California Water Service Group (CWT) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2009 earnings results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Marty Kropelnicki, Vice President and CFO of California Water Service Group. Sir, you may begin.

Thanks Devon, good morning everybody. Welcome to the third quarter conference call for California Water Service Group. With me here today is Pete Nelson, President and CEO of the Company. I'd like to remind everyone that the recording of today's call will be available from October 29 through December 28. The dial in number for the replay is 1-888-266-2081, ID 1399873.

Yesterday at the close of market, we released earnings. I'd like to remind everyone that the earnings release is also available at www.calwatergroup.com.

Before going through the results for the quarter, I'd like to take a few minutes to talk about forward-looking statements, in particular, during the course of this conference call, the Company may make certain forward-looking statements. Because these statements deal with risks and uncertainty, they are subject to change materially from the Company's current expectations. Because of this, the Company strongly advises all current shareholders as well as all interested parties to carefully read and understand the Company's disclosures on risk and uncertainty found in our Form 10-K, 10-Q, and other reports filed from time to time with the Securities and Exchange Commission.

Now, let's take a look at the results for the quarter. Revenue for the quarter was $139 million, up $7.5 million or 6%. Rate increases added approximately $12.5 million, new customers added revenue of about $3.3 million, and usage and other decreased about $8.3 million.

Operating expenses for the quarter were $115 million, up $10 million or 9.7% from 2008. Purchase water was $35.3 million, up $1.5 million or 4.3%. Purchase power was $10.1 million, up approximately $800,000 or 8.7%, and pump taxes was $3.5 million, up $200,000 or 5.2%. All three of these components are now covered by the modified cost balance account.

A&G was $19 million, up $4 million or 27% for the quarter, primarily driven by other cost to benefit programs, legal outside services, and miscellaneous. Other operations was $14.6 million, an increase of $1.7 million or 13%. Primary drivers in this -- for this variance were chemicals, filters, conservation, and customer accounts.

Maintenance for the quarter was $4.4 million, up $600,000 from last year. And depreciation and amortization increased $1 million, to $10.3 million for the quarter. Taxes other than income increased 11% to $4.4 million, primarily due to increases in property taxes, franchise fees that were paid within the quarter. Net income for the quarter was $19.6 million or $0.94 a share.

For the 12 month ended September 30, 2009, net income was $41.4 million and diluted earnings per share were $1.99 compared to net income of $40.5 million and diluted earnings per share of $1.94 for the same period last year. Revenue for the trailing 12 months was $443 million compared to $396 million for the same period.

Going into the quarter or coming out of the quarter depending how you look at it, we had three variances that are popping up from an operating standpoint. Our legal expenses are slightly higher this year of about $1.8 million year-to-date. Outside services are approximately $1.2 million higher, that would include rate case support, a couple consulting projects, et cetera that the Company has underway. And again, like in other operations, the customer accounts are about $1.2 million over where they were last year. Primary drivers there are chemicals, and filters, water quality, and miscellaneous T&D.

And with that, I will turn it over Pete to talk about what's happening with the Company, and then I'll come back and talk about the balance sheet after you Pete.

Okay, thanks Marty, and welcome everyone to the call. I've got two rate issues to talk about that happened in the third quarter. First, we officially filed our 2009 general rate case on July 2, so that's now in process. And then secondly, I'm going to return to last quarter's call where I was asked a question about a cost of capital, and there's new information in that regard.

So first, the '09 general rate case. I did talk about this last time, so I can be pretty brief here. We call this the 2009 general rate case because it's filed in July of 2009, and then it goes through an 18 month process for rates that are effective January 2011. This is significant for us for a couple reasons. One, is it's a large case, and I'll talk about the numbers, but also, this is the first time we're filing the entire California company in one rate case. So we've got all 24 rate-making districts, plus all the corporate costs included here.

This for the first time aligns everything in California under the same three year cycle. So our request is for $71 million in added annual revenue for 2011, and then an additional $25 million in 2012, and an additional $25 million in 2013. Those second and third years are basically inflation increases plus some forward-looking capital that will be adopted we believe in this rate case.

There's a couple new issues in this rate case that I think are worthy of noting. One is for certain corporate costs, in our case, pension and healthcare, that are very difficult to -- or impossible to predict with any accuracy. We're asking for a balancing account treatment, and what that means is we're asking to keep track of our costs, actual costs, for pension and healthcare, so we can fully recover those in the future assuming of course that they are reasonable and prudently incurred. There are similar mechanisms for pension and healthcare for other utilities in California, but where this will go in our rate case is anybody's guess.

The second new issue in this rate case is conservation investments. $16 million of the $71 million first year of new revenue is for conservation, and we're asking to what we call rate base certain elements of the conservation program so we have the ability to earn on those investments similar to what we would do for a new supply project. We think this makes sense for the Company and the rate payer, it's good public policy, and we'll just see where that issue takes us in the rate case.

So we're now four months into the case, four months into an 18 month process. What's happening now is we're holding what we call customer rate workshops in all of our California districts. These look kind of like town hall meetings where we invite all customers from the particular area to come in and we walk them through what we're asking for and where the money goes and how the rates impact and benefit them. And most of the rate increases are for infrastructure.

These workshops are going as they are planned. Their attendance strangely enough is down quite a bit from what we experienced when we did this last time a couple years ago. But anyway, it's -- things are going as expected and the process is on schedule for the '09 general rate case.

The second rate item is a question that was asked last time and I can't remember who asked it, but the question was around cost of capital. And the question was basically, if there's some mechanism to adjust or adopt a return on equity if the financial markets experience some kind of wild swing or dislocations. I've got to take you back one step. First you may recall that we have a separate cost of capital proceeding that's outside of general rate cases that gave us a 10.2% adoptive return on equity for 2009, 2010, and 2011. The next cost of capital filing is May of 2011 for a new cost of capital January 2012.

So the answer to that question last time was no. There is no mechanism. Since then there has been a mechanism adopted by the commission. In fact, it was adopted August 3. It hasn't received much attention I think because it's a pretty wide tolerance span before any ROEs are going to change, and let me explain it here. It's a little technical, but I think you'll get the idea that we're talking about major swings in interest rates before this thing kicks in. I think if you understand that concept, you'll be in a good shape.

So what this is called, it's called a water cost of capital mechanism, which is not too inventive of a name, the WCCM, and there's -- it's not a good acronym. In fact, it's not like WRAM or [DISK] and that maybe why it hasn't gotten much attention. It's really not much of an acronym. This is based on changes in the Moody's utility bond rates, and in our case, it's the average interest rate on Moody's AA utility bonds. The benchmark period is October 1 to September 30 each year, it's a one year benchmark, and here's how it works.

If that Moody's AA utility bond average interest rate changes 100 basis points or more in that period October 1 to September 30, then the ROE adopted adjusts by 0.5 of that change and it's effective the first of the next year. So let me maybe give you an example that may help.

Let's say the Moody's rate goes up 100 basis points between October 1 this year and September 30 next year, 2010. That means our adopted ROE would go up by one half of that or 50 basis points from 10.2 to 10.7 effective January 1, 2011. If the rate goes down 100 basis points or more, you've got the same calculation just with a negative number.

So it's a pretty wide band. This year, the 2008 to 2009 period did not qualify for any change in ROE, but it does have -- there is now an adjustment mechanism in case we experience, and the other California utilities experience, some upheaval in the financial markets.

So those are the two rate issues. I'll turn this back to Marty for the wrap up of the financials, and we'll take questions.

Thanks Pete. In terms of looking at the balance sheet for the quarter, a couple of the highlights. Net utility plant was $1.175 billion, up 7.5% or $82 million over the same period last year. Year-to-date through September 30, the Company has spent $83 million on company funded CapEx, capital expenditures and projects for the year-to-date. Our goal is to be between $100 and $120 million for the year and I think we're on track to be in that range.

Work-in-progress, or construction work-in-progress at the end of the quarter had a balance of $126 million. That's up about 12.5% or $14 million from a year ago. Cash flow from operations, the first line of the cash flow statement was approximately $77.2 million, up 30% or $18 million over the same period last year.

One of the things you'll notice for the quarter is that our effective tax rate has gone up. We filed our tax returns in September, and this year we were able to claim about $18 million of new timing differences. There was bonus depreciation that we were able claim as well as with the WRAM MCBA. Well, we have revenue that's uncollected and so that gets backed out. So when we did our tax true up, the effective interest rate went up a little bit and that 40.5 is probably the right number to use for forecasting for the next 12 months.

In addition for the quarter, and we announced this earlier this week, is we did close on a $300 million syndicated line of credit. That line of credit was led by B of A as the lead bank, and then CoBank and Bank of China were the co-syndicate leads. There are approximately 16 banks in this syndicate. That's an unsecured line of credit that's allowed -- that we use to finance our capital projects and operations in the short-term, and then we convert that into long-term debt and equity. There are two covenants that are associated with that. There's a 66 and two-thirds capitalization ratio, as well as an interest coverage ratio of no less than 3X and we're currently at 7X. The details of the credit agreement were filed with the 8-K earlier this week, and I would encourage everyone to look at that if they have any questions about our line of credit.

With that, Devon, why don't we open up for questions, please?

Yes, sir. Ladies and gentlemen, (Operator Instructions). One moment for our first question. Excuse if I pronounce this wrong. Our first question comes from Garik Shmois of Longbow Research.

Hi, thanks for taking my questions today. The first one is, if you could talk about the purchase of water cost inflation that you saw in the quarter and the trends that you're seeing both relative to your expectations and also relative to how much are currently embedded in your rates versus the general rate case that you filed?

Sure, let's start off at 50,000 feet, and prior to the WRAM, which was the decoupling mechanism, purchase water costs if they were higher than what was in adopted rates, the shareholders ate that cost, and if they lower, then there was a benefit. With the modified cost balancing account in the WRAM now in place, the swings in the production costs are no longer a factor for the Company, because they're covered by the modified cost balancing account.

The trend that we saw for the quarter was that it was up approximately 4.3%, and that number's going to bounce around. I mean, basically you have wholesale price indexes that -- price cost increases that get passed through to us from water wholesalers as well as we operate approximately 890 wells. If a well goes offline, well, we'll use more purchase water. When we bring it up, back up online, we'll use less purchase water.

So it'll bounce around a little bit, but at the end of the day, that is now covered by the modified cost balancing account, and the volatility associated with the cost swings has pretty much been removed.

Okay, thanks for that. And just you mentioned your CapEx, you reiterated your forecast for the year, could you update us if you've thought about CapEx spending for 2010?

Sure, we're currently doing our budget planning for 2010. I'll have more details on that when we have our earnings conference call at the end of February, but I'll reiterate what we've told people. Here in the short-term, we don't see CapEx spending going down anytime soon. We operate on a fairly broad geographical footprint, and the maintenance associated -- the capital maintenance associated with that system is pretty intensive, so we anticipate that we'll see some increase in CapEx spending next year.

Okay, and just lastly, on pension expense. Can you remind us what your forecast is for this year?

Our forecast this year on pension expense is approximately $19 million to $21 million. And as Pete mentioned, pension expense is a little bit difficult to forecast especially when you have a lot of market volatility. You have to do evaluation at the beginning of the year that you use to set your quarterly expense numbers and then you true it up at the end of the year.

In the '07 general rate case when the Company adopted FAS 158, which went from the accumulated benefit obligation to the projected benefit obligation, we were able to include all these costs in our '07 general rate case and that the number that we have in rates is enough to cover our expense for this year. So we don't anticipate seeing a big variance on our pension expense this year.

Okay, great. Thank you very much.

You're welcome.

Thank you. Ladies and gentlemen, (Operator Instructions). Our next question comes from Jim Lykins of Hilliard Lyons.

Good morning everybody.

Good morning, Jim.

Hi, Jim.

Another question about pensions. First of all, for the admin and general line, can you breakout what was pension and what was legal?

Jim, I don't have a detailed operating statement in front of me. I would have to pull that and get back to you on that. The target though for pension is like I said, between $19 million and $21 million a year, so call it $5 million a quarter, and that is fully recovered in rates. The year-to-date variance for legal through the nine months is about $1.8 million higher this year than last year.

Well, let me ask it this way then. It was up 27% for the quarter. I'm just wondering if maybe you can give us a feel for if most of that was legal, or are you -- did pension come in kind of where you're expecting it? I know the quarter-over-quarter from Q2 to the previous year's comp was like 40%. So it came down to 27%, but just something you can give us say to give a better feel for what's happening. (Multiple speakers)

Sure. Let's go back to July of last year, when towards the end of July we got the '07 general rate case results, and embedded in that rate case was a significant step up on the pension costs. So when we got that general rate case, we did step up the pension expense because you try to match the revenue with the expense, but we still had to true it up for the year-to-date. And so when we trued it up, we were a little light on the estimate that we did in July when we got the increase from the PUC. If you look at admin and general, for Q1 in just the admin and general line, it was about $19 million, for Q2 it was about $19.4 million, for Q3 it was about $19.1 million. So the big increase that we got, the big slug of rate relief that we got is now kind of leveling out.

On the legal side, we just -- we've had more legal cases this year. We've had a couple main breaks where we've had some property damage that we've had to take care of, so we're just incurring more legal costs this year. And you put on top of it, with the general rate case, we're just spending more on the legal line. That's a true variant. That's above and beyond a budget number, so that'll be a variance going into year-end is on the legal line.

Okay. Is there anything you can say regarding what you guys are thinking right now for pension in 2010?

If you look at our estimating basis, what we used in 2007, we basically took a real hard look at our forecasting factors, and we worked with our outside actuaries and we tested all the assumptions they were using. Basically took a hard look at how we presented data to the CPUC. And if you take the outcome of the '07 general rate case and compare the number we got to what we've spent, we're pretty much spot-on the number.

So I would anticipate next year that pensions will go up, but they won't go up as much. You're not going to have this big swing that you saw over the last 12 months, and it is built into rates. So I would anticipate that pension number probably being between $20 million and $24 million if I was to ballpark it right now.

Okay.

But that number can change significantly based on how the assets perform.

Okay.

And if you have another significant decline in the market, that basically is going to pump up the amount of funding and the amount of expense you're going to have and it'll be trued up in the next period.

So there is some volatility there, and as Pete mentioned, we did ask for a pension balancing account, as well as a healthcare balancing account in the '09 general rate case.

What do you think the likelihood is of getting that? Any thoughts there?

Jim, I've had a lot of deep discussions about rate-making. If you look at what other utilities have gotten in the state of California, it's a very reasonable request. If you think about pension expense, for us it's a pass-through cost. We don't make money on it. We don't lose money on it. It's supposed to be just a direct pass-through to the rate payer. So I think that the argument is very, very good. I can't predict the ultimate outcome from the CPUC, but certainly they have allowed that at other companies as a common practice within the state.

Okay, thanks Marty.

All right, thanks Jim.

Thank you. Our next question comes from Dave Parker of Robert W. Baird.

Hi, good morning.

Dave.

Hey, question for you. Maybe you could give a little bit of color as you've done on some of these other line items for maintenance expense. It was up a little bit more above where I expected it, and maybe explain maybe third quarter and what that trend may be. I know it's tough to predict, but maybe you could give us a little color?

Sure. Well, maintenance expense, in fact, this is one of the things Pete will get on me about as we go through the year because it follows a cycle, and certainly when it's wetter out, you're doing less maintenance work, and when it gets dryer, we'll do more, so there's a natural cycle that typically takes place throughout the year.

If you go back and look at the last four quarters, where we were with maintenance expense, it's been hovering right around $4.5 million. So Q1 was about $4.6 million, Q2 was about $4.3 million, and Q3 was about $4.4 million. So it's bouncing around a little bit. We have a little bit of a variance year-to-date. It's about $1.2 million as I mentioned. Some of the legal increased costs we've had on the legal side has been where we've had some main breaks and some damage that was done, and taking care of our customers in terms of making sure we fix the property that we damaged.

So it'll bounce around a little bit, but so far, I anticipate that maintenance will come in pretty close to where we've budgeted it for at -- when we get to the end of the year.

Okay, great, thank you.

Thank you, our next question comes from Tim Winter of Gabelli.

Good morning guys. I have a couple of quick questions. Do you know what the trailing 12 month ROE was for the California regulator utility business?

I haven't calculated that yet, Tim. We just signed off on earnings yesterday, so we haven't gone through and done any of the rate analysis as of yet. But if I was to anticipate, I would say we're kind of coming in at that -- at about that 10.0 to 10.2. Last year we were slightly over our target, but a lot of that will also depend on what happens in the next quarter.

Okay, and then as far as financing the CapEx budget as you go into this next rate case, is the plan to put some more equity in through public issuance before the decision?

Before the decision, probably not equity. Our next round of fundraising will probably be another round of debt. Obviously, one of the reasons why we bumped up our line of credit and went to a syndicate line of credit, is it just -- it gives us a little bit more room to operate, and if you look at our current run rate, if you take about 1.5 to 2 times our current spend, you quickly get to a $200 million number. And then we also wanted to have sufficient availability in terms of if any M&A opportunities presented themselves that we thought were good accretive buys.

So as of right now, we're going into the end of the year with plenty of cash. We're not sweating cash. We have a new line of credit for $300 million. I anticipate next year maybe middle of the year we'll do a bond offering or another debt offering, and then from there we'll probably do another round of equity.

Our cost of capital did give us an equity ratio. I believe it was 53% or 54% -- 53%, so we'll want to bump up the debt before we do any new equity.

Yes, Tim, just one more comment from me, and that is the equity debt ratio is totally out of the general rate case cycle now. It's all in the cost of capital. So it's 53%, 47% equity to debt ratio, is adopted through 2011 as is our 10.2 ROE. So it's really not a general rate case issue anymore, which is unique to California I think.

Okay, great. Thanks for reminding me of that, and then a bigger picture question. First I'll commend you on a -- keeping a conservative dividend policy through the tough years in the California regulation. But now that you have earnings power much improved and the dividend payouts falling to roughly 60% on relatively small annual increases over the last few years. Is there any thought of bumping that up, or how should we look at dividend policy going forward?

Well, it's -- we are in a new environment now, so -- and the Board and the Finance Committee will consider the dividend increase for next year later this year. The policy and the practice has always been to pay the dividend and increase the dividend each year. So where that's going next year, I can't predict. We'll see how that works out.

Yes, I think that's right, Pete. I think the Company's had a long history of increasing it every year, which I think we're proud of our heritage. The other side of the argument is that we do have an increasing CapEx budget and certainly you've had a lot more volatility in the capital markets. And so making sure that we reinvest as much as we can in the Company is an important concept for Cal Water.

Okay, great. And then just one final question. I jumped on a few minutes late, so if you gave these metrics already I apologize. Can you give some usage metrics for conservation, like maybe per customer or something?

Yes, Tim, we had not prepared any usage metrics yet. Obviously we're kind of in the throws of implementing our conservation program now that we have the WRAM put in place. Other than I will share with you that if you look at the other operating expense line where I talked about we're having a variance on a year-to-date -- on a quarter-to-date basis, a big part of that is the ramp up in conservation spending for the customers.

Okay, great. Thanks guys.

Thanks Tim.

Operator. Thank you. Our next question comes from Christian Bradbury of Sidoti & Co.

How you doing guys?

Hi, Chris, how are you?

Morning.

Good. Hey, I just had but one question. Are you guys -- you seeing any big issues with the customers not paying their bills? Had the trend for bad debt expense remained stable or is it moving up?

Very good question, and as Pete would probably say, looking at accounts receivables is one of his favorite pastimes, as is mine. Believe it or not, we've actually seen it kind of come down a little bit where the bad debt expense is -- looks like it's getting a little lighter in terms of the load. But having said that, if you go back prior to the recession, our bad debt expense was about 30 basis points, which is extremely low. Moving into the recession, we bumped it up to about 50 basis points, so it increased about 20 basis points and it's held there. And so people are paying their water bills.

Interesting for the quarter, on the 60 day bills, and looking at people who have gone past the 30 day bill mark, we've actually seen a significant decline in the number of people who are 60 days past due, and I think that's a good sign. So people have continued to pay their water bill.

Hey, well that's all I had. Thank you very much.

All right, thanks Chris.

Thank you. Ladies and gentlemen, (Operator Instructions). Our next question comes from Debra Coy of Janney.

Yes, good morning Pete and Marty.

Good morning, Debra.

Morning Debra.

Just a couple of follow-ups on everything you've already outlined. One, just in terms of how things flow through now, so that I'm quite clear, as you talked about purchase power, water, and pump taxes are covered under the balancing account, but these additional variances that you're seeing this year, legal expense, conservation, investment, maintenance spending, wherever we end up at the end of the year, that stuff is not currently recoverable under any of the accounts that will impact earnings, correct?

That is correct. So things that fall on the A&G line, and on the O&M line, so admin and general, and O&M, those variances now that we have the WRAM and MCBA, are really the things to pay attention to, and that's why I wanted to identify those three items because going into year-end, those are the three things that we're keeping a close eye on.

We're running a little bit ahead on those three.

Correct.

Okay, understood. And secondly, Marty you intrigued me a little bit when you mentioned keeping some powder dry for acquisitions. That's not something Cal Water has done much of lately. Can you repeat comment on your thoughts on the acquisition environment?

Sure. I mean, one of the things that you've heard Pete and I say when we -- and we tell this to investors all the time, we're always out looking, right, but as you know in this industry, it's very easy to lose your shirt if you buy a system that requires a lot of capital and you can't get rate relief for it.

I've noticed, yes.

So we, yes, we have continued to look at M&A opportunities. We will continue to do that in the future. It's just we're kind of picky on what we buy and our goal is to make money on that acquisition within the first year.

So nothing has changed. It's not like you're seeing more opportunities than you've seen before?

I don't think so. We've seen some that we've gone -- taken pretty far and then dropped for the reasons Marty just outlined. So I don't think the landscape is any better than it has been in the past.

Okay, just curious. And then my final question, Pete, big picture. We've been tracking this latest effort in California for water legislation. Don't know if that will actually happen, but if it did, the mandatory 20% cutback in use, and it comes back to the question earlier about usage trends. Obviously, whatever the metrics are, we know that they're down. I'm guessing that your usage per customer is probably down, what, 5%, 6%, 7% maybe year-to-date? I'm not sure, but if you can just kind of talk through the political environment and how you see that impacting Cal Water over time. Obviously, we have a decoupling mechanism that should protect you, but how politically controversial that gets.

And secondly, whether there's an opportunity in that kind of an environment for Cal Water given your broader footprint, your storage capacity, your access to various sources of water. Just kind of how you're thinking about this trend in California of everybody having to pay more for less water delivered?

Boy, I'll try to keep my answer to less than 50 minutes here.

Yes, I know. That was a long question, too. I apologize.

Well, for everybody on the call, in California, I'll talk about the whole big state now. There's a major effort underway in Sacramento to come to some conclusion finally on what do we need and what are we going to build in a way of infrastructure storage conveyance, distribution, supply, and how do we get water from one part of the state to the other.

The governor's driving this. These issues have been around for decades. There's been really no new infrastructure statewide here for 20, 30 years. And the governor is termed out next year, so this is a good chance to make this thing happen, and he's brought the legislature back into session. My God, it's like three to four weeks now to hammer this thing out. What I -- I don't know what to expect out of that except that as Debra mentions, water will get more expensive here.

We are fortunate and have planned ahead so that each of our systems in California has a 25 year supply plan, so we have to feel good about our supplier. We use a mixture of ground water and surface water. Our own surface water plus purchased water, so we feel good about our supply, but as Debra mentions, the issue is rates and cost.

We watch this real carefully. The Federal EPA has in their research has determined that if a water bill is less than 2.5% of a household's income, then it's affordable. Our bills are about 1% on average of household income. So we feel pretty good about the affordability of our water. There's some areas that of course since we have rates all over the map, there's some areas that are pretty expensive, but overall, we feel pretty good.

If costs go up, and you're right, usage has gone down. In fact, not just the last year or two, the average customer usage has dropped over the last 25 years. And unfortunately, rate cases don't account for that because they take the past usage and look -- try to project it forward, take an average, and so you're never accounting for a drop in sales in the old method of doing rate cases.

So right, the decoupling mechanism is very good when customers are conserving, and they are. For whatever reason, they're using less water.

Does this present an opportunity for us? I think for conservation spending it does. And we're doing our best to earn a return on that -- on those conservation investments in the future.

Did I cover most --?

Yes, that's helpful. I mean, it's obviously something that will develop over time. I guess just my last follow-up piece to that is, what are you investing in for conservation, and what sorts of things might you be investing in, in the future, that would potentially be recoverable investments?

Well, there's a lot of hardware first of all. Of course, toilets and showerheads and flow devices and irrigation systems, and things like that. One thing we're trying to do, and I don't know if we've publicized this much, but in some of our customer areas, our customers don't use conservation programs where they would go out and buy a new toilet and then ask for a rebate.

So what we're trying to pilot, and we're going this in Bakersfield, and trying to do it in East Los Angeles, is to go through one area and wholesale change all the fixtures in the customer's bathroom, the toilets and the showerhead and the sink nozzles, and in a lot of areas, that makes very good sense where we buy wholesale water very expensive, and we mix it with our very low cost ground water, we can lower the unit cost of the supply and lower people's bills. So that's the kind of investments we're trying to do. It would actually lower customer's bills and lowers the unit supply cost. And that is doable in several areas in the state.

Interesting. Thanks Pete.

Yes, Debra, one thing I would add because you're asking a really good question, and now that we've had the WRAM for a year, the disclosures are going to change a little bit. So when we talk about the usage line, when I talk about what the rate relief was, and what the usage was, and it's in the press release, there's a couple things that flow through that line. One, it's the change in consumption, and two, it's the change in the WRAM and MCBA year-over-year. And so, it's a little bit harder to pop out. Prior to having one full year, you could -- it was pretty easy to see what the variance was from the WRAM MCBA.

When Pete was answering, I was just playing with my calculator a little bit here. When you look at the year-to-date effects, so if you go back to October 1st of last year through September 30th this year, there's about $17 million that we were under collected that we were able to book through the WRAM mechanism, and that comes out to about 4% of our revenue. And then the flipside of that, if you look at the MCBA, and where we are with the MCBA, it's about $9 million, $9.5 million. So the accumulative effect since we've put the mechanisms in place is about $8.9 million total. So the WRAM was about $20.7 million and the accumulative balance and the modified cost balance, and again, it was $11.8 million. The net of those two numbers is about $8.9 million.

So, $8.9 million to the benefit.

Yes, so that will give you a sense of how the mechanism's working and what the accumulative balances are. And it comes out to about 4% of our revenue. So it's not a one-to-one relationship to conservation because you had price increases, but it'll give you a sense of what the WRAM has been doing on the revenue line.

Suffice it to say, earnings would have been worse without it.

Absolutely.

Okay.

Absolutely.

Thanks guys.

Thank you. Ladies and gentlemen, (Operator Instructions). I'm showing no further questions at this time, sir.

Great. Well, I just want to thank everyone for dialing in today. I know EEI's next week and I think a lot of utilities are announcing earnings today, so I appreciate everyone who called in and listened to it.

Pete and I will be at the NYSSA conference in New York, so hopefully we'll see everybody there. And if we don't talk to you, have a great holiday season, and we'll talk to you after year-end. Thank you and have a good day. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Thank you and have a nice day.