California Water Service Group (CWT) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the California Water Service Group's Second Quarter 2017 Earnings Results Call. (Operator Instructions)

I will now hand the call over to Dave Healey, Vice President, Corporate Controller. Please go ahead, sir.

Thank you, Tracy. Welcome everyone to the 2017 second quarter earnings results call for California Water Service Group.

With me today is Martin Kropelnicki, our President & CEO; and Thomas Smegal, our Vice President, Chief Financial Officer and Treasurer.

Replay dial-in information for this call can be found in our second quarter earnings release, which was issued earlier today. The replay will be available until September 27, 2017.

As a reminder, we before begin, the company has a slide deck to accompany the earnings call this quarter. The slide deck was furnished with an 8-K this morning and is available at the company's website at www.calwatergroup.com\docs\2017q2slides.

Before looking at this quarter's results, we'd like to take a few minutes to cover forward-looking statements. During the course of this -- 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 and other reports filed from time to time with the Securities and Exchange Commission.

Now let's look at the second quarter 2017 results. I'm going to pass it over to Tom to begin.

Good morning, everyone, and thank you, Dave. Martin and I are going to go through the earnings slides that Dave mentioned, and I will try to refer to page numbers when I'm talking about a specific slide and I'll try to make it general enough if you don't have the slides with you. But hopefully you'll be able to get to the website and take a look at the slides as we go through.

Our operating revenue for the second quarter was $171.1 million, and that was up $18.7 million from the second quarter of 2016, that's primarily due to the General Rate Case that was adopted in California at the end of last year, as well as some purchased water offsets that we've achieved through the California regulatory process.

Our operating expenses are $145.9 million, up $12 million from the similar quarter last year, that is largely due to depreciation and purchased water cost increases.

And if you go down to the bottom of Slide 5, our net income is $18.5 million, that is up $7 million from our net income in the second quarter of 2016. Earnings per share $0.39 versus $0.24 in the second quarter of 2016. So a very good quarterly results for us. We'll talk a little bit more in detail about that.

On a year-to-date basis, I won't go through that Slide 6 in too much detail, but I will point out that our earnings per share on a year-to-date basis are $0.41 versus $0.22 on a year-to-date basis for 2016.

Flipping to Slide 7. The earnings increase of $7 million, as I mentioned, is largely attributable to increased revenue from the California General Rate Case that was established in December of 2016. We have, for the quarter, an unbilled revenue accrual increase of $2.5 million, a decrease of $1.1 million in our drought-related costs for the quarter, and decrease of $1.2 million in our maintenance costs for the quarter. And we do think, at this time, that the maintenance cost increase is attributable to the lack of drought conditions. We'll talk a little bit more about that as we go forward in the presentation.

Finally, we have an increase in our other income of $1.2 million, and the primary driver there is the implementation of equity AFUDC for the company or for the California operations of the company, and that was an authorization that was contained within the General Rate Case decision. Previously, we only booked interest during construction on our capital projects.

So just flipping to Slide 8. Again, very similar explanations on the year-to-date result changes. I will point out on Slide 8 at the bottom there, the company- and developer-funded capital investments [for the year] were $108.7 million, that's very similar to our investment for 2016 during the same period. And we are still on track to meet our targeted range of $200 million to $220 million of CapEx for the year 2017.

The earnings bridges on Slide 9 and Slide 10 describe some of the same factors that I just mentioned. But just going through Slide 9, which is the quarter 2 earnings bridge. Again $0.159 increase due to rate relief; $0.033 increase due to the change in unbilled revenue; $0.014 increase due to the lack of drought expense in the quarter. The effect of the equity AFUDC added $0.012; and then the headwinds rather were depreciation expense, again because our capital investment last year created more [plant] to depreciate that $0.044. Interest expense $0.012 increase in -- due to -- sorry, decrease due to interest expense and then other items.

So flipping ahead to Slide 11. Just to give you an indication, the rate relief is consistent with our GRC decision. We are on target with the rates that we thought would be established. We're getting the revenue we expected from that GRC. The change in unbilled revenue is a seasonal factor. We've talked about that a lot on our calls. It was up a bit in the second quarter. It's -- actually have been down a bit in the first quarter. And if you look on a year-to-date basis, that unbilled revenue accrual has had no change from 2016. So it's not a real factor here this year.

And, I think, I've covered everything else on the slide. I'm going to turn it over to Marty to talk about some regulatory matters, starting on Slide 12.

Great. Thanks, Tom. Good morning, everyone. I want to start off by giving everyone a cost of capital update.

As you may recall, we filed our cost of capital application with the California Public Utilities Commission, so this is for the California utility, on April 2, 2017. We did request a 10.75% ROE, with no change to our equity structure. The company is currently at a 9.43% ROE, with 53.4% equity. The application that was filed at the beginning of the process and we are waiting to get the Ratepayer Advocate testimony sometime in August, and we have hearings schedule beginning in September. The commission has published and adopted schedule that should -- that has indicated a decision should be given out by the end of 2017 with any changes to the cost of capital effective January 1, 2018.

On a side note, on July 13, the commission did adopt the proposed settlement with the electric and gas companies as adopted. We think that's significant and that it shows the commission's continued willingness to work towards an agreed settlement with all parties. And the electric and gas cost of capital settlement has been filed and approved.

Going onto Page 13, a couple of other commission notes that I think are important. First and foremost, we're in the process -- are preparing for our escalation or, what we call, our step increases for 2018, that is up to $17.2 million that will be requested in the fourth quarter to go into effect after January 1, 2018. These increases, as some of you may recall, is a little different in the water industry than the electric and gas industry, and that they're subject to an earnings test, which reviews our capital investment performance, our ability to hit our capital targets. Increases or decreases also can vary with recorded inflation. And the step increases that'll take effect will also incorporate the sales reconciliation mechanism, which adjusts the -- for changes in the adopted quantities in the adopted rates for consumption.

So overall, I think, we're pretty bullish on the step increases for the year. The company has continued to do a great job on capital. I'll come back to that in just a minute.

In addition, as you may recall, there's $30 million of aggregate advice letters for the State of California, which will be included in rates after the completion of specific projects through 2019. For the second quarter of this year, the CPUC has approved 3 advice letter projects totaling an additional $1.3 million of revenue.

Also in May, we filed an application with the California Public Utilities Commission to incorporate Travis Air Force Base into the California service territory. The application requested that we establish Travis Air Force Base as a standalone district, and thereby giving a rate jurisdictional and capital jurisdictional oversight to the California Public Utilities Commission for the air force base.

And then lastly on the commission notes, Hawaii Water is on schedule. We have requested a $1.5 million increase for Pukalani sewer system on the island of Maui, and that is proceeding as planned and we hope to have something completed and wrapped up sometime in September that we can talk about on the third quarter call.

Moving ahead to Slide 14, activity of other regulators. I think it's important to note that the State Board continues to work on permanent water use requirements for the State of California as the governor said making conservation a way a life. So we continue to be engaged in those discussions and we expect more to be coming out from the state in terms of permanent conservation plans for the state in terms of preparing for the next drought.

In addition, the State Board adopted a new water quality standard for 1,2,3,-Trichloropropane or, what we call, TCP. TCP is the contaminant that was used widely in the agricultural industry. The TCP part of it is really what was used to deliver the chemical to ag product, and it's some pretty bad stuff. The requirement, the maximum contaminant level has been set at 5 parts per trillion, so it's 5 parts per trillion. Cal Water has a total of 38 wells that are affected and will be using activated carbon filtration to treat for this. This is something, if you've read our Qs and our disclosures, we've talked about for some time. Certain municipals have been kind of cut off guard by this rule. We have been well underway with our treatment process, plan and design on how we're going to handle this new rule for over a year. In fact, we are expecting our final quotes for implementation from some of our service vendors to come into moral. We included, in our capital plans for 2017, $20 million to deal with the 1,2,3-TCP, and we estimate another $40 million will be included in CapEx for next year for 2018. So again, those numbers are already into the capital estimate that we shared with the Street.

In addition, in California, a new legislation was passed that required water companies or water providers to do lead testing in schools, which Cal Water fully supports. And we have started our process of working with the 738 schools in our service areas to provide water quality testing looking for lead and copper under the lead and copper rule. The CPUC or California Public Utilities Commission has approved a memorandum account for us to track these costs as we move forward with the continued lead testing in the State of California.

It is noteworthy that of all the testing that we've done so far, we have -- we found no lead in schools. We've had one that had -- that hit the maximum contaminant level of 15 parts per billion on lead, but we're waiting for the final confirmation test to come in. So, so far, all the testing that we've seen in the schools have been coming in clean other than one that we're waiting for a confirmation test on.

I'm going to turn it back to Tom to talk about the residual effects of the drought.

Thanks, Marty. So, as you may have heard, there was a small drought in California over the last 4 or 5 years, which we've been dealing with and talking about on these calls for some time. The droughts have been over - the official declaration of drought has been over for some time and we're now dealing with a few of the aftereffects of the drought. So I'm going to talk about 2 factors and that's the water sales and then the recovery of the drought expenses.

As you'll recall, Cal Water has been decoupled since 2008 and that means that the changes in sales do not affect the income statement, they flow through on the balance sheet, creating a receivable and -- sorry, we're getting a little vibration out my window there, creating a receivable and that is our regulatory process to recover that receivable. As we've seen in 2017, with the drought being over, water sales have come back very slightly and have not come back to be adopted quantities. So our sales have increased 3.5% this year as compared to the same period of 2016, where we were in the drought. However, we're still about 20% below the adopted quantities for sales in our districts.

And as a result of that, WRAM receivable balance has grown from about $37 million at the end of 2016 to almost $55 million at the end of the second quarter. And we do expect that, if the water sales continue to lag the adopted, that we will see an increased WRAM balance as we go through the end of the year.

I do want to point out that there are several regulatory mechanisms that are going to kick in in 2018, that will start to show, for us, a reduction and a mitigation of the WRAM receivable balance. The first is, the sales reconciliation mechanism that Marty touched on with respect to our 2018 escalation year filing. What that does is, if our sales, for instance are 20% below the adopted targets, it will adjust the sales forecast for 2018 by 10% so that the rates in 2018 would be designed with 90% of the prior sales volume in mind. So it's a 50% ratchet mechanism, designed to smooth that curve. In addition, we have our WRAM surcharges, 12- and 18-month surcharges. Those go into effect every April to collect the prior year balances. And we did file, in April, for our WRAM recovery of the 2016 balances in April 2017.

So just shown on a bar chart on Slide 16, the relative balances over the course of the years. And then moving onto Slide 17, the recovery of the drought expenses. As you'll recall from prior calls, the expenses to administer drought programs were booked in the period incurred, and we need to get that back through the regulatory process. We have seen drought expenses of $0.3 million for 2017, that's down from $3.2 million in the first half of 2016. So almost 0 in terms of drought expenses will just have a few wrap up items that we've been doing.

As you'll recall, our drought costs of $4.4 million expensed in 2014 and 2015, we did achieve a regulatory result returning $2.9 million to Cal Water to recover there, and that really had to do with the determination of what was an incremental cost at the commission and what was a non-incremental cost, and that's why there's that adjustment there. We did record drought costs of about $4.4 million in 2016. And so, later this year, we will be asking the commission to recover those 2016 costs, as well as the small costs that we've seen in 2017 and any capital that was associated with the equipment used by the folks in the drought.

As per our revenue recognition policy, we're going to book the revenue when it's adopted for recovery by the CPUC. We would hope to get that by the end of the year, but there is obviously a regulatory process involved, and so there is no guarantee that we would get that approved by the end of the year.

So I'm going to turn it back now over to Marty to talk about CapEx.

Great. Thanks, Tom. I just want to give everyone a quick update on where we are with our capital program for the year.

Company-funded and developer-funded capital expenditures or investments totaled $108.7 million through the end of June. If you may recall, we got off to a slow start to the year given all the rain that we had during the first and early on in the second quarter, but we've regained some ground and we believe we're on target to complete $200 million to $220 million of capital for 2017.

In addition, the planning for the next rate case has been well underway. And once we file the GRC next year, we'll share what the capital plans are for 2019 to 2021, but that process has been going very, very smoothly. We're well under the justification phase of the capital program for the next rate case and starting to work on our prepared testimony and filing for their rate case that will get filed in 2018.

If you look at Page 19, we've updated the chart for the capital investments you will see that under 2017, where it shows the $108.7 million out of the $210 million average target that we're driving towards.

And on Page 20 is our rate base estimates and those haven't really changed.

Prior to wrapping things up and opening up for Q&A, I want to deviate from what we would normally do on call and a moment to pay tribute to someone who has been very important to our company, who passed away on June 09, Bob Foy or Robert W. Foy. Served as our Chairman of the Board for 16 years and served as a director for the company for a total of 35 years. Bob passed away in June after a good fight with a very serious illness that ultimately took his life. Bob joined the company in 1977 as a director -- outside director. At that point, we were a single-state company. We had a $156 million in net utility plant and only $45 million in revenue. Bob was one of our champions and instrumental in our expansion within California and our growth in the 3 other states. In addition, Bob was the driving force at the recruitment of Peter C. Nelson or Pete Nelson, who is our current Chairman of the Board. Bob had many personal achievements throughout his life, far too many to talk about. For those of you that know Bob, you know exactly what I mean. But some of the major ones: He was the outstanding male graduate from San Jose State University in 1956. A couple of years ago, he was voted Stocktonian of the Year from his hometown city of Stockton. He's an honorary life member of the National Association of Water Companies, where he chaired the Government Affairs Committee for a number of years, and he was awarded a lifetime membership from American Water Works Association. Bob had a zest for life and a unique ability to bring out the best in anyone and everyone that he talked to. In particular, his warm handshake, the sparkle in his eyes as he engaged in conversation, and his ability to strike up a conversation with just about anyone he meets are only -- are the -- few of the key things that I think made him so special. Bob cared deeply about our employees, our customers and the communities that we serve, and the image and the brand that our company employees portrayed every day when they went to work. He was a leader that helped build our culture of "do the right thing" and always put the customer first, while firmly believing in the human spirit that hard work always pays off. While it's sobering for all of us here to accept the fact that Bob is no longer with us, his philosophy of do the right thing and always exceed customer expectations, as well as the love for our company, California Water Service Group, lives here daily in the culture that he helped shape and the legacy that he left behind. Our sincere condolences go out to Barbara, Matt and Peter for the loss of a truly outstanding human being, who'll be dearly missed but never forgotten.

With that, I want to take a moment to just wrap up the quarter before we open up the Q&A. Obviously, a solid quarter on a year-to-date basis and for the quarter itself. Primary, we see the result of the rate relief coming in from the 2015 General Rate Case. The company continues to execute well on its operational and capital plans. I think both Tom and I are very, very happy with the budget actually managed on the expense side for the company as well as the capital investment plans, and our ability to regain some of the ground that was lost due to poor weather earlier in the year.

For the last half of the year, we kind of shift gears now and there are a couple major things going on. First and foremost, completing the cost of capital proceeding; the regulatory team is busy working on that. Complying with the new California TCP regulation; the engineering and operational crews are executing our plans that we have developed around meeting the new water quality standard. And, of course, preparing for next year's General Rate Case will be a major driver of our efforts for the rest of the year.

Operator, with that, we will open it up to questions.

(Operator Instructions) And we'll go first to Tyler Frank with Robert Baird.

Just wanted to touch on the drought recovery real quickly. When would you expect a decision to be made and for that to flow to the P&L? And then, given that there is a delta, I think you guys asked for $4.4 million last time and only recovered $2.9 million. Should we expect a similar amount to be recovered this time with your request there? And then I have a follow up.

Sure, Tyler. So this is an advice letter process, what's called a Tier 3 advice letter in the California Commission (inaudible), which means that the commission has to adopt a resolution. So it's not a decision per se. Usually it's as little as a 90-day process, but it can take longer depending on the staffing of the commission's water division. It's our intention to file this as soon as possible. Obviously, there is a few more expenses that have been trickling in. And we're just trying to wrap up the accounting and get the accounting clear for the commission staff to review. As far as the percentage of recovery, I think that is an open question. We are recording the costs of the drought that have to do with anybody who does any work on drought activities. And what the commission found in the 2016 filing was that some of that was probably already covered in rates, and what they're really looking to reimburse this for are the incremental costs. So the additional costs of hiring new person or the new mileage or equipment or outside expenses that have to do with the drought. I think we'll do a better job this time than we did in the 2016 filing, because we now kind of know what they're looking for. But there is obviously no guarantee that we're going to get the full amount back. And so I can't offer firm guidance on that, but we're trying to maximize that as much as possible.

Got it. Okay. And then looking forward over the next 18 months or so, it looks like you guys will have about little over $300 million in CapEx spending. How should we think about the balance sheet and your ability to be able to fund that?

I'm sure. So we do maintain a revolving credit line that, at the operating company level, has a $300 million cap, and then there's also a credit line for the holding company as well and that's a $150 million credit line there. We are currently, I believe, $140 million out on the Cal Water revolver, and the limitations there are both the maximum, the $300 million and also the timing with the California Commission. So we're required, every 2 years, to pay that down for regulatory purposes, so it can be considered short-term debt. And we were [lapped] off the line in September, October of 2016. So presuming that we don't get to the maximum amount on that line, the $300 million, we would have to do financing before October of 2018. So that's a consideration. As far as the long-term financing goes, we intend to stick to the capital ratio that's been adopted for us at the California Commission, and essentially similar ratios are obviously present in the other states, but California dominates the conversation there. So our long-term financing will continue to be a combination of debt and equity that keeps us in that range as close as possible.

And we'll go next to Spencer Joyce with Hilliard Lyons.

Awesome quarter. A couple of mostly housekeeping questions for me this morning. Tom, I saw in the release, looking for full year taxes closer to 37% then -- kind of the 37% to 39% range that we had previously. Is there anything that we can read through perhaps into 2018 or should we perhaps stay with kind of that midpoint of 38% for the out year?

So what we see, Spencer, driving that percentage number is primarily the amount of deduction that we have for the, let's call the, repairs deduction and that has to do with small replacements of mains within our linear asset structure, so within our district, the main replacement program. The way that our rate case authorization for capital has worked, the bulk of those were in 2016 and kind of a normal amount in 2017, and we see probably little bit less on the main replacement side in 2018. So that would tend to give you a slight upward pressure. Again, these are not major differences but they can move the needle 1% or 2%. So, I guess, I would say for 2018, the rate is not as likely to be 37% as it is to be 39%. So some...

Okay, perfect. That was very helpful and very clear. Also kind of minutia here but, Tom, can you talk about any special expenses we saw from the fires in Kern County? Is there anything we should back out or add back kind of to the current year to get kind of a fair run rate?

That's a really good point and we didn't mention that, because it didn't raise the level of some of these other factors, but we did actually receive an insurance settlement with -- for our business interruption insurance that recovered about [$600,000] of the expense that had been recorded in the 2016 period. So we did have a blip in expenses in the second half, I believe that was in the third quarter of 2016. And that $600,000 is reflected in the results for the first half of 2017. So a little bit different timing there. I guess you could say that the expense was high in the third quarter and that expense, hopefully, will not be there in the third quarter of 2017, but we did see that benefit come through in the first half of this year.

Okay, got you. And the insurance settlement, specifically on the income statement, what was that an offset to? Was it in other line or was it up in kind of either the maintenance or the G&A?

That's in A&G expense.

(Operator Instructions) We'll go next to Jonathan Reeder with Wells Fargo.

Very sorry to hear about the loss of Bob. Those were some very kind and accurate words to describe the man. Yes. So couple questions on my end. You indicated $0.3 million of drought expense in 2017. Is that the expense that we're going to see before you indicated maybe you are expecting a $0.5 million of $1.5 million?

Yes, I think we've really rounded up. I was talking to our Conservation Director yesterday and they're obviously getting ready to make that filing with the commission to recover the drought expenses. So he does think those charges are over in all significant ways. There could be a charge here and there that we capture, but I don't think there's going to be much more.

Okay, great. And then -- so the expenses like A&G, other operations and maintenance, I see they're down year-over-year on a year-to-date basis. Do you expect that will be the case for the full year?

So just taking maintenance, for example, obviously we did direct our staff at the initiation of the drought to go out and fix every leak any time and make sure that the customer knew that we weren't wasting water, and we backed off on that somewhat with a new maintenance rule probably around the first of this year. So we could continue to see a decline in maintenance cost, obviously the bump up in maintenance. If you go back historically, was over the last year, 1.5 years and it probably was related to the drought. But that said, things do break and you can have major maintenance that occurs regardless of whether it's a drought or not. So the general trend is probably down on the maintenance line, but there is no guarantee that it's going to stay low for the rest of the year. As far as the other things, they're tracking pretty well to our budget. And I don't know that I can point you one way or the other as far as the second half of the year as far as A&G and other O&M expenses.

Okay. But I guess they're online with kind of your budget, what you're expecting at least kind of for the full year.

And one of the things, Jonathan, I think Tom's team has done really well is we've kind of -- we've retooled over the last 2 years kind of the whole kind of budget management on both the expense and the capital side. So I think we're fairly comfortable with the operating environment and everyone's ability to kind of manage your budgets both on gaining the capital on the ground but also on the A&G side.

Okay. (inaudible) so good job there. And then kind of a last question I had, I'm not sure if you've had any dialog with any of the key intervenors on the cost of capital, but obviously the electric settlement approval process in the all-party meeting provided a glimpse into the various parties' stocks. What do you anticipate will kind of be the hot-button issues for the waters? And in that regard, do you think the CCM will remain in place and/or kind of be modified in some regard?

So given that the commission has established a 3-year cycle, I think it's reasonable to expect that there will be an adjustment mechanism that has to occur, whether there's thoughts on whether that should be modified. That's always been a discussion point in the cost of capital proceedings that we've gone through, whether there's a different color on it or a different way of indexing and that sort of thing. So let's await and see. I think we're going to get the DRA report or RA report pretty quicker, next couple weeks is my understanding. So I'd rather not guess as to what their issues are going to be and I'll be surprised like everybody else when I read that report.

Yes. So far, we only got one intervening party and its a local city, and they were involved in the rate case as well. I wouldn't say there were very active intervening parties. So I'm not aware of anyone else intervening the process. I also think that water, cost of capital proceeding is somewhat different than the electric folks in terms of getting the big intervenors involved. I suppose they can jump on ours anytime. But we're pretty small potatoes compared to the electric and gas companies. And so far, it looks like it's just going to be a normal process. It was nice to see the schedule get posted that shows this thing being completed by the end of the year and we're going to charge full steam ahead and hopefully get it done before January 1.

Okay, when you say 1 -- only 1 intervenor, I mean is that besides ORA in TURN? Or...

TURN is not in our case.

It's just ORA in 1 city. It doesn't mean that TURN couldn't decide today to get into the case, but they're not in case because of them.

Got you. Yes, I mean, so when you kind of went through the white paper the commission put out on kind of cost of capital, it sounds like that. I mean, nothing in that seemed, I guess, overly concerning in your opinion or I guess vastly different than the issues that should be examined in this process on a regular basis?

No, I mean, it's a pretty theoretical -- it's an odd mix, right, because you have very -- a lot of theory around cost of capital and then ultimately it comes down to a decision of the commission and an Administrative Law Judge that have to take into account lots of different interpretations of the fact that relate to those theories, none of which are always said as (inaudible) right answer. And so what we found over the years is obviously those things are influenced by the cost of capital, it's been adopted for other utilities and the general mood of the commission, which expert essentially are you going to believe, in which way, on which of the models as you run through them.

Right. So, I mean, you think a settlement is still with ORA, it's certainly a possibility? Or is it kind of predestined to be fully litigated, given the gap between the last proceeding?

So what I would tell you is, based on my experience as the Regulatory VP at Cal Water, I was always interested in talking to ORA and DRA and all the interveners in an effort to make a settlement. I think that we would continue that policy I'm sure. Paul is not here with us today, but Paul would tell you that that's his first instinct as well. Obviously there's times when you can't reach a settlement and this is a multi-party proceeding, so there's a number of different factors at play, it's not just Cal Water making a settlement that you'd probably most likely have to get everybody in the room to make a settlement. So with that said, we have settled this case before. The last case, 6 years ago, was settled among the parties. So we're constructively optimistic that we could achieve a settlement, but again we haven't seen what ORA's testimony is.

I would add too, Jonathan, I think we were generally pleased with the settlement that the electric and gas companies got. I mean, they took a -- if you look at the average haircut on ROEs and all their ROEs were in the mid-10s. It was 11 basis points on average, and I'm not saying that's the indicator of where ours is going to go, but I think the fact that they could negotiate a settlement and they all ended up slightly north of 10%. Given the interest rate environment we've been in now for the last 7 years, I think is a good indication that we probably have a chance of settlement.

We will go next to Tim Winter with Gabelli.

And I too, I'm sorry to hear about Bob. That was a very nice tribute, Marty. My prayers to his family and to you guys. I got 2 quick regulatory questions. First, just a follow-up on Jonathan, is it a certainty that this going to be a 3-year cost of capital mechanism?

Yes. Tim, I'd say that because that's in the rate case plan for our water utilities, so that's the way this works. I haven't heard anything different than that. There hasn't been a move to amend the rate case plan.

Okay. So that's a safe assumption?

For now. I mean, obviously, I guess, the Ratepayer Advocate could put something in their testimony that they want to revisit this. But, to be frank, it's a very expensive process, where everybody involved these financial experts that both sides hire to weigh in on what's the reasonable cost of capital are. It's an expense to the commission as well as an expense to the companies, which gets passed on the ratepayer. So I think the -- it's really a matter of efficiency of regulation, that we don't we see this proceeding going on every year, and so I would think they would stick to a 3-year schedule unless something really unusual is happening.

Okay. And then I was hoping you could just quickly walk through the regulatory issues in the -- with the Travis Air Force Base.

Sure. Well, first of all, it's -- I believe it's a first in California, where anyone's filed for a military base to be under PUC jurisdiction. So most of the models that are out there, it's more like an OEM contract, then the contract negotiations every [so many years] take place between the Department of Defense or one of their sub-agencies and the utility doing the operations. So this is a bit of a deviation. In terms of the business model, we think it's a business model that's much more aligned to our core competency. It gets the DoD and the military out of rate design discussions and allows the commission to give oversight. And I think we would argue that Commission in California generally does a very, very good job with oversight of water utilities. So application has been filed, we're going through a process of discussion now, and ultimately the commission will have to approve add us as a service territory. I don't foresee any big hurdles with that. Obviously, if we add -- if it's added as a service territory, there is a fee that has to be paid to have the oversight in regulation sort of add to that revenue, if you will, of the Public Utilities Commission. In terms of the timing, Tom, on an application like that, what would be normal? I...

Yes. Tim, what I was going to add to that is I know last week or the week before we did a tour of the travel system with the ORA folks, I don't believe we're far enough along in that process to know kind of what their issues might be or what the timing might be. On an optimistic -- on one end of it, if you were truly optimistic and they didn't have much of an issue with us incorporating and it could be a relatively quick application process in a sense if they don't end up protesting and raising a lot of issues. And so we'll be hopeful for that. Obviously, if they do raise issues and, I guess, there is a variety of issues they could raise if they wanted to, then it could be an extended discussion.

And there are no other questions in the queue.

All right. Well, thank you all for listening in and your good questions on our second quarter earnings call. We look forward to having good rest of the summer and talking to you all in October. So thanks very much.

Have a good day, everyone. Thanks.