Mar 1, 2012
Operator
Good morning, ladies and gentlemen. Welcome to the Fourth Quarter and Year-End 2011 Earnings 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.
Martin Kropelnicki
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 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.
Martin Kropelnicki
Also, I'd like to point out to everyone if you don't have a press release, you can get that on our website www.calwatergroup.com under the Investor Relations section and under News.
Martin Kropelnicki
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.
Martin Kropelnicki
Because these statements deal with future events, they are subject to various risks and uncertainties and actual results could differ materially from the company's current expectations. Because of this, the company strongly advises all current shareholders, as well as all interested parties to carefully read and understand the company's disclosures on risks and uncertainties and important information found in our Form 10-K, Form 10-Q, and other reports filed from time to time with the Securities and Exchange Commission.
Martin Kropelnicki
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 deferral 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 in the fourth quarter, but also affect year-end results and are attributable to the balances of a Water Rate Adjustment Mechanism that the company doesn't anticipate it will collect within 24 months.
And after I go through the results, I'll come back and talk about the accounting literature that we applied in the fourth quarter and why we did so.
Martin Kropelnicki
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 of 2010. For 2011, the net effect of the Water Rate Adjustment Mechanism or WRAM and the Modified Cost Balancing Account, MCBA, added $33.3 million of revenue.
Martin Kropelnicki
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 purchased power increased $500,000, and pump taxes increased $500,000. So the bulk of the cost increase was in purchased water.
Keep in mind that those 3 elements, purchased water, purchased power, and pump taxes, are all covered by the MCBA.
Martin Kropelnicki
A&G for the year increased $13.9 million or 10.5% to $85.8 million. Four main drivers for the increased A&G.
First and foremost, health care costs increased $3.5 million year-over-year; pension costs increased $3 million and remember, pension is covered by a 2-way balancing account, so the net effect on the bottom line is really 0; 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 themes that we talked about at the end of the third quarter on the conference call carry through to year end.
Martin Kropelnicki
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 plants and higher depreciation rates that took effect January 1st, 2011.
Martin Kropelnicki
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.
Martin Kropelnicki
Total operating expenses for Group on an annual was $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.
Martin Kropelnicki
Going down -- further down the line on the income statement, other income and 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 of the company, which is $4.5 million; that was the total swing, as well as business development costs associated with M&A activity of $500,000.
Martin Kropelnicki
Interest expense for 2011 was up 12.6% or $3.3 million to $29.7 million, primarily driven by a long-term debt issuance from late in 2010.
Martin Kropelnicki
Net income for the full year was $37.7 million, flat with 2010 and earnings per share on a fully diluted basis was $0.90 a share.
Martin Kropelnicki
Now, let's talk about the fourth quarter. For the fourth quarter of 2011, revenue was
Martin Kropelnicki
$103 million, down 2.3% or $2.5 million over the fourth quarter of 2010. The net effect of the WRAM and MCBA added $1 million in revenue.
Operating expenses for the quarter; water production costs increased $6.3 million or 16.9% to $43.5 million. Of that amount, purchased power was $34.4 million, up $5.3 million; purchased power was $6.9 million, up $700,000; and pump taxes was $2.2 million, up $300,000 over the fourth quarter of 2010.
Martin Kropelnicki
Admin and general or A&G expenses increased $1.5 million or 6.9% to $23.1 million, driven by increased benefit, legal and outside services. Other production increased $6.5 million or 48.8% to $6.8 million due to the -- excuse me, decreased $6.5 million or 48.8% and that's primarily due to the $10.5 million deferral of expenses that was booked within the quarter.
So when you look at that on an annual basis, remember, you 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.
Martin Kropelnicki
Net operating income decreased 36% or $4.3 million to $7.6 million in the quarter and other income and expense increased 4.75% or $61,000 to $1.35 million. Interest expense was $7 million for the fourth quarter.
Martin Kropelnicki
Net income was $1.9 million or $0.04 a share on a fully diluted basis compared to $4.9 million or $0.12 a share 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 of pretax income.
The 3 deferrals were attributed to the balances of Water Rate Adjustment Mechanism.
Martin Kropelnicki
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 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.
Martin Kropelnicki
As some of you may recall and as disclosed in our previous 10-Ks and 10-Qs, Cal Water was the first major water utility -- investor owned water utility to decouple sales from revenue and that's how we got our WRAM and 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 WRAM and MCBA balances.
Martin Kropelnicki
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 properly address the accounting rules that centered around revenue recognition and collectibility. Per the Commission's administrative schedule, a final decision was anticipated in December 15, 2011 and that decision was never issued.
Martin Kropelnicki
As a result, the company had to reassess its position on revenue recognition and the impact on the uncollected WRAM 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."
Martin Kropelnicki
The literature defines programs 2 ways; there is 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.
Martin Kropelnicki
In addition, the literature sets 3 criteria for revenue recognition in a current period. One, the program has to be established by an order of the regulator; we make that -- we passed that test.
Two, the amount of additional revenues are objectively determinable and are probable recovery; 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.
Martin Kropelnicki
As you can see, by not having the Commission authorize our WRAM collection -- or not authorizing to collect our WRAM 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 of deferred costs, and a $2.4 million of deferred pretax income.
Martin Kropelnicki
Going forward or until we get an order from the CPUC to address these issues, we'll have to assess our WRAM 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.
Martin Kropelnicki
So with that, I will turn it over to Pete to give you an operational update on what's going on.
Peter Nelson
Okay. Thanks, Marty.
And good morning, everyone. Of course, I can't help myself but to comment on the WRAM issue too, which I will do and I will share with you what we see has gotten derailed here.
Peter Nelson
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 our 2012 general rate case which we are preparing to file, and then an update on the commissioners in California; some of them have been confirmed now that were sitting in their seats almost -- in fact, over a year.
And then I'll wrap up by talking about the - what we are looking at for 2012.
Peter Nelson
So, first, our 2011 results. I got a couple of phone calls last night congratulating us on exceeding $0.5 billion in revenue for the first time.
That's really good. The utility operations were very solid last year, especially serving customers, and water quality, and all of that.
We had very great results from the utility operations. And actually, the income from utility operations was up 9% to $67 million.
So that was very solid.
Peter Nelson
Also, in my job, I look a lot of metrics to see how efficiently we operate. Some of these are found on the income statement.
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 are all covered by the WRAM, MCBA balancing account.
Peter Nelson
But more importantly, half of our water supply comes from the large wholesale suppliers, mainly the Hetch Hetchy system and the Metropolitan Water District of Southern California. And those 2 wholesale suppliers have been raising their rates double digits in the last couple or 3 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.
So I tend to take the production costs out of the ratios I look at.
Peter Nelson
So, 2 measures I look at that -- actually these are both on the income statement. The first is A&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 look very solid. So I'm very pleased with those in how they are moving.
Peter Nelson
But the issue today is the WRAM collection. Keep in mind, this issue is driven by a drop in customer usage and it's -- we are finding customer usage about 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 is 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.
Peter Nelson
So as Marty mentioned, in September 2010 actually, we and the American Water Subsidiary and American States Water, and a small water company all got together and filed an application to modify the original WRAM decision to avoid this deferral of income issue.
Peter Nelson
Through 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 Rate Payer 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 asked for 12 to 18 months, generally.
Peter Nelson
Anyway, lots of activity there and obviously, we thought we'd have a decision December 15. We didn't and we're now about 11 weeks past that deadline and there is no proposed decision yet on the table.
And 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.
Peter Nelson
So 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 has actually shown good leadership in a lot of issues, but this is one issue that is 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.
Peter Nelson
As I said, this is unique to water. Decoupling has worked very well for electric and gas in California since 1980s.
Electric and gas has a 12-month recovery period, that's good. Of course, they have smaller WRAM balances because their sales forecasts are more accurately reflecting what customers are actually using.
Peter Nelson
The good news is that the Department of Rate Payer Advocates has agreed with the water industry on the -- generally, a 12 to 18-month recovery. There's no disagreement among the parties.
But, I would certainly 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.
Peter Nelson
The situation is, as Marty mentioned, hurts us in 3 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 incur the financing costs of the receivables until they are collected.
I think enough said on that until we get to the questions and answers.
Peter Nelson
Moving now to the updates on the other regulatory issues in California, we did get step or escalation increases this year of about $9 million. That's pretty small, about 1% to 2%.
Peter Nelson
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 Rate Payer 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 the interim rates so we can retroactive back to January 1.
So we're -- our planning, all of our planning here, is on the basis of a 9.99% ROE.
Peter Nelson
We're busily working on the 2012 general rate case. That's such a large project, lots of folks working on it.
We will file our preliminary application May 1 and then our true final application July 2, and we'll have a lot more information on that on the second quarter conference call.
Peter Nelson
On the Commissioners, we do have 3, 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.
So we do have now Commissioner Sandoval and Florio, for now 5-year terms; they've already served one year of their 6-year terms before they were confirmed and we are waiting Commissioner Ferron to be confirmed.
Peter Nelson
Outside California, Washington Water got a rate increase of about $1.6 million effective the first quarter this year. And in Hawaii -- we serve 2 islands in Hawaii, Maui and the Big Island.
Peter Nelson
About 1/3 of our business is on Maui and all customers there have been through a rate process this last year. There's 2 systems there, our Ka'anapali system, which is the water - wastewater system on the coast.
We are -- got approval to raise rates there about $1.2 million effective early in 2012. And then our wastewater system, the Pukalani system, we are requesting $1.3 million in annual revenues.
And we are about to start settlement discussions with the consumer advocate there. I think we'll have a decision by the end of the second quarter.
Peter Nelson
On the Big Island, which is 2/3 of our Hawaii business is on the Big Island. Our main system there, we call the Waikoloa system.
Actually the Waikoloa system is about half of our business on the entire subsidiary. And we are asking for general rate increases here.
We are about to file that application and will have more information about that when we file it.
Peter Nelson
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 are looking at very small inflation increases this year and next year in California, so financial management is key.
Peter Nelson
Second of course is to resolve this WRAM collection issue, 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 forecast that were not looking at large balances on this WRAM and MCBA issue.
Peter Nelson
I think that's it. I'll go back to Marty now for the balance sheet.
Martin Kropelnicki
Thanks. It is probably noteworthy too on the WRAM collectability issue, the balances, we believe, are fully collectable and we are unaware of any cases in the State of California, especially in the electric and gas industry, where they had to impair or write off those balances.
Peter Nelson
Good point.
Martin Kropelnicki
The issue here is really 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.
Martin Kropelnicki
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 and going forward until we have this resolved.
Martin Kropelnicki
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 30 -- actually 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.
Martin Kropelnicki
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 had a new record for the company; we closed essentially $125 million of plants during the year.
So we feel really good about that. And net utility plant was approximately $1.4 billion at the end of 2011.
Martin Kropelnicki
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 that 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 the -- on our lines of credit, our unsecured line of credit.
Martin Kropelnicki
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 WRAM.
Martin Kropelnicki
So with that, Melissa, we will open it up for question and answers, please.
Operator
[Operator instructions] And our first question will come from Michael Roomberg from Ladenburg Thalmann.
Michael Roomberg
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?
Peter Nelson
Those are general rates that start in 2012.
Michael Roomberg
Okay. And they are all generally around the first of the year or are they going to be phased in over time?
Peter Nelson
They hit the first of the year, but they do phase in because we don't read meters every -- once a month, we read them every day and so they do tend to phase themselves in over about a month. But they are -- by the first quarter, they are in place and they are operating.
Michael Roomberg
Okay, okay. That's helpful.
And just going back to California into this WRAM, MCBA collection issue, assuming you do get the accelerated recovery that needs to take place for this deferred revenue issue to kind of go away, do you plan on pursuing the -- do you plan on filing to recover the carrying costs that you guys are bearing to fund these accounts during this extended period?
Martin Kropelnicki
That's a good question. I mean, 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 WRAM is the revenue piece; you are not really financing anything associated with that.
But on the Modified Cost Balancing Account or MCBA, we pay those bills. So we pay those production costs.
And so at 12/31, there is $34 million of balances when we paid all the costs associated, that's real money out the door. And that's the part that we are 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.
Michael Roomberg
Okay. That's helpful.
And then, just one last question, Marty, on the LIRA filing that you guys recently put forward to kind of 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 are paying out in benefits and what you are 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 that would help improve the overall level of profitability in that unit.
Martin Kropelnicki
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 are going to collect it; if consumption starts to fall and we are giving a supplement to low-income households, that balance can grow. But that is a separate application and a separate account.
Michael Roomberg
Sure. But I guess the net effect is that you guys have been kind of 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 a gap. I think in December, it was somewhere in the neighborhood of $200,000.
Martin Kropelnicki
Yes, well, that'll still continue to flow under GAAP [ph] .
Martin Kropelnicki
So we believe that that account's flowing, it's being collected. When you look at the WRAM issue and particularly what triggered the WRAM issue, I think this will help kind of show where that difference is.
When you look at the WRAM 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 it was built in '09, you have to go the end of 2009 and count out 2 years and it was that $4 million there that triggered this 92-7 review. So far, we haven't any problems with LIRA.
Operator
And our next question will come from Ryan Connors from Janney Montgomery Scott.
Ryan Connors
So, a couple of questions just on this WRAM issue. So I'm interested and 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 resolved by a certain period before they start to actually think about acting on their side?
Martin Kropelnicki
Yes, that's a good question. And in particular, S&P, Standard & Poor's is the company that rates us.
If you saw in December, I believe it was 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 that get added in and out.
Their requirement to keep an A+ rating is 16%, a ratio of 16%. We were above that ratio in Q3, but were 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 criteria that they publish, they try to put that out in front of everyone.
The 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 and I can't stress this enough that it's not a collectability issue, we believe it's fully collectible.
And 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, so they've resolved this issue successfully. So it's just a matter of us going through the process until it's resolved.
Ryan Connors
Okay. That's helpful.
And then I guess just more conceptually on the WRAM, as you know, we have 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 sort of reliance on the regulatory compact and making sure that all these different steps take place as they need to in a timely fashion. I mean, does this kind of thing change your view at all on that issue or do you really think this is just kind of a one-off and that it's not sort of a sign of a more recurring issue with the whole means that California's PUC has taken to implement decoupling?
Martin Kropelnicki
That's a good question. I think that -- and your point about the level of complexity, it just went way up.
And unfortunately, applying these rules for those old balances, they -- it’s like they become on the cash basis of accounting. So it's really going to make the P&L very complicated.
Again, I don't believe that that's the intent of the Commission because it wasn't the intent in the electric or in the gas space. In terms of the issue around the WRAM 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-WRAM days, our total water production was about 141 - it doesn't specify if it's cubic acre feet or MCLs -- use the 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 and 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 as water is a precious commodity.
And we do think that doing everyone you can to conserve water is the right approach for California. Remember, we got half the state is a desert and the other half 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.
Peter Nelson
Yes, I'll add in and agree with Marty that I do believe also that the decoupling in the WRAM, MCBA is the right approach. This is an adjustment we are making here to -- 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 WRAM, MCBA, and I'll give Marty an accounting credit here. We have 26 separate rate-making districts, each one with their own WRAM, their own MCBA, their own collection period.
So we have to add those altogether, 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.
Operator
And next we'll go to Jonathan Reeder with Wells Fargo.
Jonathan Reeder
I just want to try to get to, I guess, Marty what an ongoing kind of number would be for '11. And I guess there's kind of 3 items at least have jumped out to me from the call and going through the K and everything.
First, would be obviously this $2.4 million pre-tax income deferral. The second, I guess the $1.9 million insurance mark-to-market.
And then the third and I was hoping you'd kind of explain this a little more. I saw on the K about a $2.1 million reduction of revenues related to the pending settlement with the non-regulated businesses.
Martin Kropelnicki
Yes. But that's been booked.
So, I -- 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. And then -- where they administer the contracts but we still do the billing and the collections.
And so, we settled that amount, that $2 million and we have agreement 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 question.
So, if you normalized what happened in 2011, I think there's a couple of key things to look at when you're considering your numbers. First and foremost, the WRAM deferral is about $0.04, all right, when you look at it.
So, you got about $0.04 sitting there. When you look at the mark-to-market from the assets off of long-term, there's about $0.06 there.
And what was interesting about that -- the bulk of that kind of 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. So, that was -- that was a fairly big thing that's below the line.
So, you got about $0.06 there.
Martin Kropelnicki
When you look at kind of the financing costs if you're to just take the -- strip out the MCBA only. Again, because you don't really have financing costs for revenue, but the production costs we're paying out the door and then waiting to collect.
You probably got about $0.04 there of financing costs. So you take that and then, as you may recall on the third quarter, we mentioned we did have a couple case -- 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 kind of one-time events that took place during 2011.
Jonathan Reeder
I apologize, Marty. What did you say was the $0.06?
Martin Kropelnicki
The $0.06 would be the mark-to-market.
Jonathan Reeder
Well, that would, that would be the swing from -
Martin Kropelnicki
Yes.
Jonathan Reeder
'10 to '11.
Martin Kropelnicki
That's right.
Jonathan Reeder
Absolute, it's just the $1.9 million, right?
Martin Kropelnicki
Correct.
Jonathan Reeder
Okay. So and you have the $2.4 million, the $2.1 million, the $1.9 million and then depending on how we look at -- I mean the - for right now, I guess the interest expense related to the MCBA.
I mean, at least until that's resolved, it's kind of an ongoing but at least it was the $0.04 drag. So, you add all that onto your $0.90 and you get probably $1.03, $1.04, somewhere in that ballpark?
Martin Kropelnicki
Yes. That sounds correct.
And if you just look at the $1.9 million so if you're not looking at the year-over-year change in that mark-to-market, you just take the absolute, it comes out to about $0.0275.
Jonathan Reeder
Okay. And then next question I have about the Big Island.
You say it's about 2/3 of Hawaii that you're about to file for. I mean, is it fair to extrapolate on the potential amount of that based on, I guess, the other 1/3 of the system you filed?
Peter Nelson
No. I wouldn't extrapolate yet.
Let us file the case and then we'll let you know what that is. There's -- I say there's one system [ micro ] , there's really five systems -- 5 rate cases included in there; water and waste water.
So, hold off until we do a filing there. But I expect that before the end of the first quarter.
Jonathan Reeder
And that's going to be for all? I mean, you're going to file then I guess cases for all the Big Island?
Peter Nelson
Yes. Starting with the big one.
The big case, sorry.
Jonathan Reeder
Okay. Okay.
And then I guess the one jurisdiction we didn't touch on was New Mexico. Anything going on there?
Peter Nelson
Small rate increases, our smallest system. You can't see it on the income statement.
It's just -- I mean, it's pretty neutral to the earnings. They do -- 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 just can't say we don't count it, probably someone from New Mexico listening in.
But it's so small, it doesn't impact the numbers.
Jonathan Reeder
Okay. And then, Marty, if you could just make some comments I guess around equity needs.
I guess will that be addressed following resolution of the cost of capital?
Martin Kropelnicki
Yes. I mean, we're always assessing equity needs.
And obviously, as we've continued to invest north of $100 million here in CapEx, we're always looking at that. And having said that, I have 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 ARB and trade AR and someone mentioned maybe we had LIRA and the WRAM, MCBA, we got over $100 million in working capital tied up with receivable balances. So get the WRAM 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 SEC. I believe our shelf expires here in March so we will update that.
We have a shelf we keep ready to go with the SEC 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 is still been holding on strong.
Jonathan Reeder
But suffice it to say, if -- assuming you get approved for the 53.4% equity ratio, I mean, you'd had to take some sort of corrective measure to get there from the 46% that you closed the year out at?
Martin Kropelnicki
Not necessarily, that's for rate making purposes. So, that goes into the calculation for rate making.
But, yes -- I mean, 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 of transaction cost.
So, we'll just have to assess that as we go throughout the year.
Peter Nelson
Let me add one more thing to that. And that's the cost of capital is really the proceeding [ph] that makes that decision.
And the settlement is a 53% equity ratio in that cost of capital. It's a 3 year decision.
And it should be effective retroactive back to January 1st this year.
Martin Kropelnicki
And it's a 3-year average. So, we look at that on a 3-year average basis.
And that's what gives us room to do these bigger tranches in average amount over a 3 year period.
Operator
[Operator Instructions] Our next question comes from Heike Doerr, Robert W. Baird.
Heike Doerr
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. So, if we start at the roughly 502 gross margin, how we kind of 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 2 years as you've switched to the full GRC. I'm wondering if you can talk us through besides this WRAM, what else we should be thinking about that would get added into this 296 base for 2011, namely how we should be thinking about this $72 million of capital project advice letters.
Peter Nelson
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 got a lot of them - a lot filed.
We still have a lot to do over the next 2 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 the 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 will go into rates once it's approved and put into rate base.
So, the timing differences are going to be hard to gauge other than 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 margin.
Look at the adopted gross margin." Until we resolve this WRAM issue, the margin is going to be all over the place because it's going to bounce around because of the deferral.
And 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.
Heike Doerr
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 this 296 and we add back the WRAM, how close are you to what was stipulated?
We had been expecting a much higher gross margin in the fourth quarter. So, I'm just trying to reconcile where that short fall is.
Peter Nelson
So, you're talking about 2009 or - what year are you talking about now?
Heike Doerr
I'm sorry. The 2011 rates that took effect, what was supposed to be your expected gross margin as written in the rate case?
Do you know that number offhand?
Peter Nelson
It was - it was supposed to be about $307 million and this is where I think - this is why I was pointing out where the margins are going to be difficult to peg. After you look at adjusting the margin for the deferrals that we talked about, it brings it down about $296 million for 2011 because you defer it, it gets pushed out.
Heike Doerr
Right. And not to belabor this situation with the WRAM 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?
Peter Nelson
Potentially, yes. And that's why I mean, if you think about the role of generally 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.
In 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 those, for the WRAM, MCA balances.
And the ones that we don't believe are going to be collected within the 24 month period will have to be deferred.
Heike Doerr
And when this finally reaches a conclusion. Let's say the conclusion hits in 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 then in that quarter that it gets approved?
Peter Nelson
Potentially, yes. It depends on what's in the final decision and we'll have to adapt our accounting to what's in that decision.
But essentially, as long as, as long as those balances are collectible within 24 months of the end of the first period in that first year and they're billed then they can be counted as current revenue. To the extent they're not collectible then we have to defer it.
So, we lay up 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 kind of the pre-tax net income margin piece that gets popped out.
Heike Doerr
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 queue it says, you're 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?
Martin Kropelnicki
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 3 components here, right?
There's the company funding of the CapEx, so the dollars up front that go into a project then those dollars go into working progress which is the second component. And as those projects get wrapped up, they get put into planned service, right?
So, if you look at kind of the work in progress balance, we started the year about $103 million, let's say 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 because we're closing out those projects and getting them into rate base quicker. We want to stay focused on doing that because we do have an earnings test that we have to meet.
But part is just the fact these projects are lumpy. And I mentioned a large water plant that got deferred.
We spent some money on that on the design and engineering and we've just put that hold on for awhile, but 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 back log and get it in rate basis as quickly as possible.
Sure. And I'll continue to give updates on the kind of capital program every quarter and let you know if our outlook changes.
But between $100 million and $125 million, in the last couple of years we've been running between $110 million and $115 million.
Operator
[Operator Instructions] And we have no further questions in the queue. And I'll turn the conference back over to Mr.
Kropelnicki for any closing remarks.
Martin Kropelnicki
Great. Thanks, Melissa.
Everyone, thanks for joining us today and listen to me talk about EITF 92-7. Heike's questions were very spot on and 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.
Martin Kropelnicki
However, keep in mind we do believe those 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.
Martin Kropelnicki
So thank you for joining the call today. And if you have any questions, please feel free to give us a call.
Martin Kropelnicki
Thank you and good day. Bye-bye.
Operator
Thanks. That ends our conference for today.
Thank you for your participation.