California Water Service's (CWT) CEO Martin Kropelnicki on Q2 2016 Results - Earnings Call Transcript

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California Water Service Group (NYSE:CWT) Q2 2016 Earnings Conference Call July 28, 2016 11:00 AM ET

Executives

David Healey – Vice President and Controller

Thomas Smegal – Vice President, Chief Financial Officer and Treasurer

Martin Kropelnicki – President and Chief Executive Officer

Analysts

Spencer Joyce – Hilliard Lyons

Jonathan Reeder – Wells Fargo

Operator

Welcome to the California Water Service Group Second Quarter Results. This conference is being recorded. I would now like to turn the meeting over to Mr. David Healey. Please go ahead, sir.

David Healey

Thank you, Melanie. Welcome everyone to the second quarter earnings results call for California Water Service Group. With me today is Martin Kropelnicki, our President and CEO, and Thomas Smegal, our Vice President, Chief Financial Officer, and Treasurer.

A replay of today's proceedings will be available beginning July 28, 2016 through September 28, 2016, at 1888-203-112 or at 1719-457-0820, with the replay pass code of 751-4207. As a reminder, before we begin the Company has a slide deck to accompany the earnings call this quarter. The slide deck was furnished with an 8-K this morning and is also available at the Company’s website at www.calwatergroup.com/docs/earningsslides-2016-07.pdf.

Before looking at this quarter's results, we would like to take a few moments to cover forward-looking statements. During the course of this call, the company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties and actual results could differ materially from the Company’s current expectations. Because of this, the Company strongly advises all current shareholders and 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 with the Securities and Exchange Commission.

Now let's look at the second quarter results. I will pass it over Tom.

Thomas Smegal

Thanks, Shannon. Good morning everyone. On our presentation this morning, we'll discuss our financial results and some highlights from that, and give drought and regulatory updates, and then Marty will conclude with some thoughts about the business going forward.

So I’m going to turn to the financial results for the quarter and point out point out that operating revenue was up 5.6%. Net income was $11.5 million compared to $9.8 million in the second quarter of 2015. Net income was up 16.9%. The earnings per share was $0.24 for the quarter, up from $0.21 in the second quarter of 2015, and looking at the six month results, our operating revenue was up 2.9% to $274.2 million.

Our net income was down slightly to $10.7 million from $11.4 million in the first half of 2015 and earnings per share for the first half of the year, $0.22 versus $0.24 in the first half of 2015.

And talking about financial highlights, what's happened to cause that, the first thing is to remember that 2016 is the third year of our California GRC cycle. It's a very limited rate release that we have in California and our biggest service areas because of that cycle and we'll talk a little bit about where we are with the rate case.

Our year-to-date earnings have been reduced by incremental drought expenses $2.2 million on a year-to-date basis. As we will discuss later, there is a – what am I trying to say – the curve of that seems to be favorable for us. So in the first quarter, we had $2.0 million of drought expenses, in the second quarter, $1.2 million of drought expenses. We do anticipate in the third and fourth quarters that will even come down further as we take off the drought surcharges and move away from that regime.

Our maintenance expenses for the year are up $2.2 million and again, we talked about this on prior calls. Since July 2015, our maintenance expenses have increased because we've changed operations to improve our response to leaks and that's evident in our results here. In addition, in June of 2016, Cal Water $400,000 in costs to respond to a fire called the Erskine Fire, which affected our Kern River Valley District. And Marty, you wanted to mention a few things about that.

Martin Kropelnicki

Yes, sure. That was actually a fairly extraordinary event in one of our districts in the central part of the state, which is a more rural area, kind of more rugged hilly area. The Erskine Fire began on the afternoon of June 23 and quickly went from 2,000 acres to 30,000 acres overnight. The hot dry conditions coupled with 30 mile an hour winds rapidly spread that fire into what's about a 745 square mile radius, or 48,000 acres which were totally burned. So the fire and the fire crews were going from the 23 of June through July 5. Concurrently with that, we got our crews going around the clock during the same time. Part of what you see in the financial statements is $400,000 those costs are rolling in and those are being recorded – well, they're being expensed in the P&L. They're being recorded in a memorandum account.

We serve approximately 4,000 customers in the current area. During the fire, 300 structures were burned. Of the 300 structures, 280 were homes. Of the 280 homes that were burned, 250 were our customers. All power lines, all cell lines, everything that was in the way of this fire burned. And to give you an idea, some of you may have seen this on the news. You could see the fire coming over the ridge and within a matter of seconds, anything that was downhill from that ridge was up in flames. So it's a fairly devastating event that took place in the central valley.

Overall, we brought in crews from eight districts and we brought in different equipment from around the state. We didn't suffer a whole lot of damage, which is good. I think the team responded very well, although our customers did – the company and the employees did an outstanding job going 24/7 and being a first responder. We'd given out over 3,000 cases of water to our employees. In addition, being a first responder, in most cases we were on the ground before many of the relief agencies, including the Red Cross, the Company and its employees, so not rate payers, have given out $25,000 in gift cards to our customers who lost everything. Literally, we have customers that had the flip flops on their feet and the shirt on their back and that was it. They got out just in the nick of time.

In addition, the company and its employees, the company matched our employees. We did a fund drive and with some of our local suppliers, we raised an additional $45,000 that was donated for the fire relief to the Salvation Army in the area. So devastating event, but the Company's performance, our emergency operations center, and all of our employees did an outstanding job, and we are currently in the process of going through the rebuilding with our customers in that area. Tom back to you.

Thomas Smegal

Great thanks. Thanks Marty. The last major item on financial highlights for the year to date is our interest expense and as you'll recall, we did long-term financing in October and March and that has increased our interest expense $1.8 million a year-to-date date basis.

Two other highlights. Our capital program for 2016, on a year-to-date basis we have spent $116.2 million on capital expense. That compares to $75.8 million in the year before period, an increase of $40 million or 53% and the Company remains on track to meet the annual target that we've set out between $180 to $210 million of CapEx for the year.

The last item on financial highlights is our WRAM decoupling mechanism, and the balance here is $28.8 million in the mechanism. That is money that is owed to us by the customers and I will point out that at the beginning of the drought period, when there was some concern about where the WRAM balance might go, we had a WRAM balance of $47.9 million. So the fact that we had a drought surcharge and other factors that went into the rate making really helped drive this balance down when it very easily could have gone up.

And so now, I'm going to turn it over to Marty for a drought update.

Martin Kropelnicki

Thanks Tom. As many of you have seen on the news, California has officially entered its fifth year of a drought. We're still under emergency declaration but in May, during the quarter, the state made a couple changes in its drought program. In particular, the state allowed for water retailers and agencies, and municipalities to sell certified, and said a different way, instead of having a mandated target given by the state, based on local supply conditions and water supply analysis, that's a prescribed calculation, we could certify at each of our districts what would be the appropriate target. And as many of you know, Cal Water being a rate regulated company, keeps 25-year supply plans that we update through the rate case process.

Accordingly, when we did our self-certifications for all of our districts, the required reduction in all but one district was zero and we had one district that requires a 2% required reduction. Having said that, the Company's position is that we would've preferred having a hard target out there for all districts because the state has made a great deal of progress over the last 12 months in terms of water conservation and obviously, the drought is far from over. I think the Erskine fire, the fire in Kern County I just talked about, is a good example of that. That's pretty early. We're not officially into fire season yet. That's usually in August, September, or October and reservoir levels are starting to drop-down fairly rapidly in the state.

In addition, one piece of good news with the drought is the state water project, which is one of our major backbones that moves water from the north to the south has a 60% allocation that it has authorized. So that's the highest since 2011. That's really driven by the fact we've had average or above-average rainfall in the North and that allows that water to move down through the Central Valley and then down to Southern California. The team has busy implementing the new regulations which for us will include eliminating drought surcharges actually effective the end of this month, July. In addition, we have agreed to share our data with the state in terms of drop – best practices and what were some of the things we did to help achieve a greater than 25% reduction system wide.

So overall, the supply situation in California in the north is still holding well, but the south is very dry. And we continue to monitor drought conditions in each of our locations throughout the state. In addition, with the changes that we put in, which includes elimination of the drought surcharges, we are asking all customers to meet a minimum 10% conservation target in most of our areas. And we are – that’s included on the bill. So we show them what their water budget is without the adjustment. Then we show them what it is with the adjustment and we show them what their actual usage is. So we're still trying to keep people focused on a minimum 10% conservation target.

So that's kind of where we are with the drought. If you go to the next page, Tom, I think this is for you.

Thomas Smegal

Thanks. So we've shown this page in the past quarter so I won't go into full detail on it, but the California Commission has given us several mechanisms over the years that allow us to get through the drought without a significant financial impact. Of course, the decoupling, which we talk about every quarter, that helps when sales change as a result of the drought. The drought costs I identified in the prior section. We do estimate still that our drought costs will be $5 million to $6 million for the year $3.2 million on a year-to-date basis.

The other important factor on the drought costs is that these are not – they're not included in the balancing account right now. So we're not recording them on the financials as a revenue offset. We do have to wait until we get approval from the Commission on those memorandum account costs. We filed on July 15 an advice letter to recover $4.2 million of the incremental drought expenses associated with 2014 and 2015. And so we do expect at this point that we will get approval of that advice letter, which is what's called a Tier 3 advice letter, before the end of the year. But we'll update you on timing as we go through that.

I mentioned the customer surcharges on the – to get the WRAM balances down and also we also mentioned the lower sales estimates called the sales reconciliation mechanism. We do see a lower sales estimate embedded in rates for 2016 and that is certainly helping as well.

Martin Kropelnicki

Yes, one thing that's noteworthy on the drought, Tom and I, we had our board meeting yesterday and we actually had the drop team up here giving an update to our Board about the new regulations and now we're adopting them. If you remember in the drought, our benchmark year was 2013 and so if you look at the period January 1 of 2015 – excuse me – June 1 of 2015, to June 1 of 2016, and compare that to the same period in 2013, our customers have saved over 35 billion gallons of water. And to give you a visual on that, that's the equivalent of filling 53,000 Olympic size swimming pools. A little piece of the Olympic data as we get the Olympics kicked off here.

So overall, our customers have done a very good job of conservation and we hope they continue to do so as we go into the dry months here in California.

I'm going to talk a little bit about the general rate case on Slide 10. That shows the rate case as it was filed. As many of you may recall, in this rate case, the Company made a commitment to hold or try to hold expense related headcount flat and only increase our headcount on the capital side. So people that are involved in the direct implementation of capital projects, especially with our capital program. And 80% of the increase that we had the rate case is really driven by capital. So the rate increase that was requested was just shy of $95 million with two-step increases, one in 18 and one in 19 of approximately $23 million each. And as many of you know, it's about an 18 month process.

If you go on Page 11, in this process that we're in right now, there are approximately 17 parties plus us that are akin to the settlement discussions. Of the 17, ten are cities and counties, and I think that's probably driven by the drought and wanting to understand more what's happening with the drought and water supplies. Of the 17 parties akin to the settlement, approximately nine are active. So you have eight of them who are not active in the process but kind of listening in.

So as you may recall, at the last earnings call, we had just received the intervener's report and the Company has responded to that. And during the months of June and July, the Company and the intervening parties have been in settlement discussions. And on July 18, we had one day of evidentiary hearings associated with the general rate case. We can't say much more than that right now as the case is moving forward and settlement discussions are considered confidential. What we can say though is that as many of you know, the rate case is very complicated and there's tens of thousands of pages of documentation and project justifications that go into the process. All parties who have been participating have been very good about taking the time to have fruitful and correct discussions around what the products being submitted and the justifications around them. Everyone has been very, very professional and we believe that the case is being processed in accordance with the adopted schedule that would allow for a decision by the end of this year.

In addition, the judge assigned to the case as well as the commissioner assigned to the case have continued to express their interest in having this wrapped up before the end of the year. Unfortunately, we can't say much more than that right now. In the event there was a settlement, it would immediately be – once it's filed, it would be filed by the Company with the Securities and Exchange Commission via a Form 8-K. Tom?

Thomas Smegal

Thank you. Thanks Marty. I'll just cover a couple of graphs here at the end of the presentation. First, the capital investment history. I will point out it was $116 million that we have spent on capital through the first six months of this year. It's actually equal to the amount we spent for the entire year of 2013. So I think that's a good visualization of what we've been able to do in terms of capital execution and delivery. The blue bars on the right-hand side of the graph due still represent the numbers that were filed in the California GRC plus expectations for the other subsidiaries. So those numbers may change as we go through the GRC process.

Flipping to the WRAM MCBA balance, we talked about this. It did reach a high of $51 million at the end of 2011 and is now back in the range where it was in 2010. We started the decoupling in 2008. So it's good to see those numbers moderating a bit.

Last slide for me is the EPS bridge. We mentioned here the incremental drought expenses, the increased maintenance expense, and the increased interest expense. We also on this chart show a small change related to our incremental uncollectible accounts. We put in a new billing system in the first quarter of this year and we suspended our collection process for about two months. And so we are seeing the effect of that. That's a temporary effect and should even out as we go forward. And the rest of the chart we talked about. I will mention the un-billed accrual which is factored here on the quarter and on the year-to-date.

If you'll recall in 2015, in the second quarter we had a very negative unbilled revenue accrual that affected our earnings. So in the comparable period last year. So the positive here is certainly a positive for us but in addition, it's kind of a reaction to what had happened in the year before period.

And with that I’m going to turn it over to Marty for a couple of final comments.

Martin Kropelnicki

Yes, so on the last page that you see there is really talking about some of the recent awards in California. And normally, we wouldn't put a page like this in for discussion, but we thought it was relevant given where we've been the last 12 months as a Company, as a team here at Cal Water. In particular, if you talk to some of our employees who have been here 40, 45 years, and we have a number of employees who have been here, long time, they would tell you that 2015 and so far, 2016, have been two of the busiest periods in their memory in terms of being a Company, with the drought and all the work associated with the drought, and everything else that's been going on in the state of California. It was a very taxing and stressful time as we reallocate our resources to deal with the drought emergency, et cetera.

And so during this period, I think, and this is reflective of how the hearts and souls of our employees, how they put their hearts and souls into their work, we won a number of what I believe are critical awards, starting with the JD Power and Associates. This is the first time in the U.S., JD Power has ranked water utilities across the U.S. The ranking broke the U.S. into four districts, or four regions, the Midwest, Northeast, the South, and the West. And Cal Water was ranked by customers that were interviewed during the survey in all the states as number one in the West. In addition, we earned what they call the Elite 10, which is the top ranking of water utilities in the U.S. in terms of customer service. So we're very, very proud of that.

In addition, last month, we were named a top Bay Area workplace for our fifth consecutive year. So the Bay Area covers a very big kind of footprint as far south as Santa Cruz, and as far north as the North Bay up in Marin and Sonoma, and all of the East Bay. The significance of this is that we're a 90-year-old utility right in the heart of Silicon Valley and we compete with engineering talent, and accounting talent, and HR talent, with high-tech companies, companies, companies like Google, like Facebook, like Intel, like Hewlett-Packard and so many of these technology firms that are in our backyard. So it's really an honor to be recognized again as our fifth year in a row as a top Bay Area workplace, top 100 Bay Area workplace.

In addition, our IT and operations people took an award for best mobile project. Now, we didn't take first place for this. We got second place normally I wouldn't be talking about coming in second on a conference call but the significance of it is Duke energy took first place and since they have 45,000 employees and a balance sheet and income statement that's significantly bigger than ours, I'm very proud that we gave them a run for the money for that first-place position, and our team did a great job rolling out our mobile workforce.

And lastly, and perhaps this may be the most important award that kind of feeds into the JD Powers award. As we received a platinum creative award for outstanding drought communications in the state of California. And as we talked about before taking a customer first approach meant we had a lot of communications that we had to do between local cities and us, our customers and us, and constantly reinforcing drought concepts. And so we got the highest award for drought communications in the state of California.

So reflecting on the last year with so many challenges that we've had to overcome and obstacles that we had to hop over. Our employees clearly put their hearts and souls into their work here at Cal Water and I think these awards highlight kind of how much our employees care about our customers and our company. And it's very gratifying to look back now and to have these awards. And these awards all came in here during the second quarter and kind of celebrates the success of being able to help the state meet the drought mandate and be recognized for our customers, for best service, best communications, et cetera. I think it really shows how well the company has performed the last 12 months.

Having said that, we are officially halfway through the year and we're moving into the second half of 2016. Time is flying, as Tom mentioned. We're very happy with the capital program numbers and we continue to get good productivity out of the changes we've made in engineering and some of the reorganization things we've done internally to expedite getting capital in the ground.

Going forward, we really have three focuses during the second half of the year, or three priorities. First, keep the GRC moving. The GRC is a big project with a lot of tentacles, and we've got to keep all those things moving and make sure we drive that to conclusion before the end of the year. The drought, obviously, we're still in a drought emergency. I think with the changes the State water resources control Board made, there's a sense that the drought's over in the state of California and it's not. We are still under the same emergency declaration and mandatory conservation numbers can be called back on and turned back on at any time. And that's a function of the state EOC, state emergency operations center, and the governor. So making sure we stay focused on the drought.

And then lastly, as Tom said, it's the third year of the rate case so budget to actual management is always one of the things we're looking at, but it's very critical this year. And that the margins remain tight as we try to get the rate case wrapped up and get the stepped up rate relief going into 2017. So we'll remain vigilant in terms of budget to actual management and making sure we are operating as efficiently as possible as we move into the last half of the year.

So with that, Tom

Thomas Smegal

Yes, Melanie. That concludes our presentation. We'll be happy to take questions at this point.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll go first to Spencer Joyce with Hilliard Lyons.

Spencer Joyce

Marty, Tom, good morning and congrats on a nice quarter here. Just a couple of quick ones from me. Tom, I have in my notes that we were looking at about a 37% tax rate for the full year here as of the last quarter. Is that still approximately right there?

Thomas Smegal

That is still approximately correct, yes. The things that are going to drive that toward the end of the year is how much capital we get in the ground, how much deduction get on the repairs and maintenance deduction. So right now, that's our estimate and we'll keep updating that quarter to quarter.

Spencer Joyce

Okay. Perfect. And I promise I'm not trying to ring the alarm bells here in any way, but with the relaxation of some of the usage restrictions and the removal of some of the penalty rates, is it reasonable to expect that we may see the under collected balances creep up a little bit over the second half of this year? And then kind of a follow-up to that, what type of impact will those Q1 2017 water board permanent restrictions or permanent rules have on either the MCBA or the WRAM moving forward?

Thomas Smegal

Sure. Let's take those in turn. So we do expect that obviously, if we hadn't had the drought surcharges during this period, the last 12 months, we would have seen a spike up in the WRAM MCBA net balance. So the real question on the go-forward basis for the rest of the year is how much water are our customers going to use. We do have a 10% conversation call and we do still want our customers to conserve. If they do relax their conversation efforts a little bit, that could help that balance but right now, I think you're correct that you would expect to see it flat to trending slightly upward as we go forward in the year. Again, it's all recoverable and it's all subject to the mechanisms. And so even if it were to go a little bit higher, we would surcharge that in the next year or just as we've been doing for the last eight years.

Regarding any long-term issues with our mechanisms and the state board's action, to give you maybe the smallest hint of what they're talking about, what we hear is they really talk about budgets and setting individual water budgets for customers. And that is kind of the undercurrent that you hear from the state board is that's what they would really like to do, rather than setting percentage calls and saying, well, everybody in this district needs to conserve 30% or what have you. They're really looking to be a little bit more interventionist and say people in this area should be using X, and if they use more than X they should pay a higher rate for that maybe.

That is a concept that's going to have a lot of difficulty getting through a lot of public agencies. I think we're very indifferent to it considering the WRAM mechanism. But it'll be interesting to see the political behind the scenes and what comes out about their proposal.

So Marty, do you have anything else to add? I think that's…

Martin Kropelnicki

Yes, I think to that point, Spencer, our systems are set up to already do that. That was one of the things we did with the drought last year is we adjusted the customer's water consumption target based on the calculations for that area and then we reported on that. And so we're keeping that process going on the customer bills. So in the event they do want have water budgets, we're already set up to do that. And I think overall, this process with the state, Tom kind of hinted on it a little bit, you know, we've actually submitted testimony recommending keeping a minimum target, as did the California Water Association. But you also have a lot of municipal systems that were lobbying the other way. And if you think about it, with consumption taking such a dramatic decline, I'm sure many of them had a hard time covering their revenue requirement or their operating costs.

And so the states I think weighed these two things out and they were dealing with some of the politics. And having said that, I also think the state is probably realizing they may have made a mistake. And it's been hot in California so far. It's been very hot in Southern California. We're watching the drought levels on the reservoirs and they're moving quickly in Southern California. So I think the governor and then the state is going to come up with more stringent long-term reduction targets that will include landscaping ordinances, that will include ordinances that will effect how homes are built, what type of appliance go in homes, things more focused on long-term water conservation and efficiency.

And as I mentioned in my part of the call this morning, we're participating in those discussions and there's a couple studies underway. One is with the public policy institute. We're partnering with them and giving them our data that they can use in their study and with the state as well. So if it is to be determined but I said I don't think it's going away anytime soon. And California passed up France for now the sixth largest economy in the world, with 39 million people. And so we're going to have to come to terms with water. You just need more water and you've got to be more efficient with water. And we'll know more in January, but we are going to stay actively engaged with the process, and we believe in leading from the front. And we're going to continue to do that, especially when it comes to water use efficiency.

Spencer Joyce

Absolutely fantastic color there. Just to jump back maybe to the mechanics of the individual water budgets for a second, acknowledging that we're still some time away from potentially seeing that, if we were to see that would there also be potentially some sort of framework where the penalty rates or any penalty rates would still flow to you guys in some fashion to help keep down those accrued balances?

Thomas Smegal

Yes, I think that if you're talking – we could have an offline discussion about the mechanics of rate design. There's graduate level courses in rate design. So the concept is really one that's more on a tiered rate basis. If you think about – and there are utilities in California that have adopted this mechanism. Irvine Ranch Water District has had this adopted for many years where you identify kind of a base water use and anything about that gets charged the higher rate.

So in a sense, I think that accomplishes some of the same thing that we have had with the drought surcharges in the last year where you see a higher kind of penalty type rate that goes in if you're well above that water budget.

Martin Kropelnicki

What typically happens, Spencer, if the regulation comes out from the state, it'll then go to the commission and the commission will look at do we adopt it or don't we. And if they say we have to adopt it, then typically we would be allowed to work on the rate design at that point. And obviously, we think the drought rate design was outstanding. We're not profiting from the surcharge to customers. It goes to anyone's who saving water is not paying more, as long as they're coming under their coming under their budget. But anyone who's using more than their budget, they're paying the penalty surcharge and they're paying the WRAM balance down for everybody else is doing the right thing, which is conserving. So we think the rate design has worked very well. But we'll have to wait and see what the state comes out with and then from there we’ll go into the rate design once you know the blue print from the state. And we'll have to file an application with the commission to how we want to implement it.

Spencer Joyce

Okay, sounds good. That's all I had.

Thomas Smegal

Thanks Spence.

Martin Kropelnicki

Thanks Spence.

Operator

[Operator Instructions] We’ll next to Jonathan Reeder with Wells Fargo.

Jonathan Reeder

Good morning, gentlemen. I know you're limited as to what you can say on the settlement discussions, but unfortunately I kind of got pulled away when you were going through a little bit of that additional detail. So were you saying, I guess the settlement discussions were focused on kind of the CapEx projects and drilling down on justifying each individual one?

Martin Kropelnicki

Consistent with what we talked about before, over the last 18 months, Tom and I have worked with the company on strategically shifting away from kind of – I don't want to use the word minutia – that we've had in the rate cases before where we would be looking at $20,000 projects. So part of the process and what took so long in the last rate case was we were reviewing 3,000 jobs. Some of them were big and those should be reviewed and some of them were tiny. In fact there was one case I think where one of the interveners was trying to get down to $5,000 jobs, which you'd never get a rate case done if you operate at that level.

In this rate case, we took much more a programmatic approach, starting with the main replacement program, and you have a water supply program, you have a well rehabilitation program. And so we tried to focus the discussions more at the program level and it gives more a holistic view across the state and allows us to focus more on water supply strategy, main replacement strategy and long-term replacement rates of capital.

That’s what we went into going this rate case. The company spent an enormous amount of time preparing for this rate case. So we were very comfortable. With all the justifications that were submitted, but our goal was to push those discussions up at the program level and not get lost on the well rehab project in Bakersfield, for example.

And I think when I talk about people being professional and embracing this concept that the discussions have been going okay. I mean there's been no – they've been fruitful. They've been progressive. People have embraced the concept and that's about all we can say about it.

Jonathan Reeder

Okay, and then you said if a settlement is reached, you'll file an 8-K or just when the filing decision is received?

Thomas Smegal

So the procedure from here on out is if there's a settlement to be filed, we will 8-K that. That settlement, whether it's – so it'll go before the judge. The judge will have an opportunity to review the opportunity to review the settlement and decide whether it's in the public interest. Again, resuming there's a settlement, and then any issues that are not in a settlement have to be decided by the judge as well. So there's a full public airing of the judge's proposed decision before a decision is rendered by the commission.

So the three kind of steps are settlement filing, if there's a settlement to file, the judge's proposed decision, that it will happen in every case and then a final decision. And so we'll make it clear out there. Certainly, any of those milestones happens well let you know.

Jonathan Reeder

Okay, and presumably, I mean, if a settlement were going to be filed, I would think it'd have to be pretty soon if the case is going to stay on track for year-end. Otherwise, what would be the timing of the ALJ, I guess, proposed decision absent a settlement?

Thomas Smegal

So the schedule I believe, and I'd have to double check this, but I believe it gives the judge about 90 days to write a decision in any of these cases. Now, obviously, we've seen instances where a judge has taken much longer to do that and I've actually seen some instances where a judge was much quicker than that, especially in the presence of a settlement. I had a judge one time when I was VP of rates or manager of rates that did a case in about three weeks. So it can be done quickly. It can be done slowly. That depends on what's going on with the judge and also the review process of the commission.

Certainly, if there are complicated issues as there are in this case, just like any other multi-district rate case, the amount of issues that the judge has to deal with will in large part determine how quickly they can get it done. So obviously, you can look to one of our peer companies that had a fully litigated case and that took a year and a half for the judge to write a decision because there were 1,000 issues in the case.

So right now we think we’re on schedule. We're optimistic that the judge and the commissioner and all the parties want to get this done.

Jonathan Reeder

So is there a drop dead date on your end as to when you kind of stop settlement discussion and you say the issues that we've settled at this point is all the further we're going to get and then we're going at those 90 days for the judge to hopefully do the rest. Do you have an internal drop dead date?

Martin Kropelnicki

The only thing that's published as of now is that I believe there's going to be an all-party status conference in mid-August and maybe more will be known on the schedule at that point. But I don't have any more to give you there.

Jonathan Reeder

Okay. And then absent any sort of settlement, is there a date that the ALJ is supposed to render the proposed decision by?

Thomas Smegal

Again, in order to get a decision out by the end of the year, has to be out in public for at least 20 days. You can work backward from the last commission meeting of the year and go to a point some time in November where a proposed decision would have to be published to get it voted on by the end of the year. And I know what I was going to say. Just a reminder that in any of these cases, the end of the year would be fabulous because it would keep us from having to implement interim rates, but we do have the interim rate mechanism as do all the other water utilities in California.

So if does slip, we will go again to interim rates and get the rates when we get the rates. So the delay is not going to affect the company except on a short-term basis.

Martin Kropelnicki

Yes, I think what Jonathan was doing in terms of trying to back into it, if at a real high level September actually is a critical month for the rate case, right. If you take the steps are to have it resolved by the end of the year, a lot has to happen between now and September. And there's two paths. There's path A, which is a settlement path and that has one set of steps. And there's path B, which is a [indiscernible] litigated, which has another set of steps. So I think September is probably the month to watch, Jonathan.

Jonathan Reeder

Okay. That's very helpful, Marty. And then just the last question. So assuming the advice letter recovery that you get approval for that for the $4.2 million, that would be booked in net income such that it would just offset a good portion of the $5 million to $6 million of expenses expected to be incurred in 2016, correct?

Thomas Smegal

That is correct. Our revenue policy is that we'll book that when it's authorized for recovery.

Jonathan Reeder

Okay. Well, thanks for the update today gentlemen. Appreciate it.

Thomas Smegal

Thanks Jonathan.

Operator

And we have no other questions at this time.

Martin Kropelnicki

All right, well, again, thank you everyone for your interest in California Water Service Group. We'll look forward to talking with you on our third quarter call.

Thomas Smegal

Thanks everyone.

Operator

Thank you for calling.

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