Thomas F. Smegal - VP, CFO, and Treasurer Martin A. Kropelnicki - President and CEO.

Spencer Joyce - Hilliard Lyons Jonathan Reeder - Wells Fargo Timothy Winter - Gabelli & Company.

Good morning ladies and gentlemen and welcome to the California Water Service Group First Quarter 2015 Results Conference. This call is being recorded. I would now like to turn the conference over to Mr. Thomas Smegal, VP, Chief Financial Officer. Please go ahead, sir..

Thank you, Kayla. Welcome everyone to the first quarter earnings call for California Water Service Group. With me today is Martin Kropelnicki, our President and CEO. A replay of today's proceedings will be available beginning today April 30, 2015 through June 30, 2015, at 1-888-203-1112 or at 1-719-457-0820, with a replay passcode of 9010716.

Before looking at this quarter’s results, we would 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 our actual results could differ materially from the company's current expectations.

Because of this, the company strongly advices 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 and other reports filed from time-to-time with the Securities and Exchange Commission. Now, let's look at the quarterly results.

I'm going to go through the income statement and then turn it over to Marty for some commentary. So on revenue for the first quarter, we had a 122 million that’s up 10.4% or 11.5 million. The revenue decoupling mechanisms as well as balancing accounts added 9.1 million within the quarter.

This is largely due to our California rate case adopted decision last year and as we talked about on some of the prior calls we’ve raised some of the service charge revenue so we do see more revenue in the first quarter and the fourth quarter as a result.

In addition on the revenue, the company received 4.8 million of annual increase related to its steps in California that’s less than adopted due to the CPUC earnings test on some of the districts. Our production costs for the quarter were 45.2 million that’s down 0.4% or 0.2 million.

Our total water production was down 8% and our unit cost of water was up. The production mix, well production within the quarter was 50%.

Our total water production while purchased water represented 47% and service water accounted for the remaining 3% and this mix continues to reflect reduced surface water deliveries and our ongoing efforts to add local production. Last year during this quarter the mix was 50% purchased, 4% serviced, and 46% wells.

So there is a little bit of a change there. Our administrative and general expenses was 27.7 million for the quarter, its up 10.2% or 2.6 million. Pension expenses were higher by 3.8 million, wage expenses were higher .about 1.4 million, our health care cost were lower by 1.4 million and that’s driven by lower claims activity in the healthcare plan.

And other operations was 15.8 million for the quarter, down 3.3% or 0.5 million. And partly there we have $1.3 million decrease within our conservation expenses and those conservation expenses are driven by customer demand for conservation programs and devices.

Our maintenance costs were 4.5 million for the quarter, down 10.9% or 0.5 million, that’s a $400,000 decrease in mains maintenance and roughly $300,000 decrease in wells maintenance for the quarter.

Appreciation and amortization was 15.3 million for the quarter, a decrease of about 5% or 700,000 driven by lower depreciation rate that were adopted in the GRC decision.

Our net other income was 600,000 for the quarter, that’s up about 500,000 and that reflects a reduction in marginal activities, those activities are not very profitable and also rate increases for some of our contracts.

Our net income for the quarter was 1.6 million compared to a loss of 5.5 million in the same period of last year for an increase of 7.1 million and again that’s largely an effect of the general rate case and more service charge revenue in the quarter.

Our EPS was $0.03, earnings per share on a fully diluted basis for the quarter as compared to a loss per share in 2014 of $0.11 in the first quarter. So now I’d like to turn it over to Marty for some comments. .

Thanks Tom. Good morning everyone, there is four areas I want to cover today.

One, provide some brief commentary on the quarter; two, and perhaps the heart of my discussion today is really talking about government grounds executive order that was fined on May 1st, that pertains to the prolonged drought in the state of California including our implementation plans and what are some of the mechanisms in place to protect stockholders.

And then lastly, I want to take a minute to discuss and introduce everyone on the call to Rob Kuta, our new VP of Engineering. First talking about the quarter, as Tom mentioned our Q1 results are $0.03 a share compared to a net loss of $0.11 a share for the first quarter of 2014.

Overall we are very happy with the $0.14 swing from last year to this year and overall the organization performed a plan and the operating entities have continued to do a good job at managing their budgets and looking at their budget to actual performance.

As many of you know we don’t get too excited during the quarter as the first quarter is always the "slowest" quarter for us from a consumption or demand perspective. So it’s nice to have Q1 behind us, it’s nice to have a positive earnings effect in Q1 now we are moving into our busy season which will be the second and third quarters.

Looking at the drought and what’s happening, many of you have probably seen there has been a lot of media coverage with the government's executive order that is fined on April 1st of this year.

Really the executive order which as b-29.15 does six major things; one, it continues to declare a state of emergency throughout the state due to continuing drought conditions. Two, the state of emergency goes to govern a very broad authority to act on behalf of the best interest of the state and the citizens.

Three, it directs the State Water Resource Control Board to impose restrictions to achieve a 25% reduction in potable urban water usage through February 28, 2016.

It directs the Water Resources Board to direct urban water suppliers to develop rate structures and pricing mechanisms to maximize water conservation and constitute and be consistent with the state wide water regulations.

Five, it increases enforcement against the water waste which includes required reporting by water retailers, the use of water budgets, and penalty terrace for excess of use. And six, it stream lines the states response to the drought including facilitating water transfers and expediting permits for water supply projects.

For us in California there is really four parties that we are paying attention to, our four major players. One is the governor who has clearly become very actively involved with the drought. Two, is the State Water Resources Control Board who the governor has empowered to develop and implement the mandate.

Three, is the California Public Utilities Commission who regulates us. And four, the cities and communities in which we serve.

The proposed regulations that were given out by the State Water Resources Control Board in early April, the common period of ending, we expect that the state board will issue and adopt a final ruling on May 5th and we expect the public utilities commission to turn around on May 7th and adopt the same measurements and requirements for us.

So what does it mean for our customers, it means a couple of things; one, there is mandatory water budgets. Budgets are set via a nine tier systems that requires reductions that range from 8% to 36% and it is based on gallons per capita per day, that’s the bad news.

The good news is that the target reductions are netted against conservation savings that were achieved in 2014 and as many of you know we’ve had a very aggressive conservation program in California and many of our customers have done a good job at conserving.

So for the majority of our service areas, the net reduction that we’re going to be working with ranges between 4% to 32%. We have actually three districts that have done an outstanding job in conservation and their net reduction is going to be zero based on what they achieved in 2013.

Before I go over our plan on how we are going to implement our plan in the requirement set forth by the governor’s declaration, I want to make a few key points that are important for shareholders. There is a number of mechanisms and protections that are put in place in the rate making process that I think are important.

I want to reaffirm that these are still in place. First, the California Utility has continued to remain decoupled so our sales and revenue are decoupled and covered by a two way balancing account that get booked monthly. Second, our production cost are covered by a two balancing account and that covers purchase power, purchased water, and pump taxes.

And also gets booked monthly. So any swings in production cost go through the balancing account. Three, we have a conservation balancing account that’s a one way balancing account. Meaning if we don’t use those conservation dollars we end up giving them back.

We have been under spending on our conservation dollars here in the short-term in anticipation of what’s going to happen over the summer months. So we have some extra powder in our conservation balancing account that we plan to use during the difficult summer months. And lastly we have in place and we’ve been using a drought memorandum account.

Now a drought memorandum account is a little different than the balancing accounts and that the cost actually hit the income statement and go through the income statement where they are allowed to track the incremental drought related expenses that we will have in terms of responding to the Governors continued state of emergency and recover those at a later date.

And so we have had a memorandum account in place and we are currently using that memorandum account to attract and to track our incremental expenses and we will fight for recovering for those dollars at a later date. So now what are we going to do to help our customers respond to the mandatory reductions.

First, we are going to continue our industry leading conservation program. As I mentioned many parts of our service area in California has done an excellent job at conserving and we need that to continue.

Secondly, on Tuesday of this week we followed our schedule 14.1 with the California Public Utilities Commission, and that lays out how we plan to comply with the Governors executive order. And there are a couple of highlights I want to point out on that and again this is still proposed, it's not approved yet but it has been submitted.

One, water budgets that we’ve established are based upon the state's reduction target. So it includes things like surcharges for people who go above their monthly allotment of water. It allows for water banking, so customers who save one month have extra water for the following month.

Includes an appeals process for people who go above their budgets for a particular reason. There is a mechanism that they can appeal and it allows surcharges to be applied to the WRAM decoupling mechanism. In addition we’re restricting irrigation to three days a week.

No one can water between 8 AM and 6 PM and we imply to build a flexibility deal with the local city ordinances for the various cities and communities that we serve. We have also put in place the authorization to penalize people so they will get a warning the first time if they are wasting water.

For example, if someone's sprinkler is on and shooting five feet up in the air that’s considered a waste of water. The first time there is a warning that’s issued a letter, the second time there is a $50 penalty, the third time it’s a $100 penalty, and the fourth time we have the ability to flow restrictors on someone’s home.

And if it gets down to a fifth time we have the ability to discontinue service if someone continues to waste the water. So there is a lot of elements that are put into 14.1. Again it puts us in compliance with the state mandate that we will be ready to roll out and go live with on June 1st.

So how are we going to respond to it effective immediately, Cal Water is implementing a dedicated full time draught response organization. This is taking a customer first approach. There is two approaches here that we can take one is pure enforcement but we don’t believe that’s the right approach.

I mean I think most of our customers currently understand the emergency declarations set forth by the Governor but we think in order to help people head to the aggressive stretch goals set by the Governor we got to work with them to help them hit their targets.

So we are doing it by making some organizational changes internally and setting up a temporary drought organization. The drought organization will be headed by a full time project director and program management office.

We will be setting up a dedicated call center for drought related issues including the issuance of enforcement letters to customers who are wasting water. We are going to continue to focus our drought response team on water supply and expediting water supply projects.

We’ll be adding 11 more conservation specialist who will be dedicated full time in the field to helping our customers reach their conservation goals. We are adding a drought communications specialist to help coordinate the drought messaging throughout our organization and throughout our customers.

We are also adding a drought governmental relations specialist who will help us coordinate working with the cities, the counties, the PUC, and the state Governors office. In addition there will be people put into the program management office to help manage, track, and report our results.

This team will report directly to a steering committee that’s chaired by me as President and CEO. Other officers that are on the team, Shannon Dean, Vice President of Corporate Communication and Community Affairs. She will be taking a leadership role with the project team.

Tim Treloar, Vice President and Operations; Mike Rossi, Vice President of Water Supply and continuous improvement; and Michael Luu, Vice President of IT and customer service. This team will be meeting weekly to manage and track our progress and to respond and to adjust our resource allocation as needed as we go through the summer months.

As you can imagine and as I mentioned we have some extra dollars in our conservation balancing account but we will be sitting above and beyond what we thought for the drought. And so we’ll have charges going to the drought memorandum account.

So we anticipate spending an additional $4 million to $6 million that’s as much as $0.08 a share that will go to the income statement reduced earnings but will apply for recovery at a later date. Those costs will go to the memorandum account and we believe we will be able to recover those later.

I want to take a brief moment to talk about our water supply team. Some of you may recall last year when the Governor made the original declaration we put in place the drought response team. That team has continued to meet weekly.

There is an offshoot to that team that we started that is just focused on water supply and the team has continued to meet since last year. As challenging as the drought maybe in 2015 from the supply standpoint we continue to believe that our water supply is adequate and we are in good shape going into the warm summer months.

So overall the idea of putting the customer first, what does that mean, that means people out on the street working with the customers. We have an outstanding conservation program that a lot of people have not taken advantage of.

I think there will be a lot more interest in our and especially our high end users take an advantage of the conservation programs. It means effectively -- in our effective monitoring and communicating water budgets on a monthly basis and making sure that the customer knows that we are here to hold their hand and help them achieve their water budgets.

So I believe it’s the right approach. I think we are moving very, very fast. If you look at the -- when the Governor signed the Bill to full implementations less than 60 days and it certainly has been a very busy time around here. Next I want to transition to talk about Rob Kuta who is our new Vice President of Engineering.

Rob has over 31 years of water and wastewater experience. He joins us from CH2M Hill where he was the Senior VP of Operations Management surveying the water and wastewater customers. Rob led a team of 1400 employees responsible for the capital improvements, project management, and design build aspects for the water and wastewater clients of CH2M Hill.

He was prior President of Arizona American. Rob has a BS in Biology and MBA. He also has the design build certifications including he has won two national awards merited by the Design Build Institute of America. So as I mentioned last year when Rob said he will retire from the company, we did conduct a nationwide search.

We interviewed a number of candidates. I can’t begin to tell you how many hours of interviews that we had but it was a lot and we found an outstanding candidate from Arizona who has started and will be moving his family out here once they finish up school.

Rob is going to be a very valuable asset to the company and we are glad he has accepted our offer to join the team. So in closing my comments, there are two big things we got going on, obviously one the drought and we’ll be doing a lot of reporting on the drought to Wall Street as we go into the summer months.

In addition we’ll be filing our 2015 general rate case on July 15. So we’ll be throttling back some of the corporate initiatives and allocating a lot of our resources on these two big areas, the drought and the general rate case. And with that Tom I’ll turn it over back to you. .

Thanks Marty. Now I’d just like to cover a couple of highlights from the balance sheet, before we get into Q&A. On utility plant, our net utility plant grew to 1.61 billion as of March 31st. Our work in progress decreased to 108 million.

The company funded capital investments were 35 million for the quarter, that’s about a third more than we were at this time last year and we are well on way to our targeted 125 million to 145 million of CAPEX for the year. Our cash on hand was 33.3 million and we had 109.1 million outstanding on our revolving credit facilities as of March 31st.

Also in March the company refinanced its syndicated lines of credit for five more years and increased the available credit to 450 million, that’s 300 million to Cal Water and 150 million to Group and the other subsidiaries. Our WRAM and MCBA balance increased during the quarter from about 45 million to 48 million.

That is because water costs were higher than adopted in the rate case. Our sales and sales revenue were very close to the adopted values. And one administrative note as we end, Marty and I will be travelling at the end of July meeting with institutional investors.

Right now we anticipate that our second quarter earnings call will be held earlier in the day than we usually do, on Thursday, July 30th. So look at the time carefully when we do put the announcement out of our earnings call. So that’s the end of our presentation today and we are very happy to take questions from you..

[Operator Instructions]. We’ll go first to Spencer Joyce with Hilliard Lyons..

Good morning guys, thanks for taking my call and thank you guys for so much good color there on the drought. .

It’s our favorite topic. .

Oh, yes, it’s a hot one at this point, no pun intended. My first question I want to ask about the drought memorandum account and thank you for given us that 4 million to 6 million roughly $0.08 share potential impact to earnings this year.

My question is, did we see any of that expense in Q1 or is that full 4 million to 6 million likely a Q2 through Q4 item?.

Spencer, the Governor’s order came out at the very end of the quarter. So we are going to see most of that expense in the second, third, and fourth quarters. I don’t think it was much of any significance in the first quarter.

We did have a drought, we’ve had the drought memorandum account since last year and we had already booked about $0.5 million of that drought memorandum account to date. Most of that was occurring last year..

And I think Spencer, the significance of the memorandum account is it allows us to take incremental expenses that we didn’t anticipate and didn’t budget for or didn’t have in the rate case in charge that the increased marginal cost to the memorandum account.

So again it’s another protection that for tax stockholder interest as we go through things like the long dry summer months. .

Absolutely, as far as the time table for recouping there, I would assume that will not be part of the 2015 general rate case here.

Is it possible that, that is working to a surcharge outside of full rate case process or how should we be thinking about that?.

So the commission rules on memorandum accounts are that you can only ask for separate recovery if the amount is equal to 2% of your revenue. So that would be for us roughly $12 million to $14 million if the account balance got that big.

We will put it as an item for request in the 2015 general rate case filing which means that we most likely wouldn’t get decision authorizing recovery until the very end of 2016 and into 2017, unless the balance obviously grew to that larger amount. .

And what’s also noteworthy too is the California Public Utilities Commission typically and historically when there have been emergencies, they have been very good to work with on cost recovery for the utilities.

So the nice thing about it frankly was between the conservation memorandum account, the WRAM, balancing account, the MCBA and now this drought memorandum account. There are a lot of good stockholder protections put in place and frankly it freeze us out to respond to the drought with the best way we know how.

And that’s why we are setting up the separate drought team. On one hand we have organization as to their daily work. We got a water utility around but they will have a specialized team right now that’s going to be about 25 to 26 people dedicated full time to drought management throughout the state. .

Okay, perfect, that makes a lot of sense, it’s very helpful. Turning to the debt rate case of 2015 filing, I think you briefly mentioned and understandably so that the CPUC is going to be pretty heavily involved in the drought management operation this year and moving forward.

Do you anticipate that, that could cause some delays with the normal rate case cycle. I know the issues that we work through kind of over the past year or so on that front work were separate from anything at the CPUC level.

But do you have a sense there or perhaps we are way too early in the process to be thinking about delays but do you have any thoughts there?.

Yes, I mean I think it goes back to starting with our relationship with the Commission, that we have a very good working relationship with the Commission. So we don’t anticipate any delays. I think part of the challenge that we face is we file a consolidated rate case and it’s a lot of data for them to analyze.

So going into it we anticipate staying on schedule. As you know with the last rate case we lost about eight months but it was retroactive back to January 1st. We are planning to stay on schedule.

The other thing I would tell you, we’ve had some changes at the Commission with Picker becoming President of the California Public Utilities Commission and then we have a new Commissioner Liane Randolph.

And over the last 45 days there has been two business round tables that we been able to attend and we been very impressed with both Commissioner Picker and with Commissioner Randolph. And it just feels like the Commission is settling down now.

We’ve had a lot of turmoil with some of the other utilities within the state but it just seems like things are calming down, things are focused. The Commission has made it very clear to us that they expect us to comply with the Governors executive order and emergency drought declaration.

And they’ve encouraged us to be very aggressive to think outside the box and do what we need to do to help the conservation net reduction 25% for our systems. So I think it’s all systems go and Tom if you want to change anything to what I said or add anything. .

No, I think that was a good response Marty. The one thing that I will say touching on the rate case little bit is that we lost a lot of time in the last rate case cycle due to the way that we presented our capital projects.

And one thing we’ll probably talk about this again next quarter when we do talk about the rate case, but we do plan to take a more pragmatic approach to our capital investments in this rate case.

And so we think that will cut down the time required to make a settlement in the case which is obviously our goal most the times that we go forward in California. So we had six months of settlement discussions. In the last case we hope to be able to cut that down and make the timeline a little bit easier for us..

Understood, encouraging comments there.

Finally for me did I hear correctly 125 to 135 was the CAPEX target full year?.

125 to 145. .

145, okay. Thanks guys, nice quarter and we’ll talk soon. .

Thanks Spencer. .

Thanks Spencer, have a good day..

[Operator Instructions]. We’ll take our next from Jonathan Reeder with Wells Fargo..

Good morning Marty and Tom.

Just wondering if there were any expedited water supply projects that Cal Water might be working on that could also help move the needle on the current CAPEX budget or your expectations going forward and would those projects be outlined in the upcoming GRC application?.

Thank you, very, very good question. We haven’t seen from the state the details behind the Governors point about expediting water supply projects. One of the things that happened to state of California is we have a secret process. Our environmental permitting process that can take a long, long time. So we are hoping that could some relief.

As we’ve talked about, we do have a growing capital program, and as a part of that program is main replacement and a big part of its water supply and water treatment. So we’re hoping that we’ll get some relief in some of these permitting areas but we have to wait and see what's in the details of the Governors Bill.

He was out on Tuesday and he made a number of comments that pertained to making sure enforcement happens at all levels. And he further mentioned again the idea of expediting water supply projects and making sure that he cuts bureaucratic red tape in Sacramento to help utilities find new sources of water.

So that’s a long answer and in terms of rate case, yes, you will see things in the rate case that we’re doing to explore other water supply options for our customers. .

So when do you expect to kind of see the details on I guess this expedited processes that something that in the next few weeks or months?.

We have to be up and running with this new organization by June 1st and enforcement starts on July 1st. So reporting starts June 1st, enforcement starts July 1st. So I think we are going to have a lot of stuff that comes out in the next 30 days. .

And I think Jonathan, it is Tom, the Governor is moving very quickly on this too. So when he is making a public statement if it’s in his control by emergency order or by administrative action it’s going to happen very quickly, as quickly as the law will allow. There is a legislative solution obviously at the California assembly incentive.

They are the same party as him and I think they are all behind this, the effort that we have to expedite all these processes. So I think the government is going to move very quickly in putting in new rules to speed things up. .

Do you think like, I guess investment opportunities along reducing like line losses throughout the distribution system is that something that could qualify like sort of acceleration of the current kind of pipe replacement, anything like that?.

In every crisis there is always opportunities. I mean there are couple of things we’re doing. We’re accelerating our flats, people who don’t have meters to meters. So we’re doubling our efforts there, we are looking at including AMI information on those meters since we are already doing the replacement.

The marginal cost of adding AMI to the meter is just the marginal cost. So, yes I think there is going to be a lot of things that come up. But the hard thing as you know is water supply is a long-term game. So we have a short-term crisis that we have to respond to.

I don’t think anyone should be surprised that the states in the condition that it’s in, it has been dry. But the water supply is a long-term issue and that’s exactly why we have a Vice President sitting on top of the water supply portfolio, working with the team to see what we can expedite and see if there is new things we got to be considering.

So I think water reuse is going to be a big area. I think recycled water like of wastewater will be a big deal. .

Jonathan let me just add one thing to that. We talk about this being a crisis and emergency in short-term. We’ve also realized that there is a possibility this could be the new normal.

And so we have dedicated resources going back to our 25 year water supply plan and looking at this verbal data that we use to support those plans and trying to reinvestigate, do we need more water supply, do we need new totally different sources of supply, how can we improve reliability to customers in that kind of a situation.

So we are looking long-term as well as short-term on these issues. .

Yes, it seems to make sense.

Last question I have, just more of a housekeeping, Tom are you guys just going to separate out the 4 million to 6 million of cost that will be recaptured by the drought memorandum account, that’s kind of a onetime non-recurring items in the quarters ahead?.

We can certainly talk about how much is spent and we’ll be sure to notify everybody as we go forward how much we think is in that account. It’s not something that we can book to earnings. So just give you the notes on it. .

Quarterly, Jonathan keeps everyone in the loop..

Yes, it seems to make sense to separate it out from your ongoing operation. So, alright appreciate the time today. .

Thank you. .

[Operator Instructions]. We’ll take our next from Tim Winter with Gabelli & Company. .

Good morning guys.

I just wanted to follow up, I didn’t catch the numbers on the water production mix or the supply for the quarter, Tom could you repeat those and then what are your projection for the year?.

In the quarter we moved to 50% of our total water production was wells and 47% surface water. Most of our investors are pretty set so when we talk about these marginal changes, the well production went to 50% from 46% last year at this time.

We do have well projects coming online all the time where we can, those are longer processes to construct a well. It’s a pretty big endeavor these days. And so if we see that number it’s going to fluctuate quarter-to-quarter, I am not sure I can predict what’s it is going to be in the second, third, and fourth quarters.

But it’s always right around those numbers. .

One of the challenges we have Tim is as we move into the summer months, a lot of the farms that surround the urban areas that we support, a lot of the farmers have put in wells because they have had reductions in the supply of water from the State Water project.

So they start pumping some of the basins and so that’s going to pose some challenges for us especially as basins go down and you run the risk of having some water quality issue. So the mix will bounce around. We’ve had an internal project team for the last few years working on pumping our water rights.

So as purchase water prices have gone up its more economically efficient for us to put more wells in and pump our water versus buying water from the major wholesalers.

And so you are starting to see the effects of this team, it’s been in place for a couple of years and that we been able to push our mix up and bring down our reliance on expensive purchased water. .

Okay and then what is the consumption reduction that you guys are going to need to put forth this year versus last year. .

It varies and one of the interesting things when the Governor made the announcement, as you had a lot of disinformation going out from the media, how is that number calculated where people who have water budgets won’t pay. They will be able to bank water.

Essentially what they did is they established a water budget looking at the consumption for July, August, and September of 2014, and they are used now to set the numbers. And then they are using the 2013 consumption number as a base line. So the aggregate they are looking for is 25% reduction from production from 2013. So that’s something.

There is kind of good news and bad news. The bad news is people are going to have water budgets and we expect them to hit the budgets. The good news is, is that it does account for conservation efforts in 2014. And so by way of example if you remember on our previous calls we’ve talked about Livermore.

You know Livermore was one of the districts that we were more concerned about from a water supply standpoint. And Livermore, their net reduction needed this year is actually they have 7% that they can go up and still had to stay in target. So they are in very good shape. Redwood Valley is another one that is well above their targets.

South San Francisco which is a very industrious part of our service territory. Their net reduction need is zero. They have done a good job at bringing the numbers down. So it varies in every district but essentially the range is at say 0% to 32%.

And it shouldn’t surprise anyone that the areas that have -- that needs the most reduction are the more financially affluent neighborhoods because they have the bigger loss and the larger landscaping in the pool. So that is sort of what I think the challenge is going to be.

And hopefully they have a little more elasticity in their demand that we will be able to work with them to bring their consumption numbers down. .

Who keeps the penalties, let’s say you impose penalties on customers?.

Tim, we’ve asked the Commission in our filing that we made yesterday that the penalty money would roll into the WRAM. Because if you think about it most of the effect of the drought conservation is going to be the reduced sales, reduced production cost those are WRAM activities.

Anybody who is not reducing that should go to offset the other reductions of other people their districts are making. So that’s what we’ve asked for and we’ll see. We really do expect the Commission to adopt that but we’ll have to wait and see. .

Okay and then final question, the drought organization or the drought team that you guys have formed are those new employees, are you assigning existing employees, I am just wondering if there is going to be a pickup in expenses there?.

Now actually it’s a very good question. The short answer is yes and we talked about how we are staffing it. We are hand picking our best and brightest to put on this team.

On Friday of last week we signed a memorandum of understanding with the union that allows us to bypass a lot of the bidding rights for some of the key positions and not worry about seniority but make sure we post the job and people whenever we will pick the best candidates.

All the managerial positions were all handpicked by the steering committee and myself. So they are going full time on the drought team. The cost of back filling our position with somebody and this is where we have some of the temporaries come in, that’s what we’ll be charged to the drought memorandum account. .

Okay. .

That’s a big part of what we consider Tim, I don’t know what it cost but we expect 4 million to 6 million of expenses. So largely that is actual cost and any pro dramatic cost of mailing out notices to customers, outside expense for reprogram existence to do those things. .

Okay, great. Thanks guys. .

Alright, thanks Tim. .

There are no further questions at this time. I’d like to turn it back to our speakers for any additional or closing remarks..

I just wanted to thank you all for your continued interest in California Water Service Group. Obviously interesting times this year with the drought and the Governor's declaration. So we look forward to talking with you again after the second quarter. Thanks very much. .

Have a good day, bye, bye. .

This concludes today’s conference, thank you for your participation..