U.S. Markets open in 3 hrs 59 mins

Edited Transcript of CWT earnings conference call or presentation 28-Feb-19 4:00pm GMT

Q4 2018 California Water Service Group Earnings Call

SAN JOSE Mar 15, 2019 (Thomson StreetEvents) -- Edited Transcript of California Water Service Group earnings conference call or presentation Thursday, February 28, 2019 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David B. Healey

California Water Service Group - VP, Corporate Controller, Assistant Treasurer & Principal Accounting Officer

* Martin A. Kropelnicki

California Water Service Group - President, CEO & Director

* Paul G. Townsley

California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer

* Thomas F. Smegal

California Water Service Group - VP, CFO & Treasurer

================================================================================

Conference Call Participants

================================================================================

* Durgesh Chopra

Evercore ISI Institutional Equities, Research Division - Associate

* Jonathan Garrett Reeder

Wells Fargo Securities, LLC, Research Division - Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the California Water Service Group Year-end 2018 Earnings Results Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. David Healy, Vice President and Corporate Controller. Sir, you may begin.

--------------------------------------------------------------------------------

David B. Healey, California Water Service Group - VP, Corporate Controller, Assistant Treasurer & Principal Accounting Officer [2]

--------------------------------------------------------------------------------

Thank you, Skyler. Welcome everyone to the 2018 Year-End Earnings Results Call for California Water Service Group. With me today is Martin Kropelnicki, our President and CEO; Thomas Smegal, our Vice President, Chief Financial Officer; and Paul Townsley, our Vice President, Corporate Development and Chief Regulatory Officer. Replay dial-in information for this call can be found in our year-end earnings release, which was issued earlier today. A replay will be available until April 30, 2019. As a reminder, before we begin, the company has a slide deck to accompany the earnings call this year-end and quarter. The slide deck was furnished with an 8-K this morning and is also available at the company's website at www.calwatergroup.com.

Before looking at the year-end results, I'd like to take a few minutes 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.

--------------------------------------------------------------------------------

Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [3]

--------------------------------------------------------------------------------

Thanks, Dave. So going through the slide deck, I'm going to start on Slide 6 and talk a little bit about the adjustments that we made to our financial statements. During the year-end close process, company management discovered that it had incorrectly understated operating revenue for 2 cost recovery balancing accounts, the medical cost, pension cost balancing account that are authorized by the California Public Utilities Commission.

What had happened was that the company took its actual expenses and compared them to the expense plus capital, which was adopted by the commission and what was proper was to compare the actual expenses to the adopted expense portion of those costs.

Correcting the error increased our operating revenue $9.2 million in 2017 and $6.9 million for the year-to-date period September 30, 2018, with corresponding changes to regulatory assets and liabilities.

The company has designed new controls to better prevent, detect and correct this type of error in the future, and we've been -- we got a lot more detail on that in the 10-K, which we expect to file a little bit later this morning or hopefully before this afternoon, so you can read all about that at your leisure.

Now I'm going to roll into our financial results and the reason that we mentioned the adjustment is because we're comparing our 2018 financial results to the adjusted 2017 financials. And so on Page 7 of the slide deck, our net income for 2018 is $65.6 million, that is down about 10% from $72.9 million in 2017. Our earnings per share is $1.36 and that is down from $1.52, again, as adjusted for 2017.

Flipping through the quarter on Slide 8, we'll talk about net income there. We are basically flat from 2017, $15.4 million of net income versus $15.1 million of net income in 2017, again, 2017 as adjusted. And the earnings per share in the quarter, $0.32 versus the $0.31 in the similar quarter of 2017.

Flipping to Slide 9, our financial highlights. Basically, the same factors that have been driving the company's performance throughout the year in 2018 were the story of the entire year and that is that our net income decrease of $7.3 million is largely driven by 3 large factors. First was the reduced adopted cost to capital for 2018 for California that reduced our revenue by $6.9 million.

Second was the expenses related to business development, particularly the San Jose Water that y'all know about and that was about $5 million of increased expense on the year that was unanticipated at the beginning of the year. The third bullet, grew a little bit in the fourth quarter as the stock market performance of our investments in one of our retirement plans decreased with the market, and we have about a $5.4 million decrease in the value of those assets, and that's a mark-to-market that we have to do every quarter.

So increased revenue from rate changes. If you'll recall that we got a very large step rate increase at the beginning of 2018. That increased revenue was partially offset by increases in our operational cost, labor, maintenance, property taxes, interest and depreciation. Those are the kind of normal course things for us. We also, at the end of the year, received approval to recover $3.3 million of 2016, 2017, drought expenses. That's reflected in our financials as a reduction to expense. That's how that's recorded.

And finally, our effective tax rate for 2018 was about 20%. That's lower than we estimate for next year and lower than we had anticipated, in part because of the large volume of capital additions for linear assets, the mains and services, and that drives the repairs deduction that we were able to take.

On the EPS bridge, you can see these same factors discussed in a graphical form on Slides 10 and 11. I don't think there's anything else to highlight there on 10 and 11. I'm going to turn it over to Marty Kropelnicki for capital investment update.

--------------------------------------------------------------------------------

Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [4]

--------------------------------------------------------------------------------

Thanks, Tom. Good morning, everyone. Happy to report that it was another record year for our infrastructure improvement plan. Our company, developer funded and litigation proceeds funded capital program investments exceeded $271 million, they were $271.7 million for the year, that's an increase of 4.8% over the same period last year of 2017.

Couple of things driving the target above what our original range was, was just general cost increases with the main replacement program, the cost of permitting, cost of paving. We saw a fairly substantial increase in the cost of pipe through the year, and so as we got those projects underway and got that main replacement work in the ground they certainly had higher costs.

The company funded component of the $271 million was $231 million. And then as we note on the slides, we had to do 1, 2, 3-trichloropropane or TCP work for 36 wells, that was $22 million. That was funded through proceeds where we sued the responsible parties for contaminating the water supply and that was paid for by the legal proceeds.

Later on in the deck, we have a placeholder of $290 million as the holder for 2019. That is just the placeholder based on what was submitted in the 2018 General Rate Case, which was $825.5 million (sic) [$828.5 million], and we're going through that process now. Paul is going to talk about the General Rate Case and where we are, but that is just a placeholder. And we anticipate as we get farther along in the process here with the commission, in particular, in the second and third quarter, we will come up with a firm range for 2019 once we have some more clarity with the commission on our infrastructure improvement plan for the year in the rate case.

I'm going to hand it over to Paul, who is going to start talking about what's happening on the rate case side.

--------------------------------------------------------------------------------

Paul G. Townsley, California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer [5]

--------------------------------------------------------------------------------

Thank you, Marty. So as Marty just mentioned, we filed our rate case in July of last year, and we requested $828.5 million of new capital investments and those -- that capital would be made over the 3-year period: 2019, 2020 and 2021. Well, we are in the midst of the rate case process right now. Last Friday, February 22, we received the consumer advocate's, California Public Advocate's testimony in the case, and so we are in the midst of reviewing all of that. It's a lot of documentation there.

Tomorrow, this -- tomorrow, we're expecting testimony if there's any testimony from other interveners in the case. There are 3 cities that filed for intervention in the case. Don't know if they'll provide testimony, but if they do that will be coming out tomorrow. And then our rebuttal testimony is due on April 23. So our team is really in the midst of reviewing the California Public Advocate testimony right now and determining what we will be saying in our rebuttal.

Turning to Slide 14, we've also been active in other regulatory matters. We have filed for -- we filed for a step increase of $16.2 million of increased revenue and that went into effect on January 1 of this year. We also have filed for some advice letter projects for about $6.6 million of additional revenue, and we'll be filing for other advice letter projects across 2019 as we complete those projects.

We have 2 rate cases in Hawaii that we -- were completed last year. The Hawaii Waikoloa rate case, which is on the Big Island and that was -- it was finalized in 2019 with $2.6 million of additional revenue. Hawaii, we phase in rates if they're large, so $1.6 million will be realized in 2019 and the balance will be realized in 2020. And we also finalized our Washington rate case in November of last year and that increased revenue up there by $1.1 million.

Turning to Slide 15, on the business development front. We've been very active in the business development area. We have a pipeline that we continue to grow. And I wanted to highlight 4 projects: the first one is, we have now received final commission approval to own and operate the Travis Air Force Base system and we're going through the transition period on that right now. We expect to be operating that as a fully regulated utility in July of this year.

We also began operating as an O&M contract, a wastewater system on the Big Island of Hawaii called Keauhou, which is about 1,500 resort -- it's over 1,500 resort unit community. We're also operating the water and the wastewater system for Tesoro Viejo, which is a new development under construction in the Central Valley. And then we also agreed to acquire the water and wastewater assets for another system in Central Valley known as the Preserve at Millerton. So there's been a lot of activity in that area and with that, I will turn it over to Tom.

--------------------------------------------------------------------------------

Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [6]

--------------------------------------------------------------------------------

Thanks, Paul. Just a quick update on our decoupling balancing accounts. This is an area that we like to talk about because of the balance of the receivable. And Cal Water in 2018 sold 95% of its adopted estimated sales. So that's a pretty good number for us. That was largely driven by the fact that we triggered the Sales Reconciliation Mechanism, which is in the California General Rate Case process.

We believe that had that not triggered, our sales percentage of adopted would be considerably less than that and our WRAM balance probably would have grown. We estimate that the WRAM balance was reduced by $21.4 million throughout the year due to the SRM. So the good news is that the net WRAM receivable balance is $56.1 million and that's down from $69.1 million at the year-end of 2017. On Slide 17 you can just see the chart of that.

And so we did engage the SRM mechanism once again for 2019. So hopefully with similar water sales this year, we will have a similar outcome as we continue to work on that balance of the WRAM receivable. Now I'll turn it over to Marty for our outlook for 2019.

--------------------------------------------------------------------------------

Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [7]

--------------------------------------------------------------------------------

Great. Thanks, Tom. 2018 certainly was a very, very busy year here in the hallways of California Water Service Group. One of the big events is generally -- was getting the General Rate Case on file on time, as Paul mentioned. The third year of the rate case cycle in California typically generates the largest gap in cost recovery for us. And so as we go into the third year, we're always mindful of it's our tightest year, keeping our operating budgets tight and staying focused on our mission, our objectives.

We have a couple projects that, I think, are strategic and noteworthy to mentioning. One, we are doing our first call center consolidation project in Southern California. So each of our districts have had a separate customer center. In some of our regions, these customer centers might only be a few miles away. And so based on looking at customer flow through our customer portal, we put a portal in about 5 years ago, we've been tracking when do our customers interact with us, when do they pay their bills. Approximately half of our customers pay their bills electronically.

And we've noticed that the change in customer preferences and it's moving away from -- strongly moving away from a 8-to-5 business model to be more around-the-clock business model. So we are doing our first call center consolidation down in Southern California. We anticipate that call center will be up sometime mid-year and off to the races, and then we will be enhancing and improving the vehicles by which customers can communicate with us. And so the goal is to have customers always be able to talk to a Cal Water employee and not an after-hours call center who takes the message and calls an on-call employee. So we think this much better aligns our services to the customer's preference.

In addition, we are doing a major upgrade on our SCADA project. We have our fifth district that's gone live in the last 2 months on our SCADA project. In today's world of cyber, SCADA is really important. And as we've learned dealing with the major fires in the State of California where you cannot have staff because it is an active fire zone, SCADA systems help us better run our systems and keep the water flowing, especially for fire flow purposes. So we have a SCADA project that's well underway.

And then what's turning out to be probably the largest project in our company's history, and this is part of our infrastructure improvement plan, is a large pipeline project in Palos Verdes, so down in L.A. So we're putting in 14 miles of main, which is providing redundancy for parts of the L.A. area, essentially for fire flow purposes.

And so anyone who has been to Southern California, you know it's very, very cramped down there. The -- this area that we're working in, a lot of high-end homes, a lot of equestrian areas. But at the end of the day, we need more redundancy of supply in that area. So this project is underway. And this project is actually -- at what should -- we're trying to have it wrapped up by the end of 2019, and I believe it's an advice letter filing when we have it done.

So we'll be reporting on these 3 projects: SCADA, the Palos Verdes pipeline project and the call center consolidation throughout the year. As I mentioned earlier, our -- we have a $290 million placeholder for the capital investment line for 2019, but that's really just a placeholder as we work through the rate case settlement process here, which will pick up, as Paul said, over the next couple months.

We think it's noteworthy, and this gets back into one of the projects that this team has been working on and a broader officer team was when we reengineered our capital -- our investment process by which we invest capital. And as you may recall, we've talked about the fact that we discovered we were leaving step increase dollars on the table. And so with the rate increases with Paul's help and the subsidiary companies as well as us being able to maximize our step increases, we believe that we will be much closer to earning our authorized rate of return in 2019. And historically, that hasn't been the case in the overview of the rate case cycle.

Additionally, we don't anticipate filing a bunch of advice letters early on in 2019. As I mentioned, the PV pipeline project will be an advice letter project. That will be towards the end of the year. So you're not going to see a lot of advice letter revenue getting approved during the year until we get towards the end of the year. And looking at our effective tax rate for 2019. As of right now, we're anticipating that will be 24% because of uncertainty and the amount and timing of the linear asset construction and mainly our main replacement program.

--------------------------------------------------------------------------------

Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [8]

--------------------------------------------------------------------------------

So I'll walk very quickly through Slide 19 and 20. And this is just something that we provide out in the public every quarter. This hasn't changed, except for reflecting the actual 2018 capital investment on Slide 19. And then flipping to Slide 20, we've updated the actual adopted rate base of the company as of 2018 there on the blue bar on Slide 20. And Marty, I'll give back to you.

--------------------------------------------------------------------------------

Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [9]

--------------------------------------------------------------------------------

Yes. So in December, we announced some significant officer changes, so I want to take a minute and talk about that. And but I first want to mention the process, succession planning is something the Board of Directors here and the officer team at Cal Water take very seriously. We do an extensive succession planning process led by our VP of HR, Ron Webb, every year. And in September, we go through that succession planning process with our Board of Directors, and we did that.

We jumped into this more detailed succession planning about 5 years ago because we anticipated the baby boomer wave starting to retire. And so we wanted to make sure we were doing what we needed to do to successfully develop, recruit, retain and build people's skill sets, so they were available to move into these opportunities as they move up.

So in 2019, we have some changes. First and foremost, Tim Treloar, who is our Vice President, Chief Utility Operations Officer will be retiring after 25 years of service. For those of you that know Tim, he is an outstanding individual. He is a water quality expert. He is a geologist by his educational background, who just likes rocks and water.

And Tim came up through operations. He ran our Bakersfield district for a number of years. Well known at Bakersfield for his civic activities and being involved in the community and doing a great job running Bakersfield. He then came up to corporate and he was the Head of Water Quality. While he is the Head of Water Quality, I asked him to get involved in wastewater when we did a number of acquisitions in Hawaii. We developed this integrated water, wastewater concept internally and Tim jumped in and got involved with the wastewater side of the business for us and helped us develop that business model.

And just really, really a top-notch guy. And as much as I hate to see Tim retire, and my heart's breaking to say goodbye to him, I'm very, very happy for Tim; his lovely wife, Erin; and their daughters, Kristin and Michelle. And the great thing about working for Cal Water is we are like a family and while he won't be here every day, we will certainly keep in touch with Tim, and we wish him all the best in his retirement when he retires the end of next month.

Along the lines of those changes, we promoted Mike Mares to be Vice President of Operations for California. Mike, again, like Tim, came up on the operations side. He has his degree in communications. He has his D5 certification, which is the largest distribution sort of certification in the State of California. Mike came up in Northern California in Chico. We moved Mike to be a local manager over in Hawaii. So again, where we have the integrated water and wastewater systems where we run both with the same set of customers.

Mike went over there to run as a local manager some of operations with -- under Tim Treloar. Mike was then promoted to General Manager of Hawaii and did a fantastic job. After serving in Hawaii for a few years, we brought him back to run Bakersfield. And he spent the last couple years running Bakersfield. So Mike is certainly well positioned for operations, and he is an operations person. He is high energy, a lot of charisma. He is the charge-a-hill type of guy and we're not going to miss a beat with Tim's retirement. And Tim has done a great job at mentoring Mike, and we anticipate a smooth hand-off of that.

In addition, as Paul mentioned, one of our goals over the last 18 months was to retool our business development pipeline. And Paul, who has had responsibility for rates and then he added the business development piece of it, there's a lot going on in California, in the California rate case, and given our infrastructure improvement plans in the State of California.

So we promoted Greg Milleman, who reports to Paul Townsley. Greg is Vice President of Rates for California. Greg's been with us for about 6 years. We recruited Greg from Valencia Water where he was Senior Vice President of Administration and Corporate Secretary. I believe, he had the CFO function in there as well. Greg's a CPA. He is former past President of California Water Association. He is an outstanding rates person, having the CPA background and knowing rates, I think, makes him very, very valuable. And he has taken over for Paul in the State of California.

Paul's title has changed. Paul has become Vice President Corporate Development and Chief Regulatory Officer. So Paul is overseeing rates in all 4 states, business development and working with Greg. So Paul has a new title. Paul, congratulations, and it's great to see the pipeline full in the business development side, as we've been working on that. In addition, so Tim had water quality and all of operations. And Tim was the first vice president in our history to have operations under him in all 4 states. So with his retirement, we've had to move a couple pieces around.

As you may recall, we recruited Rob Kuta from the outside when we wanted to make some changes in engineering and rethink our engineering process. Rob has been amazingly successful as you can see by our capital numbers. So Rob's title has changed to Vice President Engineering and Chief Water Quality and Environmental Compliance Officer. So he has engineering, water quality and environmental compliance. So all 4 of these individuals kind of hit the ground running January 1, and we are off to the races.

Looking at Page 22, and just kind of summarizing where we are and looking at where we'll be going here. 2018 was a solid year for the company. In particular in all 4 states, we met and exceeded all the primary and secondary water quality standards in all 4 states. There were no penalties, no citations for primary and secondary water quality issues.

Very happy with the infrastructure improvement plan. It was another record year for us and we've busted this record now the last 3 years and have maintained a 10%-plus growth rate on our capital expenditures and our ability to execute our business plan around those expenditures.

We had 3 major wildfires that made the record books in California, yesterday at our Board meeting we did a lessons learned, looking at what we could do better. We got excellent scores from our customers and communities for our emergency response, but safety and public health is paramount in what we do. So we took the time to do deep dive and lessons learned from the 3 fires and we want to continue to make safety a priority.

Having said that, we've made significant improvements in the company's internal safety processes, which really reflected in a strong reduction in our accident rates, et cetera, during the year and employees getting hurt. So very, very, very happy with that.

As we talk about on this page, maximizing the step increases, I think, are important. In the last 2 years in this cycle, we've achieved over $33 million of step increases. If you go back and look at the previous 2 years, when we had step increases, we achieved $9 million for the same period looking backwards. So the realignment, the reengineering that we did and the capital program to maximize those step increases is really starting to pay off.

So as we look at 2019, a lot of stuff on the business development side going. We got the general rate case going in the infrastructure improvement plan and a number of key initiatives and keeping the 2019 California rate case on schedule, on budget is going to be our key. And with that, Tom, I will...

--------------------------------------------------------------------------------

Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [10]

--------------------------------------------------------------------------------

Yes, let's turn it over for questions. Skyler, you can open the line for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Durgesh Chopra with Evercore.

--------------------------------------------------------------------------------

Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [2]

--------------------------------------------------------------------------------

Can you just discuss a little bit how are you going to fund the CapEx for the next 3 years? What combination of debt and/or equity are we looking at?

--------------------------------------------------------------------------------

Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [3]

--------------------------------------------------------------------------------

Sure. So generally the company's policy has been to maintain a capital structure that is closely aligned to what's been authorized by the California Commission. That's about 53% equity. And so if you'll recall, we did a debt deal last August, September time frame, where we put out $300 million of 2-year debt. We expect that we will have equity at some point in the next couple of years to manage the capital program and match this -- match the large expenditures that are going on through the GRC process in California.

So look to long-term debt and equity as kind of equal partners there. But also remember that the company maintains a large credit line, large line of credit. So about $300 million at the operating company and $150 million at the holding company. So that gives us an opportunity to finance those capital investments in the short term on the line of credit.

--------------------------------------------------------------------------------

Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [4]

--------------------------------------------------------------------------------

Yes, I think the other thing I would add and this is why those step increases are important in our ability to execute our rate case plan is we're getting that stepped-up revenue, which helps on the cash flow line for the company. So being able to earn or come close to earn an authorized rate of return versus having more of a lag, which we've seen historically allows us to take all that excess cash flow and plow it right back into the infrastructure.

--------------------------------------------------------------------------------

Durgesh Chopra, Evercore ISI Institutional Equities, Research Division - Associate [5]

--------------------------------------------------------------------------------

Okay. That's great color. Just, Marty, wanted to get your thoughts on M&A to the extent you can comment on this. Obviously, like in the past, you've tried to merge with San Jose Water. Given what's happening in Connecticut, what's -- could a potential merger be on the table in the future? How are you thinking about that?

--------------------------------------------------------------------------------

Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [6]

--------------------------------------------------------------------------------

You know -- well, obviously, we pulled our offer for San Jose and there is no offer on the table nor have we had discussions with them about merging. We believe the industrial logic is sound.

Typically, when we evaluate targets in our service area and this is one of the things Paul is keenly focused on, we try to focus on what's the economic benefit not only for stockholders, but for ratepayers. And what we have found when we've done deals in California and, I believe, one of the largest ones was Dominguez, Tom, when we did Dominguez a number of years ago. We have found working with the commission is a lot easier when you go in and say, here's synergies and we're willing to give up some of these synergies and share them with our customers as well as our ratepayers. So it really kind of creates that win-win environment.

So with all the stuff that Paul is working on, some of it is greenfield development in the Central Valley, and so we're excited about some of that. And then other ones are systems that are already in development that we're taking over and so we're out there looking. We're not waiting for SJW to come back to the table. We've got a business payout plan to execute. We have a growing capital budget that we execute on, and we're actually in a really good spot because we have kind of nice rate base growth happening within the company. And to the extent we can supplement that with strategic M&A growth, that's the way it's going to work.

So primary growth is rate base growth. Secondary to that is, the stuff that Paul's doing on the business development side, and we will look for opportunities to enhance stockholder value, but also for our customers. And to the extent we can get some savings out of the system for them, that creates a win-win.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Jonathan Reeder with Wells Fargo.

--------------------------------------------------------------------------------

Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [8]

--------------------------------------------------------------------------------

Just a little clarity on the earning, the ROE in 2019. When you calculate your earned rate or your ROE, does that include or exclude the items that fall under other income?

--------------------------------------------------------------------------------

Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [9]

--------------------------------------------------------------------------------

Jonathan, that is a good question. I am looking to Dave. So it includes -- so Dave is telling me that's -- you can talk, Dave. You've been announced on the call.

--------------------------------------------------------------------------------

David B. Healey, California Water Service Group - VP, Corporate Controller, Assistant Treasurer & Principal Accounting Officer [10]

--------------------------------------------------------------------------------

Yes, it does include those items.

--------------------------------------------------------------------------------

Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [11]

--------------------------------------------------------------------------------

Okay. So then, I guess, if I take the $1.4 billion 2019 average rate base, apply the CPUC approved cost of capital metrics, you get something a little north of $1.40 in 2019, but then, I guess, you got to strip out the fact that some of those advice letter projects won't wrap up until late in the year. So maybe it's $1.40 or a little less is a more realistic target. Is that kind of how we should be thinking about 2019 EPS?

--------------------------------------------------------------------------------

Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [12]

--------------------------------------------------------------------------------

Yes, we've always suggested that you do that kind of a calculation. And the company is nearly 100% regulated, and the regulated model is rate base x rate of return x equity capital structure. So I think, you're on the right track there with the type of calculation you're making.

--------------------------------------------------------------------------------

Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [13]

--------------------------------------------------------------------------------

Okay. And then any, I guess, comments if you can offer on your initial reaction to the intervener testimony in the GRC? And the prospect of being able to reach a settle agreement based on it?

--------------------------------------------------------------------------------

Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [14]

--------------------------------------------------------------------------------

Yes. So the testimony that we've seen, first of all, we've only had it for about 3 business days. So we're still in the process of really understanding it all. We -- the only testimony we've seen so far is from the consumer advocate. We've not seen any of the other testimony, if any other gets filed. And they often don't agree with us on every point.

So we will go through it. We will be working on our rebuttal, which is due at the end of April. We will enter into settlement negotiations later on this spring and the process takes some time. So it's hard for us to comment at this point on their testimony given that we've just had it -- we've really only had it a couple of days.

--------------------------------------------------------------------------------

Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [15]

--------------------------------------------------------------------------------

Let me offer...

--------------------------------------------------------------------------------

Paul G. Townsley, California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer [16]

--------------------------------------------------------------------------------

Knowing that they don't typically agree with you on, is their disagreement so far along the lines of expectation, I guess, might not be ...

--------------------------------------------------------------------------------

Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [17]

--------------------------------------------------------------------------------

Yes, I think let me add a little bit of color to what Paul was saying. In my reading, and I only read kind of 1/2 of it or 1/3 of it, because a lot going on this week as you can imagine. But the impression that I get is that it is a similar type of report that we've received before with similar types of issues, similar stances on the policy issues. And so there's nothing that I saw personally that was an out of left field kind of an argument that is different from the kinds of things that have been argued before by that group.

--------------------------------------------------------------------------------

Paul G. Townsley, California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer [18]

--------------------------------------------------------------------------------

And I agree with that position, Tom. I've read -- I've read it all. And it is a not uncommon position for ORA to take, but it is -- or Cal PA, but it is very similar to what we've seen in the last 2 rate case cycles.

--------------------------------------------------------------------------------

Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [19]

--------------------------------------------------------------------------------

And then the question about settlement or not, it really comes down to the willingness of both parties to settle. So we have felt that we've put on a stronger case in this rate case cycle, stronger every time we file, with more backup and more evidence behind our position.

So we'll just -- for the positions that are in dispute, we'll just have to look very carefully at what is the evidence that we present, what is the evidence that Cal PA is presenting and maybe other interveners. And then decide on whether settlement is appropriate based upon their willingness to settle at terms that we would be willing to settle on.

--------------------------------------------------------------------------------

Paul G. Townsley, California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer [20]

--------------------------------------------------------------------------------

And there are also evidentiary hearings scheduled for the summer. So we can -- we have those in front of us as well.

--------------------------------------------------------------------------------

Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [21]

--------------------------------------------------------------------------------

Yes, I think, what are the dates on those evidentiary hearings?

--------------------------------------------------------------------------------

Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [22]

--------------------------------------------------------------------------------

Jonathan, we could probably point you to the website of the commission where those are listed. Those often change as the parties attempt to negotiate settlement. So that's at the CPUC's website. There's a scoping memo for the proceeding and it has those dates on there.

--------------------------------------------------------------------------------

Paul G. Townsley, California Water Service Group - VP of Corporate Development & Chief Regulatory Matters Officer [23]

--------------------------------------------------------------------------------

When you get a settlement, I mean, it doesn't necessarily have to be in front of those hearings, it would be nice if they were, but...

--------------------------------------------------------------------------------

Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [24]

--------------------------------------------------------------------------------

Yes, we've had settlements both ways. We've had settlements before hearing and we've had settlements after hearing. So typically they would -- any settlement would be before hearing, so that the hearing could just focus on any unsettled issues. But sometimes, you get through a hearing and then everybody realizes their positions aren't that far apart or whatever, so.

--------------------------------------------------------------------------------

Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [25]

--------------------------------------------------------------------------------

Okay. And then last question for me the Travis Air Force Base, can you remind us about the CapEx rate base growth opportunity there. If I recall correctly, you start with the rate base value of 0 and then start building it up as you invest the capital?

--------------------------------------------------------------------------------

Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [26]

--------------------------------------------------------------------------------

That's right. We have about $12 million of initial capital investment that we're going to be making over the first couple years of the program there. And I believe the total is about $50 million when we announced the deal. And obviously, inflation happens and other things might come up, but the total CapEx that we had expected over the medium term was about $50 million.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

At this time, I'm showing no further questions. I would like to turn the call back over to Tom for any closing remarks.

--------------------------------------------------------------------------------

Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [28]

--------------------------------------------------------------------------------

Great. Well, thank you all for your interest in our earnings call this morning, and we look forward to talking with you throughout 2019. Marty, you want to fill in anything there?

--------------------------------------------------------------------------------

Martin A. Kropelnicki, California Water Service Group - President, CEO & Director [29]

--------------------------------------------------------------------------------

No. I think, 2018 was certainly a really busy year. We started off 2019 here with a bang, and we remain steadfast on our execution of our business model, in particular, the infrastructure improvement plan and getting through this rate case. So we appreciate your support. And any questions, feel free to give us a call. Thank you.

--------------------------------------------------------------------------------

Thomas F. Smegal, California Water Service Group - VP, CFO & Treasurer [30]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.