California Water Service Group (CWT) Q4 2020 Earnings Call Transcript

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California Water Service Group (CWT 0.73%)
Q4 2020 Earnings Call
Feb 25, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the California Water Service Group Year-End 2020 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference to your speaker today, David Healey, Vice President and Corporate Controller. Please go ahead, sir.

David B. Healey -- Vice President, Controller

Thank you, Victor. Welcome everyone to the 2020 year-end and fourth quarter earnings results call for California Water Service Group. With me today is Marty Kropelnicki, our President and CEO; Tom Smegal, our Vice President and Chief Financial Officer; Paul Townsley, our Vice President of Business Development and Chief Regulatory Officer; and Shannon Dean, our Vice President of Customer Service and Chief citizenship Officer.

Replay dial-in information for this call can be found in our year-end earnings release, which was issued earlier today. The replay will be available until April 26.

As a reminder, before we begin, the Company has a slide deck to accompany the earnings call this quarter and year-end. 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 and year-end results, we'd like to take a few minutes 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 risk 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 Commissions.

I'm going to pass it over to Marty to begin.

Martin A. Kropelnicki -- President and Chief Executive Officer

Thank you, David. Good morning, everyone. Thank you for joining us as we recap our 2020 efforts and released our 2020 results. We thought we would do it a little bit differently this morning. I'm going to start off with some brief comments, overview in the year, and I'm going to hand it over to Tom, and then we'll go through our normal deck.

I want to do that because, almost by every measure, 2020 was a year like no other. We started the year with a delay to general rate case, that was almost a year late that we were able to book here in December and we finished the year 2020 with record earnings. It was a year of record capital spending as we invested almost $300 million in our infrastructure improvement program, which is up 9.1% from 2019, which was our old record. As part of this program, we replaced a record 169,000 feet of main during 2020, and we completed the largest single capital project in the Company's history, the Palos Verdes Peninsula Water Reliability Project, that went into service in the fourth quarter of 2020. We closed on our transaction of our acquisition of Rainier View Water, which doubled the size of Washington Water, and as many of you may have noted, we increased our dividend 8.2% earlier this year in January given the strong financial position that we were ending the year with.

At a time when many companies were cutting spending and adjusting to the economic shock associated with the pandemic, we recognized the critical role our economic activity plays in the communities that we served. As part of this, we donated thousands of units of PPE to first responders and the communities that we serve, and many of these communities that were under prepared were more the rural communities. We donated a record $1.7 million to various community support organizations that support our customers during a difficult time with the pandemic. We increased the size of the Cal Water philanthropic scholarship program out for all eligible customers and the communities that we serve, and we recorded a record $51.4 million in diverse spending on diverse suppliers that help us achieve our mission throughout the service. We forgave more than $400,000 of overdue balances for customers struggling to pay their bills. And, of course, we suspended shut-offs very early on during the pandemic to ensure our customers have the water they needed to fight the pandemic at their homes.

On the governance side, we completed the first-ever ESG materiality assessment that lays the foundation for our continued work on climate change, sustainability, conservation, and other major ESG, an enterprise wide risk that can affect our operations. We ended the year with zero primary and secondary water quality violations. And despite the worst fire season in California history, coupled with numerous public safety power shutdowns, none of our customers experienced any major outages during the dry, hot summer months in fire season.

The Cal Water team, our water professionals operated safely seven days a week, 24 hours a day, 365 days a year, doing what they do best. And we accomplished all of this during the worst pandemic in the last 100 years. It was truly a year of countless challenges and many unknowns and we're very proud to share our results with you here today. Having said that, I do want to take a special moment to thank all the Cal Water employees for their hard work and dedication that has led to the outstanding results that we noted during 2020.

And with that, I'm going to turn it over to Tom to start us off, going through the deck. Tom?

Thomas F. Smegal -- Vice President, Chief Financial Officer and Treasurer

Great. Thank you so much, Marty. I am going to start talking about the slide deck on Slide 5, if you want to follow along, if you have a copy of the slide deck in front of you. And this is our traditional table of results and I'll just highlight a few key results. As Marty mentioned, our net income was a record. It was $96.8 million for the year 2020, that was up a little bit over 50% for the year. The earnings per share of $1.97, again was up over 50% from the earnings per share from 2019. And the capex that Marty mentioned, almost $300 million, that was up 9% from the year before.

For the fourth quarter, which we'll also talk about briefly, we did see increased earnings per share of $0.31 versus $0.24 in the prior period, and net income of $15.5 million versus $11.3 million in the prior year at the same time.

So, let me talk a little bit about the financial highlights and what led to this result on Slide 7. The increase was primarily due to the adoption of the California General Rate Case. As those of you who have been following us know we were waiting for a final decision on that rate case throughout the year and did in the third quarter book what we had anticipated to be the final results of that rate case that turned out to be correct. The rate case was adopted on December 3 without any changes or material changes from what was expected to be adopted at the end of our third quarter. So, the rate case really added to our revenue and net income. It also lowered the adopted purchase water and purchase power expense. And when those items came in a little bit higher during the course of 2020, we're allowed to book revenue associated with the balancing accounts that we have for the modified cost balancing account associated with purchase water, purchase power. And so, what you'll see is that, margin between revenue and water expense, those what really that -- that's what really increased our earnings for the year.

One other big factor that is -- both the factor within the rate case and outside the rate case are our lower effective income tax rates. So within the rate case, we are returning to customers our excess deferred taxes associated with the lower federal tax rate in the Tax Cut and Job Act, and that is a planned program over about a nine-year period. So what you'll see in our rate cases is lowered income tax expense, and lower revenue, that goes directly back to customers. And then the second item was, we exceeded our expectations for repairs and maintenance deductions. And this is the tax treatment that we have on mainline replacements within our water systems, we're able to expense that for tax purposes and that exceeded the estimate in the General Rate Case and added to our earnings for the year and for the fourth quarter.

And Marty and I have mentioned enough of the capital investment, but just to highlight again, $298.7 million in capital improvements, including the completion of the Palos Verdes Peninsula Water Supply Reliability Project.

For the fourth quarter, some of the same factors that I talked about, the rate increases from the General Rate Case, the increased repairs tax deductions, offset by general and normal operating cost increases.

We do have our traditional bridges on Slide 9 and 10. I won't go over these in detail as I normally don't. But as you can see, the general rate increases and regulatory mechanisms that modified cost, balancing account I referred to. That's the bulk of the difference in earnings between 2019 and 2020, followed by the repairs tax treatment. And you can see the other factors as you go through the bridge there.

So, I did want to take a moment as I've been doing for the last couple of quarters and talk about our earnings breakdown, give some context and understanding about how the Company makes money. We'll talk about this for 2020 and for 2021. So, in 2020, we estimated that the California Rate Case adopted a net income of $76 million, and if you see -- this is on Slide 11, if you see down below, we had some differences from the GRC adopted earnings associated with our California regulated operations in -- some good and some bad. In particular, adding to expense was a recorded bad debt that was higher due to COVID and we'll talk in more detail about that later in the call. But we did see, in some sense due to COVID, lower travel cost, training cost, outside services cost for the Company as we were in lockdown and, obviously, employees were just not getting out in other places through travel and training.

We had lower depreciation and property taxes then were adopted in the rate case, and this is really a timing difference, and as you'll see on the next slide, we expect that to revert back to normal next year.

Finally, going up to the outside of the California Rate Case, our regulated activities outside of California added $3.8 million of net income and additional net income for the year came from sort of what I would call outside of our core regulated earnings, the recognition of AFUDC equity was $5 million, the mark-to-market on our benefits plans investments added $3.4 million, our non-regulated activities added $1.4 million and the repairs tax treatment added $3.3 million above what was allowed in the General Rate Case in California.

So moving to 2021, just a little bit of a kind of a walk through about what to expect and what to think about the variables for 2021. We have had a step rate increase in California, as well as the inclusion of the Palos Verdes pipeline in our rates. And so, we believe that we have regulated rate base in California of $1.7 billion and that gives us an adopted net income of $83.5 million.

Now, as I mentioned, the depreciation and property taxes are likely to be higher due to those 2020 plant additions. We record depreciation beginning in the year following the year that we install a new facility. Our bad debt expense will likely continue through most of 2021. We're under a moratorium for collections process, at least through June in California and at least through the first quarter in other states. Part of what happened in 2020 was due to the rate case delay, we delayed hiring some of the authorized physicians associated with that rate case because we were uncertain as to how the commission was going to finally decide that issue. We, therefore, have to hire some authorized physicians in 2021 and that will add wages.

Our other states will perform, we expect similarly to how they performed in the past. And then this outside of co-regulated, just to make sure the analysts are aware, we have this recognition of AFUDC, which is likely to be lower in 2021 after completion of major projects in 2020 and what we mean there is that, this AFUDC is recognized on the construction work in progress and we believe we're going to have a less balance over time of construction work in progress in 2021 just because we've had some major projects that were sitting in progress for a long period of time in 2020. The mark-to-market on those benefits plans investments, as well as our unbilled revenue are always unknowns for the Company, and they do vary from quarter-to-quarter and year-to-year. Our non-regulated activities have some variability.

And then finally, that last piece which added to earnings in 2020, which was the net income effect of the state tax repairs deduction, that is going to be determined by our construction completion in 2021. So, that's another variable for the Company.

So that is my quick outlook on explanation for earnings of 2020 and outlook for 2021. And I'm going to turn it over to Marty now to talk a little bit about the details of our COVID-19 pandemic response.

Martin A. Kropelnicki -- President and Chief Executive Officer

Thanks, Tom. So, yeah, looking ahead with COVID and looking backwards and looking forwards kind of seeing where we are, we're going to continue to operate with enhanced safety protocols. Cal Water developed a five-stage COVID response plan. We have been operating in Stage 3 of that plan, which is keeping people on pods, strict PPE requirements, dispatching employees from remote locations versus having them come into a central location. 90% of the Cal Water employees have been at work every day throughout the pandemic. Some of our corporate staff has worked remotely. But most of our assets are in the field and most of those assets in the field have been productive all year, which has what helped lead to the record results that we've seen for 2020.

We're going to continue to suspend water shut-offs at least through the end of the first quarter of 2020. Different states have different mandates. California is under a mandate. But we will work through that. And we've seen a increase in customer receivables greater than 90 days. It's about $9.6 million and that's really the effect of the economic shock and people not being at work. As a result of that, we have increased our reserve for doubtful accounts from $2.7 million to $5.2 million in the fourth quarter.

Our COVID-related expenses during the fourth quarter about $400,000. There is a potential for recovery in both Hawaii and California, in that we have memo account established with both states for COVID-related expenses.

It's interesting to note that water sales in the aggregate, we're close to the adopted, which was -- we came in about 96% of adopted sales, which is up about 4.9% from 2019. It was interesting that we've seen increases in residential usage, offset by lower business and industrial and public authority usages. So, as people at [Phonetic] sheltered in place and businesses remain closed, we've seen more usage on the residential side and they came pretty close to kind of netting out.

We ended the year with strong liquidity. We had $44.6 million in cash and current borrowing capacity in excess of $180 million on our line of credit, which are subject to certain borrowing restrictions.

So, overall, Cal Water has weathered the COVID storm quite well. Thankfully, we don't have any loss of employee life with COVID. I think all of us know somebody or work with somebody that has lost their life to COVID and thankfully at Cal Water, all of our employees have been safe, and I attribute that to an outstanding safety program and early adoption of strict PPE requirements, given our safety team here at Cal Water.

For something new and something we spend a lot of time working on in 2020, I'm going to turn it over to Shannon Dean to talk about our ESG efforts. Shannon?

Shannon C. Dean -- Vice President, Customer Service and Chief Citizenship Officer

Great. Thank you, Marty. So, before I dive into our ESG highlights for 2020, I'd like to start with the strategic framework we developed eight years ago, which you see on Slide 14, if you're following along. The point is, long before ESG was top of mind for so many investors, we were setting strategy around ESG. You can see on our map, right there in the center, we set our purpose was to enhance the quality of life for customers, communities, employees, and stockholders, and we were driven by our core values of integrity, service, value, corporate citizenship. So, doing the right thing has always been in our DNA.

Moving on to 2020, something that we recognize, even though we were doing so many good things in the ESG space, we weren't doing a very good job of telling our story. So, as Marty mentioned at the outset, we completed a materiality assessment early in the year to help us identify the top most relevant ESG topics for us to help sharpen our focus. And now, we're working on an ESG report that aligns with SASB and references GRI, which will be available in early April. So that's the reporting side. As for ESG performance, 2020 was a very good year despite all of its challenges.

On the environmental side, we combined our water supply and demand management teams, so that we can sharpen our focus on climate change and we also completed Phase 1 of a new climate change study that's really going to help us going forward. And then we also continued our industry-leading conservation program and programs that we implemented in 2020 will save an estimated 43 million gallons of water every year, which is pretty impressive when you consider much of the year we were in lockdown mode.

Marty mentioned on the social side all of the wonderful things we did with the backdrop of COVID, whether it was forgiving customer balances or keeping our employees safe or really supporting the charitable organizations that needed us so much.

And then when it came to governance, I would like to highlight that we introduced at Corporate Citizenship in ESG practice section to our proxy to enhance our disclosure. We held our first of virtual-only stockholder meeting, and we added guidelines to our corporate governance guidelines regarding Board diversity. So, I think we had a very good year in 2020 and I will say in '21, we're really looking forward to progressing on our journey and doing even more and look forward to reporting on that on a regular basis.

And so, with that, I'll hand it off to Paul.

Paul G. Townsley -- Vice President, Corporate Development and Chief Regulatory Officer

Thank you, Shannon. As Marty reported earlier, in 2020, we completed our California General Rate Case and new rates are going into effect -- have gone into effect in 2021. So that's been positive. But we are, as 2021 dawns on us, we have a very full regulatory plate for us this year. We will be filing a cost of capital application with the California Public Utilities Commission on May 1, that a triennial application, and so we are due to file that this year. Also, this year, in July 1, we will be filing our triennial California General Rate Case. And remember, that those rates will be effective -- expected to be effective on January 1, 2023. So that's going on. We also have a number of other smaller rate cases in our other states that we will be working on this year. So it is really a very full plate of regulatory activity.

In the California General Rate Case, we anticipate that we will be filing and requesting continued strong capital investment for our communities in California. We're also going to be working on our rate design in this upcoming rate case, continuing to refine and improve our sales forecast and water cost forecast, and we're doing that because we're just getting better and better at it. And also, in this particular case, we expect that we will have a discontinuance of our RAM or our revenue decoupling mechanism. So, we're really focusing on how to adjust all of these things so we can still continue to provide affordable and reliable water service and enhance conservation.

So with that, I will turn the slide deck over to Tom.

Thomas F. Smegal -- Vice President, Chief Financial Officer and Treasurer

Thanks, Paul. So, just as a little bit more color on our capital investment update. As we've been mentioning, we invested $298.7 million in developer and Company-funded capital investments in 2020. They exceeded our target range. Our target had been, I think, $260 million to $290 million, and that was primarily due to the favorable working conditions we had throughout the year. With COVID there was a lot less traffic and a lot more availability of contractors and subcontractors. So we were able to accomplish more than we had anticipated.

Our target for 2021 is $270 million to $300 million. Remember, we're in the third year of the California General Rate Case authorization that came out of the 2018 General Rate Case. That was a total of about $830 million over three years. And so, we've got the California spending plus spending in other states, it gets us to that target range for 2021.

When we do file the rate case that Paul just mentioned? We anticipate releasing our capital plans for 2022 through 2024. And this will be our estimate based upon our rate case filing and, obviously, that filing will be subject to adjustment based upon the Commission' action throughout that process of that case.

Flipping to Slide 18. I wanted to mention that development that's happening today. We're announcing today that we have priced $280 million in first mortgage bonds through a private placement process. We priced $130 million of 30-year bonds with a coupon of 2.87%. And $150 million of a 40-year bonds with a coupon of 3.02%. The bonds are going to be funded on May 11 of 2021. We're very excited about the opportunities that this provides for us to continue our capital investment program, to balance debt and equity for the Company as we go forward with major capital improvements that we've been undertaking.

One of the things I will highlight and, again, ties back to what Paul just mentioned is that, this issuance, along with the other issuances of debt that we've done in the last couple of years is going to bring our weighted average debt cost for the Company -- for California Water Service Company below 4.3%, benefiting our customers through the cost of capital, process and application beginning in 2022. The adopted weighted average cost of debt back in the 2018 cost of capital, I believe, was 5.51%. So, we've seen a substantial reduction in the overall debt cost that we can share and pass that back on to our customers.

As you all know, we are running an at-the-market stock issuance program, that's the other side of this debt and equity position. And in 2020, we issued $82.6 million worth of -- or we realized $82.6 million on stock sales through that at-the-market program. We do expect to raise about $300 million of equity over the duration of that program.

On Slide 19, for those of you who've been following us for a bit of time, this is a little bit different look at our capex chart. I wanted to emphasize that we've added the line item here of depreciation. So what you can see is the bars on the chart on Slide 19 reflect our capex that's happened over that period of time and the line that's shown is our accumulating depreciation for each of those years. And what we mean to derive from this is that, the Company has very clearly been investing capital at a rate that is over 3 times depreciation for the period of 2015 through 2020. I think I calculated this at 3.1 times depreciation. But it's over 3.1 or over 3% -- let me say that again, over 3 times depreciation, and we're hopeful that that can continue going forward to the next General Rate Case.

As you can see, the estimate for 2021, the range that we gave was $270 million to $300 million, and the $285 million represents the midpoint of that range.

On Slide 20, this is our traditional rate base chart, this has been updated with our adopted rate base for 2020 and the adopted range of rate base for 2021. As you can see, we have an adopted rate base of $1.81 billion right now and we have a few advice letter projects that remain to be approved in California. Those projects can be approved during the year or during next year. And so, that's listed as a variable from the high to low for rate base for 2021.

So, I'm going to leave it at that, and let Marty take over on Slide 21.

Martin A. Kropelnicki -- President and Chief Executive Officer

Thanks, Tom. Looking at the business outlook for 2021, a couple of things to note. First and foremost, we have a new Commissioner at the California Public Utilities Commissioner. We look forward to working with Commissioner Houck in her new assignment, as she starts her new job at the Commission. She has a legal background, spent a number of years at the ALJ, she has been a commission advisor. So she is someone who knows the rate-making and regulatory world well and we think she was a fine pick to add to the California PUC behind Liane Randolph, who termed out. In addition, we have a new Head of the Water division, who was named Terence Shia. So we look forward to working with Terence in his new role as he heads up the water division at the California Public Utilities Commission.

We have like just really kind of a handful of things that we are going to be focused on really the first half of the year. One, as Tom mentioned is, filing the 2021 General Rate Case, in particular, with the new rate design, getting rid of decoupling. So, we're very keenly focused on that. We're also very keenly focused on the affordability impacts of not having decoupling of what it means for lower income customers. So the team is busy working on that and trying to work on a very progressive rate design that kind of meets the needs of all our customers.

Second, we will be filing our cost of capital. The PUC denied our request for a one-year extension on our cost of capital. The rationale was frankly pretty good, which is that we hadn't had a cost of capital proceeding in four years and it's just time to come in. So the rates team is busy working on that.

As I mentioned earlier, COVID. COVID is not going away anytime soon, and we'll continue to monitor and track the changes in the CDC guidelines of what that means for our employees, making tweaks and adjustments as we go through the ebb and flow or the peaks and valleys of the pandemic with the same goal overall goal in mind, which is keep customers safe, keep our employees safe.

And then as Shannon mentioned, we're going to continue our investment in ESG efforts. We took a big quantum leap in 2020 getting that materiality assessment done. As Shannon said, it's in our DNA. We've just realized we got to explain things a little bit better and be a little bit more transparent. And I think you're going to see us continue to make big strides on the ESG side to improve our transparency for our investors.

So, in summary, as we wrap up, what was a challenging year, we performed very well through the pandemic and with the delayed General Rate Case, we got -- finally got that done. We ended the year with record earnings paired with record capital spending. We kept our employees and our customers safe and try to do everything we can to help, both of those sets of individuals, our employees and our customers to the fullest extent possible. We need to thank our Board for allowing us to overspend our budgets on contributions and for giving some of the bad debt, the Cal Water Board was fantastic to work with during the crisis and quickly recognized the role that we play in terms of helping our communities out.

It was a strong year of business development, probably the strongest year we've had in the last 20 years and the business development team has continued their work with a full pipeline of potential opportunities for the Company to consider. And overall, we just look forward to starting the New Year with a new set of challenges and getting 2020 behind us. It truly was a long year, although we had great results, don't kid yourself, those results took a lot of people's efforts, and we're very thankful for the team that achieved these record results.

So with that, Victor, we're going to open it up for Q&A, please.

Questions and Answers:

Operator

[Operator Instructions] Our first question will come from the line of Ben Kallo from Baird. You may begin.

Benjamin Kallo -- Robert W. Baird & Co. -- Analyst

Hey, guys.

Martin A. Kropelnicki -- President and Chief Executive Officer

Hey, Ben.

Thomas F. Smegal -- Vice President, Chief Financial Officer and Treasurer

Hey, Ben.

Benjamin Kallo -- Robert W. Baird & Co. -- Analyst

Congrats on 2020. You've navigated through all that. It's hard from our standpoint to know what all the work that your employees did, but thank you. On the numbers, just for '21, I think the consensus has numbers ticking down. Yeah. I think that's a product that may be not having the rate case fully baked in. But maybe if you could just help us with that? And then '22, how we should think about, like longer-term growth as you go through the next rate case and onwards? Thank you.

Thomas F. Smegal -- Vice President, Chief Financial Officer and Treasurer

Yeah. Ben, let me start and this brings us back to Slide 12 in the deck and we can talk certainly more about that with other questioners, as well as yourself. But -- so we do see -- if you look -- if you kind of compare Slide 11 and Slide 12, if you will, we do see an increase in earnings in that core California regulated authorized earnings because of the jump in rate base. And so, we're looking at a rate base of $1.6 billion in 2020, $1.7 billion in 2021. And so, that is a positive to earnings. And think about that in the longer-term, when I showed the capex growth, we've got roughly $175 million of additional capex minus depreciation every year, that's going to keep adding to the rate base of the Company and that will continue to grow the earnings of the Company. These other factors that we talked about on Slide 12, some of which were additive to earnings in 2020, they may or may not be as additive in 2021. And so, that's kind of the message there is that there's a lot of variables outside of that kind of core regulated earnings potential.

I mentioned a couple of things that were very favorable for us this year, particularly I wanted to highlight the depreciation expense. And the depreciation was lower than was adopted, so we made more money on the California regulated operations than was adopted for us, and that's really a timing issue because as we complete project, the depreciation comes in the next year. We had a lot of major project completions in 2020, that's going to hit us in increased depreciation in 2021. So that's a factor which will tend to pull our earnings back a little bit toward that regulated calculation. So, some of the things like that would lend you to believe that 2021 is going to be a little bit more moderate. But as I say, we do have the increase in rate base and you'd expect that would increase the earnings of the Company in a general way.

Does that makes sense, Ben?

Benjamin Kallo -- Robert W. Baird & Co. -- Analyst

It does. Maybe on the bus dev --. Go ahead.

Thomas F. Smegal -- Vice President, Chief Financial Officer and Treasurer

Go ahead. No, no. Go ahead.

Benjamin Kallo -- Robert W. Baird & Co. -- Analyst

On the bus dev front, Marty or Paul or Tom, the Washington deal was -- it was good. I mean, how do we think about where your focus on geographic? I know you probably don't want to do this on a live conference call. But where you're focus on buying assets? And then maybe weave in how you think any kind of infrastructure from what you've seen to the -- impact you or not impact you? Thank you.

Paul G. Townsley -- Vice President, Corporate Development and Chief Regulatory Officer

Hi, Ben, this is Paul. I will talk about the bus dev side of it. We have a very full pipeline of opportunities that we are working on. It's an exciting time for us to be in business development. And we do continue to focus on the states that we are in and states that are in the western part of the US. We believe that's our sweet spot. You've seen a number of other acquisitions that we've announced over the last couple of years, and you will continue to -- should continue to see that kind of activity from us. But I can't talk about anything that's in the pipeline until we're ready to announce it.

Martin A. Kropelnicki -- President and Chief Executive Officer

Yeah. The only thing I would add to what Paul said -- Ben, this is Marty, is, we tend to be value buyers. So we like acquisitions that are potentially undercapitalized that maybe have some operating challenges that need capital, and where we can raise them up to our operating standards. And so, we're not out doing M&A because we have lack of growth in the core rate base growth. Clearly, at a 3 times depreciation rate, we're growing rate base just by following our capital improvement program, our investment program that we have within the Company. But as Paul said, we're out there looking kind of in all the corners of the states that we operate in, looking for a good kind of small that to potentially mid-size companies that are ready to sell and move on and need a capital infusion and need some help, and those are the ones that are ideal for us. So, I think we'll stay kind of focused on the value side of the equation as we evaluate these deals.

Benjamin Kallo -- Robert W. Baird & Co. -- Analyst

Thanks and congrats on the ESG front, Tom.

Thomas F. Smegal -- Vice President, Chief Financial Officer and Treasurer

Thanks, Ben.

Martin A. Kropelnicki -- President and Chief Executive Officer

Thanks, Ben. We appreciate it. Hey, Tom, just the one thing I would add to your point about the depreciation. We had the record investment of almost $300 million in 2020. But we also closed a record $391 million to plant and that's that big bubble that will come through and sharpen [Phonetic] depreciation in 2021.

Thomas F. Smegal -- Vice President, Chief Financial Officer and Treasurer

Thanks, Marty. That's right, yeah.

Operator

[Operator Instructions] Our next question comes from the line of Angie Storozynski from Seaport Global. You may begin.

Angie Storozynski -- Seaport Global Holdings LLC -- Analyst

Thank you. So, I have a question on the cost of capital proceeding, since you guys noted the Commission wants you to come in because it's been four years since the last proceeding. Now, did you talk about lower interest rates? And I'm just wondering, if it's mostly about the cost of debt or the cost of equity. I mean, and also how that change coming in 2022 would impact your earnings, i.e., are you currently meaningfully benefiting from lower interest rates on the debt side outside your earnings are concerned?

Thomas F. Smegal -- Vice President, Chief Financial Officer and Treasurer

Sure. Let's figure out, Paul and -- maybe Paul, I will start with the kind of the last side of that. So, there is a couple of things going on that are difficult throughout 2020 and continuing through 2021. We do have a lower cost of debt on a weighted average cost basis. But we have a little bit more debt than we would normally anticipate and that is due to this collections and primarily the collections issue and also the RAM issue, and frankly, the third thing being the delay in the California Rate Case. So we have a number of dollars that are out there that are owed to us, and that requires us to increase our financing cost to maintain the cash reserves at the Company.

So, I would say, are we net-net benefiting from lower interest rates? I think that it's pretty much awash right now. And we would expect it to improve as we collect the cash from the '21 General Rate Case. But I think going forward, as those things normalize out, obviously, it's important for us to pass on to customers the lower cost of debt. And I think that's going to be a key consideration of what we do in that cost of capital filing. I think when we look at it, I think the overall rate change associated with the cost of capital that we will file in May, it's going to be pretty moderate considering that lower cost of debt that's out there. So, hopefully that helps.

I don't know, Paul, do you have any other thoughts on that issue?

Paul G. Townsley -- Vice President, Corporate Development and Chief Regulatory Officer

Yeah. On the equity side, we are -- to be honest, we're still in the middle of doing the analysis of all of that. We still have over two months before we make our filing. We have our -- we're doing our research now on appropriate cost of equity to include in the filing. So, it's too early for us to really be able to say what we are anticipating filing for. And then, of course, it's a -- there is a process that we go through, the consumer advocate will file their points of view. And, of course, we're also doing this in conjunction with three other water utilities. So, what the Commission ultimately decides toward the end of this year, is really unknown at this point.

Angie Storozynski -- Seaport Global Holdings LLC -- Analyst

Good. And then, separately, as you will be preparing to file your next GRC, which will have no full RAM. Is there -- and I understand that you're talking about changes in the rate design, which will be embedded in this filing. But I'm just wondering if there are some lessons learned from what you're seeing from San Jose Water two years of coming below their water production volumes, meaningfully below. And if you feel like that's a risk that you are ready to manage and how you're planning to address it in that filing?

Paul G. Townsley -- Vice President, Corporate Development and Chief Regulatory Officer

So I will start. This is Paul. With the loss of the co-decoupling [Phonetic], it's obviously very important that we are as accurate as we possibly can, not only on the water sales side, but also on the water production cost side, the RAM and the MCBA, if you will. And we've been spending a tremendous amount of time focused on both of those issues in preparation for this case. At the end of the day, their forecasts and our forecasts are what we actually see in 2023, '24 and '25 are uncertain, but we're really trying to anticipate potential turndowns in terms of water sales because of drought or economic conditions and trying to make sure that our risk exposure is equal. We have an essence that has picked up a cost of production and water sales in which our downside risk and our upside risk are balanced. So, it's an iterative process. We've been working on this for months and months so far. We expect that when we're ready to make our filing in July, we're going to have pretty solid numbers. But at the end of the day, we'll just have to see how that all plays out.

Angie Storozynski -- Seaport Global Holdings LLC -- Analyst

Good. And my last question on the non-California systems. I'm assuming that given that Hawaii is in it and given the downturn in tourism, that you would expect to see some higher realized ROEs on that non-California rate base as soon as 2021 simply because, again, the -- there's is going to be a pickup in sales volumes. Is that fair?

Thomas F. Smegal -- Vice President, Chief Financial Officer and Treasurer

I think that just from a business perspective what Marty said is key and that is, we don't know where COVID is going. It looks really good right now. If you draw a straight line through the direction of the COVID cases and the pandemic and the vaccinations, you'd say, boy, we're going to be out of this by summer and everything is going to be lovely, but we don't know that that's actually the case, right? There could be another surge, there could be other variants that come in. And so, I guess, if you suppose that COVID situation improves to the point where people are wanting to travel to Hawaii, that's going to be a plus there.

I think we have favorable rate designs in Hawaii, we did not see as big a downturn in profitability as you might expect given that we have high volumetric charges that cover high purchase electricity costs. And so, if you look at -- as we do internally, we look at the margins in Hawaii and, frankly, considering that the hotels were closed and there wasn't much travel there, we did OK in Hawaii this year. So, there would be an uptick if COVID is radically diminished. But I don't think it's getting [Phonetic] an uptick as you might expect.

Paul G. Townsley -- Vice President, Corporate Development and Chief Regulatory Officer

And then in our other states, Washington and New Mexico, our customer base are almost completely residential, small amounts of commercial. So we have not seen too much of effect there because of the downturn.

Angie Storozynski -- Seaport Global Holdings LLC -- Analyst

And just one follow-up on this. So, some of these systems were added midyear. So, if you were to give us the annualized impacts, earnings impact from those systems, so that we have a better year-over-year comparison, what would be the incremental earnings if you were to own all these systems for a year during 2020?

Thomas F. Smegal -- Vice President, Chief Financial Officer and Treasurer

Yeah. Probably the biggest one and the only one that would matter in any way to the Company would be Rainier View. And I think you could go to the Washington UTC and look up the regulatory filing. I think the rate base, Paul, there last adopted was about $13 million for that system. I know we have a rate case coming in, that we'll be filing this year as mandated in the acquisition. So, it's again a return on that rate base that you can calculate. But the other systems have been relatively small. The biggest acquisition in Hawaii is not closed yet and that's the Kapalua system, we expect that to close pretty soon here and hopefully, in the first quarter, and that could add a little bit to Hawaii.

Angie Storozynski -- Seaport Global Holdings LLC -- Analyst

Very good. Thank you.

Thomas F. Smegal -- Vice President, Chief Financial Officer and Treasurer

Thank you.

Operator

Thank you. [Operator Instructions] And I'm showing no further questions in the queue. I'd like to turn the call back over to the speakers for any closing remarks.

Martin A. Kropelnicki -- President and Chief Executive Officer

Great. Thanks, Victor. On behalf of the team here at Cal Water, thank you for joining us here today. Any follow-up questions, feel free to reach out to us. And we'll look forward to announcing our Q1 results with everyone at the end of April or early May. So be safe. Have a great day. And thank you for your support during 2020. Thank you.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

David B. Healey -- Vice President, Controller

Martin A. Kropelnicki -- President and Chief Executive Officer

Thomas F. Smegal -- Vice President, Chief Financial Officer and Treasurer

Shannon C. Dean -- Vice President, Customer Service and Chief Citizenship Officer

Paul G. Townsley -- Vice President, Corporate Development and Chief Regulatory Officer

Benjamin Kallo -- Robert W. Baird & Co. -- Analyst

Angie Storozynski -- Seaport Global Holdings LLC -- Analyst

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