California Water Service Group (CWT) 2011 Q4 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the fourth-quarter and year-end 2011earnings results conference call. Today's call is being recorded. I would now like to turn the meeting over to Mr. Martin Kropelnicki, Vice President and CFO. Please go ahead, Sir.

Thank you, Melissa. Good morning, everybody. I'd like to welcome you to our fourth-quarter and year-end conference call for 2011. With me is Pete Nelson, President and CEO.

I'd like to remind everyone that a replay of today's proceeding will be available starting on March 1 at 1 (888) 203-1112. The replay code is 9998142 and that replay will be available through close of business on April 30. Also like to point out to everyone, if you don't have our press release you can get that on our website www.calwatergroup.com under the Investor Relations section and under news. Prior to going over our results for the quarter, I'd like to take a minute to cover the usual 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're 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 risk and uncertainty and other important information found on our form 10-K, form 10-Q and other reports filed from time to time with the Securities and Exchange Commission.

Prior to going over the results for 2011, I want to point out that during the fourth quarter, the Company made a deferral of $12.9 million of revenue, a deferral of $10.5 million of expenses and a deferral of $2.4 million of pretax income. Please note that these adjustments are in both the fourth quarter -- were booked the fourth quarter but also affect year-end results and are attributable to the balances of the water rate adjust mechanism that the Company doesn't anticipate it will collect within 24 months.

And after I go through results, I'll come back and talk about the accounting literature that we applied in the fourth quarter and why we did so. Looking at year-end results for 2011, the Company had revenue of $501.8 million, up 9% or $41.4 million over the full-year 2010.

For 2011, the net effect of the water rate adjustment mechanism or RAM and the modified cost balance account, MCBA, added $33.3 million of revenue. Operating expenses, water production costs are as follows. Overall water production costs increased 10.75% or $17.6 million to $181.7 million.

Of this amount, purchased water increased $16.6 million, which is the majority of the increase and purchase power increased $500,000 and pump taxes increased $500,000. So, the bulk of the cost increase was in purchase water. Keep in mind that those three elements, purchase water, purchase power, and pump taxes, are covered by the MCBA.

A&G for the year increased $13.9 million or 10.5% to $85.8 million. Four main drivers for the increase in A&G, first and foremost, healthcare costs increased $3.5 million year-over-year, pension costs increased $3 million and remember pension's covered by a two-way balancing account so the net effect on the bottom line is really zero. Salary increases for the year over 2010, were $1.5 million and legal and outside services increased $700,000 year-over-year.

So, the same things that we talked about at the end of the third quarter on the conference call carried through to year-end. Other operations was $54.7 million, down slightly from 2010 and maintenance expense increased $1 million or 5.1% to $20.7 million. Depreciation and amortization for the year increased $7.6 million or 17.6% to $50.4 million driven by our continued investment in net utility plant and higher depreciation rates that took effect January 1, 2011.

Income taxes for the year was flat at $23 million and property and other taxes increased 7% or $1.2 million to $18.3 million. The primary reason for the increase in property and other taxes was the increase in real property as well as the increase in franchise taxes. Total operating expenses for a group on annual basis $434.7 million up 9% or $36 million over the same period last year. Net operating income for group was up 9% or $5.3 million to $67.2 million compared to 2010.

Going down, further down the line on income statement. Other income expense was $259,000 down $1.9 million or 88% from 2010. This is primarily driven by the non-cash, non-realized mark to market adjustment associated with assets held for long term. The Company, which is $4.5 million, that was the total swing, as well as business development costs associated with M&A activity at $500,000.

Interest expense for 2011 was up 12.6% or $3.3 million, $29.7 million, primary driven by our long-term debt issuance from late in 2010. Net income for the full year was $37.7 million flat with 2010 earnings per share on a fully diluted basis was $0.90 per share.

Now let's talk about the fourth quarter. For the fourth quarter 2011, revenue was $103 million, down 2.3% or $2.5 million over the fourth quarter of 2010. The net effect of the RAM and MCBA added $1 million in revenue.

Operating expenses for the quarter, water production costs increased $6.3 million or 16.9% at $43.5 million. Of that amount, purchase power was $34.4 million up $5.3 million, purchase power was $6.9 million up $700,000, and pump taxes was $2.2 million up $300,000 over the fourth quarter of 2010. Admin and general or A&G expenses increased $1.5 million or 6.9% to $23.1 million driven by increased benefit and legal and outside services.

Other production increased $6.5 million or 48.8% to $6.8 million due to -- excuse me a decrease $6.5 million or 48.8% and that's primarily due to $10.5 million deferral expenses that booked within the quarter. So, when you look at that on an annual basis remember you've got to back out that $10.5 million and normalize it. Maintenance expense increased $900,000, or 17.7% to $5.6 million while depreciation and amortization increased $2.2 million or 21.3% to $12.7 million.

Net operating income decreased 36% or $4.3 million to $7.6 million in the quarter and other income expense increased 4.75% or $61,000 to $1.35 million. Interest expense is $7 million for the fourth quarter. Net income was $1.9 million or $0.04 a share on a fully diluted basis, compared to $4.9 million or $0.12 for the same period last year.

Again, included in the fourth quarter was a revenue deferral of $12.9 million, a $10.5 million deferral of expenses and a $2.4 million deferral pretax income. The three deferrals were attributed to the balances of the water rate adjustment mechanism.

So, this is where I would normally turn it over to Pete, but I want to talk about this adjustment that we had to book and I'll warn everybody I've been called a lot of things in my life but I've never been called an accounting professor. So, bear that in mind as I walk you through this complex issue we had to address during the fourth quarter 2011.

As some of you may recall and that was as disclosed in our previous 10-Ks and 10-Qs, Cal Water was the first major water utility -- investor in water utility to decouple sales from revenue and that's how we got our RAM MCBA accounts. When the California Public Utilities Commission issued our decoupling order, it was silent as to the timing and amortization of the under- or over-collected RAM and MCBA balances.

In the fall of 2010, the Company, along with other investor-owned water utilities in the state of California, filed an application to modify our decoupling order to procedural address the accounting rules around revenue recognition and collectability. Per the Commission's administrative schedule, a final decision was anticipated in December 15, 2011 and that decision was never issued. As a result, the Company had to reassess its position on revenue recognition and the impact on the uncollected RAM balances that will not be collected on a timely basis.

In particular, we had to assess these balances under the Emerging Issues Task Force Bulletin 92-7 which is entitled or titled Accounting By Rate-Regulated Utilities For Certain Effects of Alternative Revenue Programs. The literature defines programs two ways; there's an A and a B, and the type A program is defined as programs that are just billing for the effects of weather abnormalities, broad external factors or to compensate utilities for demand-side management or conservation.

So, you can see where a decoupling mechanism fits into the type A program as defined by the accounting literature 92-7. In addition, the literature sets three criteria so revenue recognition in a current period. One, the program has to be established by an order of the regulator. We make that -- we pass that test. Two, the amount of additional revenues are objectively determinable and are probable of recovery. We believe we meet that test.

And three, the additional revenues will be collected within 24 months following the end of the annual period in which they are recognized. As you can see by not having the Commission authorize our RAM collection or not authorizing to collect our RAM balances within 24 months following the end of the annual period in which they are billed, we have to look at 92-7, how it applies to our business.

In particular, the third criteria under the revenue recognition is not met. As a result, we had to reassess our position and the end result was we had to defer the $12.9 million of deferred revenue the $10.5 million deferred cost and the $2.4 million of deferred pretax income.

Going forward or until we get an order from the CPUC to address these issues, we'll have to access the RAM balances on a quarterly basis and make appropriate adjustments to defer amounts that we don't believe will be collected on time. Now that's a very subjective process. There's a lot of factors that go into determining that. Current consumption levels, weather, et cetera so this is going to be a little complex going forward as we do this on a quarterly basis.

This process and the new treatment poses many issues for us, let alone the impact on the financial statements and the cost of carrying balances for the Company. So, with that I will turn it over to Pete to give you an operational update on what's going on.

Okay, thanks Marty and good morning, everyone. Of course, I can't help myself but to comment on the RAM issue too, which I will do and I'll share with you what we see has gotten derailed here. And so I'll spend a few minutes talking about that and how it impacts us, and then I'll talk about some other regulatory issues, specifically our rate increases in 2012 in California and outside California.

Our cost of capital proceeding, which is still ongoing and 2012 general rate case which we're preparing to file. And then an update on the Commissioners in California. Some of the them have been confirmed now that were sitting in their seats almost like over a year and then, I'll wrap up by talking about the -- what we're looking at for 2012.

So, first, our 2011 results. I've got a couple of phone calls last night congratulating us on exceeding $.5 billion in revenue for the first time. That's really good. The utility operations were very solid last year. Especially serving customers in water quality and all of that. We had great results from the utility operations. And actually, the income from utility operations was up 9% to $67 million, so that was very solid.

Also in my job, I look at a lot of metrics to see how efficiently we operate. Some of these are found on the income statements. More of them are internal measures we look at. And I don't tend to include the production costs in my ratios I look at partly because they're all covered by the RAM MCBA balancing account. But more importantly, half of our water supply comes from large wholesale suppliers.

Mainly the Hetch Hetchy system and the Metropolitan Water District of Southern California and those two wholesale suppliers have been raising their rates double digits the last couple three years and that's unique to our situation in California. It doesn't really compare to other waters outside California. So, it doesn't really reflect, I don't think, our efficiencies. I tend to take the production costs out of the ratios I look at.

So, two measures I look at that actually these are both on the income statement. The first is A and G plus other operations plus maintenance divided by revenue. And the second one I look at is other operations plus maintenance divided by revenue, the basic O&M efficiency ratio. Both these measures improved year-over-year, which was the plan and they looked very solid. So, I'm very pleased with those and how they're moving.

But, the issue is the RAM collection. Keep in mind this issue is driven by a drop in customer usage. And it's -- we're finding customer usage 15% below what was predicted in the last general rate case, which is our 2009 general rate case. And that rate case was -- set the rates based on a higher usage calculation. So, there's a lot of consternation over a fairly basic issue here and that's what's the recovery period for that balance? This is not an issue for the electric and gas business, and I'll talk about that in a minute how we're different here.

As Marty mentioned, in September of 2010 actually we and the American States -- or pardon me, American Water Subsidiary and American States Water and a small water company all got together and filed an application to modify the original RAM decision to avoid this deferral of income issue. Multiple pre-hearing conferences; a schedule was set in June of last year for a final decision by December 15, 2011.

In August, the Department of Ratepayer Advocates, which is the consumer advocate of the Commission, issued a response to the filing that did not oppose the shorter period of recovery. We ask for 12 to 18 months, generally.

Anyway, lots of activity there and obviously, we thought we'd have a decision December 15. We didn't and we're now 11 weeks past that deadline and there's no proposed decision yet on the table. As a result, we had to apply the different accounting rules Marty mentioned and defer the $2.4 million in pretax income. Of course, this is compounded by the fact that we had to finance that receivable throughout the year.

Some thoughts there. One is the Commission policies we believe are still sound. The water action plan is driving policy that's good. The Commission is actually shown good leadership on a lot of issues, but this is one issues that not going well. And the frustration for us is that the commission itself has not had a chance to deal with this issue. We're still stuck waiting for a proposed decision.

As I said, this is unique to water. Decoupling has worked very well for electric and gas in California since 1980s. Electric and gas is a 12-month recovery period, that's good. Of course, they have smaller RAM balances because their sales forecasts are more accurately reflecting what customers are actually using.

The good news is that the Department of Ratepayer Advocates has agreed with the water industry on the generally 12- to 18-month recovery. There's no disagreement among the parties. But, I would characterize this as a unique form of repertory lag. And I'm optimistic once the Commission sees the issue and deals with it that they will resolve it.

The situation, as Marty mentioned, hurts us in three ways. One is we defer the income to a future period. Second is this may well damage our credit metrics, which in the long run could increase our borrowing costs, and those are paid for by customers. And of course, we occur the financing costs of the receivables until they're collected. I think enough said on that until we get to the questions and answers.

Moving now to the updates on the other regulatory issues in California. We did get step or escalation increases this year of $9 million; that's pretty small, about 1% to 2%. The cost of capital proceeding is still proceeding. In January, the Commission held additional hearings to get more information on the proposed settlement and we do have a proposed settlement. All parties agree, including the Department of Ratepayer Advocates. The issue there is the adopted rate of return. We all agree on 9.99% starting 2012. No decision yet, obviously.

The Commission has authorized a memorandum account, which really just tracks interim rates so we can retroactive back to January 1. So we're -- our planning -- all of our planing here is on the basis of a 9.99% ROE. We're busily working on the 2012 general rate case. That's a large project; lots of folks working on it. We will file our preliminary application May 1 and then our two final applications July 2 and we'll have a lot more information on that on the second-quarter conference call.

On the Commissioners, we do have three, I'll say, new Commissioners that were appointed by Governor Brown last year. Two of those have now been confirmed by the State Legislature. That's Commissioner Sandoval and Florio. Commissioner Ferron is pending confirmation, we expect that in 2012. We do have now Commissioner Sandoval and Florio for now five-year terms, they've already served one year of their six-year terms before they were confirmed and we're awaiting Commissioner Ferron to be confirmed.

Outside California, Washington Water got a rate increase of about $1.6 million effective the first quarter of this year. And then in Hawaii, we serve two islands in Hawaii; Maui and the big island. About one-third of our business is on Maui and all customers there have been through a rate process this last year.

There's two systems there, our Ka'anapoli System, which is the water, wastewater system on the coast. We are -- got approval to raise the rates there about $1.2 million effective early in 2012. And then our wastewater system the Pukalani system. We're requesting $1.3 million in annual revenues and we're about to start settlement discussions with the consumer advocate there. I think we'll have a decision by the end of the second quarter.

On the big island, which is two-thirds of our Hawaii business is on the big island. Our main system there is we call the Waikoloa System and the Waikoloa System is about half of our business on the entire subsidiary and we're asking for general rate increases there. We're about to file that application and I'll have more information about that when we file it.

So, those are the rate issues and updates. Looking ahead to this year, budgets are very tight. Marty has really turned the screws down. We need to be very efficient again, drive that efficiency ratios and all those metrics because we're looking at very small inflation increases this year and next year in California.

So, financial management is key. Second, of course, is to resolve this RAM collection issue, it's critical to us. And third, is get the 2012 general rate case filed. We see this as a real opportunity not only for rate relief in California but also to true up the sales forecasts that we're not looking at large balances on this RAM MCBA issue. I think that's it, I'll go back to Marty now for the balance sheet.

Thanks. It's probably noteworthy too, on the RAM collectability issue, the balances we believe, are fully collectible and we're unaware of any cases in the state of California, especially in the electric and gas industry, where they've had to impair or write off those balances.

Good point.

The issue here is where the timing of collectability and not having that clarified we had to trigger this alternative revenue recognition program.

It's also interesting to note, that the EITF that we had to apply was issued in 1992, and as many of you may recall if you were around electric space in 1992, there are a lot of interesting out of the box concepts that were being debated. Performance-based rate making, retail wheeling, incentive conservation programs, and so the basis of 92-7, I think, was to deal with incremental programs that the utility could provide.

In our case, one of the arguments about why it may not be applicable to us is that we don't have any other way of doing this. We just have the one way which is the decoupling mechanism itself. But nonetheless, not having clarification on that receivable we have to apply this treatment now going forward until we have this resolved.

Looking at the balance sheet, a couple of interesting things to note. The Company funded CapEx for the year, so the amount of the expenditures we invested on new projects was $111 million. That is essentially flat from last year, but we had a $65 million water plant that was deferred. We are anticipating spending $30 million this year on that plant and that's being pushed out to a later date.

Plant additions for the year, so this is projects that were completed and work taken out of construction work in progress and put into rate base. We hit a new record for the Company. We closed essentially $125 million plant during the year so we feel really good about that. And net utility plant was approximately $1.4 billion at the end of 2011.

So, looking forward into 2012, we anticipate that we'll continue to spend between $100 million and $125 million a year on new capital and we'll see that continued growth in rate base that we've seen. Cash and liquidity continue to be good even despite this collectability issue. Cash flow from operations was $115 million for the year, so that essentially covered the CapEx program for the year and we ended the year with $27 million of cash and approximately $352 million of availability on our lines of credit, our unsecured line of credit.

So, going into 2012, the balance sheet continues to be strong although the cash flow from operations is starting to be affected by the collectability issue associated with the RAM. So, with that, Melissa, we'll open it up for question and answers please.

(Operator Instructions) And our first question will come from Michael Roomberg from Ladenburg Thalmann.

Good morning, guys.

Good morning, Michael.

Just the first question I have is on Hawaii and Washington rate increases. Are those all incremental to 2012 results? Were there any interim rates that were in effect in those states?

No, those are general rates that start in 2012.

Okay. And they're all generally around the first of the year or are they going to be phased in over time, or --?

No, they hit the first of the year but they do phase in because we don't read meters once a month we read them every day. And so they do phase themselves in over about a month. By the first quarter, they're in place and they're operating.

Okay, okay. That's helpful. And just going back to California and this RAM MCBA collection issue. Assuming you do get the accelerated recovery that needs to take place for this deferred revenue issue to go away, do you plan on pursuing -- do you plan on filing to recover the carrying costs that you guys are bearing to fund these accounts during this extended period?

You know, that's a good question. Typically we can go after it in our GRC. We have a GRC filing in 2012 and we'll have to assess that as we pull that plan together. The real issue on the financing side, if you pick this thing apart, the RAM is the revenue piece, you're not really financing anything associated with that. On the modified cost balance [they got or] MCBA, we pay those bills, we pay those production costs and so at 12/31 there's $34 million of balances where we've paid all the costs associated. That's real money out the door and that's the part that we're carrying going forward. So, essentially if you look at that 5.5% bond we issued at the end of 2010, we have half of those proceeds tied up in these receivables now.

Okay. That's helpful. And then just one last question. Marty, on the LIRA filing that you guys recently have put forward to speed up the collection of that $5 million account that's been outstanding. I think, if my math is correct, on an annualized basis, based on your under-earning that you disclosed in December, the gap between what you're paying on benefits and what you're collecting from non-LIRA customers, it's about $2.5 million annualized hit to earnings. And I'm just wondering whether or not that's something that is actually flowing through your P&L right now or if it's protected by a balancing account and if not if it's something that going forward you might be able to collect on a more rapid basis it would help improve the overall level of profitability in that unit?

Yes, obviously, there's a lot of information in the application Michael, and I'd encourage you to look at that. Conceptually the -- and it's also reflected in the financials, I mean conceptually, that's going to flow based on consumption and the more people use, the quicker we'll collect it. If consumption starts to fall and we're giving a supplement to low income households, that balance can grow but that is a separate application and a separate account.

Sure, but I guess the net effect that you guys have been short of your budget in that line item. I'm just wondering whether or not that's something that is flowing through the P&L and presumably would be rectified through this special LIRA re-determination filing, or if it's something that you expect to continue to accrue GAAP, I think, in December was somewhere in the neighborhood of $200,000.

That will still continue to flow under GAAP.

Okay.

We believe that that account is flowing it's being collected. When you look at the RAM issue, in particular what triggered the RAM issue, I think this will help show where there's differences, when you look at the RAM balances, 2008 wasn't a problem, that's all been collected. 2009, there's about a $4 million piece that was not collected within the 24 months, so you look -- it was billed in '09, you have to go to the end of 2009 and count out two years and it was that $4 million there that triggered this 92-7 review. So, so far we haven't had any problems with LIRA.

Okay. All right, thank you.

And our next question will come from Ryan Connors from Janney Montgomery Scott.

Morning Pete and Marty.

Morning.

Good morning, Ryan.

So a couple of questions just on this RAM issue. I'm interested you made a comment on credit metrics and presumably credit ratings as well. What kind of clock is ticking there in terms of your rating agencies and how they're looking at this? Have you had any communications with them in terms of do they have milestones in their mind? They'd like to see it resolved by a certain period before they start to actually think about acting on their side?

Yes, that's a good question. And in particular, S&P, Standard and Poors is the company that rates us. If you saw in December, I believe early in December, they changed our outlook from stable to negative and the metric that they look at is really -- they call it FFO, Funds From Operations, but it's really cash flow from operations with some non-cash things added in and out. Their requirement to keep an A plus rating is 16%, a ratio of 16%. We were above that ratio in Q3 but we're below that ratio for the year. So, how they will interpret that I can't say. I will tell you though, if you go to their website, standardandpoors.com, they do have all their rating criterias that they publish, they try to put that out in front of everyone. S&P does know we've had an open application in an attempt to try to resolve this and I think it's really important, I can't stress this enough, that it's not a collectability issue, we believe it's fully collectable. I think when you look at the broader utility space in the state of California, this is just a kink in the process, that the other utilities that have been decoupled for years have not had to deal with this or they've resolved the issue successfully. So, it's just a matter of us going through the process until it's resolved.

Okay, that's helpful. And then, more conceptually on the RAM, as you know, we've been of the view that although on paper, the decoupling mechanism pencils out. It does introduce the potential for an elevated level of administrative complexity and increases reliance on regulatory compact and making sure that all these steps take place as they need to in a timely fashion. Does this kind of thing change your view at all on that issue? Or, do you really think this is a one off and that it's not this sign of a more recurring issue with the whole means that California's PUC has taken to implement decoupling?

You know, that's a good question. I think -- and your point about the level of complexity it just went way up. And unfortunately, applying these rules for those old balances, it's like they become on a cash basis of accounting. So, it's really going to make the P&L very complicated. Again, I don't believe that's the intent of the commission, because it wasn't the intent in the electric or in the gas base. In terms of the issue around the RAM and does it pencil out, I do believe it works and I believe it works as someone who grew up in California. We've seen it work on the electric and we've seen it work on the gas side.

And if you look at just our production numbers in terms of the magnitude of the effect if you go back to the pre-RAM days, our total water production was about 141 -- doesn't specify if it's cubic acre feet or MCL's but there's -- use 141. For 2011, it's 120. So, you've had a significant decline. You've had a 15% drop essentially in consumption over -- since we've decoupled. Part of that could be attributable to weather but weather changes all the time. I think part of what's behind that is just everyone is focused on preserving water because water is a precious commodity. And we do think that, that doing everything you can to conserve water is the right approach for California. Remember, we've got half the state that's a desert and the other half that has plenty of water and there's always fights over boundary issues around water. So, we do believe it's the right approach and we do believe it works.

I'll add in and agree with Marty that I do believe also that the decoupling in the RAM MCBA is the right approach. This is an adjustment we're making here for the collectability period, but Ryan, you hit it on the nose when you said how complex this is. Because we don't have one RAM MCBA, I'll give Marty and the accounting group credit here. We had 26 separate rate making districts, each one with their own RAM, their own MCBA, their own collection period so we have to add those all together. It's very complicated. Electric and gas have one rate district and I know our Commission is beginning to look at consolidating rate making but that's a long, long way away and a lot of hurdles to get there. So, for the time being, it's a lot of accounting work here and very complex but the concept is still good, still sound.

We'll watch with interest and thanks for you time today, very helpful.

Okay, thanks Ryan.

And next we'll go to Jonathan Reeder with Wells Fargo.

Good morning, Marty and Pete.

Hi, Jonathon.

Just want to try to get to, Marty, what an ongoing number would be for '11, and I guess there's three items, at least, have jumped out to me, from the call and going through the K and everything. First, would be, obviously, those $2.4 million pretax income deferral. The second, the $1.9 million insurance mark to market. And then the third, and I was hoping you could explain this a little more, I saw in the K about a $2.1 million reduction of revenues related to the pending settlement with the non-regulated businesses?

Yes, but that's been booked. So, let's go with the first one first. That's a settlement that we're waiting to be approved. If you remember, we had service line protection and we grew that business, then we sold that business to a third party where they administer the contracts but we still do the billing and collections. So, we settled that amount, that $2 million and we have agreements from the DRA on that settlement. So, that's been booked. So, that is a one time event that took place in the third quarter of 2011.

Getting back to your questions if you normalize what happened in 2011, there's a couple key things to look at when you're considering your numbers. First and foremost, the RAM deferral's about $0.04 when you look at it, so you have about $0.04 sitting there. When you look at the mark to market from the aspect of long-term there's $0.06 there. And what was interesting about that, the bulk of that hit in the third quarter and we recovered a little bit of that loss, but it wasn't enough to offset it for the year. That was a fairly big thing that's below the line, so you got about $0.06 there. When you look at the financing costs if you were to take -- strip out the MCBA only again because you don't want to have the financing costs for revenue but the production costs, where we're paying out it out the door, then waiting to collect. You've probably got $0.04 there of financing costs. So, you take that, and then as you may recall in the third quarter, we mentioned we did have a couple law cases that we litigated and then we had to step up security in a couple of our regional offices. We actually had an armed robbery. So, there's another $0.01 to $0.02 sitting there associated with these one time events that took place during 2011.

I apologize, Marty. What did you say was the $0.06?

The $0.06 would be the mark to market.

That would be the swing from '10 to '11? Absolute, it's just the 1.9. Right?

Correct. Correct.

So, you have the 2.4, the 2.1, the 1.9, and then depending on how we look at -- for right now, that interest expense related to the MCBA, at least until that's resolved it's an ongoing but at least was a $0.04 drag. So, you add all that onto your $0.90 and you get probably $1.03, $1.04, somewhere in that ballpark?

Yes, that sounds correct. And if you look at the 1.9 -- not looking at the year-over-year change in that mark to market. If you take the absolute, it comes out to about $2.75.

Okay and then next question I have about the big island. You say it's about two-thirds of Hawaii that you're about to file for. Is it fair to extrapolate on the potential amount of that based on the other one-third of the system you've filed?

No, I wouldn't extrapolate yet. Let us file the case and then we'll let you know what that is. I say there's one system Waikaloa, there's really five systems, five rate cases included in there, water and wastewater. So, hold off until we do a filing there, but I expect that before the end of the first quarter.

And that's going to be for all -- I mean you're going to file then, I guess, cases for all of the big island?

Yes. Starting with the big one, the big, big case.

Okay. And then I guess the one jurisdiction we didn't touch on was New Mexico. Anything going on there?

Small rate increase, it's our smallest system. You can't see it on the income statement. It's pretty neutral to earnings.

Okay.

Actually, they are able to raise their rates every year without a formal application but it's such a small subsidiary that we don't even count it. Well, I can't say we don't count it, there's probably someone from New Mexico listening in. But it's so small, it doesn't impact the numbers.

Okay and then Marty, if you could make some comments around equity needs. I guess will that be addressed following resolution of the cost of capital?

Yes, we're always assessing equity needs and obviously, as we continue to invest north of $100 million a year in CapEx, we're always looking at that. Having said that, I've been feeling really good about how good cash flow from operations has been, even despite growing these receivable balances, if you look at the total working capital that's tied up in our AR, and AR being trade AR, and so I mentioned about LIRA and the RAM MCBA, we've got over $100 million in working capital tied up in receivable balances. So, get the RAM resolved, that's a big deal. That will definitely help our cash flow from operations.

We're still a little upside down on our debt to equity ratios, obviously 2012 is a rate case year. I'd like to try to get that corrected before the end of the year, but we're not going to go to market unless we really have to. And as Pete said, we're keenly focused on expense control for 2012 and 2013, since we only have the inflationary offset increases coming through and trying to manage costs and keeping those in line. So, I can't say if we'll go to the market or not, other than we're always looking at that and you will see, we will be updating our shelf with the FCC, I believe our shelf expires here in March, so we will update that. We have a shelf we keep ready to go with the FCC, so we can go out when needed. But as of right now, we got through year-end and we're in the Q1, which is always our toughest quarter and cash has still been holding on strong.

Suffice it to say, assuming you get approved for 53.4% equity ratio, you'd have to take some sort of corrective measure to get there from the 46% that you closed the year out at?

Not necessarily. That's for rate-making purposes. That goes into the calculation for rate making. But yes, if you think about our strategy and we've talked about this in previous years, we try to do bigger tranches because it lowers the overall expense transaction cost. Though, we'll just have to assess that as we go throughout the year.

Okay, thanks, guys.

Let me add one more thing to that and that's the cost of capital is really the proceeding that makes that decision. And the settlement is a 53% equity ratio in that cost of capital, and it's a three year decision. And it should be effective retroactive back to January 1, this year.

And it's a three year average so we look at that on a three-year average basis and that's what gives us the room to do these bigger tranches and average them out over a three-year period.

Right, okay. I appreciate it.

Thanks, Jonathan.

(Operator Instructions) Our next question comes from [Hyka Door], Robert W. Baird.

Good morning.

Good morning.

I'd like to return to this topic of ongoing earnings that Jonathan was talking to you about but perhaps maybe looking at it from a top down basis. If we start at the roughly 502 gross margin how we should be thinking about 2012, 2013. I know we have the GRC step increases of $9 million, $9.5 million. I know we have the Hawaii and Washington rate cases that together will be about $3 million, $3.5 million next year, and then we also have this about $3 million over the next two years as you switch to the full GRC. I'm wondering if you can talk us through besides this RAM what else we should be thinking about that would get added into this 296 base for 2011? Namely, how we should be thinking about the $72 million of capital project advice letters?

That's a good question. That's a very good question. Obviously, we've stayed focused on advice letters and getting those capital projects into the ground. We've gotten a lot filed. We still have a lot to do over the next two years, but depending on the project, that's hard to predict. For example, we just finished -- we built a new IT building. We call it the IT building but it's our conference center and it houses HR and IT. That's actually a separate full application, that's about a $6 million project we're getting ready to file that and that'll go into rates once it's approved and put in the rate base. So, the timing differences are going to be hard to gauge. Other than that, I suggest or -- we can give updates on where we are with the advice letter projects on a quarterly basis. To your point about the margin though and as many of you know, I've been preaching, look at the margins, look at the adopted gross margin. Until we resolve this RAM issue, the margin is going to be all over the place because it's going to bounce around because of the deferral. So, we hope to get this corrected soon, because I think ultimately in the end, applying this accounting principle, this 92-7 is going to make it very difficult for the users of financials to back into the margin of the operations and to back into the rate case.

But now if we were to look at what the 2009 general rate case had stipulated for gross margins or they're calling it revenue requirement, if we take the 296 and add back the RAM, how close are you to what had been stipulated? We had been expecting a much higher gross margin in the fourth quarter. I'm just trying to reconcile where the shortfall is.

So, you're talking about 2009 or what year are you talking about?

I'm sorry, the 2011 rates that took effect. What was supposed to be you expected gross margin as written in the rate case? Do you know that number off hand?

You know, it was supposed to be about $307 million, and this is why I think this is where I was pointing out the margins difficult to take. After you look at adjusting the margin for the deferrals that we talked about, it brings it down to about $296 million for 2011 because you defer it. It gets pushed out.

Right, and not to belabor the situation with the RAM and the MCBA, but will we continue to see for every quarter that this drags on, will you need to take a deferred charge in each quarter for whatever is accruing?

Potentially, yes. And that's why if you think about the role of general accepted accounting practices, the overall goal is to make the financial statements as simple and as easy to understand for the users of the statements and applying this 92-7 it's going to make it frankly hell to reconcile. And yes, every quarter we're going to have to do an assessment and look at the probability of collections for the RAM MCBA balances and the ones we don't believe will be collected within the 24 month period will have to be deferred.

And when this finally reaches a conclusion, let's say the conclusion hits in the third quarter, so now you've taken a deferred charge this quarter in the first quarter and in the second quarter. Would we see all of that hit in the quarter that it gets approved?

Potentially, yes. It depends on what's in the final decision and we'll have to adopt our accounting to what's in that decision. But essentially, as long as those balances are collectible within 24 months of the end of the first period, that first year in their bill, they can be counted as current revenue, to the extent they're not collectible then we have to defer it. So, we lay out the cost component of it under FAS 71 as a regulatory asset but we have to back out the revenue and that's what gets you to the pretax net income margin piece that gets popped out.

Okay. Final question. I wonder if you could talk a little bit about your capital expenditure outlook? I believe we had been talking about an annual range of $125 million to $135 million? In your Q, it says your range is going to be $100 million to $125 million, but, Marty, I believe on the call you just mentioned a 2012 assumption of $125 million?

Yes, we say $100 million to $125 million, and part of it is just because it's lumpy and let me give you some more data on that, that might help. If you -- there's three components here? There's the Company funding of the CapEx, so the dollars up front that go into a project and those dollars go into work in progress, which is the second component. And as the projects get wrapped up, they get put into plant and service? If you look at the work in progress balance, we started the year at about $103 million or Q4 of last year we ended 12/31/10 at $103 million sitting in WIP. And then we ended 2011 with $99 million sitting in WIP. So, we've been able to bring part of our WIP balance down which is good. We're closing out the projects and getting them in the rate base quicker. We want to stay focused on doing that because we have do have an earnings test that we have to meet. Part is just the fact that these projects are lumpy and, and I mentioned a large water plant that got deferred. We spent some money on the design and engineering and we've put that on hold for a while. That was $35 million that was planned to be paid for during 2011. So, if we would have moved forward with that plant, we would have conceivably been $137 million, $138 million of Company funded CapEx for the year. So, there's a lot of projects. There's a lot of backlog and so we want to try to knock out that backlog and get it in rate base as quickly as possible.

Okay, that's helpful. Thanks.

Sure. And I'll continue to give updates on the capital program every quarter and let you know if our outlook changes. Between $100 million and $125 million. In the last couple of years we've been running between $110 million and $115 million.

(Operator Instructions) We have no further questions in the queue. I'll turn the conference back to Mr. Kropelnicki for any closing remark.

Great, thank Melissa. Everyone thanks for joining us today and listening to me talk about EITF 92-7. Hyka's questions were very spot on in that we will have to assess this every quarter. And so it will have some volatility associated with it until we get the proceeding resolved. However, keep in mind we do believe the balances are fully collectible when you look at the broader utility market in California, we think this issue will resolve and we hopefully will have it resolved quickly. So, thank you for joining the call today and if you have any questions, please feel free to give us a call. Thank you and good day.

That does conclude our conference for today. Thank you for your participation.