Welcome to the California Water Service Group Fourth Quarter and Year-End 2015 Earnings Results Teleconference. Today's conference is being recorded. I would now like to turn the meeting over to Shannon Dean, Vice President, Corporate Communications. Please go ahead.

Thank you, Nova. Welcome everyone to the fourth quarter and year-end earnings results call for California Water Service Group. With me today is Martin Kropelnicki, our President and CEO, and Tom Smegal. A replay of today’s proceedings will be available beginning today, February 25, 2016 through April 25th, 2016 at 1-888-203-1112 or at 1-719-457-0820 with a replay pass code of 4899398. As a reminder before we begin today the company has developed a slide deck to accompany the earnings call this quarter. The slide deck was furnished with an 8K this morning and is also available at the company's website at www.calwatergroup.com/docks/earningsslidesfebruary2016.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 the call, the company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties and actual results could differ materially from the company’s current expectations. Because of this, the company strongly advises all current shareholders 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 2015 results. I will pass it over Tom.

Thanks, Shannon. Good morning everyone. Martin and I will be going through our presentation today a little bit differently than in the past and we will be walking through the slide deck that we distributed. So we'll refer to page numbers as we go through to follow along on where we are on the slides and I will be and just to summarize we'll talk about the financial highlights for the year. We'll talk about the drought of course. Our regulatory update whether California GRC, some slides that we've developed relating to our adopted rate base and return on equity and lastly to talk about what we expect some of the things we expect for 2016. So very briefly turning to slide 5, our financial results, our operating revenue was down just a little bit that has to do with the unbilled revenue that we will discuss in a moment. Our operations expense was relatively flat, that is lower purchase water cost offset by higher costs in other areas particularly pension costs. All of those things are subject to balancing account protection in California, our main service area. I will highlight that our net income is down 11.7 million or 20.7% and the EPS is down $0.25 of that same 20.7%. Turning to slide 6 for a little bit of explanation and just as a reminder we talked about this for a number of calls in a row here but our unbilled revenue has been a factor for us all year and just to give an update on the accounting, unbilled revenue is excluded from our revenue decoupling mechanisms. The WRAM and the MCBA track, the actual bills that are sent out to customers and so as a water utility that does billing on an everyday, every workday cycle. We…

Thanks, Tom. Good morning everyone I want to give everyone a update on what's happening in California with the drought. Starting off talking about kind of where we are and what it shaping up to be for '16 and then on slide 11 I'll talk about some of our results of our efforts for 2015 to save water. First and foremost California is entering potentially the 5th straight year of a record drought. So far we have had good -- our precipitation up and down the state but it has warmed up pretty quick from a water supply standpoint if you look at the major reservoirs where they are today versus where they were a year ago. They're mostly about the same, there hasn't been a big change in reservoir conditions year over year. The thing that has changed is the snow back and act as earlier this week as of 23rd February our snow pack for the state was 93% of normal. If you go back to the end of January, the snow pack was 124% normal and that will give you an idea how much it's warmed up over the last 30 days in the state. So it's good to see the snow pack is at 93% that’s certainly better than last year, but we like to see that snow pack a little higher and not have the warm weather that we've been having throughout the state. So the snow pack is good but really what's going to happen they'll do a snow pack measurement in April and that will determine kind of our next steps with the drought. Having said that the state has extended the drought emergency through October 31 as I mentioned the final allocations and targets will be set at the snowpack reading later…

Thanks, Marty. This is an item I talked earlier about the construction work in progress and it's exclusion from rate base. We did have comments in the last rate case cycle from the rate advocate actually suggesting that it would be better for us from their perspective to move to construction work in progress instead of accumulating interest in construction into project costs. So we did make that request in the rate case. We think it will be adopted based upon the earlier motivation of or [indiscernible] and just remember that there would have an immediate effect on our adopted rate base in the rate case we've asked for 80 million which represents a long term average of construction work in progress and 80 million would be added to rate base on an annual basis and that roughly translates to 4 million of net income or $0.08 on a per share basis if that is adopted. Turning to slide 14, just to give you a graphical representation of our CapEx and how well we did this last year. What you can see with the yellow bars is that we have increased over the last eight years from a capital expense of 76 million, 100 million moving up, 177 million. The blue bars for '16, '17 and '18 represents what we filed for in the general rate case the 205s that I showed there in 2016 that represents what we filed in California plus what we expect to spend in the other states. And we have given a range in our 10-K that we expect to spend between 180 million and 210 million in 2016. So we will forward already working on the CapEx for this year as you would expect and we look forward to that level of CapEx continuing…

Great. So let's talk about 2016 and what to expect. First and foremost as I mentioned earlier, continued drought conditions and mandatory restrictions in the State of California. We don't see that going away now until the end of October and this will be a standing kind of agenda item that will update everyone on the quarterly calls. Based on current conditions we expect drought expenses to reduce earnings per share between $0.05 and $0.10 a share and again those costs will even though they are expensed in the period they will be recorded in a drought memorandum account that's already been authorized and we apply or recovery of that at a later date. It's the third year of rate case cycle. So you we know limited rate relief, we had $5 million in escalation plus a miscellaneous advice letter filings. It's the greatest period of regulatory lag. One of the questions people ask me is well you have a year round balance in account which covers your revenue, you got your production costs balancing account you've got a health care balancing account, you've got a pension balance account, well what else is there well? Well there's labor and as Tom mentioned with the leaks we told our team across the state you fix leaks 24/7, you don't let water run. Any incremental costs like that are going to hit the labor line. You’ve chemicals, you have filters, as water conditions change throughout the state change. It can become more challenging from a water quality perspective. So those cost of treating water are not covered by any type of balancing account, those are forecasted into the rate case and any significant changes in water supply that we have to change treatment we have to absorb those cost and try to…

[Operator Instructions]. And we will take our first question from Spencer Joyce with Hilliard Lyons.

Just a couple of quick ones from me, first off I know you mentioned the drought memoranda account had grown to about 4.4 million and I was hoping you could refresh us on the time table for making a recovery filing. I guess correct me if I'm wrong, at some point we will work that even as somewhat of an addition to the general rate case. Is that correct?

Well it'll be incremental to the rate case so essentially we will file an advice letter later most like an advice letter later this spring and then once that's approved we will book that revenue. It used to be before we decoupled when we had memoranda accounts we would book the revenue as it was billed. So as that account balances worked out it was incorporated in rates and that's when we recognized the revenue. Now that we have decoupled the balance in accounts it will happen as once the commission completes it's prudency review and they authorize the collection of that memorandum account we will book all that revenue at once as it's collectible.

Okay. So if we file this spring would -- is it correct to assume that we would only be filing for amounts accrued to that point so say if we file May 1st, we may go kind of May 1 through December and not accrue that additional expense?

Yes. That's right there's going to be a delay for the 2016 expenses because the memorandum account deals with incremental expenses, there's a proving to the commission that these expenses are actually incremental that you know we backfill the positions that we’re assigned to this drought task and all that. So we're really looking at the 2015 costs and the small amount that was in 2014. Those costs are what we would file for in 2016. Any costs that are incurred in 2016 are likely to be filed in 2017.

So those costs that we file for in 2016 that would likely be a net income benefit at some point in 2017? Well it depends on the length of time of the commission review. This is an informal review not a application filing. So I would anticipate that the review would take 90 to 120 days. So we're talking about most likely what would that be? Probably a third quarter type event but it could be early or it could be later. I would hope that we would get recovery of that within 2016.

[Operator Instructions]. We will take our next question from Jonathan Reeder with Wells Fargo.

So I might have missed it in your remarks Marty, the 2% to 4% adjustment you said in the conservation goals kind of across the district that you expect this spring. Is that like allow more usage or would it just increase the level that they have to conserve? I miss which direction it's going?

It would allow for more usage. So essentially if you look at the comments of the State Board right now they're anticipating -- we had a 25% kind of total target for the state last year in 2015, they are talking about an approximate 20% target for '16 but again that's subject to the final snow pack reading here in April. So it'll allow customers to use a little bit more water essentially and it'll vary by region by region which is nice. The other thing I'll tell you from a rate design perspective that we're looking 70% to 80% of our customers are doing a great job and hitting their targets and we have that 20% that are going over their numbers. We’re looking at trying to incorporate in our rate design to call the dead band, you know that’s not a technical rate making term. But for example if Tom has a water budget of 10 units and he uses 11, on that 11th unit Tom will pay two times the highest rate and if you assume Tom hit his target all year [indiscernible] pretty mad when he gets that one unit at the super high rate. So a dead band essentially would put a little bit of a buffer in there before the surcharges kick in and again we have been very happy with our customer responses across the Board and we serve a very diverse slice of California from low income areas to very, very high income areas and overall just 70% to 80% of our customers have just done a fantastic job at hitting those targets.

Okay. So if you implement that dead band and that might I guess impact how quickly you I guess recover -- under recovered WRAM balance, is that right how you made some headway there because of the surcharges?

That would reduce the surcharges, remember also that Marty mentioned the sales reconciliation mechanism. So the extent that we had a 28% drop in our sales in '15. We've adjusted our sales targets within the rate design by 10% to 15% across the Board. So they were actually collecting more cash throughout the year in base rates. So that is going to have the opposite effect and hopefully the combination that you won't change the pace of recovery of the WRAM balance.

I think the other thing too, Jonathan again the surcharges are being paid by 20% to 25% of our customers who go well above their targets, their authorized water budget. So that dead band will basically give the customers who are been doing the right thing a little bit of breathing room. But the ones who really you know basically where we have collected the majority of the surcharges, I think they're going to continue to go away over their budgets and those are people who tend to be less price sensitive and they just continue to write the check. So it'll be interesting to see a year from now how that plays out.

Okay. So that's good there and then I guess the other part the you mentioned the higher usage. If it does move to 20% that should hopefully help the unbilled revenue issue in '16 where that's actually may be a tailwind turnings, is that accurate?

Again it's very hard to say because it's so dependent upon really the usage in December and so month the month it may have an impact really comes down for the annual basis it really comes down to December of '15 versus December of '16. And remember we're incorporating - we’re as good as we are based upon the surcharges because we're incorporating the unbilled surcharges as well, the drought surcharges into that number. If we get to October and that drops off we could still have a problem of unbilled in '16 and expected to normalize later.

Yes I think Jonathan, a lot of times I think people get -- the unbilled can be complicated but it's just a revenue accrual at the end of the quarter. So if consumption is going down your revenue accrual is going to go down, if consumption starts going up at the end of the accounting period your revenue accrual is going to go up. So it'll follow that and then it's just subject to you know weather conditions and where we have seen more of the violent swings in the unbilled balance or the revenue accruals is been where we've had significant shifts in weather. So as Tom mentioned a warm dry December it was a $6 million pick up and now this year we had a really a wet December, a lot of rain in December and it ram back the other way.

Unfortunately unbilled not going through WRAM and just been kind of a timing issue, it creates a noises for the quarter, for the year and for the investors that maybe aren't paying as close of attention.

Right. And really that's kind of why we're pointing in those last few slides of the deck to sort of what's the core earnings potential of the company just to get focused on that. It is noise related to that unbilled issue and it does float up and down and try to kind of pass through that and say what should we really expect this company to earn.

Right. So turning to the rate base forecast. What you showed does that included the 80 million pick up from the [indiscernible] or would that be incremental to your forecast?

That does include that. The 1.3 billion - 4 billion estimate for '17 is California GRC as filed which includes [indiscernible].

Okay. And then why wasn't there much of an increment to rate base in 2016 given you know the high level of CapEx in '15?

Remember this is the authorized, this is not the actual rate base that we went in and calculated what's there on the balance sheet as far as the rate base goes. This is what ended up being additional authorized rate base. Two things drive that, one is that if you look at our CapEx, the 177 million about 60 million of that, 65 million of that is still in SEWIP and so it's not earning a regulated return. There was an increase to the SEWIP balance from '14 to '15. So that's part of it. There's also timing issues associated with the rate case, they're looking at an weighted average plant and a lot of our CapEx was at the end of the year so we’re looking at 177 million through the end of the year. A lot of it is necessarily going to get incorporated into '15 whereas it would get incorporated for the following year.

Okay. And so the projections you're showing are they average rate base or are they year end balances?

Those are average rate base, so that is the weighted average rate base that we've applied for with the commission for '17 and '18 plus what we in the other states.

Okay. So that's the total company rate base not just California?

That's right. That's the total company rate, yes.

And then I guess last question and then I will let some other people get in there but the higher level of CapEx that you’re doing so does require that advice letter recovery for the portion that was above the authorized amount in the last GRC and I guess there is like a little bit of a lag involved there, is that how to kind of think about those higher amounts?

Yes. I think there's two things, remember in the GRC process. The last year GRC was filed in mid-2012 and so to forecast out what we're going to spend and what we're authorized to spend in 2015 is a little bit of a stretch from that vantage point from the vantage point of when you initially file. So part of the CapEx for '15 is anticipating the recovery in the 2017 test year. So we do have potentially a lag between what the actual rate base and what's the adopted rate base for '16. That kind of what you're talking about there. Some of these projects are advice letter projects and we will be filing for recovery of some of the advice letter projects throughout the year. The difficulty in predicting those into our earnings for '16 is really the timing of the commission's authorization for recovery as we go through the year as you get later, later in the year you get less and less of a recovery within the year. So we do have a number of advice letter capital projects that we expect to file but that the amount of revenue that we can expect from that is fairly limited based upon when we think we're able to file that during the year.

So last thing to understand, you were talking about kind of the headwinds against achieving that maximum regulate earnings should we also think I guess [indiscernible] on SEWIP is I guess offsetting a portion of that?

Well I mean those are it's really timing differences, so when we say the AFUDC on the SEWIP what we’re talking about is including those costs and we have for the last 15 years included those costs in our rate base figures as the products are completed and recognized in rate base and so that adds whatever it adds 2% to 5% of the project cost based upon how much interest happened during the period that the project was under construction. So what you'll see is an initial bump based on the SEWIP and the trend will be that for each project going forward there will be no capitalized interest included in the project cost of the trajectory of CapEx would decline somewhat over what it would have been including interest during construction.

Right, but until that potential change like for 2016 when we look at what you said the maximum allowable regulated earnings I guess why you're still accruing AFUDC that potentially offset some of the cost recovery and regulatory lag those kind of headwinds.

It does but you don’t see it right away, I think that’s what I'm getting at. That gets capitalized and incorporated into the plant that's built in 2016.

[Operator Instructions]. It appears we have no further questions in the queue at this time.

Okay. Well thanks everybody for joining us and we look forward to discussing our first quarter results at the end of April. Thanks very much.

Thanks everyone.

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