California Water Service Group (CWT) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the California Water Service Group, third quarter 2007 earnings results conference call.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Marty Kropelnicki, the Vice President and Chief Financial Officer.

Sir, you may begin.

All right, thank you, Matt.

Good morning everyone. Welcome to the third quarter of 2007 earnings conference call for California Water Service Group. With me today, I'm joined by Pete Nelson, President and CEO.

I'd like to remind everyone that today's call is being recorded and the replay number is available from today through December 31st at 888-266-2081, ID is 1143157. Also, if anyone is interested in seeing the press release and hasn't received it, you could find it at calwatergroup.com.

Before looking at the financial results for the quarter in the nine-month period, I'd like to remind everyone to take a brief moment to consider certain forward-looking statements.

In particular, during the course of this conference 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 all interested parties, to carefully read and understand the Company's disclosures on risks and uncertainties found in our Form 10-K, Form 10-Q and other reports filed from time to time with the Securities and Exchange Commission.

Now, let's take a look at the quarter ended September 30, 2007. Revenue for the quarter increased 6% or $6.1 million to a $113.9 million versus a $107.8 million, for the same period last year. Total operating expenses increased $4.6 million or 5% to $96.3 million.

Part of operating expenses, as you may recall, we have three major components. We have purchased water, purchased power and pump taxes. I'd like to take a brief moment to give you those numbers for the quarter.

Purchased water, increased 4.4% or $1.4 million to $32.8 million. Purchased power, decreased 1.8% or decreased about $171,000 to $9.2 million. And pump taxes, decreased 4.2% or a decrease of $137,000 to $3.1 million during the third quarter.

Other operating expenses, increased 12% or $2.7 million to $26.5 million over the same period last year, driven by a couple of primary areas, one, outside services, consisting of legal and consulting. As you may recall, we are in our '07 GRC as well as some outside legal support that we currently have and the cost associated with our health and welfare plans

Maintenance expense was flat to last year at $4.2 million while depreciation increased 9% or $700,000 to $8.4 million.

Net operating income increased $1.4 million or 9% to $17.5 million while net income was $13.8 million, an increase in 9% or $1.2 million, over the $12.6 million for the same period last year.

Earnings per share for the quarter were $0.67 versus $0.68 for the same period last year. During the third quarter, earnings per share were diluted by approximately $0.08 per share due to the equity offering completed in the fourth quarter of 2006.

Now, I'd like to take a brief moment to look at the nine-month results through September 30, 2007.

Revenue for the nine-month period increased $27.1 million or 11%, to $281.2 million, compared to $254.1 million, over the same period last year. Total operating expenses, increased $23.6 million or 10.6% to $247 million.

Net operating income, for the nine-month period was $34.2 million, an increase of $3.5 million or 11.5% over the $30.6 million for the same period last year. Net income for the nine-month period increased $4 million or 20.6% to $23.1 million.

Earnings per share, on a fully diluted basis increased $0.8 or approximately 7.8% to $1.11 versus $1.3 over the same period, last year. The equity offering completed in Q4 of 2006 diluted earnings per share for the 9-period by approximately $0-14 per share.

With that I want to move over and talk about the balance sheet a little bit -- couple of things in there on that.

Balancing accounts, net balancing accounts were approximately flat to where they were at the end of Q2 to where they are now, approximately $3.9 million.

Looking at CapEx, capital expenditures during the quarter and our work-in-progress balances, CapEx for the quarter was $14.2 million versus $12.3 million for the same period last year. Company-funded CapEx, capital expenditures in the quarter was approximately $62 million through September 30, 2007.

Our work-in-progress accounts, the balances are approximately $82.6, up $2.6 million from the $80 million where we were last year. So far, we believe we're on target to complete the $80 million to $90 million budget target in capital projects that we had scheduled for this year, and we'll move into Q4, trying to get those wrapped up.

In addition, I want to take a couple of minutes before I turn it over to Pete to talk about the revenue and the revenue mix. A couple of things stand out there on the quarter. First and foremost let's talk about the 2006 General Rate Cases.

There is a proposed decision out there, but we have not been able to put those rates into effect yet, and I guess that's the bad news, the good news is, we did get interim rates. The interim rates approximate $150,000 to $170,000 per month versus the proposed decision, which actually would come out to about $613,000 a month.

So, you do the math behind that and Cal Water has a benefit of approximately $0.01 or so for the quarter when the -- if the final draft is adopted, it would be about $0.06 per quarter. So clearly we're waiting on getting the '06 GRC decided and getting those rates put into full effect.

The second thing that we saw, during the quarter on the revenue side is clearly -- the change in demand that we were typically seeing in Q3 wasn't there. Basically, as it's noted in the press release the increase in sales for existing customers was a couple of $100,000, last year in Q3 it was approximately $2.9 million.

So, kind of what's behind that and I think there's two primary reasons there. First and foremost, there are calls throughout the State of California to conserve water. For example, the City of San Diego has the 20-gallon-a-day challenge where they challenge their citizens to save 20 gallons a day. The San Francisco Public Utilities Commission has their Super Hero campaign going on, which is on the media, TV, on billboards talking about the everyday super heroes helping to conserve natural resources. So we are seeing, I think, some changes in demand due to conservation.

And lastly, and one that I think is fairly interesting as well, is just the weather. And if you look at the weather within the reasons, we've been a little cooler this summer, not as hot. Some of you, in the past have asked me about doing a regression model and trying to figure out the correlation between weather and revenue and we've done that, but before I give you that information, let me just share the temperature differences within our three main regions.

For the Bay Area region, the average temperature this year was 67.2 during the third quarter, versus 67.5. So it was down approximately one-third of a degree. The Los Angeles area, the average temperature is about 71, and that's down from 72.6 and the Central Valley was 76, down from 77.1.

So, on an average, we're down, if you blend those numbers out, just below 1 degree, but when you look at LA being up, kind of 1.6 degrees, that becomes kind of a bigger deal when you put that into a regression model. That coupled with precipitation days, not so much that you had large amounts of noticeable rain, but that you had rain within a day, so it may not have been measurable, but it certainly gets people to turn off their sprinklers.

To give you an idea, the differences this year and the last year for the Bay Area, for 2006 during Q3, you had zero rain. This year in terms of precipitation days you had 2.3. For the LA area you had 0.7 precipitation days versus 1.7 this year and for the Central Valley, it was 0.8 last year, versus 1.5 this year.

So, clearly we've had a little bit cooler and a little bit wetter, summer season. Throw that into a regression model, and I won't give everyone a lesson in statistics here, but the adjusted R squared -- but think of it as the confidence interval -- basically kind of, spit out a number that said for every 1 degree change in temperature, that's approximately $600,000 decrease in revenue.

So, for the quarter, a combination of 2006 General Rate Case, although we're getting interim rates, we're not getting the full benefit on all the rates, the milder weather and the conservation efforts we've seen some decline in the demand.

So, with that I'll wrap up the balance sheet income statement and turn it over to Pete.

Okay, thanks, Marty. Good morning, everyone.

I'm going to cover two or three items that we've been asked about recently in the last couple of weeks. One is the fires that have been burning in the last couple of weeks in Southern California. A second is an earthquake that we had here a couple of nights ago, a pretty strong shaker, headquartered just north of San Jos. And then third, I'll talk about the supply situation in California and in particular, talk about the Delta, because not many people understand what the Delta is and it's been in the news in the last quarter.

Then I'll move from those items to just a general rate update, the conservation proceeding, which is very important to us and then the 2006 General Rate Case, as Marty mentioned, and then the 2007 General Rate Case.

So first, those fires in Southern California, I know this has been in the news nationally and internationally, the last couple of weeks. These fires had no impact on us. We're really -- our operations are too far away from where the areas were burning. And of course, the danger is for a water company, if you have a house or a building that burns, that creates a leak, a water leak, which drops the pressure in the system and that reduces fire protection.

So, of course we're worried about fires overrunning our pumping stations and wells and storage facilities, but also just a fire hitting homes can significantly decrease fire protection, which makes things much worse. So, we were very lucky in Southern California this fall, it had no impact on our operations.

Second is earthquakes, there was a 5.6 Richter scale earthquake two nights ago on the Calaveras Fault, which is about 9 miles or 10 miles east of downtown San Jos. Pretty good shaker, it was about 8 o'clock at night, no damage to our system at all. That was kind of a minor one for us. The last major earthquake was the Loma Prieta earthquake in 1989 that was 6.9 Richter scale.

And from the earthquake we learned a lot about how to strengthen our infrastructure, and in particular, our storage tanks, and where the storage tanks connect to our distribution systems. So, that system has been strengthened significantly back in the early '90s, and so we feel very good about our preparation for the next earthquake.

Third item is supplying California, in the Delta, this has been in the news in the last quarter, and it will be in the news, I'm sure, for years to come. But not many people understand just the basics here, so I'm going to talk about the Delta for about two or three minutes. And first understand that California has the most complicated water supply conveyage, storage, distribution system, probably in the world.

So, I'm going to use some shorthand here, and simplify the issues just so you get the general idea of what's happening. The punch line there at bottom will be that there could be much more conservation called for in the future, and that is another reason why we need a decoupling mechanism to decouple sales and revenue, what we're calling the revenue adjustment mechanism, very important to us.

So, first what the Delta is, if you look a California, it's kind of a long skinny state, and the Central Valley has two rivers; one going north to south, the other going south to north. The northern river is the Sacramento River -- comes down from the northern part of the state -- and the southern river is the San Joaquin River, which is going south to north.

Now those two rivers meet east of San Francisco in an area called the Delta. The water mixes in the delta before it goes out the Golden Gate Bridge into the ocean. Now, the Delta is kind of mixture of farms that are protected by levees, and wetlands, open space but it's a -- the Delta is a major supply source for Southern California and parts of Central California, because at the bottom of the Delta, the south end, there is a pumping station that takes water from the delta and sends it south to the state and federal water projects.

Now, of course in California we've got lots of species of animals, and fish, and wildlife, and one of the species that's in the Delta is the Delta Smelt -- native species, and it's endangered. The Smelt migrates back and forth in the Delta and at certain times of the year when the pumps are turned on, and if-- when the pumps are turned on in the southern part of the Delta that could extract about one-third of the water from the Delta to go south.

If the Smelt are swimming in front of those pumps at that time they are -- essentially, part of the population is taken and that's not good, meaning that they are killed by the pumps. So, what's happened here is in the last quarter a federal judge ruled that the protections in place, how the system is operated, are not sufficient to protect the Delta Smelt population, and changes had to be made.

Now, the water coming south, there is 29 separate agencies that buy that water, the largest agency being the Metropolitan Water District of Southern California. In fact, they take about half that water coming south; they are also one of our major suppliers of Southern California.

Everybody, all 29 contractors in the state and federal government are working on this issue of how to better protect the Delta Smelt. We're not sure yet what this means but it could mean reduced supplies to Southern California at certain times of year, which then would drive more conservation of course both mandatory, and voluntary and who knows.

But this issue is being worked on, we don't know yet what the results will be. This would take weeks or months to sort out. The Metropolitan Water District is very sophisticated, they're an excellent supplier, they've built significant storage over the last few years. They are saying that this year's supply, that's very good and they are working through the future supply and probably have to rely on other sources more, be that groundwater or storage.

So, more to come on to the Delta, and I hope that gives you're a better picture for what the Delta is and what it means to the California's water supply. That leads me to the first rate issue, and that's the conservation proceeding, which has been going on for a few months.

There is three pieces of this proceeding that are very important to us. One is the decoupling mechanism, decoupling sales and revenue, which we called a water revenue adjustment mechanism. It's very important for us to promote conservation, and also to mitigate the impact of changes in sales on our revenue, that's very important to us.

The second item in the conservation proceeding is a modified cost balancing account, which we've talked about before, which basically would include, allow us to include changes in our supply mix, purchased water, pumped water in recovery -- in our balancing accounts for recovery by customers. A change in supply mix now is not recoverable on our balancing accounts.

The third item in the conservation proceeding is what's called period rates, which essentially means the more water you use the higher the rate you are going to pay. Right now, all customers pay the same rate. There is no proposed decision yet out on the conservation proceeding. This could be issued -- proposed decision could be issued this year.

After that proposed decision is out, it is a 30-day wait time before the Commission can vote so you can probably do the math and see that we don't expect a decision by the end of the year, but there could be a proposed decision out by the end of 2007.

The second rate issue, Marty talked about and that's the '06 General Rate Case, which covers 8 of our 24 districts. As Marty said a decision has been delayed. We do have interim rates about $2 million annual revenue. In fact, all the numbers I use here are annual revenue. $2 million in annual revenue that we're collecting beginning July 1, 2007.

And more importantly, we have an effective date for this rate case of July 1, 2007. What that means is, once the decision is granted we can essentially back-bill to the July 1, 2007 date. And then generally we collect that revenue that's back-billed over the succeeding 12 months. So the proposed decision as Marty said is out.

It's recommending a total of $7.4 million in annual revenue that's the $2 million that's already been granted in interim rates, plus $5.4 million additional revenue. We've commented on that proposed decision, and we're waiting for the final decision from the Commission.

The last rate issue is our 2007 General Rate Case; this was filed in the July of 2007 looking toward rates in July 2008. The filing was made on time; this is a$69 million annual revenue filing. The big change for us in this rate case is what we're asking for us to reflect our general office or corporate costs in all 24 of our rate districts immediately, once the case is decided and not phase those corporate costs in overtime. Also, in this rate case there is 8 districts who are looking for General Rate Case increases, and then the other 16 are looking for step rate increases or inflationary increases.

The cases in process, the Commission staff, the Department of Ratepayer Advocates has toured all the facilities that we have included in the rate case. We have begun public workshops with our customers, and the Department of Ratepayer Advocates has asked the Administrative Law Judge for more time to do their work.

And the administrative law judge did grant them 4 weeks to 6 weeks more time, to complete their analysis. So, although these July 1, 2008 date is the target date for a decision, and rates of change, I'd say that's less likely given the fact that the judges granted the DRA 4 weeks to 6 weeks more to do their work

We would expect an effective date though for the 2007 General Rate Case of July 1, 2008 as they did with the 2006 General Rate Case. If I look at the regulation in our last two rate cases that are in process, in the conservation proceeding, one point that we've made in the past is that regulation in California is improving and we believe it is improving.

The California Water Action Plan is good public policy, it's being implemented; it's committed to by the Commission and the staff and water companies. But change is slow, these changes don't happen overnight. I think the effective date and the interim rates on our 2006 General Rate Case are very good signs and the conservation proceeding, considering a water revenue adjustment mechanism and a modified cost balancing accounts, also very good signs. And in the case of the conservation proceeding we do need a -- a decision there to be made and implemented as quickly as we can.

So, we do believe rates, rate making is improving in California but this is not happening overnight. The water action plan, it's been in place about two years and we have see movement and we're looking forward to more movement.

Marty I'll turn this back to you?

Great, thanks Pete. Well that gives a sense to what's going to happen with us in the fourth quarter. We obviously have a lot going on.

First and foremost is the Water Action Plan, continuing our full-court press in that area trying to get the '06 General Rate Case wrapped up. As Pete mentioned, the '07 General Rate Case is well underway and we are in the throes of all the data requests, financial data and we're going with the orders from the Commission.

In addition we are well into our planning process for 2008 -- that's another head in the -- as you'll note on the balance sheet, we are just shy, we are $9 million shy of $1 billion in that utility plant, and I think we'll hit that here during the fourth quarter.

So we have a lot to talk about down the year in conference call as we wrap 2007 and move ahead in the 2008.

Matt, with that we will open it up to question and answers, please.

Thank you sir.

(OPERATOR INSTRUCTIONS).

Our first question's from Michael Gresens of Robert W. Baird. Your question please?

Good morning gentlemen.

Hey Michael.

I have a question just in terms of looking into the post Water Action Plan world once all these rates and the rate improvements are being made, what kind of impact would something like this, say the conservation clause or decoupling mechanism have on earnings, and use maybe, this quarter as an example, sort of $0.67? What would be the benefits of a conservation or decoupling type program?

Sure, I'll take that one. I mean, there is -- that's a multifaceted question. But in theory I think you could look to the electric and gas companies. Cal Water has had a very tough time in its authorized rate of return. And as most of -- a lot of that's not because of anything the Company's doing, it's just the way the rate making structures are set up within the state where we have to do a rate case for every district we'd 80 years. So the regulatory lag-effect is fairly significant.

That's kind of one issue, and that's been addressed in the Water Action Plan. The other side of it on the RAM is basically kind of what you saw in this quarter, where you did not see a significant pickup in demand like we would typically see during the summer months. It was relatively flat, and that if the RAM was in place, we would be allowed to surcharge up or down based on whether the demand is up to the point to where we are hitting -- hitting our numbers.

So we think the two real significant items in the Water Action Plan that we are keenly focused on -- they are very strategic for the Company, and they are both big issues for not just me but also for Pete and our whole team -- is really the RAM, getting the RAM implemented in a way that allows to surcharge up an down based on changes in demand, changes in conservation, basically decouples our earnings from revenue.

Right now we are fully coupled to revenue, so changes in demand affect the bottom line in fixing the regulatory lag. So, I view the changes as being significant. We are in the process of designing the RAM, which is fairly complex, but we have some good models to look at in the -- from the electric and gas companies. And I think that will be a -- a fascinating thing to talk about as we get more into the proceedings here in the future months.

In terms of a 2006 GRC that you are working on, the proposed rates and the difference between what you guys are seeking if you got all the, I suppose, the remaining issues. What's the difference there in terms of what we could see in for a final rate increase?

Sure, the difference as Pete talked about, we're getting approximate $2 million right now regularly from the '06. But, what's in the proposed draft is $7.4 million of total relief. So, if you break that down and just apply it to Q4 essentially that means you had about $0.01 per share of rate relief that flowed through to income and another $0.05 of rate relief that the Company has not achieved because of the stay that's been put on the '06 GRC.

But in terms of the 7.4, is there any upside relative to that in what you guys are seeking?

Upside in terms of the effect on --

Ultimate rates and, I guess, the ESP program being one of the contentious issues going on here?

Yes, the ESP one that's -- that's one that frankly is part of one of the primary drivers why this thing hasn't come out yet. We are actively working on that. Other water companies in other states have an ESP program in there so we basically, our customers for a small amount every month we basically guarantee that we'll fix their water line in case of a freeze or a leak or a break and that line being from the house to the water meter. And typically the homeowner is responsible for that piece.

So I think, we have to go through the process here and see where we end up. But we do believe that the -- we are anxious to get that additional, money -- rate relief put in the rates and put into effect.

Thanks.

Sure. Thanks Michael.

Our next question is from Jim Lykins from Hilliard Lyons. Your question please?

Good morning gentlemen.

Hi Jim.

Just got a couple of questions. A follow-up on the last one about the decoupling, do we have a -- even a rough timeline on what the -- or on the proceedings for the conservation -- timeline for the conservation proceedings, especially regarding decoupling?

Jim, this is Pete here. Yes, we did expect the proposed decision out in 2007, and we haven't given up on that. We're just, basically, waiting for the proposed decision to come out. As I mentioned, once that proposed decision is issued as a mandatory thirty-day wait period before the Commission can vote on the decision.

Okay.

Your guess is as good as mine when it will -- when it will be rendered.

Okay. And Marty mentioned $613,000, I believe, per month for the proposed '06 GRC. Does that include back billing or no?

Yes. Basically that's the amount of net benefits that's flowing through right now. There's a $150,000, $160,000 a month. And if the proposed decision was fully adopted, it would be over $600,000.

Okay.

So again, and so I think looking at, we've -- we have a net benefit during the quarter from the '06 rate relief of about $0.01 and there should be, if it was fully adopted as the proposed draft has been written, it would be about $0.06.

Okay. And you guys are going to be filing a General Rate Case in -- 2008 General Rate Case as well, correct?

Jim, I forget the schedule on that I think we are going to -- well let me get back to you on that one?

Okay.

I can't remember the schedule for the '08 rate case.

Okay. And just one last thing. I notice that your customer receivables were up about 50% over the year ago quarter. Just if you could give us some color on that number?

Sure, sure. Generally it's up. If you look at the ageing though, the ageing is staying 80% to 85% current. So we haven't seen any shifts per se. So really, I think what you are seeing is a residual in Q1 and Q2 demand was up over what I recall normal demand would be, because it was just a dry year. And now we've moved into of course, a normal season or a slightly -- slightly cooler season.

So I think you are seeing those receivables kind of work through. So they are up slightly. But having said that, I'll tell you, and certainly we're watching. Clearly there is issues in the housing market nationwide, and we have parts of our service territories that maybe effected by the slowdown on the housing market. So we are watching that and we are making sure that our -- our bad debt reserves is established and fully funded. So not concerned about it, but we are watching it.

Did you see your bad debt go up this quarter?

They are up slightly for the year -- and I want to say they are approximately $300,000 or so for the year -- but that's a year-to-date number. And, that's on a higher base of revenue as well.

Okay. All right, thank you gentlemen.

Thank you and have a good day. Thank you.

Thanks.

Our next question is from Debra Coy from Janney Montgomery. Your question, please?

Thank guys. Good morning.

Hi Debra.

Just, Marty, to follow-up on your very interesting regression analysis related to weather.

I wonder if you have a sense as to how, yes, I mean, how predictable that would be going forward, in other words, the math obviously works in terms of the relative temperatures, but can you sort out of how much of that was temperature and seasonal, and how much might have been some of this conservation stuff starting to sink in?

In other words, does that -- do those same correlations work historically? I'm wondering how to think about this going forward. I'm not sure it will matter if we get the decoupling mechanism fully in place. But it is interesting to think about whether we are seeing conservation finally take hold in California -- consumers have be fairly immune to those kinds of calls, or whether we are really seeing the conservation -- at least as big an impact as weather?

That's a really good question Debra. Statistically, we are getting a very high confidence interval, so you can take historical data and you can get the averages and you can get the statistical mean, medium, mode, you can do the regression analysis and you over the confidence intervals. So, the interesting thing about this is you have a fairly high confidence interval on that number.

How far back did you go?

I'd have to pull the regression sheets.

Just curious.

Yes, it was kind of our first attempt to add it -- a lot of you have asked me about it, and our statistics are something that I like, because I think it's a good tool to help describe things. But in terms of taking it by itself, it doesn't work. I think you have to take that coupled with the conservation, coupled with the -- the weather just being slightly off and you can see why demand was a little softer in the quarter. I think you have to put the two together.

And then, in answering your second question, I believe if the RAM is implemented the way it's implemented with the electric and gas companies, this becomes a [inaudible] argument.

Yes, yes, that is right. And I guess just two more quick questions related to that. Number one, how is demand shaping up for you now that we're almost halfway through the fourth quarter?

That's a good question. We haven't closed out October yet. Obviously it just ended yesterday. So I haven't had a chance to look at that. It's been an interesting fall. And that I'll tell you in the Bay Area some parts of the Bay Area we've already had up to two inches of rain, which is very abnormal. But right after the time we had that rain we went to 75 to 80 degree Indian summer weather.

So, in terms of having a good indicator, to give you an idea how far down we take the argument, we have between Pete and myself and a couple of other people here, we've got out the Farmers Almanac. I talked about the big oak tree in my backyard and how many acorns are falling off of it as an indicator of the winter. We just don't know.

As Pete told me when I was interviewing for this job, the only thing predictable about our business is the unpredictability of the weather. I think that's a very true statement.

Yes, that's what makes it fun on a trading standpoint.

Yes, it does, it does.

And then, Pete, you said it sounds like we should expect to get some, hopefully some decision, I'm guessing, maybe in the first quarter of '08, on the conservation proceeding. And then how will that take affect? Would we expect to see that in effect by assuming that there was a decision in 1-Q? Would that be in effect by the summer season next year?

Well, I think your best guess is probably consistent with my best guess on the timing. We have to see the decision before we know how to implement it. I know Marty is doing a lot of work getting ready for revenue adjustment mechanisms, because it's not an easy thing to implement from a technicality point of view --

Exactly.

-- especially when you have 24 rate districts, each one will have their own -- probably their own Revenue Adjustment Mechanism. And do you want to add to that Marty?

No, Pete, I think you are absolutely right. I mean, basically when you have a change of regulation that effects the change in accounting -- its complex. Obviously for selfish reasons I wouldn't want to implement it -- interim on a quarter. The best time that we do it would be at a year end, and second to that would be at a quarter end, because it is the change of regulation that effects accounting.

We have done a fairly detailed preliminary design that we are testing now, and we'll have that on the shelf ready to go. But it is a big shift. For example, we talk about the balance in accounts, and for those of you that may not remember, we had spent everything within the period that it's incurred, and then if it has -- if we believe it's recoverable for whatever reason, it goes into our balancing accounts. So, balancing accounts are off the books. With the RAM you potentially start booking those balancing accounts, and so --

Right.

-- there is a whole bunch of SOX work that goes into that Sarbanes-Oxley Bill, there's a whole bunch of changes you got to make to the billings system. It's much more complex. And so, we are spending a lot of time and money on it now so we are ready when it comes through. But obviously I think it would have to be on a changeover on a quarter.

And would it be -- would it be reasonable to think that it might get implemented at the same time as say the '07 GRC to take effect July 1st of '08? Would it be reasonable to think that we might implement it at July 1st of '08, or would that be over optimistic?

I don't know if we can answer that because I don't think have any indicators. I mean, obviously --

Right.

-- one of the things I think that's fascinating, get into your point about changes in demand and conservation, is there a lot of the municipalities, a lot of the cities, there's a lot of advertising going on about saving water. So, clearly, I think, the state's marching to the same drummer in terms of that message. However, will that reach into the Commission and the Commission then effects -- the public utilities like us. I don't know. I think that's too hard to speculate.

But obviously for us Debra, the thing you can be assured of is that we want around.

Yes, and we know that. I mean, I think, I mean, we are obviously seeing the impact in the stock price today, and just a concern about how much you're going to get yanked around over then next three or four quarters until this gets put into place, I guess is what I'm trying to get a sense of, and it sounds like it's just too early to sell.

Yes, I think it is. And I know you and Heike just published your water utilities 101, primer for investors and I think on page 34 for everyone who has it, and if you don't have it, I recommend getting it, because I think you guys are doing a really good job highlighting the kind of beta problem here --

Yes.

-- that if you look at the average water company in the U.S. -- beta is a measurement of risk. 1.0 is equal to the market in general -- the average water company has a beta of about 0.82. So that means, on average, water companies are less risky than a stock market in general.

The utility index for all the utility companies is this 0.86, and as Debra and Heike point out in their report, the California water companies are well north of that and -- San Jos Waters at 1.7, American States is a 1.25, and we're kind of in between at 1.64. So, mathematically that's just inferring that the California Water Companies have double the amount of risk right now, and that probably explains some of the volatility that we've seen over the last 6 months.

Yes, I think your beta has gone up after this week.

Yes.

All right, final quick this little housekeeping question.

How should we think about tax rate going forward? This thing kind of bouncing around -- came a little bit lower than we expected this quarter -- how should we think about that over the next few quarters?

I think the range that you've seen this year is the right range. The bounce around effect that you've seen is the effect of flow-through accounting and our ability to -- the cost of removal on qualified facilities is causing it to bounce around a little bit. So I would keep it probably plus or minus --

Thirty-eightish?

Yes, I would say thirty-eightish to fortyish -- I would give it that range. It all depends on the effect of flow through accounting. And what happens just so that you guys know and would think 48 as well -- we have to calculate that tax provision on a quarterly basis. And so, as things get into the books and those things affect the tax calculations, they kind of pull it -- it's like they'll flow through to it and then we have to true it up based on what we think our annual year end number is.

So it is going to bounce around it a little bit more. We are trying to minimize that obviously, but it really -- it really is a result of whatever comes through that we are taking deductions on.

Okay, that's helpful Marty. Thanks.

Okay, thanks Debra.

Our next question is from Steven Hill from First Investors. Your question please?

Hi you guys.

Hi Steven.

How are you doing?

Good. How are you?

I'm hanging in there. Got some good weather in New York today.

The -- I have heard, and I don't know if this is correct, but in your other expenses, I guess, where you have, I guess, I'll just call it consulting fees, in addition to legal you also have some IT consultants, I guess, putting in some new systems.

And that perhaps that number was larger than expected in this quarter. I wonder if that's true if that's a number you can break out and if it's a number that you can give disability on.

I don't have a sub ledger in front of me to give you the exact number. But I would tell you, if we are putting in new systems, there's the probability of capital. It's not going to be an expense, it would be flowing through a whip.

Is -- what about other -- what about other consulting fees? Have this created a negative variance this quarter?

We have a couple of things going on. If you look at the 10-Q from last quarter, and it will be updated in the disclosures this quarter. We did get named in two asbestos suits. So obviously those -- and we don't believe we have any liability associated with those suits. One of them has fallen off this quarter, one is still moving forward.

So, legal fees are up because of that. We have a General Rate Case going on. We've got another litigation associated in Chico [inaudible] I believe that's in the queue as well and some litigation associated with the Hawaii. So, things where we're recovering costs, but we have to go to court to get those. So that's, kind of, one bucket, call that litigation.

Okay.

And that's probably the biggest. And then you put kind of a General Rate Case, the '07 Rate Case on that, where we are. There's a lot of very, very tedious work that goes into preparing a General Rate Case. And to your point about certain expenses, healthcare plans, pension plans, retiree group health plans, those all require a great deal of actuarial work so we can come up with a good forecast that we can go argue with the Commission in terms of trying to get those dollars and rates.

And so, we got have a lot of costs associated with the Rate Cases, in terms of preparing them and getting them to go to the Commission. So you are seeing higher expenses in that line, but really it's driven by the legal and it's driven by the General Rate Case.

All right, thanks a lot.

Okay, thanks, Steven.

Our next question is from Selman Akyol from Stifel Nicolaus. Your question, please.

Thank you, good morning.

Good morning, Sel.

Couple of questions, if I may. With all the calls for conservation going on in the drought out there, should we be expecting to see purchased water prices increase, betwixt that -- you see that you see line go up?

That's a very good question. If you refer back to our 10-K at year end, we put what the increases were for 2007, and we'll update that table in the 10-K going into 2008, so you can see it.

If you look at the quarter, purchased water was up a little bit approximately $1.3 million. So, yes, you're seeing a little bit of that, but it hasn't been that big of a problem for us. I know it's been a larger problem for some of our water sister or brother companies within the state, but not as much for us.

So, I wouldn't say that we're seeing anything that's out of the ordinary right now like you're seeing with some other water companies, but it something that we watch.

Okay. And then going back to, I guess, your statistical analysis on weather and precipitation, I guess you summed up and you said you had adjusted R Square for a 1 degree Delta leads to a $600,000 change in revenue?

Right.

Would that be -- just be that across the entire quarter for that 600K?

Yes, so let's -- yes, that is your question? Well, let me summarize it as follows. So, you -- basically, what the '06 GRC being held up, there's $0.05 there because we've got a net benefit of about $0.01. So its there's $0.05 on the margin, if the statistical analysis worked out as approximately $1.2 million of revenue, that was lost because of the weather.

Okay.

So you want to add those two together, and you kind of get the effect.

All right, and then -- just going back to the General Rate Case area, you said you've got $2 million on an annualized basis now, and there's an additional $5.4 million to get, if it were to come through as recommended, I guess?

That's correct.

So how quickly would you recover that additional $5.4?

Typically, we are -- as Pete said, we're allowed to retro it back to July, but we would typically collect the difference, the variance between July 1st and when it's adopted over the next 12 months.

Okay. I think that's it, thank you so much.

All right, Sel have a good day, thank you.

You too.

Our next question is from Bishal Katrawal of Sanford Group. Your question, please?

I think my question was answered. I pressed two; I'm not sure why I didn't exit the queue.

Okay, thank you. Our next question is from Bill Garrison of Ironworks. Your question, please?

Thank you.

Marty, I wondered if you might be able to review the net balancing account with me. I know you mentioned early on, it was flat quarter to quarter. And I'm just trying to think again about how that works and any insights in terms of how -- what sort of improvement there might be in the upcoming quarter?

Sure, that -- good question, Bill. Let's start off kind of with balancing account basics. So under GAAP when we have any expenses, and Sel just asked about purchased water, any of those costs have to expended in the period, that's GAAP. So you match the revenue with the expense, so, it hits the income statement.

In the event that you have cost that's -- are recoverable, so for example, you have changes in power costs, power cost actually went down a little bit in the quarter, you have changes on pump taxes, and then wholesale price changes in purchased water can all flow through a balancing account -- and we're allowed to recover those costs.

So, the idea behind is you got to look at what happens in the balancing account within the quarter. And to the extent you have costs that you're expensing that are being currently recovered in the rates, they would show up in the balancing account if they were recoverable.

So, when you look at the slight increase in purchased water, that's probably more of a mixed problem right now, so there's $1 million-$1.3 million there, we probably won't get recovery. But if you look at all of a sudden Pacific Gas and Electric increases its rates that they charge us to pump water, you would see those costs flow to the balancing account. And that's why we started disclosing what are the net balancing account numbers every quarter.

Now, that's a very simplistic view, when you go in behind that concept, you have to remember we have a balancing account for every district, we have a set of balancing accounts for every district, and those numbers can flop around, kind of all over the place. But I think we have about four balancing accounts per district on average, and then when we get a RAM, we'd put a RAM in -- for every district on average.

And so, if you try to back in the numbers and stuff, it just doesn't work because we have so many districts. But the idea -- and that's why we've tried to highlight the balancing accounts -- because it talks about what's happening in the -- caught on the gross margin line, it shows what's happening in the production line.

And then in terms of trying to think at all about implications for the fourth quarter, is there anything we can do as analyst in terms of trying to think about the -- what the variables are that may impact you?

Yes, no -- that's a very good question. The question ask is, okay, when you try to recover those balancing accounts, and typically, when a variance in the balancing accounts equals 2% of the revenue for that district, we can apply for recovery or refund and we surcharge up or down based on that.

We did apply for a couple of $1 million to surcharge a couple of our districts. Those have been submitted by the Commission -- I believe they were approved. So there's $2 million that we'll surcharge up here over the next 12 months for one or two of our districts.

So, not a big change. It's kind of the point for Q3 to Q4. There wasn't a lot of things that flow -- that kind of went through the accounts, but there is a couple of districts that the 2% rule kicked in, and we filed for recovering those costs.

Okay. Okay, and --

And then Bill, when we get a RAM by the way, that almost becomes irrelevant because I believe those will be booked every quarter.

Okay. All right, and secondly, I just wanted to also ask some questions on your regression work.

Would there be a seasonal effect there in terms of -- if it turned out that the fourth quarter, for example, also proved to be a little bit cooler, would you expect to see that -- the same kind of results then?

Yes, I think potentially yes. And so, Debra asked a good question, which is kind of what was the time-horizon that you looked at. And in statistics, typically, the bigger the sample size, the more data you get and the more accurate you can make to model. This is just that now -- we've just started to play with a little bit, and I think it starts to explain some of the demand function that we face in the Company. So the demand changes what the impact is going to be to our income statement.

So, going into Q4, yes, I think the big thing to look for, for us, frankly, is you're going to look at when is the rain going to start, and if the rain is going to start late December or we're having an early winter, that's the thing to watch.

Yes, okay. All right, appreciate it.

All right, Bill good talking to you.

The next question is from Michael Gresens of Robert W. Baird. Your question, please?

My question has also been answered.

Thank you. Sir, at this time I'm showing no further questions from the audience.

Great. Thanks, Matt.

In closing, Pete, I want to thank everyone for joining us today. Obviously, there's a lot of stuff going on. I think a lot of stuff will happen here in the fourth quarter, so we'll keep everyone attuned to what's happening.

I'll be in the office all day today. If anyone has any questions, feel free to call me at 408-367-8200. And we thank you for your support and look forward to talking to you next quarter.

Thanks everybody, have a good day, bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Good day.