California Water Service Group (CWT) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the fourth quarter and yearend 2010 earnings results conference call. (Operator instructions.)

I'd now like to turn the conference to your host, Mr. Marty Kropelnicki.

Thanks, Amy. Good morning, everybody, and welcome to the fourth quarter and yearend 2010 earnings conference call for California Water Service Group. With me today is Pete Nelson, President and CEO.

I'd like to remind everyone that a replay of today's proceeding will be available from February 24th, 2011 through April 25th, 2011 at 1-888-266-2081, ID 1508018.

Before going over the results for the yearend and fourth quarter, I'd like to take a few moments to cover 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 future events they are subject to various risk and uncertainty and actual results could differ materially from the Company's current expectations. Because of this the Company strongly advises all current stockholders, as well as all interested parties to carefully read and understand the Company's disclosures on risk and uncertainty found in our Form 10-K, Form 10-Q, and other reports filed from time to time with the Securities and Exchange Commission.

Having said that, we'll go through the results for yearend first, and then I'll follow that by going through results for the fourth quarter. I'll be turning it over to Pete, who will give you an update on the Company, and then I'll come back and go through the balance sheet and conclude on the income statement.

Looking at the yearend results for yearend 2010, revenue was $460.4 million, up $11 million or 2.5% over 2009. Included in revenue was a positive net WRAM, which is the Water Rate Adjustment Mechanism, and MCBA, Modified Cost Balancing Account, adjustment of $18.5 million. There's two components that make-up that net adjustment. Just the WRAM was a positive $41.2 million, where actual revenue was below adopted, so we booked a positive $41.2 million, and that's offset by a reduction in revenue from the MCBA of $22.7 million due to production costs being lower than adopted. So those two net out. During the year consumption was down approximately 17% for the year.

Looking at operations, operating expenses for the year were $398.6 million, up 1.87% or $7.3 million. Of that amount purchased water, or excuse me, water production costs were $164.1 million, up 2.9% or $4.6 million. There are three components that go into water production. Again, these are all covered by the MCBA but I'll give you the breakdowns. Purchased water was up $4.2 million or 3.5% to $126 million. Purchased power was up $1.3 million or 4.6% to $29.6 million. And pump taxes was $900,000, down 10% to $8.6 million.

A&G for the year was flat at $75.3 million. As we mentioned going into 2010, 2010 would be a stretch year since it was a year of a consolidated rate case, which Pete will talk about in a little bit, and the Company managed to keep A&G flat.

Other operations were down slightly to $56.5 million. Maintenance expense was $19.7 million, up $1.1 million or 6% over 2009.

Depreciation and amortization was up $3.1 million or 8% due to investments from property, plant and equipment, our new Net Utility Plant that was put in the ground during 2009.

And taxes were down $1.7 million or 7%, to $18.6 million. Property taxes and other were up 1.67% or $280,000 to $17.1 million.

And net operating income was up 6.36%, $3.7 million, to $61.8 million from $58.1 million in 2009.

Other income expense was $2.2 million, down $1.5 million from the $3.7 million the previous year. This was primarily due to changes in value associated with the Company's trust owned corporate life insurance policies, our mark-to-market adjustment.

Interest expense was up 23.7% or $5.1 million to $26.4 million due to the issuance of the Company's first mortgage bonds in November of 2010, as well as having the first full year, the first mortgage bonds that were issued in the spring of 2009.

Net income for the year was $37.7 million, down 7.2% or $2.9 million, and with earnings per share of $1.81.

For the fourth quarter, and this is just the fourth quarter now, revenue was $105.5 million, down 1.37% or $1.5 million over the fourth quarter 2009. Included in revenue was a positive net WRAM, MCBA adjustment of $2.3 million. The two components that make-up that adjustment, the WRAM was a positive $9.7 million, and that was offset by an MCBA adjustment of $7.4 million to get to your net of $2.3 million.

Operating expenses for the quarter were $93.5 million, down $1.8 million or 2%. Water production costs of $37.2 million, down 7% or $2.8 million. And, again, those are covered by the MCBA, but let me give you the break-out of the three components -- purchased water, purchased power, and pump taxes. Purchased water was $29.1 million, down 8.3% or $2.6 million in the quarter. Purchased power was $6.2 million, up 2.1% or $125,000 in the quarter. And pump taxes were $1.9 million, down 14.8% or $326,000 for the quarter of -- for fourth quarter of 2010.

A&G was $21.6 million, up 20.4% or $3.6 million. That was primarily driven by increased pension costs associated with new employees, increased healthcare costs, and increased workers comp costs.

Other operations was $13.3 million, down 12.1% or $1.8 million. Maintenance was $4.7 million, down 8.9% or $461,000.

And depreciation and amortization was $10.5 million, up 15.8% and $1.4 million over the fourth quarter last year.

Income tax was $1.7 million, down [48%] or $1.6 million. And property and other taxes were $4.6 million, up 2.4% or $107,000.

Net operating income was $11.9 million, up 1% or $114,000 over the same period last year.

Other income and expense was $1.3 million, up $500,000 or 69% over the same period last year. That was driven by an $800,000 change in the mark-to-market adjustment associated with the trust owned corporate life insurance policies that the Company holds.

And interest expense was $8.3 million, up 36% or $2.2 million. Again, that's due from increased use of the line of credit to fund capital activities and the affects of the first mortgage bonds that have took place, that I mentioned, in 2010 and 2009.

In addition, in interest there was a decrease in capitalized interest due to booking and adjustment in the fourth quarter of prior in-service dates for completed projects that were closed and put to net utility plants. Said another way, we closed a number of projects in the fourth quarter. As we were closing some of those projects some of them came-in with a retroactive in-service date, and we booked an adjustment of $1.6 million or we reduced capitalized interest for $1.6 million in the fourth quarter.

Net income was down $1.6 million, or 24.5%. And earnings per share in the fourth quarter was $0.23 a share versus $0.31 over the same period last year.

Having said all that, Pete, I will turn it over for you for an update on the Company.

Okay. Thanks, Marty. And good morning, everyone. I'll say a few words about year 2010 and then look ahead to the year 2011, and I'll talk about why these two years are so different and, of course, it's all about regulation. Then I'll move on to the State of California and talk about our new Governor and what he's been doing, and about the Commission and two new Commissioners we have. And then I'll work-in a few words about our new Director that the Board appointed or elected yesterday.

So, first, year 2010, last year we all knew this was going to be a stretch year for us financially, meaning we were stretching between an old ratemaking system to a new ratemaking system. And this transition put a lot of pressure on our operations budget and our folks here, and they came through. But we did move from a three-year rate case cycle where we had 24 ratemaking districts, and our Corporate Headquarters, all phased in ratemaking and meaning that each district had a three-year rate case but they were staggered. So we would file eight of the 24 rate cases each year, and we've transitioned to now, this year, we're all together as one 24-district and Corporate Headquarters in the same cycle in one rate case.

To wrap-up that 2009 rate case, which is very important, and I'll spend a couple minutes on this, probably because this is the last time I expect to talk about it. But that rate case made that bridge or the transition to the whole Company rate case. And the timing was such on this rate case that eight of our 24 districts had waited four-and-a-half years since their last rate case, eight had waited three-and-a-half years, and the remaining eight had been two-and-a-half years since their last scheduled rate case.

The rate case was not only the largest one in California history but it did make this change, and in a lot of ways this rate case turned the page for us in regulation from an old process that was designed and implemented in an era, 2001, '02, '03, and '04, when the process was created and created a real regulatory lag for us and was very tough on utilities. Just in basic cost recovery, things like electricity to produce water, we were getting a major lag in collecting those costs. Probably had the most impact on us, as a Company, because we had the most ratemaking districts, 24 throughout the State. It did take us some time to get untangled from that process, but the old process did not serve us well and is now history, which I'm happy to say.

Looking forward to the year 2011 and beyond you see more revenue, of course, across the board. You know about that. But also the way the revenue is set in the rate case the proportions and the timing of the revenue are changing. And what I mean by that is the way we receive and book the revenue is going to change. We expect to have more revenue collected in the quantity charges, the usage charges, and less revenue in the fixed area, which is service charges and flat rates. Flat rates are customers who pay one amount every month because they don't have a meter, and as we convert those customers to meter they'd convert to more quantity or usage charges rather than the fixed area. So that is changing.

And what that means for financial results is more of our results will be concentrated in the second and third, especially the third, and fourth quarter when usage is higher and much less concentrated in the first quarter when usage is low. This is the pattern that I expect to see for this rate case cycle of 2011, 2012, and 2013. We'll see what happens in 2014, but I expect this pattern to take effect for the next three years.

A couple of other important outcomes from the rate case that will serve us well going forward. One is our pension costs are now covered by a balancing account, so I see that expense item as less volatile, as a less volatile impact on financial results. And healthcare we were granted a memorandum account to collect the costs that result from changes in our healthcare costs as a result of the Federal Healthcare Act. This gives us I think a much fairer chance to recover those marginal costs in future periods.

So going forward, some things are changing. We have a new Governor, two or three new Commissioners, and I'll talk about them later. Some things are staying the same, with Commission Staff is basically the same, water policy is the same across the two years, and I'll come back to that. So things are changing.

One, the next rate case that we're looking at and preparing for on the horizon is our cost of capital proceeding, which sets our adopted rate of return and our capital structure. Now our next cost of capital proceeding is going to be filed May 1st this year with an expected decision by the end of this year, but there's no guarantees on the timing and this could easily take much longer than 2011.

This time the cost of capital filing is going to have the four largest water companies in California in the same filing, that's San Jose Water, American States Water, and California American, which is a Subsidiary of American Waterworks in California. Although each of the four can have a different outcome, we're all filing together now.

So in this case there's so many moving parts and the parts haven't even been geared up or started to move yet. It just makes no sense to speculate on the proceeding, but I'm sure it'll be the main star, and we'll talk about this in our third and fourth quarter conference calls.

So moving out of the ratemaking area to our Board of Directors. They elected a new Director yesterday, Lester Snow. Lester is one of the most respected and knowledgeable water professionals in California. You can read about his background in our press release. Most recently Lester has been the Secretary of Natural Resources under Governor Schwarzenegger, which was a Cabinet level position. And before that he was Director at the Department of Water Resources. And before that he held top positions at the Bureau of Reformation, the CALFED Bay-Delta program, and the San Diego County Water Authority.

Everyone who knows Lester and as he's been involved in water in California for a long time, everyone that knows Lester and works with Lester say he's universally respected, and he is. He'll be a great addition to our Board.

So moving on from our Company to the State of California, as we all know we have a new Governor, Governor Jerry Brown, since our last call. And like most, all other Governors in the United States, he is focused on the State budget. And here he has been quite impressive, I think there's no one that knows the Legislative and Executive process better than he does. He's filled almost every State elective office at the top. And at times he can seem a little unorthodox, but at the same time he is realistic, he's persuasive, he's strategic, and he has proven to be effective. And if anyone can lead the State finances to a turnaround it would be Jerry Brown. I think he's the most qualified person to do that.

He has found time since the first of the year to appoint new Commissioners. He appointed Mike Florio, who is an Attorney or was an Attorney with a consumer advocate group. Mike has decades of experience in the regulatory process, primarily with electric and gas regulation. He knows the role of the Commission. He knows how the Commission works very well.

The second Commissioner that Governor Brown appointed is Cathy Sandoval, who was a Law Professor at the University of Santa Clara. She's new to the regulated scene. We have met with Cathy, spent some time with her, and we're very favorably impressed with her. And she's very interested in talking about water. But my guess is given her background she'll probably take the role of lead Commissioner for Telecommunications, because that's her background.

These two people joined Mike Peavey, who is the President of the Commission, and Timothy Simon, filling four seats on the Commission, that leaves one vacant. No word yet as of this morning on who or when that last seat will be filled by, but we'll just have to see what happens there.

With all these changes, of course, there always comes uncertainty. And with some Commissioners we do not have the benefit of seeing a track record of decisions or opinions that they've made as Commissioners. And, as we know, one's perspective can change when one assumes the role of a Public Utility Commissioner.

Which means we're back kind of full circle to the regulatory policy for water in California, which we call the Water Action Plan. It was revised in 2010, and this period right now is exactly what the plan was designed to be used for -- provide policy guidance that transcends people and commissions when things are changing. The policy has made good sense, and it's a reasonable policy. It really does a good job of balancing the interests and needs of the companies and the ratepayers.

And the ultimate test I think in the last four or five years has been has the policy been followed, and it has been by the Commissioners, by its staff, in fact, the staff has reorganized themselves around the policy in the Water Action Plan, as well as it has been followed by the Department of Ratepayer Advocates at the Commission.

It's also been followed by the companies in our rate filings, and we have been consistent using our rate applications to implement the policies in the plan. So it's been working as it was intended. It's brought more consistency and predictability to the water regulation in California. It's been in place now almost five years. It was recently updated last year. And I think it does bring in a changing environment some stability, and that's good news I think for the water business and for the investors.

So, with that, I'll go back to Marty for the balance sheet, and then we'll take questions.

Great. Thanks, Pete. I'll go through the balance sheet real quick and point-out some of the highlights of the year.

Net utility plant was up about 8% or $96 million to just shy of $1.3 billion. Construction work in progress is up about $13 million or 15% over Q4 of last year, and we ended the year with $103 million in work in progress.

Company funded CapEx, so these are rate based projects, was $113 million, up 5% from 2009. In total the Company closed, and this includes developer contributions which we don't get credit for in rate based, we closed about $125 million worth of projects.

Cash flow from operations, the first section of the cash flow statement, was $76 million, up 5.5% over the same period last year. And we ended the year with $42.3 million in cash and available line of credit of $276 million. So overall the balance sheet continues to grow and be very healthy, as well as we have plenty of -- we have adequate reserves to take advantage of any market conditions that we, you know, might come-up and opportunities that are out there.

As Pete mentioned, 2010 was a stretch year. A couple things I'd like to point out, that if you look at A&G expense the Company did keep it flat on an annual basis. Our goal was to have that down. However, in the fourth quarter we did see a spike in healthcare claims associated with our uninsured plan, as well as you start the year with a pension estimate and then you true that estimate up based on your census data later on in the year. We did see an increase in our pension costs, as well as our workers compensation costs. So that really drove the increase that we saw in Administrative and General expenses. Some of those will be corrected with the balancing account that Pete mentioned, but we still came in flat year-over-year on an A&G basis, as well as operations. We were able to keep that flat.

So overall a lot of positioning this year keeping the budgets very, very lean, knowing that the break-out that we have eight districts that have gone longer than four-and-a-half years without rate relief, and another eight districts that have gone longer than three-and-a-half years without rate relief. We felt we'd done a pretty good job positioning the Company going into 2011 by keeping our operating expenses lean and mean and positioning for the rate relief that's coming in this year.

Amy, having said that, why don't we go ahead and open it up for questions, please?

(Operator instructions.)

Our first question comes from [Christopher Pertsvel] of Janney Montgomery.

Yes, thank you. Good morning, guys.

Good morning.

Hey, how you doing?

All right. Just have one quick question for you on the acquisition environment. We've seen some increased activity recently on the West Coast and more and more headlines on municipal budget concerns. So just curious if you've seen an increase in opportunities, either in the public or private sector? And maybe if you have any color on if you're focusing your Corporate development efforts in-State or if you're seeing maybe opportunities out-of-State that you'd be interested in?

Chris, we're not seeing a lot of increase in activity there, and I think the acquisition you were referring to is probably the Southwest Water acquisition, which took place I think in the fourth quarter last year, and maybe the Park Water Company, which was a private company sold to a private equity firm.

I'm not seeing a lot of business beyond those two. The last year or two has been very active in Hawaii for us. I don't see a lot of cities coming to us. They're definitely trying to hunker down and meet their own budget obligations. It could change this year, but I'm just not seeing a lot of activity there.

Okay. Thanks, guys.

Thanks, CJ.

Our next question comes from Jim Lykins of Hilliard Lyons.

Morning, Pete. Morning, Marty.

Good morning, Jim.

Good morning.

The first thing I wanted to ask you is the additional $8 million in revenues when certain capital projects are completed, can you just give us a sense of the timing when you anticipate that happening?

Yes, there's a couple ways you can think of capital projects and rates. There's the actual filing, itself, and then there's actually completing some of the projects and filing an advice letter. So it'll be staggered throughout the year. There's a handful of projects there. For anyone who has visited our Corporate Offices, one of them will be, you know, we're building a new building here at Corporate. Most of those will go into rate base in '12 and '13.

Okay, and I'm also wondering about the balancing account with pension benefits, is there anything you can say just to give us a sense on how to think about admin in general to model in 2011? I mean should we expect something that's flat again next year or just any color you could give us on that would be very helpful?

Sure. Well, just a couple things. One, on a year-to-date basis for 2010 the pension plan cost to the shareholder is about $0.03 a share. So going forward into 2011 it's a balancing account, it's a two-way balancing account, it's based on the full FAS 87 expense, which covers the expense of the plan as well as the SERP, so the SERP is a mirror plan, supplemental executive retirement, a mirror plan of the pension plan. And basically it's based on the full FAS 87 expense. And so if the 87 expense goes up like what we saw this year then that's booked right into the balancing account. So we shouldn't have this issue of pension variances next year.

Now the flip side is it's a two-way balancing account. If the plan assets are earning more and it runs the other way, that if we're earning too much on the pension plan we may have to give some of that back. But in terms of the volatility, and Cal Water historically has had volatility associated with the pension plan, that's been somewhat remediated by this balancing account.

That's helpful. And then, lastly -- and I'll let someone else ask a question -- but could you just give us your CapEx expectation for 2011, as well?

Sure. Our goal internally is to spend between $125 million and $135 million in CapEx. We closed a little bit more than what I thought we would. I wanted to get to $115 million, $120 million this year but we didn't get there, but you see the growth in [WIP]. We have a couple fairly big projects that are out there, and they're going through the permit process, et cetera. So for 2011 it's fair to say that we're shooting for $125 million to $135 million.

Okay, thanks, guys.

Thanks, Jim.

Our next question comes from Heike Doerr of Robert W. Baird.

Good morning. Thank you.

Hi, Heike.

I wondered if we could go back to the discussion of these A&G costs that Jim had brought-up? And if we could perhaps start with a break-down of the year-over-year increase that we had seen in the fourth quarter, and what percent of that or if maybe, Marty, you can give us a dollar amount on how much of that was worker comp costs that you don't expect to see? And what portion of that is increased pension and healthcare costs that will fall into the balancing accounts, going forward?

Yes, let me go back and give everyone just and you might want to write this down for color on the topic. Let me give you the last five quarters of A&G just so you can see the trend. Q4 of last year it was $17.9 million. Q1 of 2010 was $17.4 million. Q2 of 2010 was $18.5 million. Q3 2010 was $17.8 million. And then Q4 2010 was $21.6 million. So clearly you see that nice flat line there, which was good. That was our target. But then you see this tick up that happened in the fourth quarter.

By way of numbers, workers comp, we are self-insured. There was about an $800,000 swing associated with the workers comp, so as claims go down we can bring that reserve down. We work with our actuaries to give us their estimates, and that kind of trues up and trues down based on claims experience.

The pension plan was about $0.03, so about a million dollars. And then your healthcare, healthcare is a little bit trickier on a year-to-date basis the variance is about $350,000, but if you look at how it hit in the fourth quarter it was closer to about $800,000 or about $0.025 a share. That's because the plan, again we're self-insured in healthcare, claims were trending flat or down, and then in the fourth quarter we saw about a $1.3 million increase in claims processed. So that brought the -- we had to bring the reserve up during the fourth quarter.

And if we think about how these pension and healthcare balancing accounts get credited back to you and what the timeline is I believe you need to hit a certain amount before you can file an advice letter for that. Should we expect this, let's call it $0.03 to $0.05 to hit in 2011?

Let's pick the memorandum account versus the balancing account apart. The pension balancing account, which is new for 2011, gets booked monthly and that actually gets booked. Now the memorandum account we incur the costs and it's tracked, call it offline or off the books. And when those costs get to be a certain level then we file for recovery of those via an advice letter. In addition, for 2012 one of the key things that Tom Smegal and I'll be working on is trying to get a healthcare balancing account the same way we got a pension balancing account. So those are two different mechanisms.

But in terms of -- the biggest one has really been the pension, and the pension given the market volatility when you hire new employees, that's the one that's been bouncing around the most. And so we're very happy that we got the pension balancing account put in place. The Company's expense and the cash contribution, the FAS 87 contribution are the same, so the pension one should be basically resolved and the volatility eliminated.

Healthcare, in our rate case with the memorandum account we got a little bit higher escalation factor for the next three years so that'll help, but it's certainly, it may not be enough to keep-up with healthcare inflation. So the 2012, watch that, and we'll see what Tom and I can do in terms of getting a healthcare balancing account.

And how should we think of the size and timing of a rate case filing in Hawaii?

We've filed [Kujalani], it's been filed.

We have filed Ka'anapali --

Oh, I'm sorry.

-- they all kind of sound the same. Ka'anapali was our first acquisition so it's our first rate case. And I think we're asking for -- I'm looking across the table at a number for Ka'anapali about $1.5 million in new annual revenue. That's the first case filed. There's six more to come, and we're putting those together now so we don't know what their magnitude is. But we expect every customer in Hawaii to be on -- to have new rates in place late this year, early next year.

Yes, I know, Pete, it's probably noteworthy, too, that that Hawaii is a historical ratemaking State versus California, which is prospective. So we have to incur those costs, get those costs into the ground. We've built a lot of new plant in Hawaii, and part of the -- part of our yearend results this year is the fact that we have financed all those costs and those have to be embedded in rates, and they're embedded after you incur those costs.

Okay, and a final question, these mark-to-market swings that we see, can you talk a little bit about what the year-over-year EPS swing was from 2009 to 2010? And it is our understanding that as the market is flat to up you would be seeing a benefit, not necessarily a drag. So how should we be thinking about that going forward?

Like A&G, let me go ahead and give you the quarters. I think that's the best way to look at it because it gets a little confusing. So in Q4 2009 we had a positive mark-to-market adjustment of $500,000. In Q1 2010 we had a positive mark-to-market adjustment of $600,000. In Q2 2010 we had a negative mark-to-market of $700,000. In Q3 2010 we had a positive mark-to-market of $1.4 million. And in Q4 we had a positive mark-to-market adjustment of $1.3 million. On an annual basis for 2009 we had a positive mark-to-market of $4.1 million. And for 2010 we had a positive mark-to-market of $2.6 million.

So when you look at just the fourth quarter it had a positive mark-to-market adjustment, and it was up $800,000 over Q4 of last year. But when you look at the annual number in 2009 it was a positive $4.1 million mark-to-market. In 2010 it was still positive, it was $2.6 million. So that variance, that all flows through that other income and expense line.

Okay, that's helpful. Thank you.

Sure. Thanks, Heike.

Our next question comes from [Jose Garza] of [Cabalion & Company].

Hi, guys.

Good morning.

I was just wondering, your thoughts on your next equity issuance, what you guys are thinking about that?

In 2010 we did get an equity -- we got a shelf approved for $350 million, and we've drawn $100 million in first mortgage bonds off that shelf, so we have $250 million of availability. That's also filed with the Securities and Exchange Commission, and since our market cap is over $750 million we are a [WIKSI] filer, a well-known and established filer, which means we can basically file and go.

So we can go do a debt or equity offering at any time. However, having said that, we did complete the $100 million last year. We have plenty of room on our line of credit, as well as another almost $43 million in the bank. So we haven't scheduled anything yet, and we're always looking at our CapEx budget and when we're going to be spending those dollars. So we anticipate doing some equity or debt raising in 2010, like we've done the last two years, but we haven't completed those plans yet.

Okay, and I guess just in terms of the consumption decline, if you could maybe just touch on a couple of the major drivers there, if you could?

Sure, sure. One, we spend a lot of money on conservation. Now the whole point of decoupling and getting the WRAM and the MCBA is it takes away the disincentive for the Company to promote conservation. So the Company has adopted a fairly aggressive conservation program. In 2010 we'll spend approximately $9.5 million to $9.8 million on our conservation program. Conservation costs are covered in a balancing account, which definitely helps. And so we also have had a drought in the State of California, which has helped put public pressure on overall conservation.

So we've seen consumption decline by about 17%. That shows up in our mix numbers. If you look at our water production we produced, about 54% of the water we produced was from our sources, and that would be wells and that would be surface water. And we purchased about 46%. And so we've had a change in mix. Part of it is purchased water costs have continued to go up, and as they go up it allows us, it affords us the opportunity to spend some more capital and bring more of our wells online and improve treatment on our own well sources.

So it was about a 17% reduction that we saw. What -- how much of that's driven by weather, how much of that's driven by consumption, changes in consumption, that's harder to tell, but the overall decline was about 17%.

Jose, I'll answer that. If you'd have asked that question before July 2007 I would have known exactly what the weather was and how many days precipitation and how much rain. I haven't looked at that for two years because it doesn't make any difference to us, as you know.

One thing about the consumption is the State policy is to reduce per capita usage 20% by 2020, and we are well on our way to achieving that with our conservation programs and just the general usage declines from drought publicity and things like that.

Okay. Thanks, guys.

(Operator instructions.)

Our next question comes from Jonathan Reeder of Wells Fargo.

Good morning, gentlemen. Most of my questions have been answered, and I apologize if I missed it on the call but, Marty, can you kind of outline the items that you would consider somewhat nonrecurring impacts for the year?

Yes, but, Jon, let me go through them again because I think they're important. The pension plans for the year was about a $0.03 variance, a little over a million dollars. We had a GRC impairment, if you remember, in the third quarter we had as part of our settlement we had two small projects that we in settling we came to the conclusion with the Division of Ratepayer Advocates that we needed to impair. The project was fine, the work was fine, but there was a cost issue there. It was about $0.02 a share, so there you have $0.05 between the two.

And, in addition, in the fourth quarter while we were closing out the capital projects for the year we had a handful of projects that had retroactive in-service dates. And I'm surprised no one has asked me about this yet, so let me give you some more color on it because it's a fairly big adjustment.

So we don't really have AFUDC allowance refunds used during construction. We get capitalized interest. So as we're building an asset that will ultimately go in rate based we're allowed to take the interest costs associated with financing that project and capitalizing it, and that becomes part of the embedded asset value that goes into rate base.

As we were closing out projects for the year we had a number of projects that had retroactive in-service dates. Well, once a project goes in-service we have to stop accruing capitalized interest. So there's $0.04 of cap interest in-service date adjustment that we booked in the fourth quarter. So you got $0.04 there. You got $0.02 on the GRC impairment. And you have $0.03 on the pension plan. And then you have another $0.01 to $0.02 on the healthcare plan.

Okay, and so this capitalized interest, that's just reflected in your kind of higher interest expense in '10 but as far as a going forward basis it doesn't really -- I mean that interest expense will stay there?

Yes, I mean essentially what we did was we had to correct the capitalized interest for these projects and back-out to the in-service dates that amount. We, you may recall two years ago we put in a new application. We completed the second half of that phase this year, which was putting in the tax component of it. So what the system does, the system applies capitalized interest on a monthly basis on a project basis, and the system now allows us to note that the project is in-service once it goes in service versus making a retroactive adjustment right before you put it into rate base.

Okay, and then when we look at the other income line going forward, I mean is there -- I mean how would you I guess recommend we kind of model those margins out? I mean I know they're affected by those mark-to-market gains on the Corporate owned life insurance policies, but how should we be thinking about that? Because I mean that has the ability to fluctuate and greatly impact the bottom line.

Yes, that's a very good question, and let me kind of pick apart what those assets are because I think a lot of people don't understand it. So the supplemental executive retirement program, which is a mirror program of the pension plan, so you have funding limits on your pension plan and you have income limits on your pension plan. So the SERP really mirrors that plan.

That typically is an unfunded liability for most companies, and you recover those costs on a pay-as-you-go basis. And, again, the current portion is covered by the now in place pension balancing account. However, most companies have an unfunded liability. We have corresponding assets to offset that liability. And so while you do see volatility associated with the changes in the asset values underlying these life insurance policies, the fact is it's good for shareholders that we have the corresponding assets and fund that liability over the long term.

In terms of how to model it, I know it's difficult and that's why we try to put as much color and disclosure round this, and we'll give everyone the numbers every quarter so people can look at it. The other items that flow through that line is our non-regulated business, we have [sell site] leases, we have -- we partner with a company called Home Services for waterline protection, that all flows through that line, as well. So I think the simplest way is for us to continue to give you the numbers every quarter in terms of what is the mark-to-market adjustment, and you can back that out.

Okay, that makes sense. And then I heard your comments on kind of A&G, 2010 was a stretch year and you're hoping to keep '11 lean. So I mean the cuts I guess in A&G in 2010 you believe the majority of those should be kind of sustainable where we're not going to see an abnormal I guess spike in that line for '11?

That's a very good question. Obviously, in 2010 we held the operating budgets flat and in some cases, in some of the Corporate budgets we reduced them. We're a high fixed cost provider. That's not going to change, so as certain costs go up that'll get reflected in the A&G expense lines, like pension and healthcare, et cetera.

But, having said that, we did change our budgeting tool and we implemented a new budgeting application. Pete is a hard driving CEO that keeps a close eye on the budgets. He's laughing, but he is very tough when it comes to the operating budget. We've spent a lot of time looking at that.

So I think you will typically see increases that reflect what's happening in the market. If healthcare goes up it's going to go through the A&G line. If pension -- well, pension is now neutralized with -- volatility is limited with the pension balancing account. But as people costs go up some of that stuff flows through that line, and it's just the reality of what we have to deal with. Now, it doesn't mean we're going to open-up the floodgates for the budgets for 2011 and let people kind of budget hog-wild. We're going to keep that in line.

Keeping A&G flat in 2010 was a chore but the Company did it, and again our goal was to come in below the 2009 number of $75.2 million, and we almost did it but as you pointed out we had some onetime items here that popped up as well as increased costs that got reflected in it.

Okay, and then --

In addition, I briefly mentioned the conservation expense. We do have a balancing account that is now in a place for conservation expense effective January 1st, 2011, so that's being booked, and that's about $9 million of expense over the year. And, again, that's being booked on a monthly basis.

The other thing I'll tell you, and Pete you might want to chime-in on this as well, is as we convert people to meters in the State of California, as we get more up into the consumption charge with the WRAM, the WRAM revenue, the consumption revenue follows a seasonality chart. And as we get more and more kind of pushed up into the WRAM we are going to push more revenue and more of our income is going to come from the summer months.

And so as we're working on our models for this year you almost get like a standard deviation distribution where you have the tails, you have thin tails on the first part of the year and the last part of the year, and the bulk of your income, revenue and earnings is going to come in the summer months. And that's becoming more concentrated than what it was previously with Cal Water when it was driven purely by demand.

And, Marty, I agree 100%. It's hard to describe what the curve looks like. It's not bell shaped. The first quarter is flat, and then it goes up second, and third quarter is very good, and then the fourth quarter looks a lot like the second quarter. And because we are high fixed costs the first quarter is pretty flat.

The big change in A&G that I see, as Marty mentioned, is conservation. And we're increasing that spending in A&G $7 million this year over last year. So you'll see that immediately in the first quarter as expense, and you can definitely model that in.

Okay, and then a last question just piggybacking off of Jose's, it sounds like 2011 the financing needs are kind of pushed back maybe a little bit. Is this driven at all by the bonus depreciation extension or what sort of benefits I guess do you expect to see from that? And is it possible we might not see equity then until 2012?

We ended the year with our equity about 47.5%, and we're authorized for 52.5% or 52%, excuse me. So most likely our next capital raise will be on the equity side. However, after going through the credit crisis in '08 and '09 we put in a sizable line of credit, unsecured line of credit of $300 million, and that basically gives us plenty of breathing room to make those decisions as we go throughout the year.

The last place I want to be in, again, is where we have to go to the market and you have horrible or extreme market conditions. And so the balance sheet is good, the bonds are rated AA-, our credit rating has continued to be good. We have a nice line of credit backing up the Company. So we have a lot of discretion around that, and we plan on exercising that discretion.

All right. Thank you.

Thanks, Jonathan.

I'm showing no additional questions at this time, sir.

Great. Thanks, Amy. Just in closing out, we want to thank everybody for staying with us in 2010. It certainly is starting anew in 2011 as we start-off with the rate case being resolved and new rates coming in effective January 1st, 2011. 2011 will be an interesting year for the Company, a fun year for the Company, as we continue on our path to grow rate base and continuing to serve our customers with outstanding customer services. And we look forward to working with everyone during the year. So thank you for participating, and we'll talk to you again soon. Thanks, Amy.

You're welcome. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.