California Water Service's (CWT) CEO Martin Kropelnicki on Q2 2014 Results - Earnings Call Transcript

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 |  About: California Water Service Group (CWT)
by: SA Transcripts

California Water Service Group (NYSE:CWT)

Q2 2014 Results Earnings Conference Call

July 31, 2014 11:00 AM ET

Executives

Thomas F. Smegal - Vice President and CFO

Martin Kropelnicki - President and CEO

Paul Townsley - Vice President, Regulatory Matters and Corporate Relations

Analysts

Jonathan Reeder - Wells Fargo

Tim Winter - Gabelli & Company

Operator

Good morning, ladies and gentlemen. Welcome to the California Service Group Second Quarter 2014 Earnings Results Call. I would now like to turn the meeting over to Mr. Thomas F. Smegal, VP, Chief Financial Officer. Please go ahead.

Thomas Smegal

Thanks, Mark. Welcome everyone to the second quarter 2014 earnings call for California Water Service Group. With me today is Martin Kropelnicki, President and CEO; and Paul Townsley, Vice President of Regulatory Matters and Corporate Relations for the company.

A replay of today's proceedings will be available beginning today July 31, 2014, through September 30, 2014, at (188) 820-311-12 or (171) 945-708-20, replay pass code is 3765528. 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 advices all current shareholders, as well as interested parties to carefully read and understand the company's disclosures on risks and uncertainties found in our Form 10-K, Form 10-Q and other reports filed from time-to-time with the Securities and Exchange Commission.

So now let's look at this quarter’s forward-looking statements and I am going to start with the income statement. For the second quarter our financial results on the revenue side, we recorded $158.4 million for the quarter that is up 2.5% or $3.9 million from the prior year.

Our unbilled revenue was $4.3 million more than in the second quarter of 2013, a part of this reflects at quarter one and quarter two timing difference, as you may recall we reported $2.6 million less unbilled revenue in Q1 as compared to prior year. This is a seasonal item for us and as a reminder it's an accrual we perform at the end of each reporting period, representing water which was used but not yet billed for.

Unbilled revenue is not included as a component of our RAM decoupling mechanism and can vary significantly particularly in the spring and fall. Recorded sales once they occur are reflected in the RAM balance.

Our production costs were $61.9 million for the quarter, that’s up 3.8% or $2.3 million. Primary driver for that is increased wholesaler water prices despite a 2% decrease in our overall water production for the quarter. These costs are booked to our MCBA modified cost balancing account part of the decoupling mechanism.

Water production from wells increased. The company pumped 51% of its production from wells as compared to 47% in the second quarter 2013. Purchased water was down from 48% of production to 46% of production, while our surface water declined from 5% to 3% of production.

On the administrative and general lines, we recorded $23.8 million of expense for the quarter, up 2.8% or $600,000. As anticipated at year end, our pension costs are lower in this quarter by $1.6 million. This benefit flows into a recorded balancing account and does not affect overall earnings. Our liability insurance costs are higher by $1.3 million for the quarter, resulting from increased uninsured loss reserve.

Our other operations were $16.0 million for the quarter, that’s down 6% or $1 million and within that the biggest factor is a decrease -- slight decrease in conservation expense of $500,000.

On the maintenance line we recorded $5 million of maintenance cost for the quarter that’s up 19.1% or $800,000. It's due primarily to planned increases and cost of maintaining transmission, distribution equipment, water lines and pumping equipment.

Our depreciation was $16.1 million for the quarter, that's an increase of 11% or $1.6 million and that is due to 2013 capital additions and that's the similar to last quarter.

Our net other income increased $700,000 from zero to $700,000 during the second quarter compared to last year and the total net income was $17.2 million for the quarter compared to income of $13.5 million in the same period last year.

Our earnings per share $0.36 on a fully diluted basis for the quarter as compared earnings per share of $0.28 in the second quarter of 2013.

And just a couple items on a year-to-date basis, year-to-date our net income $11.7 million that’s down 6% or $700,000 and on earnings per share basis for the year-to-date we have $0.24 per share on a fully diluted basis, down 14.3% from $0.28 in the first six months of 2013. The year-to-year decrease in earnings per share is partially attributable to the dilutive effect of the stock offering that we completed in March of 2013.

So, now, I’d like to turn it over to Paul Townsley for a regulatory update.

Paul Townsley

Thank you, Tom. On July 21st a proposed decision for 2012 California General Rate Case was released by an administrative law judge for the California Public Utilities Commission. The proposed decision approved the settlement agreement filed by Cal Water and the other parties to the rate case settlement discussion back on last October 30, 2013.

The proposed decision adopted an overall rate increase of $45.3 million in 2014 over 2013 revenue. It also provides for step rate increases of $10.1 million in 2015, $10.0 million in 2016.

And finally, the proposed decision authorizes Cal Water to increase rates by up $19 million, upon completion and approval of certain capital projects covered under the commission advice letter process.

As part of the proposed decision, it appears that the commission will approve Cal Water's proposed sale reconciliation mechanism or SRM as we call it to address sales forecasting errors for the escalation years of the general rate case periods.

The sales reconciliation mechanism will provide a number of benefits. First of all, it will reduce the size of the RAM surcharge, which is been aggravating many of our customers. Second, it improves cash flow because it reduces the time it take the company to recover it’s RAM revenue shortfall from about three to four years currently down to year or so.

Third, it gradually adjust customer rate upward during the three-year rate case cycle based on declining sales towards help mitigate rate shock in the next rate case associated with reduced usage.

It’s important to note that the sales reconciliation mechanism is a two-way mechanism, so that if usage goes up and some -- as it have in some of our district the mechanism will adjust customer rate downward based on increase in sale.

Sale reconciliation mechanism if approved by the commission will mean that California Water Service Company will be the first regulated water utility in the state to have a sales mechanism that more closely resemble the sale adjustment mechanisms currently found in the electric utilities here in California. The proposed decision is scheduled to be voted upon by the Commission at its next open meeting which is scheduled for August 14th.

I also wanted to report good news coming out of Hawaii. The Hawaii Public Utilities Commission approved Hawaii Water Service Company’s application to increase rate in our Waikoloa Resort Utilities business unit. Of course, Hawaii Water Service Company is a subsidiary of California Water Service Group.

The approved rate increase is for potable water, waste water and irrigation water services for residential, commercial and hotel customers located at the Waikoloa Resort on the Kohala Coast, the Big Island.

And overall the rate increased approved was about $1.95 million annually and will be paid in over two years and new rates go into effect today, July 31st. Overall, I believe that California Water Service is doing well in executing our rate case strategies both here in California and in Hawaii.

That’s all I have, Tom.

Thomas Smegal

Thanks, Paul. Now I’d like to cover some highlights on the balance sheet. Our utility plan balance grew to $1.54 billion as of June 30th, our work in progress increased from $109 million to $117 million during the quarter, company funded CapEx was $53 million year-to-date and company still plans to meet its CapEx target of $110 million to $130 million for the calendar year.

Our cash balances, we currently have $29.6 million in cash as of June 30th and $81.2 million outstanding on our revolving credit facilities at the end of the quarter.

So, with that, I'm going to turn it over to Marty for some comments.

Martin Kropelnicki

Thanks, Tom. Good morning. I have four things I'd like to cover today. One, just briefly talk about my impression of the first quarter and how we did? Two, gives some comments on the California proposed decision that came out for our California subsidiary.

Three, take a little bit time to give everyone update on drought and how things are looking in California. And four, talk about the second half of the year, what’s going to be the focal for the company, it’s hard to believe we are half way through 2014 already it’s been a very busy year, what’s on a docket for us for the next six months.

First starting off looking at the quarter, results for the quarters were slightly better than we expected, even after back out the one-time tax adjustment of $2.5 million, essentially you get a $0.31 quarter versus a $0.28 quarter in Q2 of last year. Obviously, we moved into the summer months so they increased any consumption drives revenue and then also affects the accrued revenue at the end of the quarter.

In addition and probably most noteworthy from my perspective is the fact that we have minimum increases in A&G. And when you look at A&G and other operations, those are two areas where we have costs that are not covered by balance account. We also hold those are controllable costs. When you net those two costs out, they actually went down 1% for the quarter, which certainly helped the bottomline.

We are in the third year of using a new budget process and budget software that we put in place and the company has remained very focused on budget to actual management. And overall, I’m very pleased with how each and every one of our locations and our districts have been able to manage our budget targets and hit or exceed our internal budget targets. So overall, happy with the results for the quarter and how we ended Q2 of 2014.

As Paul mentioned, the general rate case, the proposed decision for California, it’s nice to see that finally get released. Overall, we are very content with the language and we look forward to bringing it to its logical conclusions. We are also very happy to see that the sales reconciliation mechanism was included.

As Paul mentioned, that has been used in the electric and gas industry for a long time and when you have decoupled revenue, the margin basically is locked into the company so to the extent there are swings in consumption that makes sense to have the mechanism that truce it up on a more normal basis.

Our next steps, as Paul said, were on the docket for 8/14 for approvable from the commission that is subject to being moved, but we don’t anticipate any big changes right now since the majority of the rate case was settled. We believe we will be able to adopt the new tariffs within about five days of the PD being adopted. In the interim, we will be waiting for the PD to come out. The team has been working on the new tariffs and getting us set up in the system.

So I think this will be fastest that we have implemented the new tariffs once the PD is approved. Shortly after the PD has approved and after we start recognizing new revenue tariffs, we will file a Tier 2 advice letter to start collecting retroactive balance. And that’s the Tier 2 advice letter that’s going to take 30 days to get through the commission and if all goes to plan, we will start collecting the retroactive piece effective around 10/1 or October 1.

In addition one of the nice things about having the PD just about wrapped up is if you remember in the decision, we have an intense LIRA or low income rate assistance program that we put in place as well as our rate support funds. So it will be nice to get those plans put in place with the increased amounts for funding as we go into the peak summer months and peak demand for the company

So that’s a good segue and to talking about the drought. We have given everyone a drought update. Just to remind that everyone of our -- about 50% of water comes from our sources and about 50% of our water comes from wholesalers. We have four major wholesalers that we really work with. Two of the wholesalers don’t have voluntary reductions put in place and two of our wholesalers have mandatory reductions put in place. So we move from where it’s been voluntary to mandatory and two of our wholesale areas that we use for supply purposes.

Moving into the summer moths we believe we’re in fairly good shape. We have a number of districts that we are monitoring closely and thus far supplies look adequate to meet the demands to get to the dry summer months.

Having said that, conditions do vary dramatically throughout the state and we have launched our enhanced conservation programs in some of these districts that we are more concerned with. Activities that are in enhanced conversation program includes contacting our top 50 customers and talking about their demand, what we can do to help them reduce their consumption levels, working with large homeowners associations on their landscaping and making sure their proper drip irrigation systems put in place.

We have weekly printouts that we’re running out of newspapers, video advertisements as well as other public-service announcements that are going on the radio. The restaurant tabletop water notices that water is going only to be served upon request and we’re also working with a number of local drought task force to help the local cities and counties meet their targets.

So in addition, during the second quarter, we updated our Rule 14.1 as directed by the commission which is Drought Contingency Plan. That was done and effective on May 1st. There are number of things that were included in our update. It included the processes set up for voluntary and mandatory conservation. They got mandatory conservation levels.

It includes the definition of nonessential and unauthorized water uses. It has the appeal process. It has enforcement mechanism et cetera. In addition, we also established a drought memorandum account that was effective on May 1st as well. Two weeks ago, many of you may have seen that the State Water Resources Control Board issued their emergency declaration that was published and it received a lot of media faith throughout the state because they talked about fines up to $500 for people who are wasting water.

And really there were four areas that they focused on. One was water landscape use that unnecessary runoff; two, people using a hose to wash their vehicle which doesn’t have a control nozzle on the end; three, the use of water for washing driveways and sidewalks; and four, fountains that aren’t using a recycling process off the water that’s in the fountain.

In the final resolution itself, they dropped the penalty language but if you get into the back of the document and the middle of the document, their language is still there. Most of the stuff was already covered in our Rule 14.1 update. We’re in the process of reconciling to the State Water Resources Control Board’s emergency declaration. Though we don't believe there will any changes to our Rule 14.1 that was already on file with the CPUC.

Though again, overall we continue to be in good shape as we move into the hot summer months and the ability to meet demand. Overall, we have a strong push on conservation. And we believe it’s incumbent upon all California customers. They help do their part to help out with conservation. We believe conservation is the key.

In preparing for this call, we went back and looked at customer demand from July of 2007 to August -- July 2007 to June 2008, which was decoupled with California on July 2008. So the year before we decoupled and we compare that to July of 2015, 12 months to June 2014. Just a few other changes in demand were an overall demand for the same period.

Looking at the two different data sets was down 10% on average. The variation was wide between the averages, the lowest amount of decline in demand that we saw was approximately 3% and the highest amount of decline we saw in demand was highest 42%. So overall, we believe that that the decoupling mechanism is the right way to go. We’re seeing the results and decreased consumption for our customers. And we believe that conservation is still the way forward.

Last thing, I want to talk about is what’s our focal point for the rest of the year. First and foremost, we had another drought. And you had a lot of talk about El Nino in the State of California and it’s going to be winter and those statistics in categories have declined and you’re hearing less of that. I think people are realizing that the droughts are very real issue.

Just this last weekend in a number of major newspaper that I read throughout the state, there were a total of six or seven articles the I read, three of the major newspapers in our service territories. So it’s getting a lot of airplane though overall we’re going to stay focused on our drought activities working with the CPUC, the State Water Resource Control Board and our Drought Task Force working lot of possibilities to make sure we’re doing everything we can to help conserve water. That’s our first priority going into the second half of the year.

Second thing is concluding the general rate case and get the new tariffs put in place. So as Paul mentioned, we had a lot of capital. We came to the ground and we want to hit our capital targets for the year. So we’re going to stay focused on them. And then finally, Paul and his team have been doing a lot -- spending a lot time doing the capital planning for the 2015 general rate case.

In that process, we’ll be concluding the preparation of the final capital piece during the second half of the year. And as Paul said we’ve been visiting other states, filing a handful of small rate cases as well. So it’s been a very, very busy first six months of the year for us and we look forward to the next six months.

Paul, I’ll turn it over back to you.

Paul Townsley

Great. Thanks Martin. And so everyone, that concludes our prepared remarks. And Mark, I’d like to turn this over for questions now.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions) We’ll take our first response today from Jonathan Reeder, Wells Fargo.

Jonathan Reeder - Wells Fargo

Good morning, gentlemen.

Martin Kropelnicki

Jonathan, good morning.

Jonathan Reeder - Wells Fargo

Hey, if you could just explain a little more, I guess, the line in your Q1 release was that the freights were effective, it would have been something like $9.4 million and so year-to-date, only added kind of $0.8 million more on a pre-tax basis. And it looks like it’s because of the ramp offset which Q1 didn’t have. Can you just kind of explain that a little further?

Paul Townsley

Sure, Jonathan. Let me take a crack at it. And this, I will add there is certainly more detail in our public filings, in the Qs that we can get into. But part of the proposed decision that we’re looking at is change in how the revenue split between the RAM revenue and the non-RAM. So that’s what you think of it as the service charge revenue versus the quantity rate revenue for our customers. And what it appears to us is that the proposed decision will adopt rate structure that has less revenue coming from the quantity rates and more revenue coming from the fixed rates as a percentage of our overall.

So you see this fixed component is going to be relatively constant throughout the year. And the quantity rate revenue part actually there is a decline in that, it’s embedded in the rate case. And that’s what you’re starting to see in the second quarter.

Martin Kropelnicki

It’s probably noteworthy, Jonathan. There are a lot of moving parts here and Tom just gave you a really good high level summary. But obviously when the PD gets approved, we have to go look at the revenue recognition, how we’re going to record everything. And we have those discussions underway with our public accounts right now.

We have not concluded anything but obviously in the third quarter, when we book this stuff, there will be a lot of disclosure around that and a lot of explanation of that will be in the third quarter 10-Q that we filed.

Paul Townsley

Let me add just one other item that’s in there and that is -- we identified in the first quarter release the healthcare -- the proposed healthcare balancing account was a number. We did not see a significant increase in our healthcare cost in the second quarter. That was relatively stable for last year. And so that balance didn't grow proportionately from the first quarter to second quarter. I think that was a big component of it in the first quarter.

Jonathan Reeder - Wells Fargo

Okay. But I guess the underlying methodology to calculate it from Q1 to Q2 I guess based on the split between RAM and non-RAM revenue that didn't change?

Thomas F. Smegal

That’s right.

Jonathan Reeder - Wells Fargo

Okay. And then, I think, Marty, you already kind of alluded to my next question. You haven’t determined the plan for recognizing the retroactive revenue, whether it’s going to be, I guess, a lump sum or volumetric based over whatever the recovery period is?

Martin Kropelnicki

Yeah, that’s correct. I mean, one of the things, that’s happened in California as you adopted decoupling. If you remember our -- the way we used to recognize revenue is when it was built. But as we put in balance in accounts, you kind of booked -- you do book things on a real-time basis, on a current basis. So this is really our first rate case, that’s laid since we decoupled. And so there is a process. We have to go through their public accounts to determine how to best book an account for those balances. So we have not concluded that yet, but we are in discussion with our public accounts about it.

Jonathan Reeder - Wells Fargo

Okay. It would be interesting to see what they come up with, but I believe some of your peers in the state do the lump sum. But I guess we will stay tune on that. And then question I will hop off, around the drought and you introduced overall public policy moving forward. Can you kind of discuss perhaps some of the CapEx or rate based growth opportunities that might come out, whether it's on the supply or the demand side?

Martin Kropelnicki

Yeah, that is a very, very, very good question. And again, I was amazed in the Sunday paper all the articles about the drought that that were coming up, and frankly were very written a lot of times when you read something in the media. It lacks some level of substance around a particular issue are part of arguments missing. But one of the articles that I read talk about the fact may replacement program and leaks in the system and how much water has lost and unaccounted for and that the state and utility should be stepping up these programs that you think would help preserve water.

So I found that very refreshing that a journalist who's probably not a water engineer and probably not an economists is grasping the concept that that is a real issue in parts of the state. So I think on the main replacement side, I think that's very good news. On the water source and supply side, I think the state is still in a little bit of turmoil. There is a really good study that was just released from UC Davis that talked about the 400,000 or 500,000 acres that they follow this year because there is just no water.

So one of the things that’s starting to happen is what should be the policy on surface water because you have parts of California that hasn’t adjudicated based on other parts that are not. And so I am relatively certain that the governors office is trying to figure out what's the best policy in terms of looking at water supply, water supply planning and also moving to a ‘integrated’ water management system versus having fractures in the system.

And so I think what that comes opportunity. The question is going to be what type opportunities are there, but obviously new sources of supply are needed. You'll need ways to transfer water and move water from point A to point B and then you will need management at that water to make sure that you’re preserving the resources integrated the broadest measure of population. So it’s going to be a very interesting fourth quarter depending how bad things with the drought. I don’t know Tom or Paul if you want to add anything on that. It certainly is busy from a policy perspective.

Paul Townsley

And legislature is also looking at these issues with groundwater management rules that have been proposed. So there is a lot of activity in a lot of different areas and it’s hard to know how it’s all going to shake out in this play.

Martin Kropelnicki

Yeah, one of the articles Jonathan that was fairly well done in the San Francisco Chronicle is the fact that you're seeing Landstar to subside or shrink in the valley from the farmers over popping the basement. So they are not getting their water from their supply sources, but they are drilling well, they are sucking that water out of the ground, you are seeing the ground start to sink and there is one area that has actually retrenched about 8 inches already in the last two months. So I think there is going to be a strong focal point on water and it’s going to continue. I think the state is going to come up with some types of integrated management plan and they will have to be -- we will be part of that plan. And our goal is to make sure we have a seat at the table as a player and that sandbox as it’s been designed.

Jonathan Reeder - Wells Fargo

Sure. I guess at this juncture though there is still -- there is not it like task force or definitive timeline or anything, it’s just kind of different parties talking drawn things out and maybe gain more traction and we will get some sort of clarity on the timeline for this kind of integrated water system or some sort of comprehensive plan?

Martin Kropelnicki

Yeah. I mean, Governor Brown published what we call is water action plan, the first one when we declared the drought and so that’s different than what the water action plan we talked about with the CPUC, the California Public Utilities Commission. My sense is he isn’t going to come out with an update to that water action plan, because as Paul said this has become a real hot topic politically. And I think you will be seeing a plan coming out shortly from the governor’s office and maybe tall water action plan to or the update to water action plan 2013, but we will have to wait and see when that comes out, but I think you will be seeing it coming out shortly.

Jonathan Reeder - Wells Fargo

Okay. If you don’t mind pass that along to analysts that will be great.

Martin Kropelnicki

Absolutely.

Jonathan Reeder - Wells Fargo

All right. Thanks a lot guys.

Operator

At this time there are no questions in the queue. (Operator Instructions) We have response at this time. Tim Winter, Gabelli & Company.

Tim Winter - Gabelli & Company

Good morning, Marty. I was wondering if you could sort of walk us through how to think about forecasting earnings over the next couple of quarters or even in the ’15, why you are trying to decide how to implement the retroactive rate revenues?

Martin Kropelnicki

Tim, I should have known you are going to ask that question. Obviously, we don’t know how we are going to book it yet and there is two paths that are going to end up booking it right. And as Jonathan mentioned, some of it goes into state book at all once in the lump sum as the one time occurrence and it hits the P&L, in which case it probably makes the analyst’s job easier and doing outbound years in the rate case cycle.

The other way is you basically recognized it as build and you spread it over some remaining life what case it would be, the life that the commission allows you to collect that revenue.

So I don’t think I can tell you a whole lot right now Tim. I think we will be able to have a detail discussion about that after we get to the third quarter and after we conclude and sign out with our public accounts. Now we are going to book it.

Jonathan hit the nail right on the head. There is two methods on the table here and I'm just speculating. But if you looked at the most widely used method, it would be book-to-catch up all at once. And I’m not saying we’re going to do that. And there is a whole detailed process you go through with your public accounting firm up to including national office review and our national utility partner review, but those are the two options on the table. So we got to answer that question then we could talk about the outbound years. But I think we need to get to the third quarter and determine how we’re going to book everything.

Tim Winter - Gabelli & Company

Okay. Fair enough. So I had a question on that. The second question, I think one of the California water action plan. Point to say they want to lose the stream line rate cases, obviously that’s not happening. What sort of the message of the commissioner and what can we -- what can you do to make sure we get more timely rate decisions?

Martin Kropelnicki

That’s a good question. Let me give some comments. I’ll let Paul take a lack at as well. Recently they have the western conference of regulators up in Seattle. And Paul and I attended that. And we spent a lot of time in meetings with our commissioners in the four state that we operate in and generally all the meetings were very good. The meetings for California were very good. I think there is a general recognition that it’s been slow. I would say there were no excuses made for it being delayed.

The commission side is they’ve had some resource constraints that due to the cut, the State of California had during the recession and that’s probably lingering and slowing down some of their ability. I think the other side of it is I believe this is the largest rate case for water utility in the state of California. And we had 11 or 12 intervening parties that was complicated, that was settled. So it took -- essentially its taking as seven maybe eight months longer.

Having said that, I will tell you, I was happy with the PD the way the judge wrote it. I don't think we have any changes to the proposed language. So it took some time for it to come out but it was well written, it was well sought out and we were happy with the end result. So, I think we have to wait and see are there going to be any retirements coming out of the commission and who is the governor going to appoint to fill those retirements.

But our relationship with the commission continues to be good and strong. And yes, it took longer, but it’s not as long as other cases are taken and it’s just nice to get it wrapped up. Paul, anything you would add.

Paul Townsley

Yes. Thank you, Marty. I will just add -- I would emphasize the point that Marty made that the commission recognizes the challenge here and they recognize that this hurts not only utilities but hurts customers. So they are actively working on it. I know that the newest commissioner, Commissioner Picker is particularly focused on this area and trying to improve the efficiency and the processing on these things.

So, I think, we’re all on the same page. We want to see the process could speed it up not only because of the ability to get through cases quicker, but because of the resource impact it has on commission staff. We’re fortunate in the state that we do have retroactivity of our rate so that insulates us to a certain degree. And then I also wanted to pick up on the other point that Marty stated that this was a very, very large water case.

The largest water case I believe in the history of the California PUC. We have 13 interveners. We took 26 weeks to reach settlement. And so, some of the delay was not within the commissions-own processes but was because of an effort by the company and the parties come together and agree on a settlement agreement, which was ultimately adopted in the PD.

So I think as cases become bigger and more complicated and more parties become involved that’s going to tend to make cases take longer and become more delayed. So we've got to find ways to offset that to be more efficient. And we were actually also discussing that internally as to how in the next case, assuming that it’s going to be a large and complicated case, that we should try to reduce the amount of time we spent working on settlement agreement.

Tim Winter - Gabelli & Company

Okay. And then just one final question, as the drivers gaining media public interest, what have you, where is the whole concept would be desalination projects falling out?

Martin Kropelnicki

That’s a good question Tim, and in fact I just had a dialogue yesterday with our board about this topic. And desal cost will continue to drop and purchase water cost continued to increase. But desal is still very expensive and desal has a very, very large carbon footprint. And over in Hawaii, we have a number of brackish well so when you brackish desal which is a least cost alternative.

There is one or two places in Southern California we’re doing brackish desal as well. So I think you'll see brackish type treatment before you see full ocean desal and its percolating a lot. I think there's a lot of discussion about it but at the end of the day you face the fact that A, you need a lot of energy, B, what you do with the byproduct, C, you got to deal with the COFO commission with the State of California and D, you get those massive carbon footprint.

And I just don't see at any time, at least the next five years or 10 years. I think it’s probably at least 10 years out I would say, but that’s just my best guess. Brackish though I think depend on how drought goes on for brackish treatment is. There is technology that is relatively cheap.

Tim Winter - Gabelli & Company

Okay. Thanks guys.

Martin Kropelnicki

Thanks Tim.

Operator

Currently, we have no question in queue. (Operator Instructions) We have no questions at this time. I will turn the call over to our host for any additional comments and remarks.

Martin Kropelnicki

Thank you. So, thanks everyone for your continued interest in California Water Service Group, and we look forward to speaking with you again in October. Have a good day.

Operator

And that does conclude today's conference call. Thank you for your participation.

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