American States Water Co (AWR) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing the company's fourth quarter and full year 2017 results. The call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 5 p.m. Eastern Time and run through Tuesday, March 6, 2018, on the company's website, www.aswater.com.

The slides that the company will be referring to are also available on the website. (Operator Instructions) Please note, this call will be limited to an hour.

Presenting today from American States Water Company is Bob Sprowls, President and Chief Executive Officer; and Eva Tang, Senior Vice President of Finance and Chief Financial Officer.

As a reminder, certain matters discussed during this conference call may be forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Please review a description of the company's risks and uncertainties in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission.

In addition, this conference call will include a discussion of certain measures that are not prepared in accordance with generally accepted accounting principles or GAAP in the United States and constitute non-GAAP financial measures under SEC rules. These non-GAAP financial measures are derived from consolidated financial information, but are not presented in our financial statements that are prepared in accordance with GAAP. For more details, please refer to the press release.

At this time, I will turn the conference over to Bob Sprowls, President and Chief Executive Officer of American States Water Company. Please go ahead.

Thank you, Rachel. Welcome, everyone, and thank you for joining us today. I'll begin with some highlights for the year, Eva will then discuss some fourth quarter and full year details and then I'll wrap it up with some updates on various regulatory filings, ASUS and dividends and then we'll take your questions.

2017 was a strong year for the company. Excluding a onetime gain on a water system sale, we are at $1.75 per fully diluted share, a $0.13 per share increase from 2016, all while increasing our dividend by 5.4%, continuing our record of 63 consecutive years of annual dividend increases.

At Golden State Water, we invested $111.4 million in needed infrastructure, filed our water and electric general rate cases where we are requesting average capital spending of $125 million per year for the water segment and $12 million per year for the electric segment and we continue to provide a high level of reliability and customer service.

Continuing with our highlights on the next slide. During 2017, American States Utility Services or ASUS had a big win with a new 50-year contract to provide water distribution and wastewater collection and treatment facility services at Fort Riley, a U.S. Army installation in Kansas. The initial value of the contract is approximately $601 million over the 50-year period and is subject to an initial joint inventory adjustment and annual economic price adjustments. We expect to assume the water and wastewater operations at Fort Riley in mid-2018.

In addition, during June 2017, ASUS assumed operations of the water and wastewater systems at Eglin Air Force Base in Florida with a contract value of $702 million over the 50-year contract period.

With the addition of Fort Riley, ASUS will operate on 11 military bases, including 4 of the largest military installations in the United States: Fort Bragg, Fort Bliss, Eglin Air Force Base and Fort Riley as well as Joint Base Andrews, home to Air Force One.

During 2017, ASUS completed various filings with the U.S. government at its contract locations, which provided for an annualized increase of approximately $5.3 million in contract fees over the year-end 2016 levels.

Our overall company strategy remains the same: deliver outstanding customer service, make prudent capital additions and continue to grow our military base presence around the country. We had success in all of these areas in 2017.

I'll now turn the call over to Eva to review the financial results for the quarter.

Thank you, Bob. Hello, everyone. Let me start with an overview of our fourth quarter financial results on Slide 8. Consolidated earnings for the quarter were $0.35 per share compared to $0.30 per share for the same period in 2016. The tax reform, which I will discuss later in the call, negatively impacted the water segment by $0.03 per share, but added $0.03 per share primarily at AWR parent, and to a lesser extent, at ASUS and electric segment. As a result, there is no impact to consolidated earnings. Excluding the tax impact, diluted earnings for the water segment were $0.21 per share for the quarter.

Consolidated revenue for the quarter decreased $2.6 million compared to the fourth quarter of 2016. ASUS received a retroactive revenue of $1.7 million during the fourth quarter of 2016 for periods prior to that. There was no -- there were no similar retroactive revenues received during the fourth quarter of 2017. Excluding the impact of this retroactive amount, ASUS' revenue decreased by $1.8 million as compared to the fourth quarter of 2016 due to a decrease in construction activities in Q4 2017, partially offset by increases in monthly management fees from successful price adjustment and the commencement of operation at Eglin Air Force Base.

Electric revenue were lower due to a downward adjustment to the revenue requirements to reflect a decrease in the general office allocation, as stipulated in the CPUC December 2016 decision on the water general rate case. Partially offsetting these revenue decreases were increases in water revenue due to the CPUC-approved rate increases effective January 1, 2017, as well as rate increases to specifically cover higher supply costs experienced in certain rate-making areas. These were partially offset by decrease in revenues due to Ojai water system sales in June of 2017.

Looking at Slide 10. Our water and electric supply costs were $20.6 million for the quarter, a decrease of $1.2 million from last year. Any changes in supply costs for both the water and electric segments as compared to the adopted supply costs are tracked in balancing accounts.

looking at total operating expenses, excluding supply costs, consolidated expenses decreased $1.3 million versus the prior year period, primarily due to lower construction costs at ASUS as well as lower legal and other condemnation-related costs at Golden State Water Company.

Slide 11 shows the EPS bridge comparing the fourth quarter of 2017 with the same period of 2016.

Turning to Slide 12. For the full year, consolidated earnings per share were $1.88 for 2017 as compared to $1.62 per share for 2016.

I will briefly discuss the year-end results for each of our business segments. Our water utility's reported earnings per share increased $0.18 for the year. The earnings for 2017 include a $0.13 share gain on the sale of Ojai water system and a $0.02 per share increase in earnings related to the recovery of incremental drought costs incurred in prior years. Excluding these 2 items and the negative $0.03 per share tax impact, diluted earnings from the water segment increased $0.06 per share compared to 2016 due to CPUC-approved rate increases, lower legal expenses related to condemnation matters as well as an increase in interest and other income, partially offset by a decrease in earnings due to the cessation of Ojai operations.

For 2017, earnings from electric utility increased by $0.01 per share due to additional costs incurred in 2016 in response to power outages caused by severe winter storm experienced in January of 2016 as well as lower regulatory expenses and costs associated with energy efficiency and solar initiative programs in 2017.

For ASUS, earnings increased by $0.04 to $0.37 per share compared to 2016. There was an increase in management fee revenue from successful resolution of various price adjustments and asset transfer. There was also an increase in management fees and construction revenue generated from the operations at Eglin. Increased earnings were partially offset by higher operating costs due to Eglin's transition activities and joint inventory study as well as increases in labor and outside services costs related to business development and compliance.

AWR parent's earning increased by $0.01 per share after excluding the positive $0.02 per share impact from the tax reform. The increase was due to lower state taxes.

Let me now turn to the impact from tax reform on Slide 13. The most significant change impacting us is the reduction of the corporate federal income tax rate from $0.35 -- 35% to 21% effective 2018. As a result of remeasurement, the cumulative net deferred income tax liabilities related to Golden State Water rate-regulated activities were reduced by $90.1 million at December 31, 2017, to reflect the 21% tax rate. However, this did not impact earnings since this amount was recorded as a regulatory liability and will be refunded to our customers over the remaining life -- lives of the assets. The remeasurement of deferred tax balances not related to rate-regulated activities has a negative $0.03 per share impact to Golden State Water, offset by a $0.03 per share benefit primarily at the parent level, and to a lesser extent, at the other 2 business segments, as discussed earlier in the call.

We expect the reduction in the federal tax rate to benefit our customers. In addition, the effect of the [acted] deferred taxes from the remeasurement is expected to be refunded to customers and affect future customer rates as well. Going forward, as new plant is in place in service, the lower federal corporate tax rate will result in lower deferred tax liabilities, which are reductions to rate base.

The Tax Act also eliminates bonus depreciation for utilities. As a result of the lower federal tax rate and the elimination of bonus depreciation, we expect the tax reform will create growth in rate base for the same level of expected capital expenditures. However, the new tax law is expected to result in lower cash flow for operating activities and additional borrowings at Golden State Water. Regulated utilities will still have the full tax deductibility of interest expense, and therefore, the interest deductibility limit is not anticipated to have a material impact on this consolidated company.

At this point, we do not expect to issue equity in the near future.

As for ASUS, we believe our existing 50-year contract did not specifically address changes in pricing resulting from the impact of tax reform and the change in the federal income tax rate. However, the government has the opportunity to request an adjustment, which would then be subject to negotiations between the parties. There is no automatic or unilateral adjustment available to either the government or the company.

I'll briefly discuss our liquidity on this slide. Net cash provided by operating activities for 2017 were -- was $144.6 million as compared to $96.9 million in 2016. There was an increase in operating cash flow for Golden State Water due to various CPUC-approved surcharges implemented during 2017 to recover previously incurred costs as well as federal income tax refund received in 2017. The increase in the consolidated operating cash flow was also due to the timing of the link in cash received for military base construction work during the year. As Bob mentioned, Golden State Water invested $111.4 million in company-funded capital project in 2017. We expect to invest an additional $110 million to $120 million in 2018.

With that, I'll turn the call back to Bob.

Thank you, Eva. I'd like to provide an update on our recent regulatory activity.

In January 2018, the CPUC-approved third year rate increases for Golden State Water. These rate increases are expected to increase the adopted water gross margin by approximately $4.5 million in 2018 after adjusting for the sale of the Ojai system.

As a result of the new tax reform, Golden State Water intends to file revised revenue requirements and rate base in our pending water general rate case that will set new rates for the years 2019 through 2021 and in our pending electric general rate case that will set new rates for years 2018 through 2021. Both rate cases are scheduled to be finalized in 2018.

In addition, the CPUC ordered water utilities to establish a memorandum account effective January 1, 2018, to track the impact on the revenue requirements caused by changes in the tax rate and other tax code changes from the Tax Act. The impact to be included in this memorandum account is expected to generate a regulatory liability to be refunded to water customers at a later date.

In February 2018, the CPUC issued a proposed decision on the water cost of capital application. The proposed decision recommends an authorized return on equity of 8.23% and a return on rate base of 7.39% for Golden State Water's water segment effective January 1, 2018. Golden State Water's current authorized return on equity for its water segment is 9.43%, and our authorized return on rate base is 8.34%. If the commission adopts the recommendations in the proposed decision, the lower return on rate base is expected to decrease Golden State Water's annual revenue requirement by approximately $9.5 million beginning in 2018. We have filed our comments on the proposed decision with the CPUC and have been taking steps to convey our points to the commission. A final decision could be issued by late March.

Let's move on to ASUS on Slide 16. ASUS had another strong year, highlighted by the award of the $601 million privatization contract to serve Fort Riley. ASUS will assume operations at Fort Riley in mid-2018. While we don't expect a significant contribution from the new base in 2018, we expect the contract to contribute $0.03 to $0.05 per share on an annualized basis beginning in 2019, the first full year of operations.

Also, ASUS began operations at Eglin Air Force Base in June 2017. After the completion of the joint inventory study conducted with the U.S. government, the Eglin contract is valued at approximately $702 million, subject to economic price adjustments.

We are involved in various stages of the proposal process at a number of other bases considering privatization. The U.S. government is expected to release additional bases for bidding over the next several years. Due to our strong relationship with the U.S. government as well as our expertise and experience in managing bases, we are well positioned to compete for these new contracts.

Turning to ASUS' fourth quarter performance. Our management fee revenues increased as a result of various successful price adjustments during 2017 as well as revenue generated from Eglin Air Force Base. We continue to work closely with the U.S. government for contract modifications relating to potential capital upgrade work for improvement of the water and wastewater infrastructure at the military bases we serve. During 2017, the U.S. government awarded ASUS $20.2 million in new construction projects, the majority of which are expected to be completed through 2018. We will file the first economic price adjustment for Eglin later in 2018 and will assume operations at Fort Riley in mid-2018. We currently have economic price adjustment filings pending with the U.S. government for all other bases, which we serve.

Completion of filings for these economic price adjustments, requests for equitable adjustment, asset transfers and contract modifications awarded for new projects provide ASUS with additional revenue and dollar margin. In order to project ASUS' earnings for 2018, we continue to evaluate the amount of capital work that we expect to complete, which includes discussions with the respective contracting officers and the Director of Public Works at the various bases. Taking into account the $20.2 million in new construction projects awarded in 2017 as well as operating Eglin for a full year, we expect ASUS' 2018 earnings to be between $0.38 and $0.42 per share.

I'd like to turn our attention to dividends outlined on Slide 17. Board of Directors recently approved a first quarter dividend of $0.255 per share on the common shares of the company. The dividend reflects the board's confidence in the sustainability of the company's earnings at both our Golden State Water and ASUS subsidiaries as well as the prospects for our future. Our calendar year dividend has grown at a compound annual growth rate of 9.4% for the 5 years ended 2017. American States Water Company has paid dividends every year since 1931 and has increased dividends paid to shareholders every calendar year for 63 consecutive years. Given our earnings growth prospects, there's room to grow the dividend in the future.

Finally, I'd like to convey that as a water utility that provides a precious limited resource of water, American States Water is proud of its continued efforts related to environmental, social and governance issues. A prime example is the great strides we've made on the water conservation front. In fact, total water usage by Golden State Water customers is down approximately 30% since 2007 while our number of customers has increased over that same time period. We have strong corporate governance practices focused on our employees' development and well-being and are an active responsible community partner.

I'd like to conclude our prepared remarks by thanking you for your interest in American States Water, and we'll now turn the call over to the operator for questions.

(Operator Instructions) The first question comes from Jonathan Reeder with Wells Fargo.

Got a few questions for you, if you don't mind. It looks like you've bumped up ASUS' '18 guidance by $0.01 from the Q3 call. What was the driver there?

Yes, the driver there was a lot of times we'll look at the fourth quarter and try to see what was going to come in and there were some things that didn't come in that we thought would, and so we sort of moved those into 2018.

Are you talking about like construction work you're seeing or...

More price adjustments, that sort of thing.

Okay. So maybe some sort of retroactive component that bumped it up or something?

Well, it's not necessarily retroactive, but it -- we have filed for various economic price adjustments and asset transfers and expect to have those come in, in 2018 when we originally thought maybe they would come in, in 2017.

Okay. So what does the guidance assume with regards to tax reform and lower tax rate?

So the guidance assumes the sort of status quo. It assumes that we're not going to be able to take the benefit of the -- or keep the benefit of going from 35% down to 21%. However, we believe that our 50-year contracts do not specifically address changes in pricing from the impact of the Tax Act. And the government does have the opportunity to request an adjustment, which would then be subject to negotiation between the parties. To the degree would be able to keep the benefit on the existing bases, that would be upside to the $0.38 to $0.42.

Okay, perfect. When do you expect to kind of get some clarity on that issue? Is there a certain time that you normally have this conversation with the government? Or this is something you would initiate? Or how does that exactly going to work?

It's not really clear at this point. Sometimes it would come up in a price redetermination process, but since all of our current contracts are economic price adjustment at this point, there doesn't seem to be a natural vehicle for this coming up. My sense is it would come up through a request from the government, but we have not received that at this point.

Okay. And then last question on ASUS, any portion of that $0.03 to $0.05 annual contribution from Fort Riley, is that included in the 2018 guidance a small portion, since you expect to assume operations during '18?

Yes, we are soon to start operation in probably mid-'18. They -- there is a small portion of the earnings contributed there because we are doing the transition activity as well as certain inventory -- joint inventory with the government. So till that's done, we decide how much of the contract value will go forward and then we start operations. So we do expect some small amount of contribution from Riley this year.

Yes, it's a small amount, nothing close to the $0.03 to $0.05.

No.

Okay. And then shifting over to the utility, how would you characterize kind of the ex-parte meetings you've had on cost of capital? And do you get the sense that the CPUC is seriously considering altering the proposed decision?

We're -- to be honest, we're in unchartered territory there, so it's really hard to say, Jonathan. The fact that the proposed decision took ORA's sort of points almost verbatim was quite surprising and disappointing for us, but we're trying hard to sort of make our points there. We and the other 3 companies that are in this application, we all sort of have the same major issue, which is the return on equity. So it's really difficult to see whether there'll be changes or not.

Right. I know it's -- certainly, the interesting proposed decision that came out certainly surprised us. Do you think the CPUC acts on, I think, it's the March 22 when they're first able to? Or if you don't think they're going to -- or if they don't act, would you view that as a greater likelihood that they're going to modify the PD, that they'll basically take it under -- further consideration?

Really difficult to say. I think if it gets deferred, maybe there'll be added hope there. It's just really hard to say. It's just such a strange decision that -- and obviously, it's -- the thing I scratch my head about over this is California needs to be investing in water infrastructure and lowering the ROE. It's not exactly what you do when you want to encourage investment in water infrastructure or encourage the purchasing of troubled systems. So it's a little bit strange that's -- it's a bit off kilter with California policy. I should probably stop there.

You putting yourself in trouble, right, Bob? We're sure we don't want you to do that.

It may go downhill from here.

Eva, I think you mentioned that you're going to file some revisions to the pending rate cases. I think it was in terms of revenue requirement, but also I think you might have mentioned kind of rate base. Do you have, my favorite question of all, kind of what the authorized rate bases for the water and electric utility in 2018?

Yes. We are -- for '18 -- the one we're going to file is really to update the rate case for '19 to '21 because that new rate. So we will be filing that probably in the next weeks or so and we're still crunching the number at this point, Jonathan. So the tax rate will impact the revenue, but that shouldn't have earnings impact. But the rate base should have a little uptick because the tax rate is lowered from 35% to 21%.

Creation of less deferred taxes going forward.

Yes, so you will have a higher operating income then derive the revenue requirement. But we expect that to ramp up in the next week or so.

What's the authorized rate base -- average rate base for water and electric in 2018?

For '18? Actually, we have $752 million for water for '18. Electric is about $45 million to $47 million.

That's right.

But that's -- this is based on the current rate case cycle. It's based on the rates set for '16, '17 and '18.

For water.

For water, okay?

So the $752 million for '18 is based on the '16 through '18 rate case.

Rate case, yes.

Okay, okay. And then, I guess, just kind of last question. I noticed your utility maintenance expense is down 11% in '17 versus '16, and prior to this, it's kind of largely been flat the past few years. Just kind of curious how you've been so successful at controlling that line item, and is that something you expect to continue to control going forward?

Yes. It's a function of planned and unplanned. And one of the reasons for the success in '17 was there was less need for unplanned maintenance than there has been historically. We're also -- recently, I would say in the last year or 2, we implemented sort of more efficient approach to dispatching our field workers and that seemed to have created some efficiencies for us.

Okay. So I mean if -- I guess, if you have a normal year kind of unplanned maintenance, we might see a little bit of a tick-up, but maybe not all the way back to the 2016 level just given some of those efficiencies, Bob, is that fair?

Yes, it's possible, yes. We've been implementing this program through our various customer service areas and it's not fully implemented at this point. So hopefully, there will continue to be upside on that.

Right. Our planning process, including detailed planning for the planned maintenance, the unplanned usually some emergency comes about, somewhat unpredictable.

The next question comes from Richard Verdi with Atwater Thornton.

A lot of my inquiries have already been addressed, Jonathan asked a lot of them for me. But I just have a higher-level question regarding ASUS and I'll use Fort Riley as an example. We closed that in October of last year. And I'm wondering, could one of you just maybe talk a little bit about the selling or closing process from when it was discovered the base will be auctioned to when the close was announced last October? And what might make that process a little bit shorter or longer?

Yes. It's, by far, not a clear process and it varies by base. It's really difficult to predict how long it's going to take. In some cases, it'll take maybe as little as 3 years. In some cases, it's been 5 years. It just takes longer than the government says it will and they've got other priorities. And we're so happy to be part of this industry. We don't really press it with them, we just respond to their inquiries. And there are several different phases of each bid. And so you go through the bidding process and try to stay in as one of the competitors because competitors do drop out as they sort of move through the -- my understanding is as they move through the various phases. So I'm sorry, I can't give you any more clarity on that, but it just seems each privatization has its sort of own issues.

Sure. No, I understand. It is helpful. And then just one other question, again a little bit on the higher-level side here. You had mentioned, Bob, that California water infrastructure was falling apart. Clearly, it's very unfavorable out there, the whole situation. I'm wondering if you could just talk a little bit about what the acquisition landscape might look out there. Is it fruitful? I mean, are more utilities coming to see the light where, hey, we might need to sell water utility here because the water infrastructure is so bad. Could you just talk a little bit about that and maybe where American States might fall in that process?

Sure. Yes, the comment I made was there just is a need for infrastructure replacement in California, not unlike most of the rest of the states in the country and that we have the additional issue of water supply issues. So it should be a state that does encourage water infrastructure investments. But with regard to purchasing systems, last year and the year before, we did see a few more systems come up for sale than we've seen in the past. Now we haven't really seen that in the last, I would say, 6 months to a year that there would be more systems up for sale, and these would be municipally run systems. Usually, they're pretty small systems that are being sold. It's not sort of a major -- less than 5,000 customers, in some cases, less than 2,000 customers. I think there is great interest by investor-owned industry to purchase these small systems, and we believe that if you bring professional water operators in that customers are better served that way and you get infrastructure replaced timely. So where we, as a company, would be very interested as systems come up for sale, it's just right now we're not seeing a lot of systems come up for sale. As you know, part of the Water Action Plan and continued California policy is for the investor-owned utilities to step up and help on sort of troubled systems, and we'd be glad to be part of that. We just -- we're not seeing a lot of those come to the table either. Those troubled systems are difficult to acquire. You may have to sort of carry them a few more years than you would a system that -- with less trouble, but it still is a situation where you could put capital to work and improve the system, the reliability and the customer service. I don't know if I answered your question, Richard, or not but...

No, no, no, it's helpful. Actually, I'm sorry, I do have one other question and it's sort of a follow-up to Jonathan's regarding the rate base. I just want to confirm something here. For 2017, the rate -- the adopted rate base, let me see, should have been about $717 million, and for 2019, we're looking at about $876 million. So that $876 million, because of the tax reform, that should be essentially going up in 2019, correct?

Yes. I mean, I haven't seen the numbers, but I believe it should, yes.

And that number is our requested number, you know. So ORA, yes, so at the end, it may be a different number, but if you compare it to this number, the rate base should be going up.

Sure. So that's a 22% jump in 2 years, and that figure is probably going to go up then, too, is that fair to say? I guess, it's fair to say on the request is going to go up from that $876 million at a 22% jump level is that a way to put it?

That's accurate, yes.

Okay, okay.

Richard, the ORA has filed their report in the rate case and -- as of a week or 2 ago, so you can just -- they are -- we did ask for about $375 million over 3 years. Their ORA's report suggests $260 million over 3 years. So that's a good starting point for us to negotiate, I think.

Yes, and here is the other question, too. I am going to ask this. Just as a reminder -- so this case, I'm going to look at my notes here. So you had asked for -- American States had asked for about 11% ROE. ORA's position was 8.23%. That's about a 275 basis point split. When I look back at the 2011 cost of capital hearing, that was originally about a 275 basis point spread where originally American States was granted something much lower and then it was finalized near 10% at 9.99%. I mean, theoretically, I mean, could that happen again here? I mean, it's the same spread.

Just for the record, we -- there was no decision below the 9.99%. I mean, the decision was 9.99% in that case. I mean, ORA had put out a lower number, but the ruling in the case was 9.99%.

And that was settled.

That's right, Eva.

ROE between ORA and the 4 companies. So 9.99% ROE for all 4 companies.

That's an excellent point.

Yes, so didn't go through the court hearings -- I mean, it went to one at the end, but it basically just filed the day all the numbers.

Yes, we had a settlement and then we still had the hearings.

Yes, that one hearing.

Yes. So going from that, Richard, what's your question?

No, I'm just trying to determine, I mean, what's the probability that this comes back up to a higher level.

Yes. I mean, we're trying really hard to convince them that this is not good policy, but we really don't know. Now this is the same commission that approved the 10.2% to 10.3% ROEs for the electric companies. That was a settlement that they approved less than a year ago. It is a head scratcher as to why we would be at 8.23% when the electric companies are in the 10.2% to 10.3% range.

The next question comes from Angie Storozynski with Macquarie.

So I have 2 follow-ups. For the ASUS, the earnings projections that, Eva, you gave us for '18, does it assume -- do they assume that you keep the benefit from the lower tax rate through 2018?

No. It assumes that it -- basically, it assumes that we're paying at 35%, I think. It assumes it all flows back to the customer.

Yes.

Anything we are able to keep, if we are able to keep anything, would be upside.

Yes. Now on your comment about municipal M&A and some reluctance from those troubled systems to offer themselves up for sale, is this a California-based comment? Because I remember that, in the past, you guys were saying that your community relationships in all of the states was you actually have the military base contracts could enable you to have some municipal M&A also in other locations. So is it just California? Or other states have similar reluctance?

Yes, it was a California-centric comment. It just -- we understand there's a lot of systems in need. It's just we don't see any of them being put up for sale. I mean -- so that's where that comment came from.

And lastly, on the cost of capital proceeding, is your pace of capital deployment going to change depending on what that ROE ends up being? And I know that those are 2 separate proceedings, 1 is the GRC and 1 is the cost of capital proceeding, but are there -- are they in any way intertwined? I mean, would you attempt to, for instance, send a message to the regulators in California that there's a certain threshold below which you're not going to deploy as much CapEx as you had proposed?

That's a difficult question. We obviously will make all the capital that we need to make the systems safe and reliable. We'll never underspend, so to say, with those kinds of issues. Generally, the capital will get -- the amount of capital that we're going to spend will be approved in the general rate case, and so then it becomes a question of how hard are we going to fight for the capital in that rate case. And I think we'd have to go back and think about that a little bit. We do understand we do think these projects all need to be done, so it'd be a little bit difficult for us to sort of back away from our capital requests. They're all necessary projects. So I guess, on balance, we continue to pursue the capital that we have and then work to try to get the ROE changed. There is an ability in California to request rehearing. If you're denied rehearing by the commission, you can then go to the California Supreme Court to get a potential relief.

But on the flip side, you could say you have -- or assuming that this lower ROE sticks or something similar to that level, you have a lower return and some tax-related benefits to customer bills, which would potentially open up some disposable income from your ratepayers, which would enable you to actually invest more. Is this at all something that you would be willing or the commission would be willing to discuss as far as your GRC discussions are concerned? I mean, if the limiting factors for spending is the affordability of bills, those 2 drivers would provide more of an affordability cushion.

Right, that's right. This is really a head scratcher. The reduction in the ROE for us is going to drop our customers' bills 1% to 3%. So it just really is -- it's not a huge savings to customers and then you factor in whether it's going to create additional costs for the company. We do still feel really good about the capital projects we have in front of the commission and more than likely would be continuing to try to argue for those capital projects in the GRC.

Next is a follow-up question from Jonathan Reeder with Wells Fargo.

Real quick, just wanted to visit your comment that the lower cash flows won't require new equity in the near term. Should we interpret that as meaning that maybe if we're looking beyond kind of the next 2 to 3 years, you would -- or you think you would need equity to kind of support whether it's a 55% or 57% equity capital structure at the utility level? Or -- how should we interpret that in the near term, I guess, phrase?

I think, Jonathan, in the next 2 to 3 years, we don't believe we need to issue equity. We are doing a detailed forecast right now to see how that goes, but our equity ratio is still a little bit high at this point. The next one we'll do will be debt issuance, probably not in '18, probably toward the '19 time frame. So that will be a debt issuance. And then we'll see how that goes.

So the equity Eva is talking about is at the AWR consolidated level.

Yes.

And then, of course, the other component here is the CapEx that will be coming out of the rate case. That will determine the cash flow needs of the company going forward.

Right. So I guess, the timing is kind of dependent on, one, the authorized equity level as part of the cost of capital but then, two, also what your CapEx budget looks like as a result of the GRC.

That's right.

Yes.

This concludes our question-and-answer session. I would like to turn the conference back over to Bob Sprowls for any closing remarks.

Yes, I just wanted to wrap up by saying thank you all for your participation today and your good questions, and we look forward to speaking with you next quarter. So thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.