California Water Service Group (CWT) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the California Water Service Group conference call to discuss the proposed acquisition of SJW Group and its first quarter results. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. David Healy, Cal Water Vice President and Corporate Controller. Sir, you may begin.

Thank you, Brian. Welcome, everyone, to California Water Service Group's conference call to discuss its proposed acquisition of SJW Group and its first quarter results. With me today is Martin Kropelnicki, our President and CEO; and Thomas Smegal, our Vice President, Chief Financial Officer. Replay dial-in information for this call can be found in our quarterly earnings release, which was issued earlier today. The replay will be available until June 25, 2018.

As a reminder, before we begin, the company has 2 slide decks to accompany the earnings call this quarter. The slide decks were furnished with an 8-K this morning and were also available at the company's website at www.calwatergroup.com.

Before looking at this quarter's results and the discussion of the proposed acquisition, we'd like to take a few moments to cover forward-looking statements. During the course of the call, the company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various 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 interested parties to carefully read and understand the company's disclosures on risks and uncertainties found in our Form 10-K, Form 10-Q, press releases and other reports filed from time to time with the Securities and Exchange Commission.

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

Thanks, Dave. Good morning, everyone, and thanks for joining us to discuss our proposal to acquire SJW Group for $68.25 per share in cash as well as our first quarter results. I'm joined by Marty Kropelnicki, President and CEO of California Water Service Group. Marty will begin with a discussion of our compelling proposal and why we believe it's clearly superior to SJW's proposed merger with Connecticut Water and to SJW's stand-alone prospects. Following that, we will review our first quarter results.

After our prepared remarks, we will open the call to your questions. So let me hand it over to Marty.

Thank you, Tom. Good morning, everyone. It's been a busy morning. I appreciate you taking time to join us here this morning. I want to begin by saying that our proposal to acquire San Jose Water for $68.25 a share in cash is a good deal for SJW stockholders. Our offer provides SJW stockholders substantial and immediate value and is clearly superior to the SJW pending merger with Connecticut Water.

If you turn to Page 3, I'd like to take a few moments to highlight what's included in our proposal. First, we propose to acquire SJW for $68.25 a share in an all-cash transaction, valued at approximately $1.9 billion, including the assumption of debt.

Second, the proposal exceeds the all-time high closing price and represents a 20% premium to SJW's closing price yesterday. I'd also like to point out, at the time we made the written offer on April 4 and sent a letter to the SJW board, that was a 30% premium on the closing stock price.

Our offer provides significant and immediate and certain value for the stockholders that far exceeds what can be received under the pending all-stock merger with Connecticut Water.

In addition, our proposal is not subject to any financing contingencies and we are confident that we can move forward to conduct due diligence and reach a definitive agreement quickly.

SJW is a superb strategic and operational fit with Cal Water. Together, we would create a stronger, larger California-based water utility. We believe this is -- it would be seamlessly -- it would be a seamless acquisition that would integrate quickly into our operations with little to no integration risk. Because we know SJW extremely well -- and remember, they're literally about a mile down the street from us -- our adjoining service territories enable us to efficiently bring these 2 companies together to create one operating system within the State of California.

The combined company would have a stronger financial position, benefit from our greater scale and overall, make us a stronger utility within the State of California. Our proposal also delivers substantial benefits to our customers, employees and communities that we serve.

I will talk about these in greater detail in just a minute. If I can get everyone to turn to Page 4, I want to talk about why we are bringing our proposal directly to SJW stockholders.

First, we've had a very good and long-standing relationship and admired San Jose Water Corporation. We've had numerous attempts over the years and discussions to constructively try to bring the 2 companies together. Unfortunately, each time we've had this, we've never been able to bring it to a meaningful conclusion. This includes our efforts from September of 2017 last year, where we made a formal private proposal to their board at a substantial premium 25% to 30%. That was rejected outright without further discussion. It's also noteworthy that our offer in September was for cash, stock or a combination thereof to accommodate their stockholders.

Approximately 6 weeks ago, San Jose Water announced that it had entered into a definitive agreement to merge with Connecticut Water, and did so without talking to us. Since then, we privately reached out to them several times to discuss our superior proposal that they have simply refused to engage. In fact, we are surprised to learn that SJW's board rejected our proposal of April 13, but waited until yesterday to inform us.

SJW's actions have prevented their stockholders from learning about the substantial and immediate value that we can deliver. In comparison, under the all-stock merger with Connecticut Water, the stockholders would have to wait for uncertain benefits that would accrue over the long term, while bearing the execution risks associated with operating 2 separate businesses located approximately 3,000 miles apart in different regulatory environments.

We believe SJW stockholders deserve the right to know about our proposal so they can decide for themselves if they want to go forward with the superior certain value for the promise of long-term accretion that may never be materialized.

I will now turn it over to Tom and let him cover the strategic rationale as laid out on Page 5.

Thanks, Marty. So Slide 5 details the compelling strategic rationale for our proposal. The combination of Cal Water and SJW would create a larger and stronger California-based water utility that would be better able to anticipate and meet the needs of the 3 million customers our companies serve in the Western United States, including over 1.4 million people in the San Francisco Bay Area. We are both headquartered in San Jose, literally about a mile apart, and we are intimately familiar with the community, its priorities and its decision makers. We also have deep insight into many of the operational water supply, water quality and environmental sensitivities of water systems in California and San Jose's system, in particular.

Our familiarity with San Jose Water's operations and our adjoining service territories would enable us to seamlessly integrate and efficiently operate the combined system. This is something that would be far more difficult to accomplish with a partner that has no local presence.

Furthermore, our combined economies of scale and greater purchasing power would enable us to continue to efficiently invest in a critical infrastructure needed to ensure a reliable water supply that meets increasingly stringent water quality standards.

If I can have you turn to Page 6, there are substantial financial benefits to Cal Water stockholders. As you can see, the combination enhances Cal Water's position as the nation's 3rd largest publicly traded regulated water utility. We would have a stronger financial profile and better access to capital as we carry out our strategy. The combined company would have net income of $126 million, total assets of $4.2 billion and a rate base of $1.9 billion, with approved ROEs ranging from 8.9% to 10.1%.

We expect the transaction would be accretive to earnings and would deliver meaningful cost synergies, primarily related to eliminating redundant public company costs, economies of scale in purchasing and operating efficiencies.

We are also committed to maintaining our strong investment-grade credit ratings, and believe that our continued investment in our rate base will drive long-term EPS growth and support steady growth in our dividend.

And now I'll turn it back over to Marty.

Thanks, Tom. If I can get everyone to turn to Page 7, I'd like to talk about the tangible benefits to other stakeholders. In particular, on Slide 7, we provide an overview of the meaningful benefits our proposal would bring to our customers, employees and communities that we serve.

In particular, there are 6 major points I'd like to highlight on this page. First, we are confident that the customers of the combined company would receive better service through increased operational efficiencies and sharing the resources as well as award-winning customer service and leading edge information technology systems.

Second, we are prepared to make firm commitments to deliver significant value to California customers, including the sharing of cost savings and other benefits we receive in ways a partner without a local presence cannot. Our increased scale will allow us to reduce the fixed costs that are paid by each customer.

Third, Cal Water has -- also has a proven track record of operating efficiently, including building and maintaining critical infrastructure to provide reliable high-quality water service, and we plan to continue diligently investing and maintaining the infrastructure of both utilities.

Next, for our employees, we believe the combination would lead to greater opportunities. As a larger California-based utility, we'd have greater ability to invest in our talented operations and customer service personnel and offer them broader career opportunities across the state.

Next, the 2 companies are represented by the same union, and we would honor all of SJW's existing collective bargaining agreements. Importantly, there would be no change in the number of union-represented field or customer service personnel.

Working together, we could further enhance the quality of life in the communities -- in the local communities. For example, we would leverage Cal Water's industry-leading water quality initiative across a larger service territory. We also believe our increased size and scale would enable us to expand our programs, such as conservation, affordability, sustainability and environmental protection in the communities that we serve.

If I can get everyone to turn to Page 8, I'd like to talk a moment to discuss next steps. We believe our proposal is far superior to SJW's agreed upon merger with Connecticut Water, and we are confident after reviewing the 2 options that SJW stockholders will reach the same conclusion.

We remain ready to engage constructively with SJW and are prepared to work quickly to complete due diligence and finalize a definitive agreement.

I'm going to now turn it over to Tom, and we're going to talk about our results for the first quarter of 2018.

Thank you, Marty. So I'm going to flip side decks now to the earnings results call slide deck, and we'll start on Page 6 to go over the summary of our financial results for the first quarter.

So in the first quarter, our operating revenue was up 8.4% to $132.2 million. Our operating expenses were also up 11.4%, up to $124.2 million.

Our interest cost was up. We'll talk about that in a moment. Our net income, we had a loss during the quarter of $2.5 million as compared to a gain of $1.1 million in the first quarter of 2017. And on an EPS basis, we lost $0.05 as compared to a $0.02 gain in the first quarter of 2017.

I do highlight on this page, our capital investments are up significantly, and again, we'll talk about that as we go through the deck.

Flipping to Slide 7 of the earnings deck, our financial highlights. The first quarter is always the leanest of the year for earnings and revenue. If you look back the last several years, we have had losses from time to time in the first quarter, and that's really due to the seasonality of our business, when our water sales come in and how the customers in our service territories use water.

The earnings decrease of $3.6 million is largely attributable to some factors which are outside the company's immediate control, including a $1.5 million reduction in unrealized income from our benefit plan investments, that's related to the stock market activity during the quarter; $800,000 increase in our uninsured loss expense, that's primarily related to main breaks, and we'll talk about 1 significant main break in a moment; and a $700,000 reduction in our unbilled revenue. And as we've talked about on these calls in past quarters, the unbilled revenue is a volatile number for us, having to do with weather and customer consumption and a number of other factors that does bounce around a bit from quarter-to-quarter. So these items may or may not be indicative of what we see later in the year.

Now we also had changes in expenses that we would expect to continue in some form throughout 2018, including an increase of $1.5 million in our depreciation and amortization, that's related to the CapEx that we had last year; a $700,000 increase in employee wage expenses, we do expect that we'll have higher employee wage expense in 2018 than 2017; we had a $600,000 increase in property and other taxes, again, related to capital investments; and $0.5 million increase in net interest expense, and again, that has to do with increased CapEx.

Offsetting these items, the company had general rate increases of $4.7 million, which were offset by a $1.2 million reduction due to the cost of capital decision in California. As well, we also had a $700,000 reduction to our maintenance expense during the quarter.

I highlight here on Slide 7, our company- and developer-funded capital investments were $70.7 million. That's an increase of 36.3% compared to 2017. There's been a lot of activity going on in the company related to complying with the Trichloropropane Regulation here in California. So TCP, we're installing treatment at 34 sites in California to meet the new water quality standard, and that project was ongoing in December and January and February to meet the new standard. We do anticipate continuing to target $200 million to $220 million of CapEx in 2018.

And I'm going to turn it over to Marty for Slide 8.

Great. Thanks, Tom. I always ask Tom to include Slide 8 in the first quarter conference call, because it really does a good job at illustrating kind of the seasonality that goes along with our business or what our revenue looks like for the year. So what's on Slide 8 is our adopted revenue curve. This is driven by the California rate case, and this is the revenue by month that was adopted. So being decoupled, we're always trueing up to the adopted revenue number through a 2-way balancing account, which is the WRAM account and the modified cost balancing account.

So as you can see in the first quarter, the first quarter is always our lowest quarter of the year. As we hit spring, consumption starts to go up, and so does revenue. Our best quarter is always the third quarter. As you can see on this chart and as we go into the fourth quarter, you start to see kind of the decline in consumption and seasonality to start take effect. So this slide really explains kind of our results for the quarter, why they are what they are, which is that Q1 is always our leanest quarter in terms of getting rate relief.

I think we're going to jump -- I talked about the EPS bridge, the items that are in there, that's Slide 9. So we'll skip over that for the time being, and Marty will talk about the cost of capital decision.

Great. As many of your saw, we had a proposed decision from the State of California that had 8.2% -- proposed 8.2% ROE. During the comment period, California Water as well as the other major water utilities in the state did a very good job at lobbying the commission in the state to discuss this issue, which ultimately led to another public hearing in Sacramento.

The good news is, as a result of everyone's hard work, we were able to get the proposed ROE raised to a 9.2% ROE for California Water Service Company, with a cost of debt of 5.51% and a cap structure that includes 53.4% equity.

The cost of capital adjustment will reduce customer rates by an estimated $6.7 million this year, and it's primarily due to the refinancing efforts of the companies. So if you look at that $6.7 million, about $1.5 million or so is really the adjustment to the equity for stockholders. The remaining amount really has to do with the refinancing efforts the company has done. And that money's been able to stay with the refinancing. If you remember, in rate case -- or ratemaking, debt is a pass-through cost. So over the last couple of years, as we've been refinancing our debt at lower rates, that's a pass-through cost that should be adjusted and given back to rate payers.

The decision was retroactive to January 1 and set authorized returns through 2020. The CPUC also approved the Cost of Capital Adjustment Mechanism. We believe this is significant in that because it allows for a trigger for the ROE to change with every 100 basis point change to the Moody's AA bond utility index. So as we go into a rising interest rate environment, and to the extent rates change by more than 100 basis points over a year, we can apply to have our ROE adjusted following that. And we can adjust it to 50% of that change. So if rates go up 1 full percent, we can apply to have our ROE adjusted by 50 basis points. And we believe that's significant going into the period going out as interest rates start to move up. Tom?

Thanks, Marty. Quick update on the Tax Cuts and Jobs Act implementation. So in all 4 of our state operations, the commissions have initiated procedures to ensure that customers benefit from the tax reform. And the California commission has asked its utilities to incorporate the expense change, so that's literally the change from 35% to 21% tax embedded on the summary of earnings for regulatory purposes to change that on June 1. So we're going to go ahead and lower our rates starting June 1. As of now, we're recording a liability for the amount that has been over collected in rates, and we'll pass that on at a future date. We expect that the balance sheet activity related to the deferred tax assets and liabilities will be handled in rate cases. The next rate case in each of our jurisdictions will deal with that issue, particularly the California General Rate Case that Marty's about to talk about. So we will file something in July with that application to propose how to refund to customers the excess after remeasurement of deferred tax liabilities.

So let me turn it to Marty to talk about GRC.

Great. So as we've talked about before, general rate cases in the State of California are massive projects that involve thousands of hours of preparation. So we will be filing our 2018 General Rate Case here in early July. We anticipate requesting more capital than what was awarded in the last cycle and it's primarily driven by the replacement of aging infrastructure, including the replacement of transmission distribution mains. The company will begin to forecast preliminary capital investment rates -- base rate capital needs for 2019 to 2022 in the second quarter earnings release. So in other words, we're going to tell you what we've included in the rate case for our capital request.

These rates, once approved, will be effective for January 1, 2020. It's about an 18-month process, if everything goes to schedule with the California commission; and it covers the capital investments for 2019 to 2021. The company staff have been working for more than 2 years to prepare and support this case and as you may recall, we have made a lot of changes over the last 5 years in how we plan for and execute our capital program. So from my perspective, I feel like we're the best prepared going into this rate case than we've ever been.

And we've also gone to looking at kind of a 3 rate case cycle in terms of our capital planning. So looking at the horizon going really 10 years out and what the replacement needs are for the company. So in the second quarter conference call, we'll be able to give you more color on what we're looking for and in the 2018 General Rate case that will be filed in early July.

Tom?

Thanks, Marty. So I'll talk briefly about the status of our regulatory mechanisms and water conditions in California, particularly with respect to the WRAM and the MCBA. So along with our escalation filing in January, that was $15.9 million of general rate relief, California Water received an adjustment in our adopted sales volumes through what's called the Sales Reconciliation Mechanism, the SRM. And that is about a 9% change in our adopted sales. The great news is that we had, in the first quarter, recorded sales volumes that are 101% of our new adopted sales after the SRM. And our WRAM receivable balance declined by $0.9 million. And it's a good sign that people are coming out of the drought and the SRM mechanism is working.

So it's a good sign for us to see that WRAM balance start to come down, that is a receivable. That's money that could be invested or spent otherwise in ongoing operations for the company once we receive it from customers. We also began billing surcharges to recover about $50 million in net WRAM or MCBA receivables. We started doing that in the middle of the month. And then on weather conditions, we had really very close to a miracle March. I think people are afraid of calling it that. We did have a miracle March about 15 years ago. But tremendous amount of rainfall here in California in March and even into April. And so we're really lower than normal, but okay as far as water conditions. We're not in drought conditions in most of the state and I think the reservoir storage is in pretty good shape. So another year goes by in California without a concern over the water supplies. But there's always next year and there's always concern as we see changes in the precipitation patterns in California. As we see less snow and more rain, we do have to be wary long term about how the state and the company deal with that.

And then I'm going to flip to just a couple of other notes on Slide 16, other notes for 2018. We always mention our advice letter projects because that's a component of our authorized rate base with the commission. Through January 1, the CPUC had approved advice letter projects totaling $2.8 million of annual revenue. We have not filed any additional advice letters in the first quarter. I do anticipate that we will be filing a few in the second quarter, but we don't have a final on that. So we'll update you on the second quarter earnings call on those filings.

We estimate our effective tax rate for 2018 to be between 23% and 25%, pretty close to the statutory rate of 28%. And this year, again, a reduction as we mentioned on the year-end call, reduction in the budgets for repairs-eligible mains projects. And the law is continuing to be interpreted, so there obviously could be some changes as we go forward during the year.

The last bullet I'll mention on these notes is that there was an accounting change where the non-service component of pension expense is now shown in Other income and expense, and the company has -- so if you look at the financial statements that will be filed later today, you'll see that presented in a different way than you've seen it before.

And now I'm going to flip it over to Marty, and Marty can take us to a summary.

Great. Thanks, Tom. Just in wrapping up the quarter. Q1 typically is close to breakeven, as you saw on the adopted revenue curve. We never get too excited about Q1, and we always tell people don't get excited about Q1.

So we ended up about where we thought we would be. Obviously, we did have a big main break in the Bayshore District, which affected a number of homes, a church and a school. So the uninsured loss that Tom mentioned was our reserve. Basically, our retention level are $500,000 before our insurance kicks in. And I just want to take a moment to compliment the Bayshore team, under Ross Moilan's management, did a superb job responding to the crisis. They quickly responded to the event. The school and church were shut down, but we had the church back open for -- I was at Catholic Church for mass on Saturday night, and we had the kids back in school on Monday morning, despite extensive flooding of the school. In addition, there were 5 homes that were affected, and we had the majority of those homeowners back in their homes within the first 24 hours. One house sustained substantial damage, and we're in the process of getting that all cleaned up and reworked for the homeowners there. So team did a great job responding to that.

The cost of capital decision, while the California cost of capital decision will reduce rates this year, which is a good thing for ratepayers, we're particularly pleased that the CPUC moved significantly from their initial proposal. And it was a lot of work to get there, and I appreciate the fact that the commission was going to meet with us and hear the issues as well as what was discussed with the other water companies. So I think we got to a good resolution of that 9.2% for our cost of capital for the next 3 years.

As Tom mentioned, we're seeing the positive effects of the regulatory mechanisms, particularly the Sales Reconciliation Mechanism, which has started to reduce the net WRAM/MCBA balance.

Tom, I believe this is the first time since 2008 where actual consumption has been higher than adopted, and that's a function of us kind of trueing up that sales forecast. If you remember early on in the decoupling, we had a pretty big gap there. We would be 75% of adopted sales. And that delta between 75% and 100% gets booked in the balancing accounts. So it's nice to see those numbers finally cross.

And lastly, we are steadfast focused on the California rate case, and that's filed on time. And I look forward to sharing some of the data with you on that in our second quarter conference call.

And with that, operator, we will open it up to questions.

(Operator Instructions) And our first question comes from the line of Spencer Joyce from Hilliard Lyons.

Two questions for me. First one, want to jump back to the acquisition. Just can you refresh us on why, perhaps from a high level, that the combination of SJW and CWT really hasn't played out kind of over the decades? Was there a pushback from a regulatory standpoint? Or was it cultural? I mean, just kind of refresh us on maybe why it hasn't happened yet?

Sure. Well, remember, we're franchise monopolies. And when you're a franchise monopoly, you need 2 people to agree to get married. So we've always had a great relationship with San Jose Water going way, way, way back. Believe it or not, a long time ago, we were in the same building together. We had -- members of the SJW board used to be on our board. So there's a lot of history that go way back between these 2 companies. And so I think while there has been discussions throughout the year, they just didn't materialize for probably a whole host of reasons. For us, that -- what kind of prompted us now to actually make a hard offer and submit it in writing was the fact that they were going into a registration statement with the Connecticut merger, and we thought it was time to put our offer in writing and submit it. And again, we also believe that there are significant benefits to be had. If you look at 2 public companies that are operating literally about a mile apart, you have 2 sets of Board of Directors, 2 sets of officer teams, 2 public companies that have listing fees on the New York Stock Exchange, 2 public company audits, 2 sets of D&O insurance, and so there is a lot of duplicative costs that we believe bring synergies into this deal that make it a very compelling offer to be considered by both parties involved in the transaction. And in California, what we've put in our release is that we would share those synergies with our ratepayers. So there is a good benefit for stockholders and for ratepayers.

This might be a difficult follow-up to address, but if we assume that SJW and Connecticut sort of closed kind of as inertia might indicate at this point, it's reasonable to assume that a lot of the same positives of combining kind of the legacy San Jose franchises and legacy Cal Water assets would still persist a year or 2, 3 years down the road. I mean, is there anything about the tie-up with Connecticut that would, I guess, ward you all off in the future? I mean, is there anything kind of about being on the East Coast per se that you think may not work for Cal Water long term?

That is a tough question to answer. I would say historically, we have been a West Coast company. And Spencer, as you know, a lot of people will view California regulation as being challenging, difficult and sometimes maybe outright outlandish. But we've kind of mastered that skill and we've built a good rapport and brand within the State of California. So I think we're comfortable being kind of a West Coast-focused company. We have -- in California, for example, I mean, we have a 12% to 13% growth in our CapEx. And it's just -- California is big, it's a massive state. People forget how big California is. So being here, we think it's a great place to be. It's the largest state in the union. It's the largest contributor to the U.S. GDP. It's the largest ag state. So there are a lot of water needs here that certainly keep us challenged, and where we have remained focused. Now could we consider stuff elsewhere? Yes, we could. But I think we kind of like the West Coast feel. And I think as we all know, running a utility is a game of economies of scale. So to the extent you have pieces of the operation that are close to each other, that's really where you get the operational synergies that result to savings and improved service for customers.

Yes, points all well taken there, and thanks for kind of addressing that question. Separately, Tom, if I might ask, so it looks to me like the tax rate in Q1 was a little bit above what we still expect for the full year. I was wondering if you could talk about maybe what the cadence of the rate kind of across Q2, Q3, Q4 might be. I guess, historically, Q4 has kind of been the lowest from an effective rate standpoint, but should we continue to model that way or may we see similar rates kind of across the next 3 quarters?

So I think, it's difficult for us to determine where we're going to land in that range over the next 3 quarters. What I'll tell you is that a lot of the remaining tax deductions that we -- or tax benefits that we have, have to do with the repairs deduction, I mentioned that on the slides. And so that's really the pattern of installation of mains and getting those remains in-service. And oftentimes, just due to the construction schedules in California, those are closing the plan a little bit later in the year. And that allows us maybe to make those estimates and get that tax benefit later in the year. That isn't necessarily going to be the pattern this year, but that's been the pattern in the last couple of years. Maybe that's what you're seeing in terms of the lower tax rate in the fourth quarter.

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

I was wondering, could you explain how you envision financing the SJW deal? Is it 50-50 stock-debt?

As part of our offer that we submitted to the SJW board, Morgan Stanley, who's our adviser, prepared a highly confident letter noting that we could finance this deal with no contingencies. Obviously, you'd have to file an application with the State of California and get regulatory approval and then upon closing, put your cap structure together. So I don't think we can talk about that yet because there's a couple of steps ahead of us that we have to maintain other than saying that we are highly confident we can get this transaction done and pay all-cash.

Okay. Maybe somewhat of another way of -- the $126 million net income that you said, can you kind of elaborate some of the key assumptions to get there? In particular, does that assume retention on a permanent basis of some of the cost synergies you expect?

I don't have the synergy model in front of me. I mean, we basically did a pro forma analysis with kind of limited data, with only what was available in the last filings. I believe SJW and Connecticut filed their merger documents last night. I think there's probably some more information on the documents. I took a quick look and it looked like the estimates for SJW and Connecticut were about 20% lower than what the consensus was on The Street. But that's as far as we were able to get into it yesterday, given our board meeting, our earnings release and preparing for this call. So obviously, one of the things we'll be working on right now after this call will be really digging into those numbers and updating our accretion-dilution analysis.

Okay. And then lastly, the SJW board, I mean, you may have seen just -- put out, they reject your proposal publicly, I think they might have sent you a letter. But how do you see the next steps playing out with regard to the potential deal?

Well, I think essentially what we're doing is let the efficient market work. We've gone forward with our offer and we put it out there for their stockholders to see. And their stockholders will be making a vote on the SJW-Connecticut merger. And their stockholders will have to decide, do you want to do a stock-for-stock combination deal through an S-4 registration or would you rather have an all-cash offer from someone like us? So I think it'll ultimately be up to the stockholders. We believe we've offered a superior deal for SJW with an all-cash offer.

Strategically, from your vantage point, is there an outreach so that you're going to be engaging in (inaudible) from a stockholder standpoint, from a regulatory standpoint? How do you see this helping get your proposal across the finish line?

Obviously, the deck that we just went through was filed with the SEC and in the 8-K, and that's going to generate questions, I'm sure, from our regulators. I know I've already gotten some calls from some of the local politicians and the phone's been ringing off the hook. So I think it's going to get out there. I think the real issue here is just how much operational synergies can be achieved? And how can we bring a better deal for ratepayers as well as the stockholders? The other thing I wanted to take note -- to mention is really on the employee side. And some of you heard me say this, while we are a company of pipes and pumps, of physical assets, the real assets are really the employees of the company because they are the ones that are serving the customers. And we're prepared to make those commitments, to honor those commitments with SJW, because it's the same union that we operate in. And so again, we think there's just a lot of operational synergies that could be achieved through this transaction. And it's hard to achieve those synergies with a partner who's on the opposite side of the U.S.

Right. Okay, well, good luck as you move forward with this as well as compiling the [SEC filings], that's obviously a core focus, I know. But looking forward to further updates.

And our next question comes from the line of Angie Storozynski from Macquarie.

So my first question is, look, in the past, I've seen similar issues with deals that cannot happen and usually management succession is a problem. And looking at the management succession arrangement around the SJW and the Connecticut Water deal, I think, it would be kind of clear that that's what it is. So is there maybe a way to address this impediment through a combination between you guys and SJW?

Well, it's hard when the other party doesn't want to engage. And we have submitted written offers to the board here kind of several times and they refused to engage with us. So I can't say what that dialogue would be like, but obviously by coming forward with our offer -- and by the way, we believe it -- this isn't a hostile bid, we believe it's a good faith, very fair bid based on a market premium all-cash for SJW. We would love to be at the table talking about that.

Okay. And then secondly, so you guys have heavily under-invested assets. We're clearly hopeful to see another big step-up in your CapEx from the -- that GRC you're about to file. So okay, so you have plenty of growth opportunities in your existing business, and yet you think it's worthwhile to make an offer at what is almost 2.4x rate base for another California utility. So just talk me through the logic here and how this premium about the rate base that you're paying would be accounted for? Would you be able to earn your ROE on that total amount you're paying? How would the goodwill be recognized on the balance sheet and versus future earnings power?

Sure. Good question. Some of the things I can address, some of the things I can't address, obviously, because we're not at the point where we can model goodwill because there's just really one of us sitting at the table. But it goes really back to 2 things, right? One, when you operate a utility, to the extent you can expand that utility, you can take your fixed costs and spread it to a larger base. That's how you get economies of scale. And utilities fundamentally work under economies of scale. So first, that's first and foremost. So we already serve a population of about 400,000 people in the Greater Bay Area. We're kind of all around SJW, so pulling that piece in would allow us -- would give us a much broader base to expand our -- spread our fixed costs over in the Bay Area region just by itself, let alone through the whole state. Second thing; it's about the synergies. And again, you have a lot of duplicative costs between 2 publicly traded companies that basically are double cost. And so squeezing out those synergies and getting those synergies to the bottom line enable us to basically pay a premium for SJW. And it really is driven by the fact that they're right next door to us. To the extent they are in a different state, it would certainly affect the amount of premium we could pay. To the extent they are in a different rate jurisdiction, it would affect the amount that we're able to pay in terms of premium. So the fact that we believe that there are significant synergies there and we're willing to share those synergies with ratepayers to help reduce their rates and bring down their costs by lowering their fixed costs, we think that's a significant point.

But it was -- just maybe a little bit of a bigger picture question, given that I haven't really seen acquisitions or large-scale acquisitions in California for a very long time. Would the state allow you to put into the rate base the entire purchase price of the company? Or would it be just the rate base that is already authorized by the commission?

So that's -- there is a state law that allows a premium to be put into rate base. It would be subject to regulatory proceeding and negotiation, and really the regulator -- I dealt with the merger of Cal Water and Dominguez Water back in 1999-2000. The regulator is really looking at the customer savings and the customer benefit from such an acquisition, and that's a limitation on the amount that you could put -- premium that you could put into your rate base and earn on. But in that instance, those were 2 relatively large companies at the time, a large merger. We were able to get the recognition of some of the premium in rate base. And I don't know that we're counting on that at this point and it's really hard to tell this early in a process that haven't started yet. But we would expect to take that angle with the commission as long as we can show that there were plenty of synergies in savings for customers and that it was a real clear benefit to the customers of both of our companies.

(Operator Instructions) And we do have one from Tyler Frank from Baird.

If this were not to go through, can you discuss what sort of capital needs you would need, if any, this year? And then how would you think about things from an equity standpoint and a debt standpoint? And then any further clarity you could provide on that from a capital maybe standpoint from -- if this were to go through as well?

Let me address the ongoing, so if this were not to go through, we've indicated in the -- in past calls and presentations that our financing strategy is to use our lines of credit to finance capital investment. And we have a 2-year limitation from the California commission on our line of credit in California, and so we do need to get off that line by October of 2018. So we expect to do some financing between now and then. So it's unclear at this point whether that would be -- in an ongoing operation, whether that would be all-debt or debt and equity. Our goal over the years has been to try to match the debt equity structure that's been awarded by the commission. So we'll continue to look to that as our guide when doing a debt or equity decision.

Yes. And I would just, again, refer everyone to Page 17 of the quarterly earnings slide deck. We show our history on the capital program. So our current 10-year compound annual growth rate is just shy of 13%, it's 12.9%. For 2018, we estimate about 2010, it's the third year kind of end of the rate case cycle for us. So we'll be a little lighter this year than last year. But as Tom and I have said, we don't see anything that's going to drive the need down for more capital. And so going forward, nothing's changing in Cal Water. We're staying fully engaged and fully on track of our capital program and we're going to continue to do that. That's at the core of what we do. In terms of the capital needs for SJW, again, we have limited information. We have what's available in the SEC filings, and we're still in the process of analyzing that. But I would speculate that they are regulated by the same regulator we are and they probably have similar experiences with their rate case and in going through the process. So I don't think any of the California utilities have been "capital rich." There's a very kind of diligent process the commission goes through, that they review all our projects on a project-by-project basis. And so I would think that SJW probably has a similar, maybe not as large of capital needs as what we have.

And I'm showing no further questions. I would now like to turn the call back to Marty Kropelnicki for any further remarks.

Great. Well, we've covered a lot of information this morning. We appreciate everyone being with us. And 2 things. One, we look forward to talking about our 2018 General Rate Case at the Q2 conference call at the end of July. We'll be able to provide a lot more color around our rate case at that point once it gets filed. And there'll be more to come on the SJW rate case. In just closing, again, I just like to say for any stockholders of SJW, we believe we've put forth a good faith offer in all-cash that we believe is superior. And we look forward to any discussions with SJW about combining the 2 companies to create synergies that improve customer service and can improve results for stockholders.

And with that, we want to thank everyone, and we'll talk to you in Q2. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may all disconnect. Everyone, have a great day.