Water and some of the other decoupled utilities in California. Our accounting and our audit firms have not given us an opportunity to change that. I think we – what we would have to have is a commission order that established here at adopted unbilled revenue or something like incorporated unbilled revenue into the WRAM mechanism.

Unfortunately, when we set up the WRAM mechanism, it's a cache mechanism on the WRAM side. And so that means it doesn't include these accrued balance. And it's just the way – it's going to be the way of life for California unless we can get an order from the commission allowing one of those regulatory changes, and then tap that through the accounting, I think that's the way that would work.

As far as – the real difference here and in water utility spaces to some extent is that we're collecting 70% of our revenue through volume metrics charges. And actually if you look at the total cost for utility, probably 70% to 80% of the total costs are fixed. And so we're dealing with costs, variable revenue and that's the reason for the WRAM really is, because you have a disconnect there. So the effort to move from 30% cost recovery to 40% fixed cost recovery, big deal actually, that really would mute up WRAM balances and some of these changes that we see due to unbilled revenue.

It's going to take some time. It's a big change in rate design and so, you don't want certain customers to be impacted by a change like that, because what you're doing is you're raising the service charges. So if there is a customer out there who doesn't use much water, they're going to see pretty big impact from you raising the service charge by 5%, if you're doing it that way. So it’s regulatory process, regulation is iterative, we expect that we're going to keep trying to push these things.

[Unidentified Analyst]

[Technical Difficult]

[Martin Kropelnicki, President and Chief Executive Officer]

No. We do not have that offer on the table to acquire SJW that was last year. And we're not in a whole lot of attention to what they have going on in Connecticut. We’re pretty focused on the rate case right now. That really is our primary engine, how we kind of power the company and power rate based growth.

And then the second thing on that is really kind of the safety issues. And if you’ve followed the – what the governor has done, he has this wildfire commission, there is a lot of stuff going on in the State on inverse condemnation. This commission is looking at, how do we deal with climate change in the upcoming kind of seasonalities because there is an anticipation that these seasonality swings will become more intense as climate change takes effect.

So we've been focused on our regulatory policies and the inverse condemnation issues up in Sacramento and then the rate case. So we haven't really paid a whole lot of attention, I haven't read their file in Connecticut. We typically won't comment on any other company’s M&A activities, we usually just talk about our own activities because those were the only thing which can really control.

So I can’t really give any comment – colour on that, other than it is not on our radar screen. And I don’t anticipate it beyond our radar screen at anytime in near future.

[Unidentified Analyst]

Perfect. Thank you.

[Operator]

Thank you. And our next question comes from Jonathan Reeder with Wells Fargo. Your line is now open.

[Jonathan Reeder]

Hey, Marty and Tom, just one quick follow-up. I know you said the hearings are in May – sorry, the settlement discussions start in May. One of the hearings slated to begin just kind of wondering how much time you have to try to hammer out a settlement between…

[Martin Kropelnicki, President and Chief Executive Officer]

Yes. So right now, it’s actually pretty quick turnaround…

[Thomas Smegal, Vice President and Chief Financial Officer]

25 days.

[Martin Kropelnicki, President and Chief Executive Officer]

Yes, I feel as though the hearings maybe tentatively scheduled even for June. Typically if the parties are making good progress, the commission will allow an extension of time for that hearing. But I know just looking at one of our peers, I was looking at the proposed decision for Golden State and it appeared that they spent a lot more time on settlement than just a month. So I think that the commission will continue to be flexible with that, if there's progress being made.

[Jonathan Reeder]

Okay. I’m having the idea, if you can't settle all the issues, I mean, guess what you can done in final hearings to simplify the hearings.

[Martin Kropelnicki, President and Chief Executive Officer]

Yes. I mean again, not to point that peers, but these rate cases are extremely complicated, we're talking about, again, 1,000 of pages of testimony on both sides and many, many different issues surrounding lots and lots of different projects and expense categories. And one of the utilities didn't settle anything few years back and their rate case took an extra, I think at least a year, because you're asking an administrative law judge to make a decision on a 1,000 topics. And so certainly, I think it's in the interest of expediency for us to make a good faith effort to settle as many issues as we can.

And if you look at our track record, we've never really walked into a judge and said, we have no settlement and all. We've left out three or four issues from time-to-time when they were just intractable, we couldn't get an agreement from the staff. But, generally speaking the commission has got a paver settlements in rate cases like this because otherwise they just get so bogged down with the detail.

[Jonathan Reeder]

Alright, okay. Well thanks for the additional details today and good luck as you enter those settlement agreements.

[Martin Kropelnicki, President and Chief Executive Officer]

Thanks, Jonathan. I appreciate it.

[Thomas Smegal, Vice President and Chief Financial Officer]

Thanks, Jonathan.

[Operator]

Thank you. I'm not showing any further questions at this time. I would now like to send the call back over to Marty Kropelnicki for any closing remarks.

[Martin Kropelnicki, President and Chief Executive Officer]

All right, well thanks everyone for joining us here today. If you have any follow-up questions, Tom and I are generally around all day to day to take those follow-up questions. And we look forward to getting into our busy season, where it's not so wet and getting more capital in the ground and getting on with the general rate case and trying to get that wrapped up. So thank you for your support and have a great day.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a great day.