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.

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. 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. 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 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. 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…

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. 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. 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. 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. 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…

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.

Good point.

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. 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. 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. 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. 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. 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. So with that, Melissa, we will open it up for question and answers, please.

[Operator instructions] And our first question will come from Michael Roomberg from Ladenburg Thalmann.

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?

Those are general rates that start in 2012.

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

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.

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?

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.

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.

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.

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.

Yes, well, that'll still continue to flow under GAAP [ph] . 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.

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

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?

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.

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?

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.

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.

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

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.

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. 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.

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

The $0.06 would be the mark-to-market.

Well, that would, that would be the swing from -

Yes.

'10 to '11.

That's right.

Absolute, it's just the $1.9 million, right?

Correct.

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?

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.

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?

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.

And that's going to be for all? I mean, you're going to file then I guess cases for all the Big Island?

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

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

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.

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?

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.

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?

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.

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.

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 Instructions] Our next question comes from Heike Doerr, Robert W. Baird.

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.

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.

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.

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

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?

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.

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?

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.

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?

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.

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?

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 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.

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. 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. 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. Bye-bye.

Thanks. That ends our conference for today. Thank you for your participation.