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California Water Service Group (NYSE:CWT)

Q3 2013 Earnings Conference Call

November 6, 2013 11:00 AM ET

Executives

Paul Townsley - Vice President of Regulatory Matters and Corporate Relations

Thomas Smegal - Chief Financial Officer

Martin Kropelnicki - President and CEO

Analysts

Spencer Joyce - Hilliard Lyons

Jonathan Reeder - Wells Fargo

Hasan Doza - Water Asset Management

Heike Doerr - Robert W. Baird

Operator

Good morning ladies and gentlemen. Welcome to California Water Service Group Third Quarter 2013 Earnings Results Conference Call. This call is being recorded. I would now like to turn the meeting over to Mr. Thomas Smegal, VP, Chief Financial Officer and Treasurer. Please go ahead, sir.

Thomas Smegal

Thank you, Jennifer. Welcome everyone to the third quarter 2013 earnings call for California Water Service Group. Again my name is Thomas Smegal, I am VP, CFO, and Treasurer for California Water Service Group. With me today are Martin Kropelnicki, President and CEO, and Paul Townsley, Vice President of Regulatory Matters and Corporate Relations.

A replay of today's proceedings will be available beginning today November 06, 2013, through January 06, 2014, at 188-820-311-12 or 171-945-708-20 with the replay pass code of 9201217. 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 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, 10-Q and other reports filed from time-to-time with the Securities and Exchange Commission.

But now let’s get into this quarter's forward-looking statements. So I'm going to go over the revenue and income statement and then move on to some of the other speakers. On the revenue side for the quarter, we recorded revenue of $184.4 million that’s up 3.5% or $6.3 million from the similar period last year. Our year-to-date consumption is 90% of adopted, our purchase water offsets increased our revenue $2.3 million and general rate increases added 1.2 million. The effect of our pension and conservation balancing accounts decreased revenue by $1.2 million and our usage net of RAM and MCBA increased $4.0 million primarily due to two factors, got increased unbilled revenue accrual of $1.1 million and increased recognizable RAM, MCBA activity of $2.9 million primarily due to the effect on revenue of higher purchase water costs.

Our production costs were $70.6 million for the quarter that’s up 6.2%, $4.1 million, primary drivers here are increased wholesale water prices and increases in the quantity of water produced. These costs are booked to the MCBA and just as a guide as percentages of the total production, our purchase water increased from 44% of our total production to 47%, local surface water decreased from 6% to 4% and well production decreased from 50% to 49% compared to the same period last year.

On the A&G side, we showed $24.7 million for the quarter up 3.5% or about $800,000, primarily this is due to increased healthcare costs which were up $800,000 for the quarter and which are up $3.4 million on a year-to-date basis. On other operations we had $17.7 million for the quarter that’s unchanged from the third quarter of 2012. For maintenance we showed $4.6 million for the quarter, that is up 4.5% or $0.2 million primarily due to variance in mains and service repairs. Our depreciation for the quarter was $14.5 million that’s an increase of 5.7% or $800,000 and that is additive for 2012 capital additions and it’s consistent with our prior quarters in 2013.

For income taxes, as a reminder, under our regulation federal taxes are normalized and state taxes follow the flow through method. Changes in state income taxes can impact earnings in the periods where they are realized. During the third quarter of 2013, the company recorded $4.4 million of State of California enterprise zone credits where sales and used taxes and highering incentives for the period 2008-2013 based on analysis of all district operations.

The company’s analysis of State of California enterprise zone credits as of September 30, 2013 also resulted in the recognition of $0.6 million regulatory liability, excuses me, liability for unrecognized tax benefits. And this is a reminder our tax credit has a dollar for dollar decrease in state income tax payments.

Also in the third quarter, the U.S. Department of the Treasury, the IRS issued final and repurposed tangible property regulations with an affective date of January 1, 2014. These final regulations provide the company with additional repairs and maintenance deductions or equipments such as fire hydrants pumps, meters and carbon filters. The company made a 2013 equipment repairs and maintenance deductions of $5 million and recorded the estimate as of September 30, 2013.

And just as a comparison with these tax items this year, last year the company recognized the repairs and maintenance regulation for mains in the third quarter and that reduced our state income tax expense $6.2 million on a net basis in that quarter. And that's one of the big differences for the quarter to quarter comparison.

The company estimates that it's full year effective tax rate for 2013 will between 32% and 35%. And we expect to finalize our current year credits for enterprise zones and repairs deduction in the fourth quarter. At this time, we do not expect any material changes to earnings resulting from the final analysis.

Moving on the net income, our net income was $29.2 million for the quarter compared to $29.8 million in the same period last year and again the major difference there is the difference in the tax credits and tax deductions we received this year compared to the tax deductions that affected our income last year.

In earnings per share, we showed $0.61 per share on a fully diluted basis for the quarter, that's down 14.1% from the $0.71 in the third quarter of 2012 and the essentially majority of that difference is related to the dilutive effect of the stock offering completed in March of 2013.

So now I would like to turn it over to Paul Townsley to give us an update on the Cal Water General Rate Case.

Paul Townsley

Thank you Tom. As management has previously reported on July 5, 2012, the company filed its General Rate Case application with the California Public Utilities Commission. And remember that this particular rate case application covers rates during the three-year period of 2014, 2015 and 2016. I'm pleased to report that on October 30, we filed a settlement agreement with the California Public Utilities Commission. And this settlement agreement was signed by Cal Water, the Office of Ratepayer Advocates and by 10 other parties that participated in the settlement negotiations.

The agreement provides rate relief for Cal Water to invest $447 million of completed capital projects in years 2013, 2014 and 2015. Anticipated revenue increases as a result of the settlement agreement of $45 million in 2014 and $10 million in 2015 and $10 million in 2016. There is an additional $19 million of anticipated revenue based on specific advice letter filings during the period. Among the many issues that were settled in these summit negotiations, I did want to comment on the establishment of a healthcare balancing account that provides for sharing of healthcare cost increases between the company and its customers.

Really the major issues in these particularly rate cases for Cal Water were included capital projects which are always an issue in every case in our 25 operating districts. The declining use by customers as a result of conservation and the need to reallocate fixed costs of running the utility and affordability concerns, especially for customers in our higher cost districts and for low income customers in all of our districts. The settlement agreement itself is over 600 pages long and after briefing will be reviewed by the administrator of law judge who signed in the case and ultimately will be voted on by the California Public Utilities Commission.

I want to emphasize that the settlement has not yet been adopted by the commission so it’s not final until the commission’s decision. We do not expect the decision from the commission until sometime in early 2014, but we do anticipate that in our mates will be an effect on January first, 2014. Overall I believe that we’re doing well and executing on our rate case strategy here in California. And that's my report.

Thomas Smegal

Thanks Paul. Now I’m going to cover very quickly a couple of items on the balance sheet. Our net utility plant was $1.505 billion for 2013 third quarter as compared to $1.443 billion in September quarter of 2012. Our cash position is good, we have $48.7 million in cash at the end of the quarter and total borrowings on our line of credit of $11.5 million and that's on the group’s line of credit, Cal Water’s line of credit is fully paid down at the end of August during the period.

In our regulatory assets, I want to mention in particular the RAM, MCBA balance, because that's been a concern for us for several years. The combined balance is $48.9 million, it is up $2.9 million from $46 million at the end of 2012. Our collections on the accounts are strong with $28 million of collections year-to-date compared to $18 million in the first three quarters of 2012. However purchased, at higher purchased water cost that increased the MCBA balance in 2013 and the increase in the balance is due to a lag in purchase water offset rate increases.

Any significant change in the RAM balance will likely be achieved after adoption of the 2012 rate case settlement which reflects sales forecasts more in line with our recent sales we've seen in 2011 and 2012.

So right now I’d like to turn to Marty for some thoughts on the quarter.

Martin Kropelnicki

Thanks Tom. I got four areas that I want to comment on this morning; one, our quarter and our position going into Q4 and year end. Two, talk about the General Rate Case and our next steps. Three and perhaps most importantly, share with you some of our lessons learned in the General Rate Case process that Paul and his team went through this year, And then lastly talk about 2014 and what it means having PDE come up hopefully in Q1 what’s the effect on the company, the first half of the year.

So first and foremost let’s talk about the quarter. Operationally the quarter came in as expected and we got a nice boost from the continued good work of our tax teams as we work on maximizing our tax efficiency within the company. The $0.61 this year versus $0.71 last year, $0.09 less is based on dilution and then you have some other entwisting costs particularly healthcare that we have been able to offset with some operational efficiencies.

So $0.61 for the end of Q3, overall very happy with the organization’s ability to hit their budget targets despite increasing cost in certain areas such as healthcare. We are entering Q4 with year-to-date earnings of $0.90 a share, frankly that’s a little bit ahead of plan driven by the good work of the task team. And overall we are closing the quarter good shape going into year-end especially given the fact it’s the third year of the General Rate Case and this is when we feel the regulatory lag the most right now and we are currently seeing that in the few of our cost lines.

Moving on, looking at the General Rate Case settlements. As Paul talked about it was 25 weeks of settlement discussions, the 10 parties plus the Office of Ratepayer Advocates signed the settlement as well as Cal Water, we are very happy to see that. It’s a very long complex process that required thousands of hours and efforts by Cal Water employees, not just Paul and his Rate’s team but a lot of the engineering efforts et cetera. So that will have an effect on our capital program, we think we will probably come in about $10 million shy on our CapEx for the year. And originally we want to anticipating $120 and $130, we think we are probably around $110 right now, would be our best guess.

So half to that we got it settled. We are a little bit behind, but as Paul said, it was a complex process and we are gaining a little bit of momentum right now. The $447 million in our proposed capital for the next three year period, that’s the big number. And we didn’t get a 100% what we ask for, we didn’t anticipate getting a 100% of what we ask for, but we believe that gives us the capital funding to adequately maintain and continue to improve our infrastructure here in the State of California.

Certainly very happy with the healthcare balancing accounts, the healthcare numbers. Tom and I had mentioned to the Street before, we think we will be $3.5 million to $5 million over what we have in rate and we are tracking that numbers to healthcare balancing account, we will certainly make a big difference in goings forward. So overall we believe it’s a fair settlement to all the parties and it gives us the capital that we need to move forward.

In terms of our next steps with the Rate Case, as Paul mentioned we filed the signed settlement on October 30th. Opening comments on the settlement will be on November 13th with reply comments and opening briefs on November 27th and then reply brief on January 6th. So we would like to anticipate or we think we anticipate a proposed decision sometime before the end of Q1 and as Paul mentioned we required for interim rates already.

So moving on and looking at a couple of key lessons. There is a couple of things that really jumped out to the management team here going to the process. First and foremost, given how our rate making works, we essentially have 28 rate making districts in the State of California, so we set a rate case up for each one. And in that process there were 2,555 capital projects submitted of which 1,912 got approved. It is a very, very cumbersome process and frankly we just got to do a better job at coordinating and planning our capital projects.

Concurrently with that and this is point number two, we need to consider a more programmatic approach to capital. And I'm sure Paul would agree with me on this, when you are reviewing 2,500 plus capital projects down at the $20,000 level, it takes a lot of time and you lose sight at the big picture. So the company will maybe make an effort to adjust to more programmatic approach for the large programs such as main replacements, well replacements et cetera and hope that we can bring our (inaudible) up to a little bit higher level and improve the efficiency going into the next Rate Case.

Three, we need to continue our efforts on affordability for our customers and operational efficiency, some of our smaller districts have been the hardest hit with rate increases and as water continues to become expensive, affordability becomes more of an issue and we need to do everything possible on our side, to keep our rates reasonable. Concurrently with that, we need to continue to invest in areas that allow us to improve our operational efficiency and help us minimize our costs. So continue on affordability and continue on an operational efficiency.

And then lastly our community outreach our brand. We do a lot of work in this area during the Rate Case process, but it's something that we got to do kind of year around. Most people do not understand that economics of water and we need to continually be in front of the cities and counties and the customers that we serve as you can amount what water costs and what we're doing to improve their infrastructure.

So, looking at 2014; as we work and set our operating budgets for 2014, we'll be in a holding pattern until the GRC gets approved and we're hopeful we will have that proposed decision by the end of Q1 and new rates in effect shortly thereafter. In the meantime, we're going to focus on affordability, planning and community outreach can show we can hit our targets for 2014.

So in closing, our quarter came in as we thought it would. We had a nice pick up from some tax [group] by our tax team. We're entering Q4 slightly ahead of plan. We believe that’s a good thing. And we feel that the settlement signed by the various parties is there and allows us the capital we need to maintain our system.

So Tom with that I will turn it over back to you.

Thomas Smegal

Great. Thanks Marty. And thank you all for your continued interest in California Water Service Group. We look forward to talking to you again with year-end results. And Jennifer we're ready to take questions at this time.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we’ll go first to Spencer Joyce with Hilliard Lyons.

Spencer Joyce - Hilliard Lyons

Good morning guys. Thanks for taking my call.

Martin Kropelnicki

Good morning Spencer.

Spencer Joyce - Hilliard Lyons

Firstly, I want to touch on a little bit on the enterprise zone tax credits. And I was looking back at last year and you all referenced the roughly $0.15 or so in special credits being non-recurring. How much of the $0.09 this year should we think about as recurring, I guess there was some catch up last year, I just want to make sure that we're not excluding some earnings that maybe we should think about as being the driver going forward?

Thomas Smegal

So as I mentioned Spencer the enterprise zone tax credits are one-time for those that five year period, 2008 to 2013. And that was I believe $3.8 million and that’s the tax credit so that goes straight to the net income. The other item that’s in our taxes for the quarter relates to the I’ll say the expansion of the repairs and maintenance deductions beyond what we have before which was names and looking now to [mears] and hydrants and carbon filters and some of those things as they come into the final regulation. That seems to be a substantially smaller amount than the main deduction was.

If you go back the entire impact of that was $6.2 million last, third quarter of last year. We’re seeing a much, much smaller impact of that continuing deduction probably around $300,000 that’s rolling into this quarter. So there may be a minor affect going forward as we continue with these repair deductions, but I don’t believe it’s going to be terribly significant on a go forward basis.

Martin Kropelnicki

One thing I would add to that Spencer. The company has always been very good at tax compliance and over the last couple of years we've been building up our efforts on cash planning and looking forward. So tax laws change all the time. And we have a very, very good tax team that's always looking at the changes in laws. And of course we’re looking at things that we can do to enhance the company’s position and our tax position going forward.

Spencer Joyce - Hilliard Lyons

Okay.

Thomas Smegal

Sorry Spencer, just to continue the answer, just one final thought on this is, remember that we do have the rate case going forward and these tax items do get recognized in the rate cases. And so as we go to the 2014 adoption of the 2012 rate case that has in it compensation to the rate payers for the federal and state tax deductions for the remainder of [here]. So that's going to be included in rate on a go forward basis.

Spencer Joyce - Hilliard Lyons

Okay. Yeah. That part makes sense. I know you all referenced then effective tax rate expected for this year of 32 to 35, if I’m thinking correctly that number should trend a little bit higher in ‘14 based on what you said about the recurring nature or non-recurring nature of some of this stuff?

Thomas Smegal

That’s right. At this point we would expect 2014 to be a normal tax year with really about a 39% to 42% tax rate.

Spencer Joyce - Hilliard Lyons

Okay, fantastic. Switch gears here just for a second, can you talk about what’s going on in Hawaii, Washington or New Mexico I know we’ve all been really focused on California in the rate case here over the past couple of quarters. But just in a broad sense talk about some of the growth opportunities or what maybe going on in some of those other jurisdictions?

Martin Kropelnicki

Sure. Paul, do you want to give an update on Hawaii?

Paul Townsley

I can give an update on the regulatory issues in Hawaii. We currently have four separate rate cases in process employee. One of them is for our Pukalani District on Maui and three of them are for our White Kohala District on the Big Island. Of those four we’ve been making good progress. We’ve been negotiating with the consumer [advocate] out there on settlements. And at this point we have two of those four cases have been settled. And we are awaiting commission approval on those. And the other two cases are still in process of settlement negotiations. But we’ve got a team working on it. And I think we are making good progress on those.

Thomas Smegal

And in terms of the other states New Mexico which is as a percent of our total business is small. They have a mechanism in New Mexico somewhat like a disk where we can essentially raise rates about 7% a year. We have to file [contastrophy] go into effect. Right now we are in the process of doing our planning for 2014. So for New Mexico and Washington we have to see where they are from a rate relief perspective. And then we’ll determine our next steps there. But the big one for us has really been Hawaii. And one of the benefits one of things we [wish] to know when we hired Paul, as Paul is actually born and raised in Hawaii. So he helps us bring a local presence to the rate cases over there.

Spencer Joyce - Hilliard Lyons

Okay. Thanks guys. That’s all I had.

Thomas Smegal

Thanks Spencer.

Operator

We will go next to Jonathan Reeder with Wells Fargo.

Jonathan Reeder - Wells Fargo

Hey good morning, gentlemen. Just following up on that first tax question a little bit getting that kind of the ongoing earnings number, Tom it sounds like just taking out then the $3.8 million that’s related to the enterprise zone tax credit of about $0.08 is what you would say as far as normalizing. Is that correct?

Thomas Smegal

Hey Jonathan, I think that’s a fair way to do it. I think we are going true up all these tax estimates at the end of the year. And so there maybe more information as we go forward. But right now I don’t think that’s too far off.

Jonathan Reeder - Wells Fargo

Okay. And then what was the unrealized gains associated with the non-qualified retirement plan in the quarter, I thought you said it was kind of lower year-over-year, but what was kind of the absolute gain there?

Thomas Smegal

I believe that was the $500,000 with (inaudible).

Martin Kropelnicki

Yes. There was $600,000 in the quarter and it was $600,000 in the same quarter last year, so very similar to what we saw last year.

Jonathan Reeder - Wells Fargo

Okay. And congrats on the constructive and kind of balanced settlement you’re able to reach in California. I guess your next item to tackle after getting the approval is going to be the cost of capital filing next year. Can you kind of just give us the initial thoughts and potential strategy as you think about that?

Thomas Smegal

Jonathan we have been doing our initial approach to that and have been talking with the other companies. As everyone probably knows we have adopted a 9.99% return on equity in the last cost of capital. And then due to the interest rates on Moody’s AA, Utility Bond Index going down, we triggered the water cost of capital adjustment mechanism and have ended up now in 2013 with a return on equity of 9.43%. So we're still really in the initial stages of that. We have filing due on March 31. And that would be for all the publicly traded Californian companies, ourselves, Golden State, California American and San Jose Water.

And so, can't really give a lot of insight on to where it might go. Interest rates could come up a little bit since the time of that index triggered, but I think they have not come up a great deal in this in the last few months, so nothing too concrete to report on that.

Martin Kropelnicki

And Jonathan, it's Marty. The interest rates were up almost 90 basis points, but they’ve kind of rolled back down again. And yesterday, I believe it was yesterday that Federal Reserve released some information, they’ve had a target, they’ve introduced this concept of target to manage inflation and when do they pull back quantitatively. The unemployment rate target they have been using has been 6.5%. And this week they announced they’re thinking about dropping that to 6%. And I think that's clearly a sign of the intent to keep the interest rate market soft probably for another year or two. Some of the experts are saying now it’s 2017 before you start seeing a meaningful rise in interest rate. I'm just putting on my economist to have right now. So interest rates right now for the foreseeable future let's say that they’re going to stay pretty soft.

Jonathan Reeder - Wells Fargo

Right. Yeah that was kind of thought and I just didn’t know if there is a way to potentially extend the agreement if you have to kind of go through the full proceeding things along that line given like you said that recent pullback and kind of the more tepid forecast than it was previously thought?

Thomas Smegal

Yeah. I don’t think anything like that is contemplated at this point. There are obviously ways to make exceptions to the regulation in California. But there has been no filings, there is no, we don’t anticipate doing anything like that at this point.

Jonathan Reeder - Wells Fargo

Okay, yeah. I mean I believe there is a little bit of pressure on the electric side that they did something along those lines extending it by two years so that’s kind of that’s all process there?

Thomas Smegal

Right. As you recall that they did extend it by two years. So we're aware of that and there is that provision in the plan that one could do that, but nobody has filed for that yet.

Jonathan Reeder - Wells Fargo

Okay, great. Thanks so much for the additional details.

Thomas Smegal

Thanks Jonathan.

Martin Kropelnicki

Thanks Jonathan.

Operator

We’ll go next to Hasan Doza with Water Asset Management.

Hasan Doza - Water Asset Management

Hi guys. Good morning.

Martin Kropelnicki

Good morning.

Thomas Smegal

Hi Hasan.

Hasan Doza - Water Asset Management

Hi. A quick question on the, two quick questions. On the healthcare balancing account its constructive mechanism definitely, I wanted to understand mechanically how it’s going to work? And so Marty or Tom if you have actual healthcare expenses above what you have in rates, how does kind of flow through with the mechanism and the impact on your P&L if any?

Thomas Smegal

So typically, Hasan with our balancing accounts that are authorized by the commission we will book those balancing accounts. And so we've done that with the pension balancing account, with the RAM and MCBA and with the conservation balancing account. So we would expect to do that here as well so there wouldn’t be a P&L impact. We create a balance sheet item for the liability or the asset and what we are talking about Paul is that 85% balancing accounts that’s the sharing mechanism that's in it. So of the change in expense the 85% of that would be tracked in the balancing account up or down and 15% of it would be at our risk.

Martin Kropelnicki

And we posted on a monthly basis, the same way we booked the RAM or the MCBA.

Thomas Smegal

That's correct.

Hasan Doza - Water Asset Management

Perfect. So for example in your comments about your healthcare expenses being up say $3 million to $4 million above what's in rates. When this mechanism is implemented 85% of that 3 million, 4 million would basically get deferred onto the balance sheet. So there will not be an impact on any movement above what you have in rates on the income statement.

Thomas Smegal

That is correct and then do remember that the rate case will adopt a new value for the healthcare cost starting in 2014, I don’t have that in front of me and I don’t mention Paul does. But that estimate for 2014 recognizes some of the impact of the increases that we've seen in 2011 through 2012, 2013 timeframe.

Hasan Doza - Water Asset Management

Right. So at the end this mechanism at least on the healthcare front should help you orderly because then in the increase in healthcare cost above, or are you having rates should not impact your ROEs going forward when you have this mechanism implemented?

Thomas Smegal

Yeah. Certainly if healthcare costs continue to increase, especially if they do at the rate that they did here in or they either to-date 2013, I will point out once again that we have a self insurer healthcare plan that is claims based. And so what that means is that we part of why we’ve seen higher cost in 2013 is we have more claims or more expensive claims. So it’s very possible and it has occurred in the past where the healthcare cost could actually decline any year. And so I don’t want to presume that this is simply a one way mechanism for us to capture the costs that are above what’s been raised, it also would give back to our customers costs that are lower than what’s adopted in rates.

Hasan Doza - Water Asset Management

That’s a fair point. And the second question I have is, based on the settlement so you gentlemen feel pretty confident that the actual level of consumption that builds in into your rate going forward will be more in line with the consumption level you are seeing in your jurisdiction?

Thomas Smegal

Let me take a first crack at that, if we look at our consumption for 2011 and for 2012 in most of the areas and certainly in all of the big areas that we have, we feel very confident that our adopted sales forecast is consistent with those recent years and nobody can predict exactly what water consumption is going to be in future years. And so that’s going to be a source of that’s why we continue to have the RAM and the MCBA balancing accounts. But looking at past years it looks to be much more appropriate number than what we’ve had adopted in the last rate case with the 2011 effective date.

Hasan Doza - Water Asset Management

Right. So going forward there should be less drag on cash and hopefully less accumulation of your RAM balances if your consumption forecast is in line with actual consumption levels?

Thomas Smegal

Yes, and that’s a big point for me, if we’ve got right now around a $50 million balance and you think of us collecting on a surcharge basis around say 28 million year-to-date. So if we collect 35 or so on an annual basis, you can see where. If we don’t have the inputs into that accounts, in other words if the sales forecast are appropriate, we should be bringing that balance down quite a bit in the next couple of years. So I am looking forward to that and getting that cash to use for other operational investment purposes.

Martin Kropelnicki

And Tom one thing I would add to that to your point about the $20 million that receivable is turning.

Thomas Smegal

Yes.

Martin Kropelnicki

I mean the problem we had couple of years ago was just growing, growing and growing but minor turns on receivable. The receivable is turning now with the rate case that trued up consumptions forecast, it should help turn it even faster.

Hasan Doza - Water Asset Management

Okay, thank you.

Operator

We do have a follow-up from Jonathan Reeder with Wells Fargo.

Jonathan Reeder - Wells Fargo

Just one quick follow-up in terms of the cash discussion, where do you see I guess financing needs as you are looking out over this increased CapEx budget, are you seeing equity needs over the 14 to 16 period given the higher CapEx?

Thomas Smegal

Let me give a little bit of a shorter-term analysis for you, because I don’t think that we are prepared to look out too far on it. What we have two things going on, we have a higher equity debt ratio then is adopted right now. So I think if you were to presume that we are going to try to meet the regulatory target for debt equity ratio, our net financing is very likely to be a debt financing rather than equity financing.

The second thing is that we have in California a limitation, we’re growing on a line of credit for Cal Water which is a 12 month limitation. And what that means is that, we cannot be out on that line longer than 12 months, even though the line has capacity to finance for longer than that, without triggering the commission thinking that that is longer term debt. And so right now as I indicated we're not on the Cal Water line, assuming that we do go on the line in the fourth quarter or in the first quarter, I think it is then a clock is ticking for us on when we would have to do a debt offering and unless we can again get off of a line maybe in the summer of next year and that's going to be dependent upon a lot of things like the WRAM balance and sales and those sort of things. We would be looking probably at a debt offering sometime in that 12 month period, just as a mechanical item. So, just those are the factors to considers.

Jonathan Reeder - Wells Fargo

In terms of equity, I mean towards the end of that ‘14 to ‘16 period, is that kind of a reasonable assumption that just given pretty significant jump up in the CapEx budget, you might need something to kind of balance out?

Martin Kropelnicki

Yeah, Jon, it's Marty. We certainly could and we look at debt and equity all the time. And as Tom said, our goal is to come in when we have the cost of capital proceeding at the right equity ratios. The company has good cash flow with this RAM receivable turning that has become a source of cash for us as well. So, I think we just got the evaluated as we go. I think Tom is right, I think the next round of financing and maybe the next two would be debt related, especially if we maintain and we stay in a low interest rate environment. But for right now in the short-term equity we are fine.

Jonathan Reeder - Wells Fargo

Okay. Thank you very much

Operator

We'll go next to Heike Doerr with Robert W. Baird.

Heike Doerr - Robert W. Baird

Two quick questions on data point I may have missed in your prepared comments. Did you share with us what the allowed rebate would be in the settlement? And can you tell us what CapEx to-date and CapEx spending to-date has been?

Thomas Smegal

Yes. I don’t know that we can answer the first question at this point, it is in the settlement documents I suspect.

Heike Doerr - Robert W. Baird

They’re not public, if so, are they?

Thomas Smegal

I've been looking for them on the commissions website, it will definitely be a public document, but it’s a large item to get uploaded I think to their website and so I would anticipate them getting it uploaded this week. I don’t know what the whole up is for them. As far as the year-to-date CapEx, we're showing $87 million on a year-to-date.

Heike Doerr - Robert W. Baird

Okay. And we're still thinking about 125 this year, right?

Thomas Smegal

That was something that you missed. Marty, do you want [come down] again.

Martin Kropelnicki

Yeah. One of the things I mentioned Heike was the nuisances and the complexity of the rate case. We had 2,555 capital projects that we reviewed on a project-by-project basis all the way down to a $20,000 threshold. So we had a lot of engineering time tied up in the 25 ways to settlement discussion and that’s going to affect our ability to hit our target this year for capital. So I mentioned earlier that we think the range is probably realistically between 110 and 120, so it’s probably come down about $10 million.

Heike Doerr - Robert W. Baird

Okay. I misunderstood, if you’re talking about how to manage the 2014. Okay, thanks. I appreciate the help.

Operator

And at this time, there are no further questions.

Martin Kropelnicki

All right. Well, thanks everyone for your interest in the company and we look forward to talking to you again I think in February with our year-end results and the further update on the rate case. Thanks a lot.

Operator

This does conclude today’s conference. We thank you for your participation.

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