Q3 2022 SJW Group Earnings Call
Okay.
Good day and thank you for standing by welcome to the SJW group's third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one one on your telephone.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Andrew Walters.
Chief Financial Officer, and Treasurer. Please go ahead.
Thank you Shannon.
Welcome to the 2022 third quarter financial results conference call for SJW group.
We'll be presenting today with Eric Thornburg Chairman of the Board, President and Chief Executive Officer, and John <unk>, Vice President of regulatory Affairs and government relations.
For those who would like to follow along slides accompanying our remarks are available at our website at www Dot SJW group Dot com.
Before we begin today I would like to remind you that this presentation and related materials posted on our website may contain forward looking statements.
These statements are based on estimates and assumptions made by the company in light of its experience.
Historical trends current conditions and expected future results as well as other factors that the company believes are appropriate under the circumstances.
Many factors could cause the company's actual results and performance to differ materially from those expressed or implied by the forward looking statements.
For a description of some of the factors that could cause actual results to be different from statements in this presentation.
We refer you to the financial results press release, and our most releases forms 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission.
Copies of which may be obtained on our website.
All forward looking statements are made as of today and SJW group disclaims any duty to update or revise such statements.
You will have an opportunity to ask questions at the end of the presentation.
As a reminder, this webcast is being recorded and an archive of the webcast will be available until January 23 2023.
You can access the press release and the webcast at our corporate website.
I will now turn the call over to Eric Thornburg Eric.
Welcome everyone and thank you for joining us I'm, Eric Thornburg and it is my honor to serve as chair President and CEO of SJW group.
We thank our 700 plus employees for building and maintaining a culture of service and their commitment to serve customers communities the environment and each other they know that there is no substitute for clean drinking water reliable service and a healthy natural environment.
We welcome Bruce Hauk to our team in August .
His leadership style aligns with our company's values and it's already making an impact as a member of our executive leadership team.
Over his 26 years in the water industry is built productive working relationships with regulators and local officials.
<unk> expertise and strong track record in utility operations acquisitions and business development will build on SJW group's successful growth strategy that has expanded our footprint and transformed us into a multistate water and wastewater company.
We had a solid third quarter. Despite some continuing headwinds led by regulatory delays in our California general rate case and cost of capital proceedings.
Our <unk> settlement agreement with the public advocates office was approved by the California Public Utilities Commission on October 6th just after the quarter ended the.
The increase in authorized 2022 revenues, which will be retroactive to January one 2022 will be reflected in Q4.
Our team has overcome supply chain issues that have caused longer lead times for some materials necessary to deliver our capital projects.
Despite the challenge our capital spending is on target for 2022.
Likewise inflation is affecting our operating expenses as it is across many sectors of the economy.
In California, we are allowed an annual inflation adjustments.
All our other operations, we're focused on blunting, the impact of inflation, where possible, but this will not come at the expense of our commitment to water quality reliable service.
Our people and the environment.
In the third quarter, we also celebrated the commissioning of our $60 million water treatment facility in Biddeford, Maine.
The Soco River drinking water resource center is a generational investment that will serve the customers and communities into the next century.
High quality drinking water and reliable treatment is just the start.
Center as a resource in the community to raise awareness about the importance of protecting and preserving drinking water and the environment.
We reaffirm our 2022 guidance of $2 30.
To $2 40 per share.
Andrew Walters will now discuss our financial results Andrew.
Thank you Eric.
Yesterday at the close of business, we released our third quarter 2022 operating results reporting net income for the quarter of $25 million or <unk> 82 per diluted share on revenues of $176 million.
This compares to 2021 quarterly net income of $19 1 million or 64 per diluted share on revenue of $166 9 million.
The change in diluted earnings per share for the quarter was primarily driven by cumulative rate increases of 32 per share.
26, <unk> per share production cost savings due to lower customer consumption and.
An increase in our California utilities surface water production.
And at <unk> 13 per share increase due to the impact of our California utilities water conservation Memorandum account.
These increases were partially offset by production cost increases of 31 per share a.
A decrease of <unk> 14 per share due to lower water sales.
And at <unk> <unk> per share decrease as a result of changes in our Connecticut utilities water revenue adjustment account.
Otherwise known as <unk>.
Regulatory mechanism, which I will discuss later in my comments.
As Eric noted we received approval from the California Commission on the settlement agreement with the public advocates office on October six 2022.
The decision will be applied retroactively to January one 2022.
<unk> will provide further information on the decision and the impact in his comments to follow.
Also of note, our California utility continues to operate under a mandatory call for water conservation declared by valley water, our wholesale water supplier the.
Declaration calls for a 15% reduction in 2022 water consumption as compared to 2019.
During the third quarter conservation by our California customers resulted in a usage decrease of 16% for residential customers.
And 10% for business customers.
Turning to revenues, we recognized quarterly revenue increase of $9 1 million compared to the third quarter of 2021.
The increase was primarily attributable to $9 5 million in cumulative water rate increases and $5 1 million and the recognition of balancing and memorandum accounts in California.
Which included $3 9 million related to our WC MAA.
And $1 million related to our Monterey water revenue adjustment mechanism.
These increases were partially offset by a $4 $3 million decrease in customer usage and a decrease of $2 9 million due to the Connecticut utilities wri.
Up to $2 9 million WR a reduction.
$4 million of the decrease occurred to align actual regulated revenues to allowed regulated revenues under the mechanism.
Connecticut water actual regulated revenues for the quarter exceeded authorized regulated revenues by 12%.
The decrease was partially offset by a change in timing of monthly usage under the mechanism, which shifted $1 $1 million in revenue from the previous periods in 2022 to the third quarter.
Water production expenses increased $1 5 million compared to the third quarter of 2021.
Expense increase included $9 2 million in higher average per unit water costs.
Actually offset by $6 million and lower customer usage and $1 8 million as a result of an increase in our California surface water production.
Other operating expenses increased $3 7 million during the third quarter, primarily due to an increase in depreciation expense of $1 7 million and a $1 2 million increase in general and administrative expenses, primarily due to increases in labor costs and higher operating costs.
The effective income tax rate for the third quarter was 1% compared to 13% for the third quarter of 2021.
The effective tax rate decrease was primarily due to a tax accounting method change related to repairs tax in our Connecticut utility.
Turning to our results for the first nine months of 2022 revenue was $449 3 million a.
A 4% increase compared to the same period in the prior year.
Net income for the first nine months of 2022 was $40 3 million or $1 33 per diluted share compared to $42 5 million or $1 43 per diluted share during the same period a year ago.
The change in diluted earnings per share for the first nine months of 2022 was primarily due to cumulative rate increases of 79 per share.
66% 66 cent per share decrease in production cost attributable to lower usage and an increase in California surface water production.
<unk> per share increase in the balancing and memorandum accounts in California, and then 11 per share nonrecurring gain on the sale of non utility property net of nonrecurring tw a purchase price pulled back we recorded in 2021.
These increases were offset by production cost price increases of 70 <unk> per share.
A decrease of 33 per share in customer.
Consumption.
And at 29 per share decrease from the impact of Connecticut Wri.
In addition, depreciation increased 27 per share.
General and administrative expenses increased <unk> 16 per share and.
And the change in California cost recovery balancing and memorandum accounts resulted in an increase of <unk> 12 per share.
Our year to date 2022, nine months revenue increase was primarily due to $22 2 million in cumulative rate increases.
$5 8 million in balancing and memorandum account changes, which included a $2 8 million related to W. CMA and $2 million related to.
The Monterey Ram.
The $3 7 million in new customers.
This increase was partially offset by a decrease in customer usage of $9 1 million and a decrease of $8 $3 million related to the Connecticut Wri.
Of the $8 3 million <unk> $4 8 million of the decrease occurred to align.
General rate.
Case revenues to allowed rate case revenues under the mechanism.
Connecticut water actual general rate case revenues year to date has exceeded authorize general rate case revenues by 6%.
In addition, the change in timing of monthly usage under the mechanism noted in my comments on the quarter resulted in a $3 $5 million revenue decrease for the first nine months of 2022.
This timing difference will reverse in the fourth quarter of this year.
Water production expenses increased $3 million in the first nine months of 2022.
Increase was primarily due to $20 4 million and higher average per unit water supply cost.
Offset by a $13 $3 million decrease in customer usage, and a $5 4 million increase in our customer our California surface water production.
Other operating expenses increased $11 3 million in the first nine months of 2022, primarily due to a $7 6 million increase in depreciation expense and a $6 4 million and higher general and administrative expenses, primarily due to increases in labor and higher.
Operating cost.
In addition cost recovery balancing and memorandum accounts increased $2 1 million and taxes other than income increased by $1 5 million.
Also in 2022, we recorded a $5 5 million gain on the sale of non utility property no similar gain was recorded in 2021.
The change in other income and expense was primarily attributed to our 2017 Twa's sales hold back which was released in the second quarter of 2021 no.
No similar activity occurred in 2022.
The effective income tax rate for 2002 was 8% compared to 11% for 2021.
The effective tax rate decrease was primarily due to a tax accounting method change related to repairs tax in our Connecticut utility.
Turning to our capital expenditure program, we have added $58 9 million in company funded utility plant in the third quarter of 2022.
The total company funded additions for 2000 $22 million to $165 million.
Our 2022 cash flows from operations increased approximately $29 million over the same period in 2021.
The increase was primarily due to an increase of $34 2 million and regulatory assets due to balancing and memorandum account activity and an increase in general.
Working capital and net income adjusted for noncash items of $5 2 million.
These increases were partially offset by $4 5 billion of payments for previously Invoiced and accrued.
An increase of payments for post retirement benefits of $3 million and a decrease of $2 9 million related to higher accounts receivable balances.
At the end of the quarter, we had $158 million available on our bank lines of credit for short term financing.
Utility plant additions and operating activities.
The average borrowing rate on our line of credit advances during the first nine months of 2022 was $2 79%.
The average borrowing rate for the same period of 2021 was approximately 134%.
Recent borrowing cost on our line of credit or around four to four 6% as a comparison and our projected by the street to increase even further in 2023.
With that I will stop and turn the call over to John .
Thank you Andrew.
As mentioned earlier in October the CPUC approved the settlement agreement between San Jose water and the public advocates office for the 2021 GIC that covers 2020 through.
Through 2024, we are appreciative of the Cpuc's public advocates office is recognition of the critical work water utility professionals performance each and every day and this is reflected in our GIC decision.
I also extend my deep appreciation to our customers employees and community leaders, who have and continue to support the essential work we do.
The decision benefits, both San Jose water and its customers by recognizing the need for continued investments in the water system to deliver safe and reliable water service and authorizes a three year $350 million capital.
Budget.
The $25 1 million in additional 2022 revenues authorizing the GSE will be retroactive to January one 2022 and.
Because the decision came after the close of the third quarter those revenues will be reflected in our fourth quarter results.
We estimate an additional revenue.
We estimate the additional revenue will be about 51 per share per diluted share.
A three year revenue increase of $54 1 million was approved prior to authorize inflation adjustments if any.
The constructive decision also reduces earnings volatility by addressing the water supply mix and further aligns actual versus authorized usage.
The water supply contribution from San Jose Water's surface water has been lowered to $1 8 billion gallons from $2 6 billion gallons and the decision establishes a full cost balancing account for water and energy costs.
Among other provisions and the final decision recovery of $18 $2 million from various existing balancing and memorandum accounts and an increase in fixed charges on water bills to recover 45% of the authorized revenue requirement, which is up from 40%.
Filings are being processed to implement new rates as well as recover memorandum and balancing and interim revenue accounts, we will provide an update in Q4s results.
The 2022 to 2020 for a cost of capital proceeding for the large class a California utilities is pending before the CPUC.
San Jose water cost of capital application requested a return on equity of 10, 3%.
Capital structure of 55% equity to 45% debt and a decrease in the average cost of debt.
The application also requested to maintain the water cost of capital mechanism authorizing previous proceedings.
This mechanism allows the ROE to be adjusted by half of the change in the Moody's double a utility bond index rate.
Drought conditions continue in our California service area.
We have regulatory mechanisms in place balancing the need to aggressively promote water conservation with the company's opportunity to earn its authorized return.
Furthermore, the combination of the full cost balancing account authorizing our GIC and our water conservation memorandum account perform in the same manner as what a full decoupling mechanism and should further minimize our earnings volatility and maximize the opportunity to earn our ROE.
On a related note the industry will benefit from Senate Bill $2014, 69, which was signed into law by Governor Newsom last month.
As you recall the low income proceeding decision from 2020 eliminated the future use of the full decoupling mechanism.
Water utilities could no longer request them going forward.
For those that enjoy decoupling at the time this decision phased it out as they completed their current trc cycle or application.
Then it fell $14 69, restores water utility's ability to request to established or reestablished a mechanism in the future <unk> application.
The ultimate authority to approve decoupling still rests with the CPUC.
Given the drought conditions, which demand is strong conservation response, we believe decoupling will allow us to be aggressive on that front. While also ensuring we can recover our fixed costs.
We anticipate seeking to establish decoupling and a future application.
Planning is underway for advanced metering infrastructure project, the $100 million project.
Which is separate from the three year capital budget, a prudent GIC was authorized by the CPUC. This June we anticipate the bulk of the spend to occur in 2024 through 2026.
The current level at Lake Eldon will likely support approximately $1 8 billion gallons in total production for 2022.
As shown on this chart Lake <unk> is slightly below the five year average and higher than in the same period in 2020 in 2021. This.
This should bring total service water production in 2020 to close to or equal to the volume authorized and the recently approved <unk>.
We now have a full cost balancing account for water supply and energy costs, providing protection and instances, where actual water supply mix diverges from what is authorized thereby allowing us to recover our actual costs.
With that I will turn the call back over to Andrew Thank you John .
In Connecticut.
The public utility regulatory authority authorized recovery of $10 million in completed projects through the water infrastructure conservation adjustment mechanism.
The increase in the wake of surcharge was effectively January I'm, sorry July one 2022.
With that contributed approximately $1 $2 million in revenue in the third quarter.
The cumulative Wicca is now 326%, which is expected to generate approximately $3 4 million in annualized revenues.
On September 23rd, Connecticut water completed the acquisition of the assets of Miami Beach Water company, an old mine.
This is a water system for a small beach community that serves 118 customers.
Maine Water company has general rate case applications pending with the Maine Public utility Commission for four of its divisions.
The <unk> in those divisions were required through the prior settlement agreements related to the tax cuts and jobs Act.
If approved as filed the increase in annualized revenues would be $532000.
A decision is expected in the fourth quarter.
Step two of the company's multiyear rate G. RC and the benefit Soco Division went into effect on July one 2022 and is expected to generate annual revenue of $6 3 million.
This was related to our $60 million generational investment and the Soco River drinking water resource Center that went online in June .
This was the middle step in a multiyear plan that is gradually raising rates in the division.
The third and last filing to reflect the operating cost of the new treatment facility is expected to be submitted in early 2023.
On August 1st of water infrastructure.
Charge filing for the Scout Hagen Division was approved by the N PUC, which increased annualized revenues by $50000.
On September 29 at the city of San Antonio approved our customer our proposal for service area transfer with the San Antonio Water system. There are no current customers associated with this transfer, but there is developer interest in adding as much as one.
500, water and sewer connections if completed.
It will add approximately 520 acres to our water service area and 317 acres towards sewer service area.
SJW, TX now serves more than 26000 water and wastewater connections between Austin and San Antonio.
And its service areas are located in three of the five fastest growing counties in the United States.
SJW PX has more than tripled its customer base in 16 years under SJW group ownership, providing service to about 76000 people today.
With a diverse portfolio of water supplies, a growing wastewater business and continued additions to the customer base through organic growth and acquisitions.
We are bullish about the prospects of SJW, TX and the increased contributions to consolidated earnings.
As Eric commented earlier, we are reaffirming our 2022 guidance to $2 30 to $2 40 per diluted share.
Our guidance is dependent on the decision in the cost of capital.
Case in California, and the completion of the four divisional <unk> and Maine in 2022.
With that I will stop and turn the call back over to Eric Eric.
Thank you Andrew we continue to have strong institutional shareholder services ISS ESG ratings further <unk> infrastructure assessments places SJW group in the top quartile of our comparison group, which includes many of our water utility peers.
GR ESB is a global ESG reporting and benchmarking framework.
Connecticut water company in San Jose Water company have helped our customers secure nearly $10 million. So far in 2022 through various state and federal programs such as the low income households assistance program, and the California water and wastewater Arrearage payment program.
Both companies also offer additional assistance programs, including a reduced water rate for income eligible customers.
I am proud of the strides we continue to make in our supplier diversity efforts in September San Jose Water company received the prestigious Trailblazer reward from the Institute for supply management for our supplier diversity efforts.
In addition, Connecticut water for the second year in a row has been named a top workplace in the state of Connecticut by the Hartford current and heart, Connecticut Media one of the only about 60 companies to receive that designation from each publication.
We're especially pleased that the top workplace award is based on an anonymous survey of employees on areas that include culture and company leadership.
Looking ahead to 2023, our board has authorized a $258 $1 million capital spending plan with $1 3 billion planned over the next five years.
We are making progress on our goal to reduce greenhouse gases by 50% by 2030.
We will be documenting our progress on this and other goals in the near future with an update to our last corporate sustainability report and with that I will turn the call back over to the operator.
Thank you.
A reminder to ask a question you will need to press star one one on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Richard Sunderland with Jpmorgan. Your line is now open.
Alright, Thank you for your time today and good morning.
Hey, good morning, Hi, rich.
Starting on the inflation side, given some of the commentary there I'm curious if you could speak a little bit more to what you see.
So is this something that could impact regulatory strategy your rate case timing going forward.
Thank you Richard Richard I appreciate the question and let me ask Andrew to make a few comments on that perhaps John as well.
Rich I think we've.
Got the inflation picture in mind in the existing strategy that we have we are planning to.
Move forward on a regular cycle in our Connecticut utilities and it.
It means that we would file.
File sometime during 2023 with a with an idea towards having rates effective for 2024.
I will.
Turn it over to John to talk about California, or other major utility as it relates to taxes before I do that though Texas continues to grow and is continuing to outpace that but we are looking at.
<unk> mechanisms there that will continue to.
Vantage our revenues.
And with our investment in that utility.
Yes, hi, good morning, Richard.
So the inflation factors will be reflected in our escalation in attrition year increases for 2023 and 2024. Those are really just published indexes that are going to be used.
It's fairly standard in here in California to do that having said that as we think about our 2025 general rate case application Im sorry, our 2024 general rate case application I should I should say.
We are going to.
<unk>.
Those costs, which will include the <unk>.
Pressures of inflation on those two of course as you know we have a triangle cycle here in California, which essentially means we true up our cost once every three years and so we will be showing up those costs to reflect.
Those those pressures when we file our.
Application on January one somewhere around there.
24.
Understood. That's very helpful commentary there. Thank you.
And then on the decoupling legislation.
How do you see the backdrop here.
Changing would be was deflation there has certainly been kind of a long history in the state in terms of decoupling on the water side. Some of the returns there just curious how you see that going forward.
Yes, I mean, I think certainly in the Senate Bill 14, 69 is really going to benefit the industry, we want to be treated the same as the electric utilities. We wanted to have the same mechanism.
That they do and so we have that we have that I guess approval to go ahead and reestablish a request to reestablish our establish a decoupling mechanism for.
For those utilities that don't have it.
And so we think we certainly think it's a positive step in the right direction, having said that.
We also worked very hard as you know in this rate case to really align our actual versus authorized usage, we're getting greater recovery in the fixed charge. We have the full cost balancing account now so all of those things, including decoupling are working together if you will.
To really give us the.
The opportunity to earn or greater.
Return on equity.
Understood and if I could just slip one more in here.
On 2023.
<unk> Capex to 58 million could you give a flavor of juice the changes there versus 22, I guess I'm curious on one hand.
Is this inflation on the capital side, that's also showing up or just wonder what are some of the new projects in there versus your activities.
This year.
Yes, Thank you Richard.
I'll start on that and see if my colleagues have anything further to comment.
Again pretty consistent with prior years, a lot of the basic blocking and tackling.
Replacing old water mains and the like and recovering those investments through our surcharges in Connecticut, and Maine, We anticipate activating a similar surcharge in Texas in 2023, depending on conditions. There and then of course, California. It's all part of the triangle plan. So as we.
Finished construction each year, we can recover that through a timely rate adjustment in January .
Other than that there's not any really large notable project. That's worked its way in as John mentioned in his commentary.
Excited about the launch of <unk>.
That's.
Just a significant win here for our customers and our company and we look forward to executing on that.
That's a multiyear project.
Really going to set the tone going forward so super excited about that.
I think are great.
Sorry, I didn't mean to cut you off there.
Rich.
Okay, Great we'll leave it at that thank you again for the time today.
Thank you Richard I appreciate your support.
Thank you. Our next question comes from Angie <unk> with Seaport Global Your line is now open.
Yeah.
Thank you okay. So just a couple of things so first of all the cost of capital.
You did reiterate your guidance.
If I understand correctly that guidance assumes that there is going to be about.
At time all of that of a.
Drag associated with the true up in the cost of debt from the.
Cost of capital proceeding and I understand that there is some.
Uncertainty when exactly this adjustment is going to happen, it's going to be impactful for 2022. So if there were not to be.
Gentlemen, do I add back the entire 10 cents or is there some offset to that.
Does that drag.
Now that number is reflected in the in the guidance and if if it didn't come to fruition then it would change our range.
Okay.
Go ahead at the right way.
You would add back the approximate $3 $5 million of of.
Dollars that we set.
Accolade for that cost.
Okay, and then you show obviously inflation is.
In SG&A costs.
So what percentage of it roughly is going to be recovered.
And.
The California, Trc in which what portion of that again roughly.
The first with your original expectation.
Andrew we havent necessarily made that that exact calculation, but I will tell you that the authorized versus actual we do have a <unk>.
Drag of approximately 10% it takes between the between authorized and actual for that could be due to disallow meant that can be due to inflation outpacing the adjustments and the time that it takes when we file the rate case to the time. It actually is effective so theres a few different factors, but that at least gives you a sense of kind of the actual versus authorized differential.
Okay, and then just moving on to this.
Potential filing for decoupling with the next year or so.
So as you said I mean I know that.
Current year, Steve recently approved you will see you.
We're protected against.
Changes in.
Cost of purchased water in the mix of the cost of the purchased water, but there is some exposure from.
Sales volume perspective, right. So the decoupling mechanism could basically remove this last two risk factor, but you couldnt be case in California is that fair.
Okay.
Yeah, Angie, it's John saying, yes, I think thats, absolutely fair and.
We're recovering more in the fixed costs now than we've ever before and so that will blunt some of that risk.
Certainly.
The climate change predictions and and the water supply challenges that we're seeing here.
On a more compressed way, we're kind of oscillating between droughts and floods.
It certainly adds to that volatility.
And so if we can get the decoupling a.
Full decoupling mechanism authorized in our next rate case, so we certainly view that as a positive.
As a positive benefit having said that and then I think I mentioned it in my comments, we do have a full decoupling mechanism now essentially through the <unk> as well as our full cost balancing account and we will continue to have that as long as this drought continues.
Okay and then my last question is.
Andrew So you guys do not mention any drag associated with the drop in the body.
Pension accounts like those.
The ones that are not track.
I think I.
It continues to weigh on earnings of your peers in California.
Right, but you don't have yet.
It's not that we don't have it but it hasnt reached to the level that it's been material relative to the other things that we've talked about.
So it is something that we are experiencing and Theres times, when we have positive adjustments as well as negative adjustments.
Okay and the last question the effective tax rate for the entire year 'twenty two and if you could give me a chance for 'twenty three as well.
I'm sorry can you say that question one more time, yes.
Just on average the effective tax rate for 2022, and maybe what you would expect for 2023, given this repair impacts.
Adjustment in Connecticut.
Let us come back to you on that question, we're still doing a little bit of work on our two.
2023, but just as a baseline assumption I would.
Hmm.
Sure.
That the tax rate that we have had prior to this most recent quarter adjustment for the repair tax would be the more consistent tax rate to use as a baseline.
And of around that 10 <unk>.
13% range.
Okay. Thank you.
Thank you Angie.
Thank you as a reminder to ask a question at this time. Please press star one one on your Touchstone telephone.
Our next question comes from Jonathan Reeder with Wells Fargo. Your line is now open.
Hey, Thanks for taking my questions. I was just wondering if you have any insight into the timing of the proposed decision in the cost of capital that you can share I know in the slides you said you expect the decision in Q4 2022, but I think that would require a proposed decision.
And the next few weeks by mid November .
Yes, Jonathan it's John Tang and good to hear from you Youre absolutely right. So the procedural schedule right now has.
Preceding wrapping up by December 31 of.
This year and so that window in terms of getting a proposed decision and then getting a final decision to be voted out is.
Getting narrower and narrower and so.
We are like you we are waiting.
Really on a proposed decision and once we have that proposed decision we will be able to work on that and.
And figure out where we need to go but that's it.
A little bit of a waiting game at this point right now.
Okay, alright, so it is not enough.
The comment in the slide is more just on the current schedule as opposed to.
Necessarily concrete expectations that we'll see something in the next couple of weeks.
Other than hope yes.
Yes, no I don't have any I don't have any concrete expectations.
Okay.
Then.
I guess, Andrew can you remind us about that.
GW is variable rate debt exposure I believe theres only exposure at the utility level, whereas the parent debt is all fixed rate with maturities not starting until.
Late in the decade.
That's right we have in terms of our variable rate exposure, it's really on their line of credit is what are they significant exposure is we do not have a significant amount of variable rate notes or any other variable out of instruments that we are.
Seeing significant moves in the in the interest rate.
That's a positive at least from our perspective and the other thing I will just comment on <unk>.
From a.
That perspective is we have a number of issues that we've disclosed previously those issues will be funding anywhere from this month all the way through till January so that will continue to fix our cost we raise those those debt issues when the interest rate environment was better.
<unk>.
The next timing that we will need to look at raising that will really be more towards the back end of 2023 at the earliest based off of where we stand today. So I think we feel like we're in a pretty good position and that obviously includes <unk>.
Some of the equity raise that we disclosed as well.
Great No I appreciate that additional detail.
Thanks.
Yes.
Thank you and I'm currently showing no further questions at this time I would like to hand, the call back over to Eric Thornburg for closing remarks.
Yes, thank you operator.
Yes, GW group as an organization with high quality regulated water utilities and economically vibrant regions, we enjoy constructive regulatory environments with capital supportive mechanisms in place with a long track record of executing accretive acquisitions, and providing sustainable and consistent long term growth and earnings.
All of that supports our 78 year track record of paying a dividend with 54 consecutive years of increasing that dividend and we thank you for your investment in SJW group and wish you a happy holiday season. Thank you.
Yeah.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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Good day and thank you for standing by welcome to the SJW group's third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one one on your telephone.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Andrew Walton <unk>, Chief Financial Officer and Treasurer. Please go ahead.
Thank you Shannon.
Welcome to the 2022 third quarter financial results conference call for SJW group.
I will be presenting today with Eric Thornburg Chairman of the Board, President and Chief Executive Officer, and John <unk>, Vice President of regulatory Affairs and government relations.
For those who would like to follow along slides accompanying our remarks are available at our website at www Dot SJW group dotcom.
Before we begin today I would like to remind you that this presentation and related materials posted on our website may contain forward looking statements.
These statements are based on estimates and assumptions made by the company in light of its experience historical trends current conditions and expected future results as well as other factors that the company believes are appropriate under the circumstances.
Many factors could cause the company's actual results and performance to differ materially from those expressed or implied by the forward looking statements.
For a description of some of the factors that could cause actual results to be different from statements in this presentation.
We refer you to the financial results press release, and our most release it forms 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission.
Copies of which may be obtained on our website.
All forward looking statements are made as of today and SJW group disclaims any duty to update or revise such statements.
You will have an opportunity to ask questions at the end of the presentation.
As a reminder, this webcast is being recorded and an archive of the webcast will be available until January 23 2023.
You can access the press release and the webcast at our corporate website.
I will now turn the call over to Eric Thornburg Eric.
Welcome everyone and thank you for joining us I'm, Eric Thornburg and it is my honor to serve as chair President and CEO of SJW group.
We thank our 700 plus employees for building and maintaining a culture of service and their commitment to serve customers communities the environment and each other they know that there is no substitute for clean drinking water reliable service and a healthy natural environment.
We welcome Bruce Hauk to our team in August .
His leadership style aligns with our company's values and it's already making an impact as a member of our executive leadership team.
Over his 26 years in the water industry is built productive working relationships with regulators and local officials.
Versus expertise and strong track record in utility operations acquisitions and business development will build on SJW group's successful growth strategy that has expanded our footprint and transformed us into a multistate water and wastewater company.
We had a solid third quarter. Despite some continuing headwinds led by regulatory delays in our California general rate case and cost of capital proceedings.
Our <unk> settlement agreement with the public advocates office was approved by the California Public Utilities Commission on October 6th just after the quarter ended the.
The increase in authorized 2022 revenues, which will be retroactive to January one 2022 will be reflected in Q4.
Our team has overcome supply chain issues that have caused longer lead times for some materials necessary to deliver our capital projects. Despite.
Despite the challenge our capital spending is on target for 2022.
Likewise inflation is affecting our operating expenses as it is across many sectors of the economy.
In California, we are allowed an annual inflation adjustments.
All our other operations, we're focused on blunting, the impact of inflation, where possible, but this will not come at the expense of our commitment to water quality reliable service.
Our people and the environment.
In the third quarter, we also celebrated the commissioning of our $60 million water treatment facility in Biddeford, Maine.
The Soco River drinking water resource center is a generational investment that will serve the customers and communities into the next century.
Quality drinking water and reliable treatment is just the start.
Center as a resource in the community to raise awareness about the importance of protecting and preserving drinking water and the environment.
We reaffirm our 2022 guidance of $2 30.
To $2 40 per share.
Andrew Walters will now discuss our financial results Andrew.
Thank you Eric.
Yesterday at the close of business, we released our third quarter 2022 operating results reporting net income for the quarter of $25 million or <unk> 82 per diluted share on revenues of $176 million.
This compares to 2021 quarterly net income of $19 1 million or <unk> 64 per diluted share on revenue of $166 9 million.
The change in diluted earnings per share for the quarter was primarily driven by cumulative rate increases of 32 per share.
<unk> <unk> per share production cost savings due to lower customer consumption and.
An increase in our California utilities surface water production.
And at <unk> 13 per share increase due to the impact of our California utilities water conservation Memorandum account.
These increases were partially offset by production cost increases of 31 per share a.
A decrease of <unk> 14 per share due to lower water sales.
And <unk> <unk> per share decrease as a result of changes in our Connecticut utilities water revenue adjustment account.
Otherwise known as a W. R E.
Regulatory mechanism, which I will discuss later in my comments.
As Eric noted we received approval from the California Commission on the settlement agreement with the public advocates office on October six 2022.
The decision will be applied retroactively to January one 2022.
John will provide further information on the decision and the impact in his comments to follow.
Also of note, our California utility continues to operate under a mandatory call for water conservation declared by valley water, our wholesale water supplier.
The declaration calls for a 15% reduction in 2022 water consumption as compared to 2019.
During the third quarter conservation by our California customers resulted in a usage decrease of 16% for residential customers and 10% for business customers.
Turning to revenues, we recognized a quarterly revenue increase of $9 1 million compared to the third quarter of 2021.
The increase was primarily attributable to $9 5 million in cumulative water rate increases and $5 1 million and the recognition of balancing and memorandum accounts in California.
Which included $3 9 million related to RWC MAA.
And $1 million related to our Monterey water revenue adjustment mechanism.
These increases were partially offset by a $4 $3 million decrease in customer usage and a decrease of $2 9 million due to the Connecticut utilities W. R E.
Up to $2 9 million W. R a reduction.
$4 million of the decrease occurred to align actual regulated revenues to allowed regulated revenues under the mechanism.
Netiquette water actual regulated revenues for the quarter exceeded authorized regulated revenues by 12%.
The decrease was partially offset by a change in timing of monthly usage under the mechanism, which shifted $1 1 million in revenue from the previous periods in 2022 to the third quarter.
Water production expenses increased $1 5 million compared to the third quarter of 2021.
Expense increase included $9 2 million in higher average per unit water cost, partially offset by $6 million and lower customer usage and $1 8 million as a result of an increase in our California surface water production.
Other operating expenses increased $3 7 million during the third quarter, primarily due to an increase in depreciation expense of $1 7 million and a $1 2 million increase in general and administrative expenses, primarily due to increases in labor costs and higher operating costs.
The effective income tax rate for the third quarter was 1% compared to 13% for the third quarter of 2021.
The effective tax rate decrease was primarily due to a tax accounting method change related to repairs tax in our Connecticut utility.
Turning to our results for the first nine months of 2022 revenue was $449 3 million.
<unk>, 4% increase compared to the same period in the prior year.
Net income for the first nine months of 2022 was $40 3 million or $1 33 per diluted share compared to $42 5 million or a $1 43 per diluted share during the same period a year ago.
The change in diluted earnings per share for the first nine months of 2022 was primarily due to cumulative rate increases of <unk> 79 per share.
66% 66 cent per share decrease in production cost attributable to lower usage and an increase in California surface water production.
A 20 cent per share increase in the balancing and memorandum accounts in California, and then 11 per share nonrecurring gain on the sale of non utility property net of nonrecurring tw a purchase price pulled back we recorded in 2021.
These increases were offset by production cost price increases of <unk> 73 per share of.
The decrease of <unk> 33 per share in customer consumption and.
And in 2009 <unk> per share decrease from the impact of Connecticut W. R E.
In addition, depreciation increased 27 per share.
General and administrative expenses increased <unk> 16 per share and.
And the change in California cost recovery balancing and memorandum accounts resulted in an increase of <unk> 12 per share.
Our year to date 2022, nine month revenue increase was primarily due to $22 2 million in cumulative rate increases.
$5 8 million in balancing and memorandum account changes, which included a $2 8 million related to <unk> and $2 million related to.
The Monterey Ram.
The $3 7 million in new customers.
This increase was partially offset by a decrease in customer usage of $9 1 million and a decrease of $8 3 million related to the Connecticut Wri.
Of the $8 3 million <unk> $4 8 million of the decrease occurred two aligns general rate.
Case revenues to allowed rate case revenues under the mechanism.
Connecticut water actual general rate case revenues year to date has exceeded authorize general rate case revenues by 6%.
In addition, the change in timing of monthly usage under the mechanism noted in my comments on the quarter resulted in a $3 5 million revenue decrease for the first nine months of 2022.
This timing difference will reverse in the fourth quarter of this year.
Water production expenses increased $3 million in the first nine months of 2022. The increase was primarily due to $20 4 million and higher average per unit water supply cost, partially offset by a $13 3 million decrease in customer <unk>.
<unk> and a $5 4 million increase in our customer our California surface water production.
Other operating expenses increased $11 3 million in the first nine months of 2022, primarily due to a $7 6 million increase in depreciation expense and a $6 4 million and higher general and administrative expenses, primarily due to increases in labor and higher.
Operating cost.
In addition cost recovery balancing and memorandum accounts increased $2 1 million and taxes other than income increased by $1 5 billion.
Also in 2022, we recorded a $5 5 million gain on the sale of non utility property no similar gain was recorded in 2021.
The change in other income and expense was primarily attributed to our 2017 PWA sales hold back which was released in the second quarter of 2021.
No similar activity occurred in 2022.
The effective income tax rate for 2002 was 8% compared to 11% for 2021.
The effective tax rate decrease was primarily due to a tax accounting method change related to repairs tax in our Connecticut utility.
Turning to our capital expenditure program, we have added $58 9 million in company funded utility plant in the third quarter 2022.
Bringing the total company funded additions for 2000 $22 million to $165 million.
Our 2022 cash flows from operations increased approximately $29 million over the same period in 2021.
The increase was primarily due to an increase of $34 $2 million and regulatory assets due to balancing and memorandum account activity and an increase in general.
Working capital and net income adjusted for noncash items of $5 2 million.
These increases were partially offset by $4 5 billion of payments for previously Invoiced and accrued.
An increase of payments for post retirement benefits of $3 million and a decrease of $2 $9 million related to higher accounts receivable balances.
At the end of the quarter, we had $158 million available on our bank lines of credit for short term financing.
Utility plant additions and operating activities the.
The average borrowing rate on our line of credit advances during the first nine months of 2022 was $2 79%.
The average borrowing rate for the same period of 2021 was approximately 134%.
Recent borrowing cost on our line of credit or around four to four 6% has the comparison and our projected by the street to increase even further in 2023.
With that I will stop and turn the call over to John .
Thank you Andrew.
As mentioned earlier in October the CPUC approved the settlement agreement between San Jose water and the public advocates office for the 2021 GIC that covers 2020 through.
Through 2024, we are appreciative of the Cpuc's public advocates office is recognition of the critical work water utility profession of performance each and every day and this is reflected in our GIC decision.
I also extend my deep appreciation to our customers employees and community leaders, who have and continue to support the essential work we do.
The decision benefits, both San Jose water and its customers by recognizing the need for continued investments in the water system to deliver safe and reliable water service and authorizes a three year $350 million capital.
Budget.
The $25 1 million in additional 2022 revenues authorizing the GSE will be retroactive to January one 2022.
Because the decision came after the close of the third quarter those revenues will be reflected in our fourth quarter results.
We estimate an additional revenue.
We estimate the additional revenue will be about 51 per share per diluted share.
A three year revenue increase of $54 1 million was approved prior to authorize inflation adjustments if any.
The constructive decision also reduces earnings volatility by addressing the water supply mix and further aligns actual versus authorized usage.
The water supply contribution from San Jose Water's surface water has been lowered to $1 8 billion gallons from $2 6 billion gallons and the decision establishes a full cost balancing account for water and energy costs.
Among other provisions and the final decision recovery of $18 $2 million from various existing balancing and memorandum accounts and an increase in fixed charges on water bills to recover 45% of the authorized revenue requirement, which is up from 40%.
Filings are being processed to implement new rates as well as recover memorandum and balancing and interim revenue accounts, we will provide an update in Q4s results.
The 2022 to 2020 for a cost of capital proceeding for the large class a California utilities is pending before the CPUC.
San Jose water cost of capital application requested a return on equity of 10, 3%.
Capital structure of 55% equity to 45% debt and a decrease in the average cost of debt.
The application also requested to maintain the water cost of capital mechanism authorized in previous proceedings.
This mechanism allows the ROE to be adjusted by half of the change in the Moody's double AA utility bond index rate.
Drought conditions continue in our California service area.
We have regulatory mechanisms in place balancing the need to aggressively promote water conservation with the company's opportunity to earn its authorized return.
Furthermore, the combination of the full cost balancing account authorizing our GIC and our water conservation memorandum account perform in the same manner as would a full decoupling mechanism and should further minimize our earnings volatility and maximize the opportunity to earn our ROE.
On a related note the industry will benefit from Senate Bill $2014, 69, which was signed into law by Governor Newsom last month.
As you recall the low income proceeding decision from 2020 eliminated the future use of the full decoupling mechanism.
Water utilities could no longer request them going forward.
For those that enjoy decoupling at the time this decision phased it out as they completed their current Trc cycle our application.
Senate Bill $14, 69, restores water utility's ability to request to establish or reestablish the mechanism and a future <unk> application.
The ultimate authority to approve decoupling still rest with the CPUC.
Given the drought conditions, which demand is strong conservation response, we believe decoupling will allow us to be aggressive on that front. While also ensuring we can recover our fixed costs.
We anticipate seeking to establish decoupling and a future application.
Planning is underway for advanced metering infrastructure project, the $100 million project.
Which is separate from the three year capital budget approved in the GIC was authorized by the CPUC. This June we anticipate the bulk of the spend to occur in 2024 through 2026.
The current level at Lake <unk> will likely support approximately one 8 billion gallons in total production for 2022.
As shown on this chart Lake element is slightly below the five year average and higher than in the same period in 2020 in 2021.
This should bring total service water production in 2020 to close to or equal to the volume authorized and the recently approved <unk>.
We now have a full cost balancing account for water supply and energy costs, providing protection and instances, where actual water supply mix diverges from what is authorized thereby allowing us to recover our actual costs.
With that I will turn the call back over to Andrew Thank you John .
In Connecticut.
The public utility regulatory authority authorized recovery of $10 million in completed projects through the water infrastructure conservation adjustment mechanism.
The increase in the Wicker surcharge was effectively January I'm, sorry July one 2022.
With that contributed approximately $1 $2 million in revenue in the third quarter.
The cumulative Wicca is now 326%, which is expected to generate approximately $3 4 million in annualized revenues.
On September 23rd, Connecticut water completed the acquisition of the assets of Miami Beach water company in online.
This is a water system for a small beach community that serves 118 customers.
Maine Water company has general rate case applications pending with the Maine Public utility Commission for four of its divisions.
The <unk> in those divisions were required through the prior settlement agreements related to the tax cuts and jobs Act.
If approved as filed the increase in annualized revenues would be $532000. A decision is expected in the fourth quarter.
Step two of the company's multiyear rate G. RC and the benefit Soco Division went into effect on July one 2022 and is expected to generate annual revenue of $6 3 million.
This was related to our $60 million generational investment and the Soco River drinking water resource Center that went online in June .
This was the middle step in a multiyear plan that is gradually raising rates in the division the third and last filing to reflect the operating cost of the new treatment facility is expected to be submitted in early 2023.
On August 1st of water infrastructure.
Charge filing for the Scout Hagen Division was approved by the PUC, which increased annualized revenues by $50000.
On September 29 at the city of San Antonio approved our customer our proposal for service area transfer with the San Antonio Water system. There are no current customers associated with this transfer, but there is developer interest in adding as much as one.
500, water and sewer connections if completed.
It will add approximately 520 acres to our water service area and 317 acres towards sewer service area.
SJW, TX now serves more than 26000 water and wastewater connections between Austin and San Antonio.
And its service areas are located in three of the five fastest growing counties in the United States.
SJW PX has more than tripled its customer base and 16 years under SJW group ownership, providing service to about 76000 people today.
With a diverse portfolio of water supplies, a growing wastewater business and continued additions to the customer base through organic growth and acquisitions.
We are bullish about the prospects of SJW, TX and the increased contributions to consolidated earnings.
As Eric commented earlier, we are reaffirming our 2022 guidance to $2 30 to $2 40 per diluted share.
Our guidance is dependent on the decision in the cost of capital.
Case in California, and the completion of the four divisional <unk> and Maine in 2022.
With that I will stop and turn the call back over to Eric Eric.
Thank you Andrew we continue to have strong institutional shareholder services ISS ESG ratings further G. R. Esb's infrastructure assessment places SJW group in the top quartile of our comparison group, which includes many of our water utility peers.
GR ESP is a global ESG reporting and benchmarking framework.
Connecticut water company in San Jose Water company have helped our customers secure nearly $10 million. So far in 2022 through various state and federal programs such as the low income households assistance program, and the California water and wastewater Arrearage payment program.
Both companies also offer additional assistance programs, including a reduced water rate for income eligible customers.
I am proud of the strides we continue to make in our supplier diversity efforts in September San Jose Water Company received the prestigious Trailblazer Award from the Institute for supply management for our supplier diversity efforts.
In addition, Connecticut water for the second year in a row has been named a top workplace in the state of Connecticut by the Hartford current and heart, Connecticut Media one of the only above 60 companies to receive that designation from each publication.
We're especially pleased that the top workplace award is based on an anonymous survey of employees on areas that include culture and company leadership.
Looking ahead to 2023, our board has authorized a $258 1 million dollar capital spending plan with $1 3 billion planned over the next five years.
We are making progress on our goal to reduce greenhouse gases by 50% by 2030.
We will be documenting our progress on this and other goals in the near future with an update to our last corporate sustainability report and with that I will turn the call back over to the operator.
Thank you.
Reminder, to ask a question you will need to press star one one on your telephone.
Please stand by while we compile the Q&A roster.
Our first question comes from the line of Richard Sunderland with Jpmorgan. Your line is now open.
Alright, Thank you for the time today and good morning.
Hey, good morning, Hi, rich.
Starting on the inflation side, given some of the commentary there.
Obviously, if you could speak a little bit more to what you see.
So is this something that could impact regulatory strategy your rate case timing going forward.
Thank you Richard Richard I appreciate the question and let me ask Andrew to make a few comments on that perhaps John as well.
Rich I think we've.
Got the inflation picture in mind in the existing strategy that we have we are planning to.
Move forward on a regular cycle in our Connecticut utilities and it means.
It means that we would file.
File sometime during 2023 with a with an idea towards having rates effective for 2024.
I will.
Turn it over to John to talk about California, or other major utility as it relates to taxes before I do that though Texas continues to grow and is continuing to outpace that but we are looking at <unk>.
Regulatory mechanisms there that will continue to.
Vantage our revenues.
And with our investment in that utility.
Yes, hi, good morning, Richard.
So the inflation factors will be reflected in our escalation in attrition year increases for 2023 and 2024. Those are really just published indexes that are going to be used.
It's fairly standard here in California to do that having said that as we think about our 2025 general rate case application I'm, sorry, our 2024 general rate case application I should I should say.
We are going to true up.
Those costs, which will include the.
Pressures of inflation on those two of course as you know we have a triangle cycle here in California, which essentially means we true up our cost once every three years and so we will be showing up those costs to reflect.
Those pressures when we file our.
Application on January one somewhere around there.
24.
Understood. That's very helpful commentary there. Thank you.
And then on the decoupling legislation.
How do you see the backdrop here.
Changing would be once inflation theres, certainly been kind of a long history in the state in terms of decoupling on the water side some of the twists and turns there just curious how you see that going forward.
Yes, I mean, I think certainly the Senate Bill 14 69 is.
Really going to benefit.
The industry.
We want to be treated the same as the electric utilities and we wanted to have the same mechanism.
They do and so we have that we have that I guess approval to go ahead and reestablish a request to reestablish our establish a decoupling mechanism for.
For those utilities that don't have it.
And so we think we certainly think it's a positive step in the right direction, having said that we also worked very hard as you know in this rate case to really align our actual versus authorized usage, we're getting greater recovery in the fixed charge. We have the full cost balancing account now so all of those things, including decoupling are working together.
Well.
To really give us.
The opportunity to earn a greater.
Return on equity.
Understood and if I could just slip one more in here.
On 2023 budgeted Capex 258 million could you give a flavor of juice. The changes there versus 22, I guess I'm curious on one hand.
Is this inflation on the capital side, that's also showing up or just what are what are some of the new projects in there versus your activities.
This year.
Yes. Thank you Richard I'll start on that and see if my colleagues have anything further to comment.
Again pretty consistent with prior years, a lot of the basic blocking and tackling.
Replacing old water mains and the like and recovering those investments through our surcharges in Connecticut, and Maine, We anticipate activating a similar surcharge in Texas in 2023, depending on conditions. There and then of course, California. It's all part of the triangle plan. So as we.
Finished construction each year, we can recover that through a timely rate adjustment in January .
Other than that there's not any really large notable project. That's worked its way in as John mentioned in his commentary.
We're excited about launching <unk>.
That's a.
A significant win here for our customers and our company and we look forward to executing on that.
It's a multi year project and really going to set the tone going forward. So super excited about that.
I think are great.
Sorry, I didn't mean to cut you off there.
Hey, rich.
Okay, great well, even at that thank you again for the time today.
Thank you Richard I appreciate your support.
Thank you. Our next question comes from Andrew <unk> with Seaport Global Your line is now open.
Thank you okay. So just a couple of things so first of all the cost of capital.
But you did reiterate your guidance.
If I understand correctly that guidance assumes that there is going to be about.
A dime.
The drag associated with the true up in the cost of debt from the <unk>.
Cost of capital proceeding and I understand that there is some.
Certainty when exactly this adjustment is going to happen.
To be impactful for 2022, so if there were not to be.
Gentlemen, do I add back the entire Tencent or is there some offset to that.
Does that drag.
Now that number is reflected in the in the guidance and if if it didn't come to fruition then it would change our range.
Okay.
Go ahead at the right way, which is you would add back.
Approximately $3 5 million.
Dollars that we set.
<unk> for that cost.
Okay, and then you show obviously inflation is.
And SG&A costs.
So what percentage of it my question.
He is going to be recovered.
And the.
The California, Trc in which what portion of it again roughly.
Whereas the first with your original expectation.
And we haven't necessarily made that that exact calculation, but I will tell you that the authorized versus actual we do have a.
Drag of approximately 10% it takes between the between the authorized and actual for that could be due to disallow meant that can be due to inflation outpacing the adjustments and the time that it takes when we file the rate case to the time. It actually is effective so is there a few different factors, but that at least gives you a sense of kind of the actual versus authorized differential.
Okay, and then just moving on to this.
Potential filing for decoupling it with the next year or.
So as you said I mean, I know that the.
<unk> recently approved you'll see.
You're protected against.
Changes in the.
Cost of purchased water in the mix the cost of the purchased water, but there is some exposure from.
Sales volume perspective, right. So the decoupling mechanism could basically referrals. This last two risk factor Betsy currently case in California is that fair.
Okay.
Yeah, Angie, it's John saying, yes, I think thats, absolutely fair and.
We're recovering more on the fixed costs now than we've ever before and so that will blunt some of that risk.
Certainly.
The climate change predictions and and the water supply challenges that we're seeing here.
In a more compressed way, we're kind of oscillating between droughts and floods.
It certainly adds to that volatility.
And so if we can get the decoupling at.
Full decoupling mechanism authorized in our next rate case, so we certainly view that as a positive.
As a positive benefit having said that and then I think I mentioned it in my comments, we do have a full decoupling mechanism now essentially through the WCS as well as our full cost balancing account and we will continue to have that as long as this drought continues.
Okay and then my last question is.
Andrew So you guys do not mention any drag associated with the.
The drop in the body.
Pension accounts like those.
The ones that I'm not track.
Thank you.
It continues to weigh on earnings with your peers in California.
Right, but you don't have yet.
It's not that we don't have it but it hasnt reached the level that it's been material relative to the other things that we've talked about.
So it is something that we are experiencing and Theres times, when we have positive adjustments as well as negative adjustments.
Okay, and then last question the effective tax rate for the entire year 'twenty two and if you could give me a chance for 'twenty three as well.
I'm sorry can you say that question one more time, just just on average the effective tax rate for <unk>.
<unk> thousand 22, and maybe what you would expect for 2023, given this repair tax.
Adjustment in Connecticut.
Let us come back to you on that question, we're still doing a little bit of work on our 2023, but just as a baseline assumption I would.
Hum.
Hmm.
That the <unk>.
Tax rate that we have had prior to this most recent quarter adjustment for the repair tax would be the more consistent tax rate to use as a baseline so kind of around that 10000.
<unk>, 13% range.
Okay. Thank you.
Thank you Angie.
Thank you as a reminder to ask a question at this time. Please press star one one or you touched on the telephone.
Our next question comes from Jonathan Reeder with Wells Fargo. Your line is now open.
Hey, Thanks for taking my questions. I was just wondering if you have any insight into the timing of the proposed decision in the cost of capital that you can share I know in the slides you said.
Expect the decision in Q4, 2022, but I think that would require a proposed decision.
And the next few weeks by mid November .
Yes, Jonathan it's John <unk>, good to hear from you Youre absolutely right. So the procedural schedule right now has.
Preceding wrapping up by December 31 of.
This year and so you know that window in terms of getting a proposed decision and then getting a final decision to be voted out is.
Getting narrower and narrower and so.
We are like you we are waiting.
Really on a proposed decision and once we have that proposed decision we will be able to work on that and.
And figure out where we need to go but.
It's a little bit of a waiting game at this point right now.
Okay, Alright, so it is not.
The comment on the fly it as more just on the current schedule as opposed to.
Necessarily concrete expectations that we'll see something in the next couple of weeks.
Other than hope yeah.
Yes, no I don't have any I don't have any concrete expectations.
Okay.
Then I.
I guess, Andrew can you remind us about.
SJW is variable rate debt exposure I believe theres only exposure at the utility level, whereas the parent debt is all fixed rate with maturities not starting until late in the decade.
That's right we have in terms of our variable rate exposure, it's really on their line of credit is what are they significant exposure is we do not have a significant amount of variable rate notes or any other variable out of instruments that we are seeing significant moves in the interest rate.
That's a positive at least from our perspective and the other thing I'll just comment on from a.
That perspective is we have a number of issues that we've disclosed previously those issues will be funding anywhere from this month all the way through till January so that will continue to fix our cost we raise those those debt issues when the interest rate environment was better.
And the next timing that we will need to look at raising that will really be more towards the back end of 2023 at the earliest based off of where we stand today. So I think we feel like we're in a pretty good position and that obviously includes.
Some of the equity raise that we disclosed as well.
Great No I appreciate that additional detail.
Thanks.
Yeah.
Thank you and I'm currently showing no further questions at this time I'd like to hand, the call back over to Eric Thornburg for closing remarks.
Thank you operator.
Yes, GW group as an organization with high quality regulated water utilities and economically vibrant regions, we enjoy constructive regulatory environments with capital supportive mechanisms in place with a long track record of executing accretive acquisitions, and providing sustainable and consistent long term growth and earnings.
All of that supports our 78 year track record of paying a dividend with 54 consecutive years of increasing that dividend and we thank you for your investment in SJW group and wish you a happy holiday season.
Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.