Good morning, ladies and gentlemen. Welcome to the California Water Service Group’s Second Quarter 2017 Earnings Results Call. This call is being recorded. I will now hand the call over to David Healey, Vice President and Corporate Controller. Please go ahead, sir.

Thank you, Tracy. Welcome everyone to the 2017 second quarter earnings results call for California Water Service Group. With me today is, Martin Kropelnicki, our President and CEO and Tom Smegal, our Vice President, Chief Financial Officer, and Treasurer. Replay dialing information for this call can be found in our second quarter earnings release, which was issued earlier today. The replay will be available until September 27, 2017. 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 available at the Company's Web site at www.calwatergroup.com/docs/2017q2slides.pdf. Before looking at this quarter results, we’d like to take a few minutes to cover forward-looking statements. During the course of the call, the Company may make certain forward-looking statements because these statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from the Company's current expectations. Because of this, the Company strongly advises all current shareholders, as well as interested parties, to carefully read and understand the Company's disclosures on risks and uncertainties found in our Form 10-K, Form 10-Q and other reports filed from time-to-time with the Securities and Exchange Commission. Now, let's look at the second quarter 2017 results. I’m going to pass it over to Tom to begin.

Good morning, everyone and thank you, Dave. Marty and I are going to go through the earnings slides that Dave mentioned and I will try to refer to page numbers when I'm talking about a specific slide and I’ll try to make it general enough if you don’t have the slides with you. But hopefully you’ll be able to get to the Web site and take a look at the slides as we go through. Our operating revenue for the second quarter was $171.1 million, and that was up $18.7 million from the second quarter of 2016. That’s primarily due to the general rate case that was adopted in California at the end of last year, as well as some purchase water offsets that we’ve achieved through the California regulatory process. Our operating expenses are $145.9 million, up $12 million from the similar quarter last year. That is largely due to depreciation and purchase water cost increases. And if you go down to the bottom of slide five our net income is $18.5 million that is up $7 million from our net income in the second quarter 2016. Earnings per share of $0.39 versus $0.24 in the second quarter of 2016, so very good quarterly results for us and we’ll talk a little bit more detail about that. On a year-to-date basis, I won’t go through that slide six in too much detail. But I will point out that our earnings per share on a year-to-date basis are $0.41 versus $0.22 on a year-to-date basis for 2016. Looking to slide seven, the earnings increase of $7 million, as I mentioned, is largely attributable to increased revenue from the California general rate case that was established in December of 2016. We had for the quarter an unbilled revenue accrual increase of…

Great. Thanks Tom. Good morning, everyone. I want to start off by giving everyone a cost of capital update. As you may recall, we filed our cost of capital application with the California Public Utilities Commission. And so this is for the California Utility on April 2, 2017. We did request 10.75 ROE with no change to our equity structure. The Company is currently at 9.43 ROE with 53.4% equity. The application that was filed at the beginning of the process, and we are waiting to get the rate payer advocate testimony sometime in August, and we have hearing schedule beginning in September. The Commission has published and adopted schedule that should -- that has indicated a decision should be given out by the end of 2017 with any changes to the cost of capital effective January 1, 2018. On side note on July 13th, the commission did adopt the proposed settlement with the electric and gas companies as adopted. We think that’s significant and that it shows the commissions continued willingness to work towards an agreed settlement with all parties, and the electric and gas cost of capital settlement has been filed and approved. Going on to page 13, a couple of other commission notes that I think are important. First and foremost, we’re in that process are preparing for our escalation or what we call our step increase for 2018. There is up to $17.2 million that will be requested in the fourth quarter to go into effect after January 1, 2018. These increases, as some of you may recall, it’s a little different in the water industry than the electric and gas industry and they are subject to an earnings test, which reviews our capital investment performance, our ability to hit our capital targets, increases or decreases…

Thanks, Marty. So as you may have heard, there was a small drought in California over the last four or five years, which we’ve been dealing with and talking about on these calls for some-time. The drought has been over. The official declaration of the drought has been over for some time. And we’re now dealing with few of the after effects of the drought. And so I am going to talk about two factors and that’s the water sales and then the recovery of the drought expenses. As you will recall, Cal Water has been decoupled since 2008 and that means that the changes in sales do not affect the income statement that flow through on the balance sheet, creating a receivable -- we’re getting a little vibration out my window there. Creating a receivable and that is our regulatory process to recover that receivable. As we have seen in 2017 with the drought being over, water sales have come back very slightly and have not come back to the adopted quantities. So our sales have increased 3.5% this year as compared to the same period of 2016 where we were in the drought. However, we’re still about 20% below the adopted quantities for sales in our districts. And as a result of that, the WRAM receivable balance has grown from about $37 million at the end of 2016 to almost $55 million at the end of the second quarter. And we do expect that if the water sales continue to lag the adopted that we will see an increased WRAM balance as we go through the end of the year. I do want to point out that there are several regulatory mechanisms that are going to kick-in in 2018 that will start to show for us a reduction…

Thanks, Tom. I just want to give everyone a quick update on where we are with our capital program for the year. Company funded and developer funded capital expenditures, our investments total to $108.7 million through the end of June. You may recall, we got off to a slow start to the year given all the rain that we had during the first and early on in the second quarter. But we've regained some ground and we believe we’re on target to complete $200 million to $220 million of capital for 2017. In addition, the planning for the next rate case has been well underway. And once we file the GRC next year, we’ll share everyone what the capital plans are for 2019 to 2021, but that process has been going very, very smoothly. We’re well into the justification phase of the capital program for the next rate case and staring to work on our prepared testimony and filing for their rate case that will get filed in 2018. If you look at page 19, we've updated the chart for the capital investments so you that under 2017, which shows the $108.7 million out of the $210 million average target that we’re driving towards. And on page 20 is our rate based estimates and those haven’t really changed. Prior to wrapping things up and open it up for Q&A, I want to deviate from what we would normally do on a call and take a moment to pay tribute to someone who has been very important to our Company who passed away on June 9th. Bob Foley or Robert W. Foley served as our Chairman of the Board for 16 years and served as a Director for the Company for a total of 35 years. Bob passed away in June…

Thank you. [Operator Instructions] We'll go first to Tyler Frank with Robert Baird.

Just wanted to touch on the drought recovery real quickly. When would you expect decisions that we made and for that the flow through the P&L? And then given that there was a delta, I think you guys asked for 4.4 million last time and only recover 2.9 million. Should we expect similar amount to be recovered this time with your request there? And then I have a follow-up.

Sure, Tyler. So this is an advice letter process what's called a Tier 3 advice letter in the California commission prevalence, which means that the commission has to adopt a resolution. So it’s a decision per se, usually it's as little as a 90-day process, but it can take longer depending on the staffing of the commissions water division. It's our intention to file as soon as possible. Obviously, there is a few more expenses that have been trickling in and we're just trying to wrap up the accounting and get the accounting clear for the commission staff to review. As far as the percentage of recovery, I think that is an open question. We're reporting the cost of the drought that have to do with anybody who does any work on drought activities. And what the commission found in the 2016 filing was that, some of that was probably already covered in rates. And what they are really looking to reimburse this for, are the incremental cost. So, the additional cost of hiring new person or the new mileage or equipment or outside expenses that have to do with the drop. People do a better job this time then we did in the 2016 filling because we now know what they are looking for but there is obviously no guarantee that we're going to get the full amount back. And so I can't offer firm guidance on that but we’re trying to maximize that as much as possible.

And then looking forward over the next 18 months or so, looks you guys what have about little over 300 million and CapEx spending. How should we think about the balance sheet and your ability to be able to fund that?

I'm sure. So, we so maintain a revolving credit line that have the operating company level has a 300 million cap and there is also a credit line for the holding company as well and that’s a 150 million credit line there. We’re currently I believe a 140 million out on the Cal water revolver and the limitations there are both the maximum the 300 million and also the timing with the California commission. So we’re required every two years to pay that down for regulatory purposes. So it can be considered short-term debt. And we relapsed off the line in September, October of 2016. So, presuming that we don’t get to the maximum amount on that line that the 300 million, we would have to do the financing before October of 2018. So that’s the consideration. As far as the long-term financing goes we intent to stick to the capital ratio that’s been adopted for us if the California commission and the essentially similar ratios are obviously present in the other states, but California dominate the conversation there. So our long-term financing will continue to be a combination of debt and equity that keeps us in that range as close as possible.

And we go next to Spencer Joyce with Hilliard Lyons.

A couple of really housekeeping questions for me this morning. Tom, I saw in the release looking for full year taxes closure to 37 and kind of the 37% to 39% range that we had previously. Is there anything that we can read through perhaps into 2018? Or should we perhaps stay with kind of that midpoint of 38% for the out year?

So what we see, Spencer, driving that percentage number is primarily the amount of deduction that we have for what’s called the repairs deduction and that has to do with small replacements of mains within our linear asset structure, so within our district -- the main replacement program. The way that our rate case authorization per capital has worked, the bulk of those were in 2016 and kind of a normal amount in 2017. And we see probably a little bit less on the main replacement side in 2018. So that would tend to give you a slight upward pressure. Again these are not major differences, but they can move the needle a percent or two. So I guess I would say for 2018 the rate is not as likely to be 37 as is to be 39, so…

Okay, that was helpful and very clear. Also kind of minutiae here, but Tom can you talk about any special expenses we saw from the fires in Kern County? Is there anything we should back out or add back kind of to the current year to get kind of a fair run rate?

That’s a really good point and we didn’t mention that it didn’t to rise to a level of some of these other factors. But we did actually receive an insurance settlement for our business interruption insurance that recovered about 6,000 of the expense that had been reported in the 2016 period. So we did have a blip in expenses in the second half, I believe that was in the third quarter of 2016, and that 6,000 in reflected in the results for the first half of 2017. So a little bit different timing there I guess you could say that. The expense was high in the third quarter and that expense hopefully will not be there in the third quarter of 2017, but we did see that benefit come through in the first half of this year.

Okay, got you. And the insurance settlement specifically on the income statement, what was that in offset to, was it in other line or was it up in kind of either the maintenance or the G&A?

That’s in A&G expense.

[Operator Instructions] We will go next to Jonathan Reeder with Wells Fargo.

Good morning Marty and Tom. Very sorry hear about the loss of Bob. Those are some very kind and accurate word to describe the man.

Yes, thank you.

Yes, so a couple of questions on my end. You indicate 23 million of drought expense in 2017. Is that the expense that we are going to see before you indicated maybe you are expecting 0.5 million to 1.5 million?

Yes I think we’d really wrap it up. I was talking to our conservation director yesterday and they are obviously getting ready to make that filing with the commission to recover the drought expenses. So, he does think those charges are over in all significant ways. Now there could be a charge here and there that we capture but I don’t think there is going to be much more.

Okay, great. And then sort of expenses like A&G other operations beginning I see they are down year-over-year on a year-to-date basis. Do you expect will be the case for the full year?

So just taking maintenance for example obviously we did direct our staff at the initiation of the drought to go out and fixed every week any time and make sure that the customers knew that we won't be wasting water and we back up on that somewhat with a new maintenance rule probably around the first of this year. So we could continue this year decline in maintenance cost obviously the bump-up in maintenance, if you go back historically, was over the last year and year and a half and then probably was related to the drought. But with that said things do break and you can have major maintenance that occurs regardless of whether it's a drought or not, so the general trend is probably down on the maintenance side line, but there is no guarantee that it's going to stay low for the rest of the year. As part of the other things they are tracking pretty well to our budget and I don’t know that I can point you one way or the other as far as the second half of the year as far as A&G and other O&M expenses.

Okay, but I guess they are online with kind of your budget but you are expecting at least kind of for the full-year?

Okay. And one of the things, Johnson I think, Tom's team has done really well, as we've kind of -- we've retooled over the last two years kind of the whole budget management on both the expense and the capital side. So I think were fairly comfortable with the operating environment and everyone's ability to kind of manage your budgets, both on getting the capital on the ground, but also on the A&G side.

Okay. Now look like, it's working so good job there. And then kind of last question I have, I'm not sure if you've had any dialogue with any of the key interveners on the cost of capital. But obviously, the electric settlement approval process at -party meeting provided a glimpse into the various parties' thought. What do you anticipate kind of mean the hot button issues to the waters and in that regard do you think the CCM will remain will place and or kind of be modified in some regard?

So, given that the commission has established a three year cycle, I think it's reasonable to expect that there will be an adjustment mechanism that has to occur and whether there is thoughts on whether that should be modified, that's always been a discussion point in the cost of capital foreseeing that we've sponsored whether there is a different caller on it or a different way of indexing and that sort of thing. So let's wait and see, I think we are going to get the DRA report, ORA report, pretty quick here in next couple of weeks, is my understanding. So I would rather not guess as to what their issues are going to be and be surprised and like everybody else when I read that report.

Yes, so far we only got one intervening party and it's a local city and they were involved in the rate case as well I won't say they were very active intervening parties. So I'm not aware if anyone else intervening in the process. I also think that the water cost of capital proceeding is somewhat different then the electric folks in terms of getting the big interveners involved. And I suppose they can jump on us at anytime. But we're pretty small potatoes compared to the electric and gas companies, and so far as it looks it's just going to be a normal process. It was nice to see the schedule get posted that shows this thing being completed by the end of the year. And we are going to charge full steam ahead and hopefully get it done before January 1st.

Okay, when you said one, only one intervener, I mean, is that besides ORA in turn or it's…

Not in our case.

Just ORA one city.

That doesn't mean that turn couldn't decide today we get into the case, but they're not in the case as of now.

Yes, I mean so, when you kind of went through the white paper the commission put out on kind of cost of capital stuff like that. I mean nothing that seemed I guess overly concerning in your opinion or I guess vastly different than the issues that should be begin in this process on a regular basis?

No, I mean it's a pretty theoretic. It's an odd mix because you've already a lot of theory around cost of capital and then ultimately it comes down to a decision of the commission and the State Law Judge that has to take into account lots of different interpretations of the facts that relate to those theories. None of which are always headed as been the right answer. And so, what we've found over the years is obviously those things are influenced by the cost of capital, that's been adopted for the utilities, the general mood of the commission, which expert essentially are you going to believe in which way if -- which of the models as you run through them.

So, I mean you take a settlement is still -- with ROE certainly a possibility or is kind of predestined to be fully litigated given the gap between the last proceeding?

So, what I would tell you is based on my experience as the Regulatory VP at Cal Water. I was always interested in talking to ORA and DRA, and all the interveners in an effort to make a settlement. I think that we would continue that policy. I'm sure Paul is not here with us today, but Paul would tell you that that’s his first instinct as well, obviously there's times when you can't reach a settlement and this is a multi-party proceeding. So there's a number of different factors at play, it's not just Cal Water making a settlement, but you'd probably most likely have to get everybody in the room to make a settlement. So with that said, we have settled this case before the last case six years ago was settled among the party. So, we're constructively optimistic that we could achieve a settlement but again we haven't seen what ORA testimony is.

I would add too Jonathan. I think we were generally pleased with the settlement that the electric and gas company has got, I mean they took a -- if you look at their average hair cut on ROEs and all their ROEs were in the mid-10s, it was 11 basis points on average and I'm not saying that's indicator of where ours is going to go, but I think the fact that they could negotiate a settlement and they all ended up slightly north of 10% given the interest rate environment we've been in now for the last seven years I think is a good indication that that we probably have a chance at settlement.

And we'll go next to Tim Winter with Gabelli.

I've got two quick regulatory questions first just a follow-up on Jonathan. Is it a certainty that this is going to be a three-year cost of capital making this?

Tim, I'd say that because that's in the rate care plan for water utilities, but that's the way this works.

I haven't heard anything different than that. There hasn't been a move to amend the rate case plan.

Okay so that’s a safe assumption.

For now, I mean obviously I guess the Ratepayer Advocate could put something in there testimony that they want to revisit this, but to be frank it's very expensive process for everybody evolved. These financial experts that both sides higher to weigh in on what’s the reasonable cost to capital are, it's an expense to the commission as well as an expense to the Company which you get passed on right there. So I think the its really a matter of efficiency of regulation that we don’t see this proceeding going on every year and so I would think that they would stick to it three year schedule and that’s something really unusual is happening.

And then I was hoping you could just quickly walk through the regulatory issues in the Travis Air Force Base.

First of all I believe that the first in California where anyone file for a military base to be under PUC jurisdiction, so most of the models that are out there is more like contract then contract negotiations so many years take place between the department of defense or wanted their sub-agencies and the utility doing the operations. So this is a bit of a deviation in terms of the business model, we think if the business model that’s much more like lined or core competency it gets the DOD and the military out of rate design discussions and allows the commission to get over sight and I think we would. We would argue the commission in California joined as a very, very good job with oversight of water utilities. So application is been filed we're going through a process of discussion now and ultimately the commission will have to approve adding that as a service territory. I don’t fore see any big, enough big hurdles with that, obviously if its added the service territory there is a fee that has be paid to have the oversight and regulations, so that the revenue if you will of the public utilities commission. In terms of timing Tom, on an application right that what would be normal.

Tim what I was going to add to that is I know about the week before we did a tour of the travel system with ORA folks. I don’t believe we're falling along in that process to know what their issues might be or what the timing might be. On an optimistic, on one end of it if you were truly optimistic and they didn’t have much of an issue with some corporate and they could be relatively quick application process and incentive they don’t end up protesting and raising a lot of issues. And so we will be hopeful for that, if you raise issues and I get there is a variety of issues they could raise if they wanted to. Then it could be an extended discussion.

And there are no other questions in the queue.

Alright, well, thank you all for listening in and your good questions are second quarter earnings call. We look forward to having good rest at the summer and talking to you all in October. So thanks very much.

Have a good day everyone. Thanks.