Good morning, ladies and gentlemen. Welcome to the California Water Service Group Fourth Quarter and Year-End 2016 Earnings Results Announcement and Teleconference. I would now like to turn the meeting over to David Healey, Vice President and Corporate Controller. Please go ahead, sir..

Thank you, Don. Welcome everyone to the 2016 year-end and fourth quarter earnings results call for California Water Service Group. With me today is Martin Kropelnicki, our President and CEO; Tom Smegal, our Vice President, Chief Financial Officer, and Treasurer; and Paul Townsley, our Vice President of Regulatory Matters and Business Development.

A replay of today's proceedings will be available beginning today, February 23, 2017 through April 23, 2017 at 1-888-203-1112 or at 1-719-457-0820 with the replay pass code of 7406571. As a reminder before we begin, the company has a slide deck to accompany the earnings call this quarter and for the year-end results.

The slide deck was furnished with an 8-K this morning and is also available at the company's Web site at www.calwatergroup.com/docs/2016q4slides.pdf. Before looking at this quarter and year-end results, we would 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 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 and other reports filed from time to time with the Securities and Exchange Commission.

Now, let's look at the year-end and fourth quarter 2016 results. I’m going to pass it over to Tom to begin..

Thanks, Dave. Everybody, this is Tom Smegal, I have a bit of a head cold this morning, and so somebody else might jump in if I get into a coughing fit, hopefully that won’t happen too quickly here. I’m going to start on page five of our slide deck, and work through the year-end and fourth quarter financials. And we did have a positive year.

We earned $1.01 on an earnings per share basis for the total year, that’s $0.07 higher than the $0.94 last year, and net income of $48.7 million, as compared to $45 million last year. Revenue was up; our operating expenses were up as well.

And if you flip to the next page, on slide six, just for the fourth quarter, we had a $0.31 earning for the fourth quarter as compared to $0.18 in the fourth quarter of 2015, primarily the result of regulatory activity in the quarter.

Primarily I want to talk about the entire year, and that will be on slide seven, our financial highlights for the full year. As I mentioned, our earnings increased $3.7 million, largely attributable to the conclusion of the 2015 California General Rate Case.

We had a $2.8 million increase in net income from the resolution of several regulatory memorandum and balancing accounts in the GRC that were effective with the GRC decision being adopted in December, a $1.9 million increase in net income relating to the recovery of drought costs.

These are the drought costs from 2014 and 2015, in the amount of $2.9 million that were recovered, again, in December of 2016. We had an increase of $1.9 million in net income in other income area, and that is mostly due to a settlement agreement on litigation proceeds relating to MTBE.

And those of you who’d followed us for a long time know that -- I think about seven or eight years ago, the Company received a settlement of around $50 million to remediate MTBE contamination. This is the remainder amount the company was awarded part of that for stockholders, and part went to the rate payers there.

We did have an increase in our unbilled revenue accrual, that’s often times a topic here. Unbilled revenue is an accounting accrual that we do based upon the number of days that we have not sent bills to some of our customers multiplied by the average bill that was up there year, $1.7 million.

And then just as a reminder, in the third quarter we had a $2.1 million decrease in net income as it related to the Bakersfield water treatment plant that we wrote-off as part of the rate case settlement.

And then the other big factor affecting our earnings for the year was $3.1 million decrease in net income relating to increased maintenance cost and interest expenses. One of the big highlights for the year, and Marty will touch on this later, that our company-and-developer-funded capital investments were $228.9 million.

That is absolutely a record for us. We had $177 million of CapEx last year, in 2015. And so that is really a great news for the company all around, both in terms of getting the plant in the ground and also just the execution aspect of that. And again, Marty will touch on that as well.

So the EPS Bridge on slide eight reflects those items that we discussed, and you can see that laid out graphically. On slide nine, I’ll just mention for everybody’s understanding, we do look at our return on equity a little bit differently than just simply book return on equity. And we’re evaluating how the company performed.

And so you’ll see on slide nine, the California Adopted ROE is 9.43. Slightly different in other states, but again the bulk of the rate base is in California. So the California regulatory ROE however is based on a rate base which excludes construction work in progress.

And so when we deduct out the construction work in progress you can see that our book ROE, of 7.48%, actually calculates to a 9.03% ROE for the year based upon removing that quit balance. And generally, remember that we have net drought costs in the year; we are in the third year of the General Rate Case.

We had maintenance expenses that were higher due to the drought and other things going on that we identified throughout the year. And so really, 9.03% for the year isn’t too bad. I think all in all we’d be very happy with that when we get to the third year of the California rate case cycle.

So, next I’m going to turn it over to Paul Townsley to talk about the GRC implementation..

Thank you, Tom. As was -- I’m on slide 10. And as was previously announced, California Water Service received the final rate case decision from the California Public Utilities Commission on December 15, 2016, late last year.

And with that decision new rates were authorized and went into effect on January 1, of 2017, and were reflected in our customers’ January bills. The decision of our authorized California Water Service to increase revenues by $45 million in 2017 and of that amount $11 million was for increased water production costs.

So over the three-year period, as a result of this decision, California Water Service was authorized to invest $658.8 million in capital and utility assets in California, and because California Water Service has decoupled revenue from water sales, we anticipate that our revenue across the year will be very close to the adopted revenue in the rate case.

And then finally, I’d just like to point out that we anticipate the total adopted rate base for California plus our other three states, Hawaii, New Mexico, and Washington should be about $1.1 billion this year. Moving on to slide 11, this slide shows the adopted revenue distribution across the year.

And you can see that most of our sales, and therefore most of our revenue comes during the summer months when there’s more outdoor irrigation that occurs in California.

To the extent that there’s a variation between actual revenue collected and the adopted revenue from the rate case, our decoupling mechanism, which is known as our Water Reconciliation Adjustment Mechanism, or WRAM, will capture that difference for later true up.

And also in this rate case, the commission authorized continuation of the Company’s sales reconciliation mechanism which readjusts sales forecasts each year the rate case cycles will account for changes in sales. So really the SRM, the sales reconciliation mechanism, works in concert with the water revenue adjustment mechanism. They work together.

They adjust customer builds gradually as sales change, while protecting shareholders from changes in water revenue collection. Moving on to slide 12, I also wanted to point out a few of the other features from the recent rate case decision.

The first one is that we have been authorized to consolidate a number of our smaller high-cost of higher cost service areas with some of our larger lower-cost service areas. And this really helps to address affordability concerns in some of those smaller districts, while having a minimal impact on customer rates in the larger districts.

Also as Tom Smegal mentioned a few minutes ago, the commission decision resolved a number of outstanding balances in some of our memorandum accounts allowing for recovery of costs of those accounts in this rate case cycle.

In 2018 and 2019 the company is eligible for escalation adjustments in revenue of $17.2 million in 2018, and $16.3 million in 2019. Those escalation increases are subject to the company passing the commission earnings tests.

And then finally, as a part of our approved capital program in this rate case, we have advice letter projects included in our total capital forecasts which would provide about $30 million in revenue upon their completion and approval by the commission. And with that, I will turn it over to Marty Kropelnicki..

Thanks Paul, good morning everyone. I think some of you heard me this say before, the only thing predictable about California is the unpredictability of the weather and as we went from a five year draught now what is one of the wettest winters in history for the state.

As of February 21, the precipitation and northern is about 150% of average water parts in Northern California actually about 200% of average is just depends on where you look and the snow accumulation year-to-date is 186%.

Last night many of the ski resorts in the Tahoe area mentioned that they anticipate stay open and through the July 4 weekend which should be a new record for us in the state.

To give you an idea of kind of the change in weather in went in and just look at a couple of spots and looked at the date range from October 1 to yesterday, in terms of the time stand what was the rainfall of last year at this time versus this year and if you look at Mount Shasta, last year for the same period of October 1 to February 22, they had 25 inches of rain, this year it’s over 43 inches of rain for the same period.

Sacramento Airport last year that timeframe was 9.7 inches over 28 inches year-to-date, so far this year. Santa Rosa its 20 inches, last year at this time and Santa Rosa at this year is at 52 inches of rain and San Francisco Airport 11 inches last year, 26 inches this year.

When you move down to Southern California, the numbers typically are in the single-digits so 7, 8, 9 as high as 11 this year they are in the mid to high teens, so even -- so we had more in Northern California, Southern California is certainly above their average rainfall as well.

As of 2/21 most of the reservoirs are well above their historical averages as many are starting to let water out to make room for some continue rainfall, we are expected to get more rain later on this weekend.

I think many of you probably saw the news of Oroville Dam, we operate the water system in the Oroville area, we don’t own the dam, the dam is owned 80% by the state, 20% by the Federal Government. But we do operate part of the water system around the City of Oroville and as well as some other lower laying cities that are downstream.

So serve about 18,000 people through about 8,000 connections in that area.

What's happened with the weather situation this year is what they call the atmospheric highway are also called the Pineapple Express were you get these warm tropical storms that move in and in the absence of not having a high pressure system off the coast of California which would normally shoot the storms north if there is a low pressure, it shoots those storms right in the California and that kind of hit us head on.

And that’s really what has happened here over the last 60 days of this year with lake Oroville and the dam itself it is the largest state owned reservoir, it’s the second largest reservoir in the state, Shasta is bigger it holds about 3.5 million acre feet, I just want to remind everyone acre foot is about 327,000 gallons.

It’s the highest dam in the U.S. 770 feet, you can compare that Hoover Dam which is 726 feet and some of you may recall, the famous photo that the Atlantic Published about two years ago, that showed that before the draught and after the draught shot of Lake Oroville, it was empty it was down about 32%. Well, all changed about two weeks ago.

Oroville, the Oroville area gets about 31 inches of rain, there is a lot of micro climates that’s center around the lake, in the winter they typically get about 17 inches of rain total for the winter.

So what this Pineapple Express or the atmospheric river fallen into Northern California, we had back to back storms and that resulted in a unprecedented equivalent of about 20 inches of rain.

Let me explain what that is, that was actually about 7 to 8 inches of warm tropical rain, but when you include the results of that warm rainfall on the snow cap mountain, the equivalent is about 20 inches of rain and about two day period of time, which is significantly more than what they have seen in the Oroville area.

As a result you had massive inflows into Lake Oroville, everyone on the media is talking about CSS I am not sure everyone knows what that means but if you convert that to gallons the following that meant a million gallons a second was flowing into Lake Oroville that 61 million a minute, 3.6 billion gallons an hour.

So that reservoir quickly filled up, when they went to release some of the water through the spillway, all the spillway washed out and they are not sure why that’s being investigated, they quickly turn the spillway off, there was about 10 to 20 feet of head room left in the lake and just to the left of the spillway is what's called the emergency spill way which is never been used or tested, since the dam was put in operations since 1961.

As a result of the spillway being put out of service, the emergency spillway was used and a result about a day there is massive erosion around that spillway and there are some photos out there on the web that you can look at, to give you an idea of how much of the emergency spillway eroded.

That all led to an emergency evacuation for 180,000 period in Northern California including our employees as well as all the local residents. Overall it was a very chaotic evacuation, there was not a lot of coordination between state and local government and I am sure many of you have seen the news it was all over national news.

Having said that, I will say Cal Water responded very well, we were only used all our Reverse 911 system to notify customers, to direct them to our website, social media like it was a big tool, where we had our people who were handicap, who couldn’t get out, they couldn’t get through the authorities, they were communicating with our operators, through our webpage and work with the authorities to connect them to help them evacuated.

We set up our emergency operation center in Chico, California which is our largest northern district and we were able to cut over our scatter system. Our engineering department cut over our scatter system and we were able to operate all of our systems in Marysville and Oroville remotely.

So overall, I think the company responded very well, we also spent a lot of time distributing water to the thousands and tens of thousands of people who were in the emergency evacuation shelters.

So it looks like things are back on track now, they were – they decided to go ahead and run the spillway even though it was damaged and they have been able to lower the lake levels, of course we are monitoring that daily as the news storm come in.

We will just have to see how it goes, the state office of emergency, services has advised everyone to just be on standby. But obviously there has been a lot of tension, given that the story and it looks like things are under control.

One kind of fun story associated with, I think a good Samaritan story is we were contacted by the Department of Fish and Game while all this was happening and the level of river, rivers that feed into lake Oroville was very high and he had a lot of debris and tree branches and things coming through it and as a result, that Fish Hatchery that’s operated by the State of California on the Feather River they couldn’t use the water, which meant that all the eggs they are currently hatching and all of the newly hatched fish were most like to going to perish.

We were contacted by Department Fish and Game, we put quickly a letter of agreement put in place and we were able to run align, that provided 60 gallons per minute to the fish hatchery and we were able to save approximately 1 million fish and that would be the steelhead and the Chinook Salmon.

So Department of Fish and Game, despite what was a very chaotic time, we were able to save about 1 million fish, despite all the rainfall that we are seeing in California.

Ground water still remains a concern and obviously surface water is not, we have plenty of it, in fact we need more storage as that surface water is being rushed out now to the ocean, as the reservoirs are all filled up.

So, we are still concerned about ground water and also recharging kind of the central valley, which it was, most of the farming takes place and it was over pumped, so, more to come on that as we get through the winter season. Cal Water reduced its conservation mandate in July, 2016 as required by the state water resources control board.

The regulations are left in place, but it was voluntary conservation, looking at year-end 2016, when you compare 2016 to our baseline 2013 which is measurement point for measuring conservation. Our customers stay at an average of 23.5%.

So, even with the relaxing of the mandatory drought restrictions, our customers still did a good job at conserving water. We saw in January of this year the State Water Resources put out their regulations that has taken the first couple of steps for budget-based rates.

This is the start of what's going to be a multi-year process, looking at better ways to manage water and more efficient ways to manage water in the state of California.

We've been intimately involved in the process and have provided comments and reviews on the information at the State Water Resources Control Board that we shared with the participating member companies, the water companies within the state, and we will continue to do so.

Also, on February 8, the State Water Resources Control Board extended the drought emergency for an additional 270 days. They have also committed to reviewing that in May, depending on how the winter conditions go, and honestly winter is off to one of the wettest weathers on record for the state of California.

So, we will have to see what happens in May, but keep your eye on the long-term drought regulations, and what the impact is going to be on consumption and use in the state, and how they're trying to make that more efficient.

Turning to page 14, a couple of things to remind everyone about, and as Paul mentioned, we are fully decoupled in the state of California, which is the biggest area that we operate. So, sales declines generally do not reduce profits, it goes to that two-way balance accounts that can change up or down. Revenue of course not included in the ramp.

So, you do get some impacts on timing of revenue. So as consumption changes, and we book the accrual at the end of the period, that accrual is not included in the ramp, it goes into the ramp when it becomes bill consumption. So, you do get some variability around the revenue accrual and the timing of the year that we're making that accrual.

During the drought and given our rate design for the drought, our receivable has actually declined, so we were very happy with the rate design that we had in place, and I believe our customers and our regulators were happy with that as well.

Our drought cost for 2015 were an estimate of $4.3 million and on December 15, 2016, California Public Utilities Commission authorized $2.9 million of drought cost that were recorded to a memorandum account.

For 2016, we have incurred another estimate of $4.3 million, and Paul and his team plan on filing a regulatory filing later on this year to try to collect those amounts during 2017.

In addition, looking at 2017 and the continuation of the drought emergency, we anticipate the spending for drops down way down, but we anticipate there will be $500,000 to $1.5 million of cost that we will incur, not get expensed, but they are not going to get recorded into our memorandum account that we will track and hopefully get recovery on a later date.

Looking at slide 16, as Tom mentioned, this is a new record for us on our capital.

The $229 million of investments during the year, in addition, we closed approximately $230 million of projects planned, meaning, that is now in queue, and put into service, which we believe positions us really well for step increase that we will be filing later on this year.

Just to remind everyone, approximately two years ago we had a major reorganization of our engineering department and focused on how efficient we are at delivering projects on scope, on schedule, on budget, and as you can see when we made those changes we had a really nice increase in productivity of our engineering group and our operators in the field.

And so, we are very happy with the results of the capital investment program for 2016. And with that, I am going to turn it back to Tom..

Thanks, Martin.

Just a couple of informational tables on slide 16, we have the adopted regulated rate base of the company, and this is the same that we published in the third quarter slides, showing our estimated 2017 rate base would be 1.1 billion with the addition of the advise letter projects we are prioritizing, those advise letter capital projects in inclusion and rates and we will be completing them throughout the year.

So, when we talk generally about 1.1 billion being the rate base and Paul mentioned that earlier, that's an opportunity for us to increase the regulated rate base throughout the year.

On slide 17, our net WRAM balance is -- again for information, 37 million at the end of the year, it was a bit lower than that at the end of the third quarter, we have seen a little bit of backsliding on this since we got rid of the drought surcharges, but remember, the drops that were charged in 2015 and 2016 made a substantial impact on lowering this receivable from the decoupling mechanism.

What we will see in 2017 is unknown at this point. Our sales forecast in the general rate case is also same in the sales forecast that we had in the last year. It's really going to be depended upon on our customer usage and how they react to a very wet winter and the tailing off a lot of the drought communications.

So we will be monitoring that and obviously reporting on that as we go quarter-to-quarter throughout 2017. So now I'm going to turn it over to Marty for some final comments about what we expect in the coming year..

Thanks, Tom. First and foremost, we are in the process of preparing our cost of capital application that we will file at the end of the March with the California Public Utilities Commission. The three water utilities will be joining us and we will go through that process concurrently.

This will result in a review of our debt and equity structure as well as our ROE and what their outcome is, and proceeding we plan to adopt that design time on January 1, 2018.

For the year 2017, we anticipate investing between 200 million and 220 million in our capital investment program in accordance with our authorizations from the California Public Utilities Commission. We have a couple of focal areas that are interesting to note.

One, TCT regulation, so that's one that's on the horizon that we see coming and we've been busy looking at what are the lowest cost treatment alternatives for our customers that we could put in place and meet the projected requirements for water quality.

In addition, we are very focused on our earnings test as you may recall, to get our step increases we have to pass our earnings test, and as I mentioned earlier, the $230 million that we put into service and closed, we think will help position us very well as we get closer to that time and date.

And then of course we have a lot of advice on our projects that we are working on and making sure that they stay on scope, on schedule, on budget.

The drought response will start to transition to what was more tactical to kind of long-term strategic water used efficiency program, and we are coordinating with the state of California on that with State Water Resources Control Board and the California Public Utilities Commission.

Our effected tax rate for 2017 is expected to be in the range of 37% to 39%c as we expect less of the investment will qualify for the repairs deduction, and that's really a function of how much pipeline we get into the ground. We do have a lot of pipeline to get into ground, but we are into our forecast.

So, what drives our planning around, all of ours strategic plan are really kind of five core elements that we used around the company. First and foremost, it's about affordability and excellent service.

And so, we are always looking at ways where we can improve service and bring cost down, enhancing stockholder value, the capital program, making sure that we continue to execute our capital investment program and we get projects in the ground on scope, on schedule, on budget.

Those are now three of my favorite words that I run around the office, and the district is talking about. Make sure we maintain high-quality water and waste water. Once again, in 2016 in the state of California we had drilled primary and secondary water quality violations for the entire state.

So we've had a nice track record of not having any violations on the water quality within the state, and seeing that continue in the various areas that we serve.

Our strong brand reputation, making sure that we continue outreach to the local communities, our environmental stewardship, water conservation leadership and making a very high corporate governance score, and ultimately perhaps one of the most important ones, our employees are the best advocates focusing on safety, focusing on employee development, effective and transparent communications, and teamwork.

So, those are the items that drive our strategic planning, and with that, Don, we will open it up for questions, please..

Thank you. [Operator Instructions] Our first question comes from Tyler Frank with Robert W. Baird. Mr. Frank, your line is open. Please check your mute button..

Hi, guys, thanks for taking the question..

Good morning..

So, yes, I guess I have a few questions I wanted to follow-up on.

Your first and foremost, can you discuss how a change in corporate tax rate may affect you guys if taxes were to be lowered to, let’s say, 30% or 25% under the Trump administration, how we should think about that impacting your earnings going forward?.

Sure. One of the things that -- maybe Paul could jump in here as well. One of the things that you should know is that the California Commission takes every advantage to make certain that the rate payer benefits completely from any tax law changes.

So, for instance, a couple of years ago when we had bonus depreciation out of the federal government, the commission immediately passed a memorandum account resolution to track the benefit from the bonus depreciation that was in place at that time. I would expect that the California Commission would do the same with any tax law changes.

If you think about what might happen if the tax rate is lowered, there is a customer benefit over time from that lower tax rate that is good. But then we do have a reduced value of the deferred depreciation which constitutes the deferred tax that is on actually a lowering rate base in the regulatory model.

So it actually -- it lowers the expense of rates but it raises the rate base. And so from a customer standpoint we’re not quite sure -- certain where it would come out. But from a company standpoint I’m not sure that you could expect any big benefit there. And that’s just because of the strong regulators that we have.

There has been a discussion of the possibility that there’s an elimination of the tax break or debt, the tax deductibility of long-term debt. California Water Service Group does not have any long-term debt at the holding company level. All of our debt is in the regulated equity debt capital structure at the utility level.

So we would expect to be compensated in the rate making structure for any change in the deductibility of debt..

So, Tyler, that’s a real hard one to answer because there’s been about three or four different models that have been kind of floated out there. And we originally were modeling those to figure out the net effect. And as Tom said, there’s some customer benefit.

But the problem is there’s nothing concrete out there that you can say, yes, there’s -- if we had something more solid we could calculate the impact, but it’s really hard to speculate. And especially with fake news and everything else that’s going on. So we’re just going to continue doing what we do best, which is execute our business plan.

And we will start patch planning to optimize whatever we need to do on behalf of customer benefit and stockholder benefits, and wait to see them come out with. I’ve read in the Wall Street Journal today that they’re saying probably by August they would have something out. But that’s to be determined..

Okay, great. And then just a quick question on the drought, when should we expect, I guess, the recovery costs to be -- for the costs to be recovered, both for the remaining 2015 costs and then for the 2016 costs.

And then, as you look into 2017, as far as I understand, California is no longer in a drought in several areas, or at least that’s what the assumption is depending on the snow pack.

And so how will this process work in 2017, do you expect to have less drought-related costs this year? And when will those also be recovered, will that be a 2018 event?.

I’ll take the last part of the question, and I’ll hand it out to Paul on the recovery. Yes, we anticipate our drought costs dropping -- Well, first of all, the drought has been extended another 270 days, and that would be on February 8 on the State Water Resources Control Board. They said they would come back the end of May and evaluate that.

But voluntary [technical difficulty] remain in place, and we’re reporting on that every month to the State Water Resources Control Board. Based on where we are and seeing things change, we think our drought costs, that will be expense during the year but ultimately recorded in memorandum account.

We’ll be between $500,000 to $1.5 million, so it’s dropping a lot, but there’s still a lot of work to do. And I think where the state’s coming from with the continuation of the drought is -- you got to remember, we have almost 40 million people in the state of California.

And people will say, well, look at Australia, look how fast they responded to their emergency drought, and that’s true. Australia did a great job with their crisis, but people don’t realize we have twice as many people in the state of California as the country of Australia.

And so obviously the state became very diligent and very conservative when they look at the amount of water needed to run the state. And hence we spent a lot more time up in Sacramento participating in the workshops on what the State Water Resources Control Board is considering for their long-term water use efficiency program. Paul, you want to….

Yes, Tyler, Paul Townsley here. So in terms of recoverability of drought costs, as Marty mentioned, we actually record those as expense in the period that we incur them. But we record them as in a memorandum account for later recovery from the commission.

So in 2015, we incurred about $4.3 million, and the commission allowed us to recovery in rates $2.9 million of that, that recovery is ongoing as we speak, because the commission approved that recovery late last year.

The 2016 cost that we incurred, about another $4.3 million, we are currently going through those numbers, reviewing them, making sure that they’re correct. And we will make a filing with the commission later on this year, probably this summer. Yes, probably early summer to recover those costs.

And we’re likely to see recovery of our approved drought memorandum costs beginning in January of next year. So there’s a one-year lag between the incurring of those expenses and the recovery of them..

Okay, right.

So it the $1.4 million different between the $2.9 million approved and the $4.3 million of actual cost, is that $1.4 million -- are you not going to be able to recover that or is that still a possibility?.

That will not be recovered as part of the memorandum account. The reason is primarily that those costs were reflective of costs that were already included in customer rates. We charge them to the memorandum account, but then after later review we determined that they were not incremental costs, but they were costs that were already included in rates..

Okay, got it, excellent. And then the last question for me, I’ll get back in queue is, the advice letter projects, how good is your visibility that these will get completed.

And should we be assuming that they will be done in our estimates?.

So we have a budget team that is focused from engineering and accounting, and rates, and other departments that is looking at these, I think, biweekly, not just monthly, but actually every other week. We’re going to do the best we can with these projects.

One of the reasons or a couple of the reasons that advice letter projects are noted in rate cases is because there is some uncertainty as to the timing, whether it be permitting or some design or property aspect of a particularly large project. So typically we have not been able to complete a 100% of our advice letter projects.

I’d like to say we’ll do better this year and in this rate case cycle because we’re really focused on it more. But you’re always going to have those projects where for some reason you aren’t able to get the permit to begin construction and there’s a six-month delay. So we’ll have to wait and see on that.

The big amount of the advice letter projects really comes in the third year, and it has to do with our pipeline project that we’ve discussed on these calls before, it’s a $70 million project to increase the reliability of the water system for our system in Los Angeles.

And that’s the one that is a very critical timeline to make sure that gets completed in 2019..

Got it. Okay, thank you..

Thank you..

We’ll take our next question from Jonathan Reeder with Wells Fargo..

Hi, good morning gentlemen. Tom, appreciate the comments on tax reform. The one that you didn’t touch on, and kind of curious about, would be the potential media expensing of capital additions, and if that’s included that would obviously impact rate based growth.

Do you think that the commission would respond favorably and allow you to just kind of further bump up the CapEx? I know there’s a lot more work that you would like to get done to get back to closer to a 100-year replacement cycle.

Just wondering what your comments are around that?.

Yes, maybe I would turn that more to Paul. Obviously rate cases are give and take as far as the rate -- rate impact side, among other things. Paul, do you want to….

Yes, thank you, Tom. First of all there’s, as Tom mentioned earlier, there’s all kinds of speculation out there in terms of what the tax treatment may be, so I really don’t want to go too far in term of hypothesizing what may happen.

But if we were to begin to expense capital in the year it was incurred I can see that their late impact to customers would be quite high. And so I would anticipate that the commission would have a lot of concern about that, and would provide guidance to us as to what extent that may affect us.

Really what I’m saying is that I’d like to wait and see what the commission comes out with before we go too far down that road..

Yes, keep in mind -- Jon, this is Marty, keep in mind you have your GAAP books, we have our regulatory books, and we have our tax books. And the commission is going to be keenly focused on not doing things that skyrocket customer rates.

The other thing I would say is, a week-and-a-half ago I was at a lunch with Kevin McCarthy, who is the majority leader in the house. He’s the elected representative for Bakersfield, which is our biggest district. And we had a good discussion with Representative McCarthy about the infrastructure bill and not forgetting about the investors.

And so he make a comment to us about keeping close to him, and make sure we contact him with any concerns we have as these bills evolve. Not that any one source could have any input on it, but obviously I think the water industry has gotten smarter about dealing with evolving changes in accounting regulation, and evolving issues on the tax side.

So between NAWC, AWWA, CWA, and our member companies, I think we’ll be keenly focused on these tax bills and infrastructure bills if they make their way through the congress in the U.S..

But then, I guess, from an earnings impact standpoint I guess it’s fair to say based on your experience with the way the CPUC work scenario being -- you would expect whatever may or may not be enacted, you know you’d kind of be held harmless on.

I mean, be overall fairly neutral from an earnings impact standpoint?.

That’s right, Jonathan..

Okay.

And then if you could just remind us, are the rate based amounts on slide 16, are they averages for the year or year end?.

That is our average for the year..

Okay.

And then going to the cost of capital; is there any specific timeline for receiving a response from the CPUC regarding the extension requests that the four water utilities made?.

So let me address that. First of all, the extension request that we applied for was not approved by the commission. So we are proceeding with our cost of capital filing which we will be making at the end of March, so we’re on schedule. That was always the schedule, and so we’re staying with that schedule.

And the anticipated commission decision on the cost of capital matter would be in late 2017 -- later this year, with the new cost of capital going into effect January of 2018..

Okay, so at this point we should consider any potential for, I guess, a settlement with ORA or the other parties to either extend the requests or make some adjustments without going through the proceeding, kind of like the electrics had, that’s off the table this juncture.

So now I guess you’re definitely making those filings, and then maybe settlement talks may arise once kind of the parties’ positions are publically made.

Is that the way to be thinking about it?.

Yes, that is the way to think about it..

Okay, looking forward to seeing those filings. So thank you for the additional time that I got..

All right, thanks Jonathan..

We’ll go next to Jim Von Riesemann with Mizuho..

Hi, gentlemen, Jim Von Riesemann with Mizuho.

How are you?.

Good morning..

Good..

Since I’m new to the water industry, can you just refresh my memory as to what the existing cost to capital or parameters are, and what the allowed ROE and equity thresholds are, and what is included and not included in the denominator?.

Sure. So we have a 9.43% ROE, and that’s based on a 53.6% equity ratio. And as I’ve indicated earlier, the construction work in progress is not included in the rate base. So that’s what the percentages are based upon..

Okay. And then on the debt component, do they include customer deposits and all that as part of the capital….

No..

Okay, great. Thank you, that’s all I have..

Okay, thanks Jim..

If you have questions about the water industry feel free to give us a call..

Will do..

We’ll take our next question from Spencer Joyce with Hilliard Lyons..

Hi, good morning guys. Thanks for taking my question. I know we’re getting a little long today..

Good morning, Spencer..

Good morning. No worries, take your time..

You all just had a lot going on out there. A couple of pseudo housekeeping questions here.

Tom, the litigation proceeds that -- the $1.6 million of net income impact, was that all in the fourth quarter?.

That was booked as of the result of the rate case. It was a settlement item in the rate case, so we did book it in the fourth quarter, yes..

Okay, perfect. And similarly the balancing in memoranda account item, I would assume that was all booked into the fourth quarter as well.

But my question is, is that indicative of a sustained bump or step function higher in earnings or is that almost a one-time item that shouldn’t repeat kind of across 2017?.

Yes, I think that generally our view would be those are one-time kind of cleanup items.

So, for instance, one of the big memorandum account items was the recovery of a return on a piece of property that we had been excluded from rates in the prior rate case, and then was allowed three years worth of revenue requirement from one piece of property was in there.

And so that’s going to be included in the rates on a go-forward basis, and not that issue. If you’re looking for the go-forward, I think we often say, look at the rate base of the company and the authorized rate of return and the capital structure, and that gives you a better guide about where we’re going on future years..

Yes, okay, perfect. As far as the CapEx goes, it looks like a really nice quarter of spend here in Q4. And has that been kind of parlayed, if you will, into a pretty good pace of projects here in the first quarter. And I know it’s still early to say if you’ll hit the full-year target or not.

But has some of that momentum carried over?.

Well, keep in mind we have a lot of dry weather the last couple of years. And wet weather certainly slows down construction work. So no, it has been a very, very wet winter, as I mentioned, one of the wettest winters on record. And that affects our ability to move capital and get it in the ground quickly.

Especially when you have things happening like all the flooding that you’re seeing right now, that things just come to a halt. So I think the clip during the first quarter is going to slow down probably substantially over the first quarter of last year just due to the change in weather condition.

And then you’ll see a lot more capital deployed and put in the ground during the warm summer months..

Okay, that makes sense. And a final item here, just so I’m clear.

The drought-specific or at least the drought expenses tracked in the memoranda were essentially equal in 2016 to 2015, is that correct, right around the $4.3 million-$4.4 million amount?.

Yes, that’s right. And that, by the way, purely a coincidence -- that worked out that way, not by any great planning on our part, but as the conservation program changes, and you put these programs in place then they have a tail. And some customers take up on what we offer, and some don’t.

So it’s just a coincidence this year they were the same two years in a row. But I think as Paul pointed out earlier, we learned a lot going through that first filing with the commission and reviewing it with them. And so I think the accuracy of the numbers for ’16 are probably -- I know higher than what they were the first time through it..

Okay, perfect. That was my follow-up question. That’s all I had. Congrats on a pretty interesting and a pretty strong year. Thanks guys..

Thank you, Spencer..

There are currently no questions in the queue. [Operator Instructions] And it appears we have no more questions at this time. I will turn the call back to Martin Kropelnicki for any final remarks..

Great. Thanks, Don. Actually Spencer's party comment there was a great way to end the call.

'16 was the third rate case cycle for us, which is always the most challenging year, and that coupled with things like the Erskine Fire and the drought made it -- certainly we had a lot of things to work on throughout the year, but even despite some of the roadblocks we had to work around, 2016 actually turned out to be a very good year for the company with the amount of capital that was employed best in the ground, the rate case coming in on schedule, and I think this is the first rate case in a decade for any utility in the state to come in on time, and everything that we got done.

There is a whole list of projects the company got done, including putting in a new billing system. There is just -- went into JD Power award, voted top Bay Area workplace.

So, the company is always firing on all cylinders right now, and so we believe what is the most challenging third of the cycle into '17, which is off to a really good start albeit wet, but a very good start, and so we have new projects, new targets, a lot of enthusiasm and a lot of momentum leaving '16 going into '17.

And we appreciate everyone's support of Cal Water. We are around if anyone has any questions, and we look forward to talking to everyone at the end of the first quarter. So with that done, I think we are all wrapped up..

That does conclude today's conference. Thank you for your participation. You may now disconnect..