California Water Service Group (CWT) 2017 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the California Water Service Group Third Quarter 2017 Earnings Results and Teleconference. At this time, all participants are in a listen-only mode. (Operator Instructions) I would now like to turn the conference over to your host, Mr. David Healey Vice President, Corporate Controller.

Thank you Sonia. Welcome everyone to the 2017 third quarter earnings results call for California Water Service Group. With me today, is Martin Kropelnicki, our President and 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 December 26, 2017.

As a reminder before we 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 also available at the company's website at www.calwatergroup.com/docs/2017q3slides.tdr. Before looking at this quarter's results, we'd like to take a few moments to cover forward-looking statements. During the course of this 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 third quarter 2017 results. I'm going to pass it over to Tom to begin.

Good morning everyone, I'm glad to be here on a beautiful and warm autumn afternoon or autumn morning rather, here again in California. So I am going to go over our financial results and then turn it over to Marti for some color on some events during the quarter, and then we'll wrap up with little bit more from me.

And I will be referring to the slide deck that was furnished with the 8-K, as well as available on our website. So, I'm starting with slide number 5 in that deck, and reporting that our net income for the quarter was $33.8 million, up 48% from the $22.9 million in the third quarter of 2016, that is $0.70 on an earnings per share basis, up from $0.48 on an earnings per share basis in the third quarter of 2016.

Operating revenue was up $211.7 million rather as compared to $184.3 million in the third quarter of 2016. On a year-to-date basis, turning to slide 6, we show net income of $53.5 million, that is up from $33.6 million or 59% over the year-to-date period in 2016. And we're showing a $1.11 earnings per share as compared to $0.70 of earnings per share in the first three quarters of 2016.

Just a flip to financial highlights on slide 7. Again, the quarterly earnings increase was primarily attributable to $12 million additional revenue from recent rate increases in California. We also had increased unbilled revenue accrual of about $3.4 million. Our other income is increasing, it's $700,000 in the quarter, primarily due to the implementation of equity AFUDC this year in compliance with Commission's decision in our California rate case last year. Our other operations expense reflects the expensing of $1.1 million from unrecovered wastewater treatment assets in Hawaii, associated with their GRC, and previously capitalized drought costs in California, which we now believe to be expensable. In comparison, in the third quarter of 2016, the company wrote-off $3.2 million from an abandoned water treatment plant project in our Bakersfield district in California.

On slide 8, the financial highlights on a year-to-date basis or year-to-date earnings increase of $19.9 million, again largely attributable to the additional revenue from recent rate cases in California. And on a year-to-date basis, we do not see a significant effect from that unbilled revenue accrual change, it's about the same as it was last year. On year-to-date as well, the drought related costs have decreased pretty dramatically, obviously we were in a drought period in the first half of 2016, and we're not in the drought here in 2017.

Our other income has increased $2.9 million. Again, primarily due to the equity AFUDC issue and also we've done head gains in our (inaudible) plan investments. Our CapEx for the year- to-date was $180.4 million and that is an increase of $14 million or 8.4% compared to the amount for the first nine months of 2016.

If you go to earnings bridge, EPS bridge on slide 9 for the quarter. You'll see the same factors listed, rate relief is the big increase, the change in unbilled accrual, the other income and the decrease drought expense. We do have increased depreciation this year, because as we invest capital we increase our depreciation expense.

On slide 10, the EPS bridge on a year-to-date basis. Again the same factors, rate relief, the decreased drought expense, other income, which includes the equity AFUDC, depreciation and also on a year-to-date basis, the interest expense is a slight drag on earnings. And that's due to more borrowing that we did in 2016.

And I think at this point, I'm going to turn this over to Marty for some thoughts on the quarter.

Great, thanks Tom. And I'm on Slide Number 12, I am going to start off talking about the California Fires, that I think most people probably heard about over the last couple of weeks. We were lucky in our northern districts, we despite being on high alert, didn't have to deal with any major fires within our service territory. We did sustain some minor damages that had to deal with three plumes up near Oroville that burn down. So it's about a $1.5 million of damage related to those plumes, including those rebuilt.

There were not a water source for drinking water, these were irrigation plumes that were used to provide irrigation water to a small number of customers. So, overall we have survived the fire storms in Northern California very well. As some of you may recall, last year we had Erskine fire, which was in the Kern county area, which is a service area we were directly affected, in part of our service area was burnt down as well as the Oroville dam emergency earlier this year and we have keenly taken our lessons learned from those events.

In terms of emergency preparedness, 2015 we promoted retired Fire Chief Gerald Simon. He was fire chief for the city of Oakland to our Chief Safety and Emergency Preparedness Officer, Gerald has a long and distinguished career as a firefighter, as a fire chief with a whole host of credentials, and he has done a great job at establishing our Emergency Preparedness program within all 4 states that we operate in. Since 2015, we activated our EOC or Emergency Operation Centers, a total of 14 times to deal with local emergency type of events. We also run joint Emergency Operation exercises with many of the communities that surround our service area. And in fact, a few weeks ago, we had the Chico and Marysville emergency operations training with about 80 participants from local government services close by. So well as a close call for us, no real damage sustained with the fire storm, however, just we do always keep our guard up, when it comes to emergency preparedness.

And in fact, many of you may have noted, we did add a new director to the Board of Directors for California Water Service Group, Vice Admiral Carol Pottenger, who retired a couple of years ago from the US Navy as a Three Star Admiral. Carol has a long, long bio of success, including being one of the first women who selected to serve at sea for the US Navy. The first female officer to command a battle strike group in an battle command. We were very interested in Carol for a couple reasons, one she has a strong background in asset protection, two, she's a very good background in cyber security from her time with NATO, and three, she has run a couple large scale disaster relief operations, including assisting with the Fukushima Reactor plant in the Haiti earthquake. So we figure, we're very, very fortunate that Carol joined the Board. We're happy to have her on the Board, she is a delightful person, and I think she will complement our already strong emergency preparedness training that the company goes through on a normal basis.

Turning to slide 13, want to take a moment to talk about the cost to capital. There was not a settlement reached in the cost to capital, nor do we anticipate a settlement being reached. It'll be a fully litigated cost to capital proceeding. Going into the proceeding, we requested ROE of 10.75% with equity of 53.4%, so, keeping equity flat. The Ratepayer Advocate proposed an 8.2 ROE with 54.4% equity. So we we're not able to reach an agreement with the Advocate. We are currently authorized at 9.43 with 53.4% equity. We had our hearings in September, the Commission has adopted a schedule for decision that we expect to have done by the end of this year, but it will be a fully litigated cost to capital proceeding.

Going to the next page on other regulatory notes, I have mentioned, we're in the process of preparing our step increases, our escalation rate increases, there was approximately $17.2 million available, that was the cap, that's subject to an earnings test and an inflation adjustment, and we will be requesting that number in the fourth quarter. We're currently in the process of preparing the filing for that, and I don't have any final numbers yet, but I am very bullish on our performance given our capital spending and expect that we will be in the higher end of the range, receiving that step increase.

In addition, we will be incorporating the sales reconciliation mechanism adjustments that will take effect in 2018. So we have adopted consumption that's greater than 5% of actual, greater than 5% of the adopted, the following year, we have the ability to file with the Commission to capture 50% of that change in the sales forecast into the next year. And so it looks like all of our districts are going to trigger that going into 2018, and then helps with WRAM and the decoupling mechanism and our cash collections. The $30 million of aggregate advice letter projects that the company has in outstanding through the third quarter, the CPUC has approved four advice letters that we filed for an additional $1.3 million of revenue, that will be included going into 2018.

In addition, we filed an application with the California Public Utilities Commission to incorporate the Travis Air Force Base, in its service territory, so it will be run like a regulated district, one of our regulated districts, the application is still in process with hearing scheduled sometime here in the fourth quarter with the Commission to try to work that into the rate regulated regime, that we have here in California.

Looking at some of our other states. We did receive decision by the Hawaii Commission authorizing us for additional $800,000 of revenue associated with our Pukalani wastewater plant as Tom mentioned, we did have some assets that we impaired as part of that settlement, that was reached with the Hawaii Commission, and so we impaired those assets, the decision has come out. And that $800,000 will be phased in over the next 4 years, effective in October of this year, so this month.

I also want to just take a moment to point out a couple of awards that the company has won at the last couple of weeks. Normally, we don't talk a whole lot about awards, but there's a couple of interesting awards, that I think are noteworthy. The first one was yesterday, we were awarded the AWWA The American Water Works Association, Larry C. Larson Safety award, as anyone who has studied our management incentive plan, that we have in place, safety is one of our 5 key objectives within the company. So it was nice to receive that recognition and a great job by Gerald in the Safety team, who really going to work on improving our safety scores.

In addition on Tuesday, the US Department of Commerce and President Donald Trump awarded us the 2017 Distinguished Supplier Diversity award, and we had people at the White House to receive that award. Supplier diversity is the goal in all of our states, but it's really a big goal in California and it's nice to receive some recognition at the Federal level for the work that we've done working with disabled veterans, and other diverse suppliers to bring them into our service chain. So the idea is create competition, more competition, lowest prices and leads to long-term better value for stockholders.

In addition, last week at the National Association of water companies' Annual Summit, our conservation team received the Management Innovation Award for their work on drought conservation and using GPS on golf courses to find trip areas that could be taken out and replaced without affecting the actual golf course. So, nice couple of awards last 3 weeks by the team, and I want to congratulate them for their job well done.

Turning to slide 15. I want to take a moment to talk about water quality and what's happening there, we continue to make good progress on the 1, 2, 3 trichloro propane or TCP which will go in regulation, that will go into effect on January 1. We're adding granular activated carbon filtration at 38 sites within our service territory. We're investing approximately $20 million this year and additional $40 million in 2018 to meet the new regulation. We anticipate new regulation has been a compliance on schedule and on-time. In addition, some of you may saw in the State of California, there was a lawsuit against the state and the state is temporarily withdrawn its regulation for Chromium 6, pending a new cost benefit analysis, the lawsuit that was filed claimed that the state does not take into effect, the economic burden put on small (inaudible) compliance water system. We were in compliance with Chromium 6 again if you go back to our management incentive plan, it's to meet and exceed all the water quality standards. So when there's a new regulation, it's adopted, we raised to meet that regulation. We are in full compliance with Chromium 6 and we continue to be in compliance of the state works out, this issue in the courts here within the state.

In addition, some of you may have seen in California, California passed a law that requires us to lead testing in schools, so in the Lead and Copper rule, schools were not necessarily tested as part of that process, that's the concept of adding school, I think is the right thing legislatively to be added to the State of California. However, Calwater was already adopting a policy to test schools. And there are 700 plus schools in our service territory, and any threat of lead in the school is a very serious issue. So, we had already developed and started implementing a plan to test schools within our service area. So, the legislation coming out behind us, I think will just further enable us to be able to recover those costs and rates as we move forward.

I am going to hand it back to Tom to talk about the residual effects of the drought.

Thanks, Marty. So as we've talked about over the course of the drought period, we're very fortunate to have a decoupling mechanism adopted in California in 2008, and that insulates the company and its customers from changes in water sales. In addition, the drought redesign that we employed during the drought allowed us to collect surcharges from those, who didn't meet their water budgets, and deposit those surcharges to offset the WRAM decoupling balance. And so, during the drought, we actually saw the receivable balance on our WRAM declined, over the couple of years that we were doing the surcharges, however we discontinued the surcharge in 2016.

We continued to see lower water sales than adopted in our rate cases. In 2017, our sales have increased about 4.9% from the drought period and from last year, but there is still much lower than historical averages, and they are lower than what we had adopted in this last rate case. So, as a result, our WRAM receivable is growing this year, is currently at $61.6 million, if you see on slide 17, and that balance can continue to grow throughout 2017 because we continue to see that lag in sales, we don't anticipate a fall, where we're going to sell a 100% of the water that is adopted for us to sell. So a couple of mechanisms that the CPUC has adopted for us. First, as Marty mentioned, there's a sales reconciliation mechanism, so if you see that we are about 20% below our adopted volumes in 2017, for 2018, we're going to take 10% of that and build it into our base rates through the sales reconciliation mechanism.

So if all other things were equal in 2018, sales were exactly the same, we would only see a 10% miss on the sales rather than a 20% miss as we're seeing this year. So that is an opportunity in 2018 to get a little more accrual into the WRAM, and then as we've been doing for many years, every year, we have an amortization of the WRAM balance, that's usually filed in March or April and we'll collect that balance over 12 or 18 months as is appropriate for the district involved.

So that is Slide 16 and 17, and just a quick update on our drought expense recovery. Remember that our expenses to administer drought programs were booked in the period that they were incurred. Our drought expenses for 2017 are really only about $200,000, that's down from $4 million in the first 9 months of 2016. So we have a total of about $4.6 million that's expensed in 2016, and the beginning of 2017. We are going to make a filing to recover these costs, we'll be making that filing in the fourth quarter, not yet made that filing, and it looks like now the expected timing would be a CPUC ruling on that filing in 2018.

And Marty, I'll turn it back to you to talk about CapEx.

Great, for those of you that follow our capital investment program, which has been growing fairly rapidly. If you may recall, early this year we had a lot of delays, given the wet weather that was experienced up to and through the majority of Q2. So the good news is we have regained a lot of that ground as Tom mentioned earlier, our capital spending is up year-to-date, is up about [$80 million] or 8.3%, which we believe puts us well on track to hit the midpoint of the range that we've given the Street. And in fact we believe we will probably be on the higher end of that range assuming we don't have a really wet fourth quarter, as just Tom said, it's a beautiful weather here in California today, and frankly it's been quite hot this week.

So cap program is clearly on track, on schedule and going just fine. On Page 20, we put the regulated rate base forecast looking out just to remind everyone, there's a lot of moving parts that go into rate base. Obviously, you have depreciation coming out, you have advice letter projects, and new capital going in, so we started publishing what we believe the regulated rate base is going out. So we like to include that slide just to remind everyone kind of how the components work, and how we see it looking going out the next couple of years.

Looking ahead to what's happening in here in the fourth quarter, a couple things that we're really keenly focused on. First and foremost is awaiting for the cost to capital decision. We will 8-K that decision when it comes out, and we expect it probably sometime near in the middle of end of December, if everything stays on schedule. In addition, as we mentioned a couple times here today, we anticipate filing, the advice letter escalation our step increases in California, as well as the sales adjustment mechanism for all districts in the State of California that Tom mentioned and we believe that these new rates will be effective sometime in early January.

In addition, we anticipate filing for the recovery of the 2016 and 2017 drought expenses during the fourth quarter. We don't know when those will ultimately get approved, but it is the start of the process. And last year when we filed them, it was a fairly quick process to go through. It took about 2 months [that we had] with the Commission to have them renew the cost and conclude the negotiations with us. So we will start that process here in the fourth quarter.

I've already talked about capital, feeling good about capital. We believe we will be in the upper end of the range, between $200 million and $220 million towards the top there. We continue to make good progress on the 1,2,3-TCP regulation, and we expect to be in full compliance with that from January 1. And, of course, the general rate case, where we have a lot of people working on the GRC and our long-term capital plan. And that will be a focal point of the company and many, many, many of our employees until we get that filed on July 1.

Slide 22. I would like to include Slide 22, Tom and I, we always go back and forth should we include it or should we take it out, but I think it serves as a good reminder that because we are decoupled, it's important to understand that slope of the adopted revenue curve, because you can predict really what our financial performance is going to be based on how that curve has sloped. And so, obviously, as we look to the third quarter, that is our best quarter of the year, clearly that shows up in our results, we are very happy with our results for the quarter, we're very happy with the budget actual management that the Company has continued to do quite well on, especially on items, and SG&A that we've been able to successfully manage.

Things do start to soften up in the fourth quarter as demand starts to fall off. In addition, it's noteworthy that during the fourth quarter of last year, when the 2015 general rate case was approved, we had about $0.13 of kind of catch-up or one-time items that were booked in the fourth quarter. So I want to share that information, because I don't want anyone to get ahead of the estimates that are really out there. We don't really give any forward guidance, but we try to give enough information that people -- to be transparent with the business model and they see how things flow, and how the pieces fit together.

So we normally don't get too excited during the fourth quarter of any given year, and this year, obviously, we're going to have our hands full with a lot of regulatory filings going on between everything, I just talked about the cost of capital, the sales adjustment mechanism, the drought surcharge or the drought recovery cost etcetera.

So fourth quarter I think is consistent with other fourth quarters we've had probably since 2009 since we decoupled or not. Super-excited about the fourth quarter, we think it'll be a fine quarter, but nonetheless, we do see consumption start to taper off during the fourth quarter of the year. And with that, Sonia, I believe we will open it up for questions, please.

Ladies and gentlemen, (Operator Instructions). Your first question comes from Angieszka Storozynski with Macquarie.

I was actually saying that I am newer to your story, but I have covered [company] utilities for a while, so I understand that the CapEx cycles and the ROE cycles now. So when I look at your CapEx versus your rate base, you clearly have under-invested assets. And so you have had pretty meaningful step-ups in CapEx over the last -- especially last year (inaudible). How should we think about the potential uptick in CapEx, I mean, is it fair to assume that we might have a similar step-up versus what you saw last time, at least what you are going to file for?

So, we haven't finalized the 2018 rate case filing, I will say that I've gotten -- our regulatory people do agree that yes, we're going to file for more than we received in terms of CapEx last time. But we can't predict what the commission is going to do with our CapEx proposals. Obviously, that's part of the negotiation and litigation of any case. What I will tell you, just going back to kind of principles, -- going back to principles, we made a big effort in the last case to reduce our main replacement cycle from a 300-year to a 200-year main replacement cycle. And so we're going to further those efforts because we think that a 200-year cycle is not adequate to meet the needs of the water system. We also have other [programmatic] needs on the replacement cycle, so I don't anticipate that we have a lack of CapEx to spend on the system, and we expect to continue to request that in the rate cases.

Now on the financing side, your CapEx level tends to go up. It does seem like you need equity, your stock is at all-time high every day. You do have some uncertainty around the ROE, but do I need to have [it end] before I should expect you to issue equity?

So our financing plans are based upon the line of credit that we have and established with the Commission, some rules around that line of credit. So back in late 2015, I believe the Commission gave us permission to be on the line of credit for up to 24 months. We're currently on the line of credit financing our construction activity there. So we do expect before the end of the 24-month period being on the line of credit that we will have to do some long-term financing. We are going to keep our financing to [track] over the long term to mask the capital structure that the Commission authorizes for us and that will mean some combination of debt and equity depending upon a) how the retained earnings and other factors go into the company and b) how the Commission determines the outcome of the cost to capital application. And so, obviously, if you follow the logic, we will probably be doing some financing in 2018, that should be expected, but we've not determined the relative volumes of different types of financing or the timing of that financing.

And, Tom, I believe our cap structure is pretty spot on, we are not having equity right now, are fairly balanced.

Yes, I think we're comfortable with where the cap structure is right now, but obviously, we have to [deprave] that line of credit at some point here.

And so how many months into the line of credit are you?

The last time we were off a line of credit were -- for the operating company, as I described, was November 2016.

Your next question comes from line of Tyler Frank from Baird.

I guess as you look at your pipeline of capital expenditure projects and -going to 2018 and potentially now to 2019, can you discuss how confident you are you will be able to hit your CapEx target and maybe give us a little bit of color on what those projects look like either from a size standpoint? And how many you may have already identified?

Tyler, this Tom. So one thing to keep in mind is that the Commission authorized for us, I believe, the number was $658 million of CapEx over a 3-year period. And, obviously, we spent almost $230 million in the first year of that cycle and it looks like we're going to be closer to $220 million on the second year of that cycle depending on where the fourth quarter comes out and if you just do some simple subtraction, there is some risk that the CapEx for 2018 really has already been done to some extent in 2016 and 2017 to meet that authorization and so we could see a slightly lower number in 2018. We are ramping up for the 2018 rate case filing and there will be new projects and new projects that we propose in the rate case. And so we may start to get to work on some of those projects. So I don't want to just say that it's simple math and the number is going to be $200 million for 2018. But I think that you're most likely not going to see a number in the $220 million to $230 million range just because of the amount of capital that we have authorized. I think that was the question, I forget there was a second question.

And I think too to Tom's point, it's really a 3-year target that we have with the rate case. One of the strategic changes we made internally was opening up those capital projects sooner in an effort to obtain more of that step increase. So if you look back at the last step increase that we got, that was 2 years ago, was about $3 million as we said on the call there's a [$17] million potential for step increase that's available right now. We think we're going to be on a much higher uptake of that about [$ 17] million because we are allowing the capital to flow over a 3-year period kind of naturally versus kind of budget accounting year-by-year. So we want to be as much as the capital as we can early on in the 3-year cycle because it helps us maximize those step increases.

And, Tyler, I remember your other question now. Most of our projects are relatively small, we did a lot of projects, we do have 1 large project, which is the Palos Verdes pipeline alignment and storage project, it's a reliability project for our Palos Verdes district in Los Angeles County, where we're putting a second supply line up the hill to our large storage tanks that feed most of the system there, that's about a $65 million project, the project is ongoing and we do anticipate spending the bulk of the money as planned. The conclusion of that project is subject to a lot of permitting. Permitting issues and getting the project finally in service but I don't think it'll effect when the money is spent, it may effect when the final project is closed.

And then just a couple quick follow-ups. Number 1, for military bases, I've heard you guys touched on this in the past as well as some of your competitors refuse to discuss what the opportunities are there and do you also view the Navy as essential future opportunity and then also on opportunities for potential acquisitions just for municipal water systems out there and how is the landscape looking?

Sure. So military bases certainly our target for a lot of water utilities. The government and the Department of Defense has been going through a process of privatizing a number of bases, the Travis, for example, is a joint base, a lot of the Army bases have gone through this process, but not all the Navy bases etcetera. So these are long lead-time type of projects. For us, military bases that are adjacent to or close to any major service area for us is really an attractive opportunity because we have staff and resources right there. So the marginal cost of adding that business to our portfolio is fairly minimal other than what's in direct labor to the extent there are remote bases, those are a little more complicated in terms of [step] costs etcetera, because there's just not incremental resources around -- our service area around that we can draw our resources from. So we do think it's a source of potential growth for us. I don't think we think of it as big as a potential for our core business, as some of our other peers in the water space do. Certainly, we will compete if they are around our service area. We're always looking at them, we're always looking for opportunities but they just take forever [a day], I think for the Travis Base, we submitted our proposals 5 years ago and went through a period of almost a year and a half of really no information and one day getting a call, hey, you're one of the finalists, congratulations. So it's government work and I think you need to keep it in the context of its government work and plan accordingly. In terms of M&A, certainly, we're seeing a little bit more kind of Greenfield development starting to happen, especially in the central part of California. We do have a full-time business development team that's active in all 4 states that we operate in. I'm more interested in kind of Greenfield development versus kind of asset bake-offs because asset bake-offs tend to attract a lot of competition evaluations can run very high and when you're buying a regulated asset, once you start paying above a certain amount, typically that's about 1.5x to 2x book value, it becomes dilutive pretty quick. So we're pretty selective on things that we look for and what we look at, we don't want to do acquisitions that are dilutive for our stockholders, we'll take some dilution during the first year to integrate them, but then we like to nice, productive utility assets. So short answer is, we're always looking, we're very selective. I would say the pipeline is fairly full, but there's nothing really big in the pipeline. There's a lot of small little projects out there that we're looking at. And in terms of municipalities, it's very hard to buy a municipal system in the State of California because it requires a vote of the local citizens. So I think we all tend to see more P3s or public-private-partnerships evolve as these municipalities start to get squeezed. We have seen in the last 3 months, specifically, where the California Public Employees Pension or CalPERS or [PERS] as it also know as has gone to the local cities instead, you need to pay more under the plan but our results aren't where we thought they would be and they are stepping up their input cost basis for people who are [funding into their] retirement plans, and some cities are having a hard time meeting that obligation. And so we think that may help drive some municipalities to consider P3 opportunities in the future here. Sorry for the long answer, but it's a complicated question and I think it's fairly complicated answer.

(Operator Instructions) You next question comes from the line of Spencer Joyce from Hilliard Lyons.

Just 3 hopefully quick questions for me, mostly housekeeping. First 1, just to be clear, all of the regulatory items here we're working through in Q4, cost of capital, advice letter filings, drought filings, all that stuff, were that to spillover into early 2018, that would all be retroactive to kind of a Jan 1 effective date. Is that right?

So, the cost of capital, the last time there was a delay in the cost of capital they did adopt what's called an effective date, and they did go back and make the company's refund or a surcharge to customers for whatever time period it was there. So we would anticipate if there is a major delay, that that would happen again, that would come from the judge in the case and we've not seen anything like that yet. As far as these the other instances, the step rate increases are a very formulaic, advice letter process and those generally are effective on January 1, and there generally would not be expected to be a delay there. As far as the drought recovery, that is subject to the discretion of the Commission. So that's not going to be retroactive, that is going to be an amount that is set on the date that its approved.

Also, Tom, I know [it's hard] to project, kind of how the capital will fall, but as we close out this year and [eyeball] kind of a 37% full-year tax rate, is that a fair base case as we, perhaps from upper estimates, kind of out to 2018, 2019 or are there are some special items here in 2017, that maybe we should take into account in looking at those forward rates?

No, I think that the 37% rate is appropriate. Obviously, there is rumbling in Washington about corporate tax changes, but we don't really know anything about that, or when it might be effective. But based on what we know that 37% is a reasonable target for us for us for '18 as well.

Final one here, maybe Marty, to the extent you might be able to comment, maybe as we look at the cost of capital filing. if we get a little bit deeper than just saying, hey, we want 10%, Commission wants 8%. Are there any major kind of underlying [those contingent or] points of methodology that you could point to that are kind, of driving the wedge between the filing companies here and the regulatory commission?

No, other than when we sat down around the table, we just get to a settlement. And we have a very good working relationship with the advocate. They wanted a lower number and we like our number. Now for those of you who have an [ECOM] degree, there is a lot of moving parts and forecasts right, and forecasts change all the time. But when I look at the Moody's Utility Bond Index, things have been kind of flattish on the spreads, they are not bumping around a whole lot in '08, '09,. '10 and even '11, you had a very kind of perverse kind of credit market, where you saw risk premiums expand and yields drop. So I feel like we're on solid footing with our position. That's why there really wasn't a settlement, none of the California Utility settled with the advocate. So, we just have to go through the process to see where we come out. When the electric companies, I believe they all settled, they were all in the 10 plus range, 10.0 to 10.3, 10.4. They all took about a average 20 basis point haircut, 15, 20 basis point haircut. I can't get into the details of settlement discussions, but, obviously, we just didn't get there with the advocate when we are in settlement discussions. And so it's been litigated, I don't think it's a big deal. I think the company were [just asking] as they normally do, and we'll get to the cost of capital and I just have to see where we end up.

Your next question comes from the line of Jonathan Reeder from Wells Fargo.

Most of my questions have been addressed already at this point. But just I guess, (inaudible) cost of capital, I mean, do you really think the decision can come out by year end or do you think it's more likely that it's [worth]?

So it's all in the hands of the administrative law judge at this point. And so we really don't have any visibility or control. The judge can be motivated and get the decision done, there is certainly -- the case was submitted a couple weeks ago. So to the extent that the judge has motivation to get a proposed decision out by the middle of next month, it [can't] be decided in December. That will be a trigger point for us, remember that the California Commission has kind of a 30-day window or it needs to be a public proposed decision, so we'll actually know by the middle of November, whether it's going to be able to yet on the December agenda or not. And so that's going to your indication. I don't have any indication or word, one way or another on how the judge is treating the timeline. So if somebody has more information, I don't have that myself.

And I think the only thing I would add, Jonathan is, I think if we look back over the last 2 to 3 years, the Commission has been pretty on schedule, with all of our regulatory stuff that we [put]. Ultimately it's not a general rate case with thousands and thousands of pages of testimony. It's really the judge's responsibility at this point.

Right, assuming the judge gets his part done, you don't think, I guess, from a Commissions standpoint, some of the things going on whether it's wildfire related, or some of the things the other energy utilities have going on will distract the Commission from, I guess, handling their part of it?

As you and probably others know, I worked at the Commission for a number of years before coming to Cal Water, just keep in mind the California Commission has five, basically, full-time commissioners and a staff of 1,200. And so I bristle a little bit when somebody says that the "Commission" is distracted by another issue. There's plenty of bandwidth with the Commission to get something done if they want to get it done. And even at the Commissioner level, I think that's true. So there may be an excuse here and there about, well, the Commission was looking at something else, but there's a lot of resource there.

And then the last question just on the drought cost recovery you file in Q4 and you are going to have a quick decision such as early 2018. Would that recovery still potentially be recorded in Q4 2017 then or is it automatically going to be a 2018 recovery item, in terms of where you are on the income statement?

Yes, I think our revenue recognition standard we're most comfortable with bookings something when it's authorized for recovery by the Commission. And so if that authorized for recovery date is in 2018, I think that's going to be a 2018 item. Obviously, if it comes out before our K filing, we'll make note of it and I'm sure we'll 8-K it as well. But, nevertheless, it'll be a 2018 figure.

I'm showing no further questions at this time. I would now like to turn the call back over to Mr.Thomas Smegal.

Thanks, everyone, very much for your interest in the company and our third quarter and year-to-date results. And we look forward to talking to you again at the end of the year. Thanks for calling in.

Thanks, everybody, have a good day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now all disconnect.