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California Water Service Group (NYSE:CWT)

Q2 2008 Earnings Results Transcript

July 31. 2008, 11:00 am ET

Executives

Martin Kropelnicki - VP and CFO

Pete Nelson - President and CEO

Analysts

Michael Gresens - Robert W. Baird

Heike Doerr - Janney Montgomery Scott

Tim Winter - Jesup & Lamont

Jonathon Breeder - Wachovia Securities

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the California Water Service Group second quarter 2008 earnings results conference. (Operator Instructions) I would now like to turn the conference over to your host, Mr. Martin Kropelnicki, Vice President and Chief Financial Officer. Mr. Kropelnicki, you may begin.

Martin Kropelnicki

Thank you, Christopher. Good morning, everyone, and welcome to the second quarter 2008 earnings conference call for California Water Service Group. With me today is Pete Nelson, President and CEO. I'd like to remind everyone that a replay of today's call is available from July 31 through September 29 at 1-888-266-2081, ID 125334.

Prior to going to the results of the quarter, I'd like to take a minute to talk about forward-looking statements. In particular, during the course of this call, the company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from the company's current expectations. Because of this, the company strongly advises all current stockholders, as well as all 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.

Our format today, I'm briefly going to cover the income statement and the results from the quarter, I'm going to turn it over to Peter, who will give you an update on the regulatory side, then I'll come back and go through a couple highlights of the balance sheet, and then from there we'll open up for question and answer.

For the second quarter of 2008, the company had consolidated revenue of $105.6 million, up 10%, or $9.8 million, over the second quarter last year. Contributing to our increases in revenue, rate increases added $6 million, sales to existing customers increased $3.6 million, and sales to new customers were $200,000.

Looking at water production cost, water production costs for the quarter were up $3.1 million overall. In that, there are three primary areas. Purchase water was up $2.3 million to $30.8 million, primarily due to cost increases from wholesalers; purchase power was up $560,000, or 8% to $6.9 million; and pump taxes increased $199,000 or 8%, to $2.6 million.

Administrative and general expenses declined $430,000 to $13.8 million, and other operations increased 16%, or $1.7 million, to $12.7 million. The decrease in admin and general has been stabilization of health-care costs and a reduction outside services and legal fees. Other operations, the increase has been primarily due to water quality, chemicals, lab fees, et cetera.

Maintenance for the quarter declined $294,000, or 5.6%, to $4.9 million, while depreciation increased $895,000, or 10.7%, to $9.3 million.

Other income and expense was down approximately $500,000 to $400,000, primarily due to the mark-to-market adjustment and the company's nonqualified retirement plan and a decrease in interest income. The decrease in interest income comes from two primary sources, one, overall lower cash reserves this year due to funding the company's capital expenditure program, and lower overall interest rates on what the company's earning on its cash reserves.

Net income for the quarter was $10.1 million, up 31%, or $7.7 million over Q2 of last year. Earnings per share was $0.48 per share, an increase of 30% over the $0.37 per share for the second quarter of last year. Pete, now over to you.

Pete Nelson

Thanks very much, Marty. And good morning, everyone. The big news for this quarter again is regulation in California, and there's several milestones I'm going to talk about that have taken place in the last four weeks. All these were anticipated. We had really no surprises here.

But I do know that in the past few quarters a fair percentage of this call, at least from my point of view has been taken up with anticipated rate changes in California, and today we can put most of those to bed, which I think is going to be good news for almost everybody on the call here today.

The challenge is going to be to organize the material so it's understandable. So, I'm going to talk about three areas. First is the conservation proceedings, and there were two of those, 1A and 1B. This has really dealt with decoupling mechanisms.

The second item I'll talk about is our 2007 general rate case, which covered 8 of our 24 districts in California plus our headquarters, and there's two pieces of that decision. And then third, I'll talk about future rate cases, and there's two of those also. One is the cost of capital, and the second is our 2009 generate rate case.

And I think I'll also just mention at the end the earthquake that hit California on Tuesday about midday because we have had some calls about any damage to our facilities. So, first the conservation proceedings. These are in two parts, 1A and 1B. 1A dealt with the decoupling mechanism. And the objective here from the commission's point of view, is to remove the disincentives for water companies to promote conservation.

There was a decision in the second quarter, and July 1st we implemented three rate mechanism changes in California. The first one is the water revenue adjustment mechanism that we talked about the WRAM. This decouples sales from revenue, and so now from third quarter on, for the revenue due to consumption, the WRAM will track the difference between the revenue adopted in the rate case and the revenue actually used, and then either collect or refund the difference.

The second mechanism is the modified cost balancing account, which replaces our old balancing account. So, this new balancing account now includes all wholesale water costs, all electric costs used to produce water, and pump taxes. So, this is meaningful because we now fully expect to recover all our water supply costs in rates.

The important impact here of these two mechanisms is that the customers usage or consumption or sales, however you want to say that, the variability in those areas on revenue and water supply costs is now mitigated.

So, of course, this is not new to those who have been following electric and gas utilities. In fact, these mechanisms have been in place there for decades, and we're real pleased that our independent accounting firm, Deloitte & Touche, has been working with this system for years, and for them it's pretty routine.

The third piece of the conservation proceeding1A installs conservation or increasing block or tiered rates for our residential customers, and that's to encourage conservation, obviously. So, these three mechanisms that I mentioned the WRAM, the modified cost balancing account, and the conservation rate design all went into effect July 1st and we're the first utility in California, water utility to implement these mechanisms.

The second part of the conservation proceeding is the 1B piece. It's a generic proceeding. And what this proceeding does is to evaluate the impact of the decisions made in 1A, which was the decoupling mechanisms, the impact of that decision on our adopted rates of return, or ROE's.

On July 9th, the administrative law judge issued her proposed decision, which recommends a reduction in the adopted ROE's by 50 basis points. And she also recommended that that could be cut back to 25 basis points if conservation goals are met.

But more significantly to the proposed decision, on the same day, the assigned commission, Commissioner Bond, issued an alternate proposed decision, and Commissioner Bond's proposal rejects the ALJ's proposed decision and defers consideration of the return on equity and risks to the ongoing cost of capital proceeding, which I'll mention a little bit later.

The cost of capital proceeding is the place where all risks are being considered, and Commissioner Bond prefers that we deal with any impact and any decoupling in the generic proceeding. Commissioner Bond's alternate is consistent with the water industry proposal so we're pleased to see it. And as with all proposed decisions, there's a 30-day comment period, 30-day wait period before any of these decisions can be placed on the commission agenda. So, stay tuned for proceeding 1B.

The second area is our 2007 general rate case, which includes 8 of our 24 rate-making districts in California and our corporate or headquarters costs. On July 10th, the commission approved a decision here. And what the decision allows for is $33.4 million in annual revenue for those 8 districts, and it gave us the ability to back-bill to July 1st for those rates. We do that because the commission was essentially 10 days late in making their decision on this rate case.

As with any general rate case, a fair percentage of this revenue is going to new employees, capital expenditures, benefits and the like. So, this is a major rate case for us for those 8 districts.

Also, significantly, this rate case allowed us to file for and begin collecting corporate and headquarters costs in the other 16 districts that are not part of this general rate case. Now, we've done so, that totals about $13.7 million in annual revenue.

Now, I've talked about regulatory lag in the past, which is the lag in recovering our corporate or headquarters costs in the nongeneral rate case districts. This decision is intended to address that very issue. And we're pleased with both of the outcomes here, both the rate case and the ability to reflect the nonrate district costs in the other 16 districts.

And I'm particularly pleased with the fact that all these decisions are consistent with the California Water Action Plan, which is the core public policy document for water regulation. They are really following through on their goal for regulatory streamlining in California.

Now, onto the third subject, which is future proceedings, and there's two important ones here. The first I've already mentioned, which is the cost of capital proceeding.

You may have noticed that in our general rate case, in fact, from now on, water general rate cases, the cost of capital or authorized return on equity is not dealt with anymore. That's now dealt with in a separate proceeding called "cost of capital." We're in the middle of that process. We expect a decision by the end of this year.

The only new twist is one I just mentioned, and that should Commissioner Bond's alternate proposed decision be adopted, then this conservation -- from the conservation 1B proceeding, then this cost of capital proceeding will consider the impact of decoupling and the modified cost balancing account among all the other risks that the proceeding's looking at as they look at the water industry and the cost of capital.

So, finally, last rate item is our next rate case, which is our 2009 general rate case. We expect to file this July 1st, 2009. This will cover all 24 rate-making districts for the first time and headquarters costs, and the target date for that decision for rate changes is January 1st, 2011. Of course, we've been working on this filing already for months and even though it's 11 months away -- so we're preparing for it as we speak.

So that's the update on the regulatory front. And I really appreciate the fact that some or maybe all these decisions in the last 30 days is a change in the way regulation has been done in California for decades, and it's really a sea change in how we will book revenue and supply cost in the future. So, they expect to help everyone as we go forward here understanding the changes and what the impact is on the company.

Last item is just, quickly, the earthquake Tuesday midday. We've had several calls on this. There was an earthquake, if you hadn't heard, in Southern California, I think, just before noon on Tuesday.

When there is an earthquake like this, our response plan immediately dispatches teams to go out to check all of our pumping facilities and all our main water facilities. We really had very, very little damage. One main leak in East Los Angeles. Otherwise, no damage to our facilities. Our major wholesale supplier, the Metropolitan Water District of Southern California, had some minor damage to a couple of treatment plants. So, although, this received some media attention nationwide, I know it was pretty routine from an emergency point of view for us and for Metropolitan Water District.

So that's the update. I'll turn this back to Marty to talk about balance sheet.

Martin Kropelnicki

Thanks, Pete. I first want to talk about cash flow given our flavor of cash flow for the quarter. Cash flow provided by operations was approximately $31.1 million. Overall investment activities, company capital expenditures for the quarter company funded was $39.6 million, and utility plan expenditures that are developer funded, so work that may or may not be done by us but funded by developers was approximately $11.3 million. That gave us total CapEx for the quarter of approximately $51 million.

Finance and activities, we had net short-term borrowings of approximately $23 million that we used on the line during the quarter. And we ended the quarter with approximately $6.1 million in cash and cash equivalents, down just slightly from where we were at $6.7 million at yearend.

Overall, capital expenditures, we think, were healthy at the company fund level at $40 million. Our target this year is approximately $90 million for the year so we feel we're tracking that number. Our capital expenditures tend to ramp up throughout the year, and then we have a push at yearend to get them all in the rate base.

Looking at WIP, work in progress, so this is when we actually incur costs before the plant goes in service, we ended the quarter with WIP balances of $80 million. That's up approximately $23 million, or 40%, from where it was at the end of Q1 '08, and on a year-over-year basis is up 18%, or $22 million, from $68 million in the second quarter of 2007.

Overall, feeling good about our capital expenditure program. Net utility plant for the quarter, we ended the quarter with $1.048 billion of net utility plant. That's up approximately 10%, or $96 million over the same period last year.

So, overall, where we are with our program, we feel like we're on track. We are continuing to look at our financing options for going forward given the uncertainty of the market. We've been fairly conservative and just working with our short-term line of credit, and moving forward, we'll continue to evaluate what our options are for financing.

But overall, we feel like we have continued to perform well and the balance sheet is in good shape, as was the income statement, for the quarter.

So, Christopher, with that, we will open up for questions and answers from the participants, please.

Questions-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question or comment is from the line of Michael Gresens with Robert W. Baird. Your line is open.

Michael Gresens - Robert W. Baird

Good morning, everybody.

Pete Nelson

Hi Michael. How you doing?

Martin Kropelnicki

Morning, Michael.

Michael Gresens - Robert W. Baird

Good. On the capital expenditure plans, it looks like you've then -- the second quarter you've done almost $67 million year to date, implying only $23 million left to spend for the remainder of the year; is that correct?

Martin Kropelnicki

That's a little bit difficult to answer because you have to -- our projects will span multiple periods, which is why I like to give kind of the company funded and what's sitting in work in progress. So, I think you're on the right track with that.

A harder issue is kind of when does something come out of work in progress and actually go into utility plant? A lot of times these are multiyear projects that getting the permits and then getting the approval from Department of Health Services and getting it in the ground and getting the commission approval on will stretch multiple periods. So, overall, we feel like we're on track to come in about where we thought we would be for the year, and we're tracking to our plan.

Michael Gresens - Robert W. Baird

And the acquisitions during the quarter. You had mentioned the Hawaii. Was that indeed closed, and is that the explanation for the increase in the outstanding shares?

Martin Kropelnicki

The increase in outstanding shares, no. We have not -- increase in outstanding shares really is due to changes with FAS 123R. So, we have not issued any new shares in conjunction with any acquisition other than with IUS at the end of 2007. We had a small amount of shares that were issued to fund that acquisition. We talk about in the press release [Kukio]. We filed with the commission for that, and then we are closing on the Pukalani acquisition now.

Michael Gresens - Robert W. Baird

Okay. Thank you.

Martin Kropelnicki

Thanks, Michael.

Operator

Thank you. (Operator Instructions) Our next question or comment is from the line of Heike Doerr with Janney Montgomery Scott. Your line is open.

Heike Doerr - Janney Montgomery Scott

Good morning. Glad to hear everyone is safe and sound in the Cal Water family.

Pete Nelson

Hi, Heike. How are you?

Heike Doerr - Janney Montgomery Scott

You never know. It's a big state. Don't know where you guys are. A couple of quick housekeeping questions first. The deprecation was up about 10% year over year. Is that a good run rate to think of going forward as we look into '09 what the depreciation level is going to be?

Martin Kropelnicki

Depreciation potentially has the ability to change when we get new depreciation schedules from the CPUC. I think that 10% is probably about right, and if there was a significant change with the commission, we'll highlight it in our disclosures and on these calls.

Heike Doerr - Janney Montgomery Scott

Okay. And as we look at acquisitions, this is now two quarters that we've heard of a new acquisition that's happening in Hawaii. Has your strategy changed, and can you talk about maybe where you see attractive acquisitions in the non-California states that you operate in? I believe historically, we've seen more in Washington than we have in Hawaii.

Pete Nelson

Heike, that's right. We've seen more in Washington and New Mexico in previous years. Right now the action seems to be in Hawaii on the Island of Maui and on the Big Island, particularly the Kona Coast, which is where the Kukio system is so that just happens to be where the market is at the moment. These are not huge acquisitions, but they're strategic, and they get us a good footprint on both islands.

Heike Doerr - Janney Montgomery Scott

Can you maybe give us a little Hawaii refresher since we don't talk about it much? How many customers do you have there? I believe that you got that as part of the AquaSource transaction and maybe what the CapEx and rate needs are down there?

Pete Nelson

I can start there. On the island of Maui, we purchased the [Ka'anapali] system right from AquaSource. And then the Pukalani system, which we mentioned in the press released, is also on that island. I'm going to say there's, I'll take a rough guess, about 6,000 -- well, I'm sorry. There's about 600 customers on that island, but a lot of those are major resorts so it's hard to do an equivalent test on that. So, it's probably the equivalent of, I'd say, 10,000 customers.

Heike Doerr - Janney Montgomery Scott

Did you treat that like a bulk water contract then if your customers are the Marriott and the Sheraton and whatever else is down there?

Pete Nelson

No. They're retail customers. It's just that they're large customers on Maui. And then on the Big Island, we've got the Kukio system now, a company with several contracts, I think 26 contracts to operate. I just haven't run the map on the numbers there.

Heike Doerr - Janney Montgomery Scott

Sorry. I didn't mean to put you on the spot. We don't talk about it much.

Pete Nelson

It's not significant to the bottom line yet so –

Martin Kropelnicki

No. They're not material yet, and if you go back at the end of Q1, we published information in the press release in terms of what the customer counts are on those pending acquisitions. And then with the Pukalani one, we are picking up 800 customers, and then Kukio is another 250 customers. So, again, these are not real big, earth-shattering, kind of move-the-bottom-line type of acquisitions, but they are strategic, and that has allowed us to build a net work of utilities in Hawaii.

And as we've talked about doing acquisitions as a utility, it's somewhat difficult because you have to buy them, and you can easily fall into a trap of, if you buy one, they require a lot of capital expenditures, and if you can't get in rates, you start losing money. So, we continue to be very strategic in how we buy these acquisitions. We like to get them accretive within the first year. And overall in Hawaii, we feel like we're building a fairly good footprint in terms of Hawaii water service company and growing the business over there.

Heike Doerr - Janney Montgomery Scott

That's helpful. Thank you. Sorry. Didn't mean to get too into the weeds with you on that. As we look at Bond's alternative decision in the IB proceeding, has he commented on what he thought the basis point impact should be or just that he thinks it needs to be tabled for the cost of capital?

Pete Nelson

The latter. He just is thinking it should be considered with all the other risks in the cost of capital proceeding.

Heike Doerr - Janney Montgomery Scott

Okay. And as a final question, Marty, I don't how much clarity you can give us, but for this water revenue adjustment mechanism, going forward we would think that revenues would be pretty stable. Are we going to need to wait 12 months until we're looking at the third quarter of '09 to know going forward what a normalized number is, or will the company be disclosing in the Q what, for the next two quarters, would be an assumed, normalized number?

Martin Kropelnicki

That's a very good question and it's…

Heike Doerr - Janney Montgomery Scott

We'd, obviously, all prefer the latter.

Martin Kropelnicki

Pete and I, last week at our board meeting, we had several presentations on this topic and a couple noteworthy points. As Pete talked about, this is probably one of the most significant changes within the state of California and maybe potentially within the United States for a water company to go through. That coupled with the fact, from the time it was approved, implementation was 120 days, and I've spent half my career in the utility industry, and frankly, this is one of the fastest regulatory changes I've seen. So, there are a lot of moving parts.

And part of that is taking what has typically been an annualized adopted revenue number, now breaking it down by district, breaking out the revenues, breaking out the costs, looking at the ROE, and we're in the process of doing that now and testing that.

So, I don't have an answer for you other than we're really glad we have Deloitte & Touche as our independent third-party accountants because they have a lot of experience in this area. We have dedicated our best and brightest over the last four months to work on this, and it's been moving very, very fast. And ultimately, we're looking at hosting an analyst day the end of September, maybe the first week in October, to walk everybody through kind of where we are and what it's looking like.

Until the accountants sign off on the accounting and everything, it's going to stay kind of squishy, which I know isn't the answer everyone wants. But ultimately I think we will get to the latter of what you said, it's just a matter of we have to go through the process to get there.

Heike Doerr - Janney Montgomery Scott

Well, then I guess we'll just keep with the squishy for the next couple of quarters. Well, thank you. I appreciate you taking the time to follow up with me.

Martin Kropelnicki

Sure. When we gave the board presentation last week, that was one of the things that we said, you're probably going to have a lot of questions, the board, that we won't be able to answer at this point because this really is all happening kind of real time. So, it's been very dynamic, very exciting, and very, very busy, but I think we are on track, and I think, as we roll it out, I think it'll create transparency and clarity for all involved.

Heike Doerr - Janney Montgomery Scott

We're happy to see you ahead of the curve.

Martin Kropelnicki

Thank you.

Operator

Thank you. Our next question or comment is from the line of Tim Winter with Jesup & Lamont. Your line is open.

Tim Winter - Jesup & Lamont

Good morning, Marty and Pete.

Pete Nelson

Good morning, Tim.

Martin Kropelnicki

Morning, Tim.

Tim Winter - Jesup & Lamont

First of all, I want to congratulate you guys on your work over the last several years working with the commission and the rate-payer advocate to get this regulatory process streamlined, and it's great to see the WRAM in place and the modified cost balancing account in a rate decision in under 12 months. So congratulations. I'm looking forward to seeing this all fall to the bottom line over the next few years and making our life a lot easier. On that note, though, I've got a couple questions on the '07 general rate case.

The overhead expenses that you mentioned that you can still recover, I think you said $13.7 million. How will that be recovered and when? I think you said it was going to be an advice letter and it would be a near-term?

Pete Nelson

Actually, Tim, those were advice letters already filed right after the 10th of July so those are all in place, and we're collecting the revenue now.

Tim Winter - Jesup & Lamont

You are collecting it?

Pete Nelson

Yes, we are.

Tim Winter - Jesup & Lamont

Okay. And then for the step increases in years two and three on the '07, could I get the numbers for those?

Martin Kropelnicki

Yes. I've got. Wait one second, Tim. Yes, I have those. Step increases, it's about $10.4 million for the eight districts in 2009, July of 2009 and $5.6 million in July 2010 for the eight districts.

Tim Winter - Jesup & Lamont

Okay. Okay. And then moving on with the action plan, I guess the next principle that we want to see in place is infrastructure improvement charge or some sort of automatic adjustment for work in progress. Any thoughts on that or if the commission's considering implementing that type of mechanism? I believe in the action plan it was called the…

Pete Nelson

Yes. It says to consider it a disc-type mechanism, and we have worked with the commission unsuccessfully in having a water infrastructure mechanism adopted. This rate case, of course, it's forward-looking. So, there's capital expenditures in the rate case, and there's also several projects that we don't -- they're not big enough to be in the press release that will be filed by advice letter when they are completed. Marty, do you want to add anything to…

Martin Kropelnicki

Yeah, I think in terms of the disc, I think that's probably kind of too standard deviation are a couple steps out. They're kind of the next big issue is that we'll go through is really the cost of capital, and that'll take place throughout the fall. And then the next thing really is really on the conservation side. I mean, you've heard Pete and you've heard me talk about that we believe conservation is really the wave of the future.

And I think for anyone struggling to understand the WRAM and the modified cost balancing account, if you go back and look at what happened in electric and gas industry when they decoupled and the results of the conservation, clearly, conservation's going to be a big deal here, and we think that's the right way to go.

Tim Winter - Jesup & Lamont

Okay. Great. And then on the cost of capital proceeding, is there any important events or scheduled things we should be looking for as this proceeds?

Martin Kropelnicki

We just got the scoping document from Judge Long here about a week and a half ago. We'll be testifying the week of September 8. One of the things that's a little unique is it looks like we're going to have a panel of witnesses. So for Cal Water I'm the witness, for the other two companies they'll have their witnesses, and we'll be participating in a panel format. So, it's a little bit different format.

As Pete mentioned, I personally was very pleased with Bond's alternate because he went to what I would consider a more neutral position on any reduction in ROE because of the new mechanisms, and he said it should be considered as a basic risk factor like any other risk factors that the company has in their cost of capital. So, look for the proceedings to start in the fall, and, hopefully, they're scheduled to conclude right before Christmas if we can stay on schedule.

Pete Nelson

Tim, one more thought there. There's been a little misconception that because several water companies are included in the same proceeding that we could all end up with the same return on equity, and that's not true. It's more likely that each water company coming out of the cost of capital would end up with a different authorized rate of return.

Tim Winter - Jesup & Lamont

Okay. Thank you, guys.

Martin Kropelnicki

Thanks, Tim.

Operator

Thank you. Our next question or comment is from the line of Jonathon Breeder with Wachovia. Your line is open.

Jonathon Breeder - Wachovia Securities

Good morning, gentlemen.

Martin Kropelnicki

Hi, Jonathon. How are you?

Jonathon Breeder - Wachovia Securities

Doing well. I'm going to stay on the cost of capital subject and the ALJ recommendation, the 50 or 25 basis point haircut. If that would be adopted, then I guess, in the cost of capital filing, they just strip out the effects of the lower risk, so to speak, from the WRAM, as well as the modified cost balancing accounts; is that correct then?

Martin Kropelnicki

Well, I think the theory is that, if the WRAM and if the modified cost balancing accounts reduce the risk, then overall it would be a less risky stock and, therefore, you should have a reduction in your ROE. As our lead witness and me and my team have put together our testimony, I don't agree with that. I think I can argue that debate on several fronts. First and foremost, the electric and gas companies with the same mechanisms have a higher-allowed ROE. Secondly, we have been an increasing-cost industry here in the last couple of years, and the need for CapEx has continued to grow. So, in order to attract higher levels of CapEx, we're going to have to pay higher levels of returns to keep those investors interested in our company.

So, I think it's going to be a very interesting process that we go through and a very interesting debate that we have with the commission and the commission's witness, but overall, I think, if you look to the free market and you look to what the indicators are, I think we have a very strong case.

Pete Nelson

I think, Jonathon, your question can't be answered, actually. If the administrative law judge's proposed decision is adopted in the 1B proceeding, I don't think anybody knows the impact that will have on the cost of capital proceeding. This is all new ground being plowed here so…

Jonathon Breeder - Wachovia Securities

Right. That's what I'm trying to get at is, is it, if they say, okay, 50 basis point reduction in ROE, then is that taken on top of whatever the judgment is in the cost of capital proceeding or what? I mean, just logically it would make sense to do what Bond has suggested and take them in all in stride at one time, rather than in two separate ones.

Pete Nelson

Yes. We're with you.

Martin Kropelnicki

Yes. I don't think we know that yet. I think we have to go through the process and see. I will tell you, when we had the prehearing conference with the three water companies, Commissioner Bond was there for the prehearing conference. And I know part of what Commissioner Bond's goal has been is to just improve transparency, and I think his theory has been, if you can improve transparency within the state of California in the rate-making mechanisms, the rate payer benefits, the investor benefits, and the water utility benefits.

And so, as you guys know, as anyone has ever tried to add up and figure out what our total ROE is, it's almost impossible unless you take every single district and add up their numbers. And even then, the way the geo lag has been, et cetera, it's very, very difficult to do, and, in fact, you could probably say it's almost impossible to do.

Jonathon Breeder - Wachovia Securities

Right. And then, I guess, is there a timeline for a final decision based on this proposed decision by the ALJ and the alternate proposed decision?

Pete Nelson

No. It has to wait 30 days, and then there's no target date to get it on the commission agenda.

Jonathon Breeder - Wachovia Securities

So it could, theoretically, just kind of linger out there until the cost of capital really gets rolling and then…

Pete Nelson

Possible. Hard to say. I think the significant thing here is that the lead commissioner for the proceeding, who's also the water commissioner, has proposed an alternate decision.

Jonathon Breeder - Wachovia Securities

Right. How often does that happen, I guess, if an ALJ comes out with a proposed decision that a commissioner immediately kind of steps in with an alternate proposed?

Pete Nelson

I'm not the best judge, but I don't think it's that common to have the alternate decision released on the same day as the proposed decision. That's pretty weighty, actually, to have that happen.

Jonathon Breeder - Wachovia Securities

Yes, and it just seems like there's complete disagreement from the start, I guess, between the commissioner, which I mean, in my opinion, I would think carry much more weight than the ALJ. Is that accurate or…

Martin Kropelnicki

That's hard to answer. I mean, to think Pete's point, this is kind of we're plowing new ground here, and on multiple fronts, whether it's the WRAM, the MCBA, now we're plowing new ground in the cost of capital, and I don't think we know until we get there. But I think that the thing that's important to communicate to our shareholders is that we know we need to raise capital, and we know we need to attract capital, and we're very focused on doing what we need to do to take care of the rate payer and the shareholders.

Jonathon Breeder - Wachovia Securities

I mean, in all honestly, I kind of like having these changes going on. It gives me something else to talk about when we're talking in the water industry rather than the same old stuff.

Pete Nelson

Glad to be of help there.

Jonathon Breeder - Wachovia Securities

One last question, just a little detail item. The other income, you said, decreased by $0.5 million as a result of mark-to-market, as well as interest income. How much was the mark-to-market portion?

Martin Kropelnicki

Mark-to-market was approximately $500,000.

Jonathon Breeder - Wachovia Securities

Okay. It was the bulk of that so…

Martin Kropelnicki

Correct.

Jonathon Breeder - Wachovia Securities

You might add back $0.02 or so?

Martin Kropelnicki

It all depends on what the market's going to do, and as you guys know probably better than anyone, it's been a very cantankerous market. Economic data's been flying up and down and all over. We do have these assets that change in value as the market value changes, and we have to mark-to-market those on a quarterly basis.

Jonathon Breeder - Wachovia Securities

Right. Okay. That's all I've got today. Thanks, guys.

Martin Kropelnicki

Thanks, Jonathon.

Pete Nelson

Thanks, Jonathon.

Operator

Thank you. I'm showing no further questions in queue at this time.

Martin Kropelnicki

Great. Well, we want to thank everyone for their support over especially the last six months, as we've gone through a lot of regulatory changes. Certainly, we have made significant progress over the last six months in implementing the Water Action Plan that we think will improve the environment for rate payers and shareholders, and we look forward to talking to everyone at the end of Q3, when we'll have more progress to report. So, thank you for your continued support, and we'll talk to everyone later. Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference. We again thank you for your participation. You may all disconnect at this time. Good day.

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Source: California Water Service Group, Q2 2008 Earnings Results Transcript
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