Q4 2022 SJW Group Earnings Call
Speaker 1: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1.
Speaker 2: Good day, and thank you for standing by. Welcome to the SJW Group Q4 2022 Earnings Conference call.
Speaker 2: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star-1-1 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, you will need to press star-1-1 on your telephone keypad. You will then hear an automated message advising your hand is raised.
Speaker 2: press star 1-1 again. Please be advised that today's conference is being recorded. I would like to now hand the conference over to your speaker today, Andrew Walters, CFO and Treasurer. Please go ahead. Thank you, operator. Welcome to the fourth quarter and 2022 Financial Results Conference call for SJW Group.
Speaker 2: I will be presenting today with Eric Thornburg, Chair of the Board, President and Chief Executive Officer, and Bruce Hawk, Chief Operating Officer. For those of you who would like to follow along, slides accompanying our remarks are available on our website at sjwgroup.com. Before we begin today, I would like to remind you that this presentation and related materials posted on our website are not meant to be a totally verbatim record of the proceedings.
Speaker 2: 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.
Speaker 2: 10k, 10q, and 8k filed with the Securities and Exchange Commission, copies of which may be obtained on our website.
Speaker 2: All forward-looking statements are made as of today. The SJW group disclaims any duty to update or revise such statements.
Speaker 2: You will have an opportunity to ask questions at the end of the presentation and as a reminder, this webcast is being recorded and an archive of the webcast will be available until April 24, 2023. You can access the press release in the webcast at our corporate website. I will now turn the call over to Eric Thorntberg. Eric? Thank you, Andrew. Welcome everyone and thank you for joining us.
Speaker 2: I'm Eric Thornburg and it is my honor to serve as Chair, President and CEO of SJW Group. 2022 was a strong year for our company. We thank our employees for their passion to serve customers, communities, and each other while being good stewards of the environment. And they do so in a manner that embodies our core values and honors our culture.
Speaker 2: which is essential for long-term success. Earlier this year, Bruce Hawks became our chief operating officer. He joined SJW Group in mid-2022 and brought with him 26 years of industry experience.
Speaker 2: and a leadership style that aligns with our company's values. He has already proved him to be an integral member of our executive leadership team, and I'm pleased to have enjoyed us today on this call to discuss regulatory updates.
Speaker 2: 2023 Capital Expenditures and the Growth of our Texas Operation. After my initial remarks, Andrew will review the financial results of the company and our guidance for 2023. As I mentioned earlier, 2022 was a successful year for us.
Speaker 2: Our leaders and their teams expertly navigated challenges and delivered solid results. Firstly, earnings per deluded share of $2.43 per share. These results were affected by a number of factors including a delayed cost of capital proceeding.
Speaker 2: and inflationary pressures which the company successfully managed. Second, delivery of a $219 million in infrastructure investments, despite supply chain challenges.
Speaker 2: successfully managed. Second, delivery of a $219 million in infrastructure investments despite supply chain challenges. Third,
Speaker 2: a total shareholder return of 13.4% for 2022, which compares favorably to the S&P 1000 utilities sector total shareholder return of negative 0.6%. And fourth, we were just one of 11% of Russell 3000 companies to have a gender balanced board. One of our biggest achievements of the year was the Constructive Settlement Agreement that was approved by the California Public Utilities Commission. It not only addressed the water supply mix challenges in California that had impacted our financial results in 2020 and 21, but also provided a benefit to customers. Given the meaningful progress achieved in our 2022 rate filings.
Speaker 2: We are pleased to provide a projected long-term growth rate of 5 to 7 percent based off of our 2022 diluted EPS. Andrew will now discuss our financial results and 2023 guidance in greater detail. Andrew? Thank you, Eric. Yesterday at the close of business, we released our fourth quarter and 2022 operating results. In the fourth quarter, we afforded revenue of $171.4 million and net income of $33.5 million.
Speaker 2: Our diluted EPS of $1.09 per share. This compares favorably to 2021 quarterly revenue of $139.7 million, reflecting a 23% increase and net income of $18 million, reflecting an 86% increase. And a diluted EPS of $0.60, reflecting an 82% increase.
Speaker 2: The significant increases were driven by the true-up of revenue for the prior periods this year and the fourth quarter due to the approval of the California general rate case. For 2022, reported revenue of $620.7 million and net income of $73.8 million or a diluted EPS of $2.43.
Speaker 2: This compares favorably to 2021 annual revenue of $573.7 million, reflecting an 8% increase, net income of $60.5 million, which reflected a 22% increase, or diluted EPS of $2.03, reflecting a 20% increase. As you can see, the 20% year-over-year increase in diluted earnings per share for 2022 was primarily driven by revenue increases of $1.56 per share, which I will break down for you shortly.
Speaker 2: The increase in diluted earnings per share is also attributable to production costs that better match our actual costs in California, contributing 21 cents. In fact, the recovery in owned water supply benefited customers in California, a welcome outcome for all. These increases were partially offset by an increase in water supply costs of 84 cents
Speaker 2: which I also will break down shortly as well as increases in depreciation due to prior investments. Inflation impacted the companies earnings in 2022, particularly due to investments in our employees that help drive the increase in administrative in general as well as higher interest cost due to the interest rate increases in addition to new investments in infrastructure that benefit our customers.
Speaker 3: As promised, a breakdown of the 8% increase in revenue compared to 2021. The revenue increase was mostly driven by $38.7 million in cumulative water rate increases.
Speaker 3: and 20.7 million in the true up related to the San Jose Water Company General Ray Case that was approved and recognized in the fourth quarter in retroactive to January 1st, 2022. It's worth noting that customer growth has become a more significant contributor to revenue.
Speaker 3: particularly in our Texas utility, adding $5.1 million in total across our utilities. Partially offsetting the increases were decreases of $14.3 million associated with lower customer usage. As a reminder, San Jose Water Company continues to operate under a mandatory call for water conservation declared by Valley Water, our wholesale water supplier.
Speaker 3: The declaration called for a 15% reduction in 2022 water consumption as compared to 2019. During 2022, conservation by our California customers resulted in a usage decrease of 11% for residential customers and approximately 6% for business customers. Also, as promised, some detail about the water production expenses for the year. There was a modest 2% increase in total water production expenses from 2021 that was primarily driven by increases in water and energy pricing of $28.6 million.
Speaker 3: Partially offsetting the increase in expenses was $15.3 million decrease in production related cost to lower customer usage and an increase in owned water supply in California that reduced cost by $7.3 million.
Speaker 3: An increase of $2.3 million in balancing a memorandum account cost recovery. The 10% increase in total other operating expenses compared to the prior year was primarily driven by an increase in depreciation of $10 million, an increase in general administrative expenses of $6.6 million, reflecting higher operating costs and labor costs, and an increase in maintenance costs of $4.7 million that included $3.7 million.
Speaker 3: group in 2022 through equity and debt issuances at competitive share prices and interest rates. Two of the debt issuances, Connecticut Water Company's $25 million Senior Note and San Jose Water Company's $70 million Senior Note, were funded on December 15, 2022, and January 25, 2023.
Speaker 3: At the end of 2022, we had $190 million available and $160 million drawn on our bank lines of credit for short-term financing of utility plan additions and operating activities. The average borrowing rate for the line of credit advances during 2022 with approximately 3.41%. The average borrowing rate for the same period in 2021 was approximately 1.32%. Of note, the SOFR, Secured Overnight Funding Rate, was 0.05% on January 4, 2022.
Speaker 3: which compared to 4.55% on February 16, 2023. I'd also like to highlight that over the same period, the 30-year Treasury rate nearly doubled and were more than double at times during 2022. The effective income tax rate for 2022 was 10% compared to 11% in 2021. We are announcing our 2023 guidance of $2.40 to $2.50 per diluted share and updating our five-year capital investment outlook to $1.4 million from 2021.
Speaker 3: significant rate case decisions expected in 2023, continued inflation affecting interest costs, labor costs, and other expenses, as well as a constructive cost of capital ruling in California. To spend a minute on inflation, in 2022 it drove significant increases in interest costs, labor costs, and chemical expenses. As I noted earlier, interest costs increased dramatically during 2022.
Speaker 3: We expect that 2023 will include the full impact of those increases compared to 2022, which started with historically low rates. Labor costs also increase significantly in 2022 and will continue to increase in to 2023. Chemical spend increased at an estimated compound rate of 20% since you are in 2020 and 39% from last year alone. While some of the chemical costs increases reflect.
Speaker 3: the changing mix of water types and acquisitions, the universal factor was inflation across the utilities. As I've highlighted, inflation is a significant factor in the financing markets with impacts on the return requirements necessary to attract capital. The interest rate environment certainly supports a higher ROE than currently authorized and ROEs for California water utilities are lower than the national average. We made a strong case for the proposed ROE in our application to the Commission for the Costa Capital Proceeding and are optimistic that the Commission will consider all the supportive factors for an increased ROE
Speaker 3: making its decision. While I can't comment further on the proceedings, we remain hopeful for a constructive outcome. As a final note on inflation, our California utility has inflation adjustment mechanisms in the forward rate cases that help offset some of the inflationary impacts. Our company plans to execute a number of rate cases that Bruce will discuss further that should help reduce inflationary impacts in 2024 and help with the recovery on and of investments made in our system.
Speaker 3: The company is instituting guidance for long-term EPS growth rate. The new five-year growth target is 5 to 7 percent, anchored off of 2022 diluted EPS of $2.43. Importantly, the year-over-year growth is not expected to be linear, given the relative contributions of each utility and rate case timing. With that, I'll stop there.
Speaker 3: The company is instituting guidance for long-term EPS growth rate. The new five-year growth target is 5 to 7 percent, anchored off of 2022 diluted EPS of $2.43. Importantly, the year-over-year growth is not expected to be linear, given the relative contributions of each utility and rate case timing. With that, I turn the call over to Bruce.
Speaker 2: Thank you, Andrew. As was mentioned earlier in the fourth quarter, we realized the full benefit of the CPUC approved settlement agreement between San Jose Water Company and the Public as well as the recovery of memorandum and balancing accounts.
Speaker 2: amounts to $18.2 million. We along with our other fellow Class A water utilities in California continue to await a decision in the cost of capital proceeding. While we have seen higher than normal precipitation in San Jose Water Company service areas this rainy season and Lake Ellsman, our largest own California surface water supply is at full capacity. The state of California is still in a multi-year drought. Recent rains have helped, but the drought declaration remains very much in effect.
Speaker 2: Regulatory mechanisms remain in place to balance the need to aggressively promote water conservation while providing the company an opportunity to earn its authorized return. Furthermore, the combination of a full cost balancing account and a full cost balance account is a
Speaker 2: authorized in our GRC and our water conservation memorandum account afford the same benefit as with a full decoupling mechanism and should further minimize our earnings volatility and maximize the opportunity to earn our authorized R08. Senate Bill 1469 restored water utilities' ability to request, to establish or reestablish a decoupling mechanism.
Speaker 2: authorized in our GRC and a water conservation then Miranda account afford the same benefit as what a full decoupling mechanism and should further minimize our earnings volatility and maximize the opportunity to earn our authorized part of the week. Senate Bill 1469 restored water utilities ability to request to establish or reestablish a decoupling mechanism. In a future GRC application.
Speaker 2: We anticipate requesting decoupling in a future application. Given the drought conditions which demand a strong conservation response, we believe pursuing decoupling will allow us to be aggressive on that front while also ensuring we can recover our fixed costs. Our Advanced Metering Infrastructure project is moving forward. The $100 million authorized by the CPUC for this project is on top of the three-year capital budget approved in the GRC. There will be a modest expenditure in 2023 with a bulk of spend to occur in 2024 through 2026. For more information, visit GRC.gov
Speaker 2: In Connecticut, we filed for a Water Infrastructure Conservation Adjustment Increase to recover $27.8 million in completed projects. If approved by the Public Utilities Regulatory Authority as filed, the increase would generate $3.1 million in annualized revenues and would bring the cumulative RICA to just over 6 percent. A decision is expected in the first quarter of 2023.
Speaker 2: with any authorized increase effective on April 1, 2023. Last month, the Maine Public Utilities Commission approved General 8K's application and four of our Maine Waters Operating Division. The rate increases were all retroactive to January 1, 2023, and will generate 692,000 in annualized revenue. Step 3 of Maine Waters Multiyear GRC and the Bidiford Socko Division will be filed in the first quarter of 2023. This filing will reflect the operating cost of the new Socko River Drinking Water Resource Center that went online in the summer of 2022. Our Texas Center SJWTX followed an application for a system improvement charge at the end of 2022.
Speaker 2: system to SJW-TX.
Speaker 2: San Antonio has already approved the service area transfer. No customers could be affected. In January , SJWTX filed applications with the PUCT to acquire KT Water Resources and KT Water Development. KT Water Development is a water utility that serves about 560 customers.
Speaker 2: in southern Comel County with the potential to add additional customers. SJWTX's application requested fair market value and applied rate doctrine treatment to constructive regulatory mechanisms available to us in Texas. KTEA Water Resources
Speaker 2: is a wholesale groundwater supplier to KT Water development. KT Water resources, once interconnected with the SJWTX water systems, will significantly increase the efficiency and resiliency of our water system.
Speaker 2: allowing us to meet projected customer growth through 2070. We anticipate PUC-T decisions on these applications in the third quarter of 2023. SJWTX now serves more than 26,000 water and wastewater connections between Austin and San Antonio.
Speaker 2: And its service areas are located in three of the five fastest growing counties in the United States. SJWTX has quadrupled its Tesla base in 16 years under SJW Group, providing service to about 76,000 people today.
Speaker 2: SAW Group has a 255 million capital expenditure budget for 2023 and plans to invest $1.4 billion through 2027. About 90 million is budgeted in 2023 for Piper Placement as part of our long-term goal to replace approximately 1%.
Speaker 2: our water mains every year. Approximately two-thirds of our infrastructure investments are forward-looking or recoverable through infrastructure recovery mechanisms.
Speaker 2: which helps to minimize regulatory lag. There are several key projects that support growth and reinforce our position as a best-in-class water and wastewater provider. Looking across our operating regions.
Speaker 2: Some of these projects include, in California, the purchase and installation of 5500 acoustic leak detection sensors to enhance our already robust leak detection program.
Speaker 2: Our current unaccounted for water at San Jose Water Company is 8.9%, which is well below the industry average. In Maine, we are currently developing two new source wells in Kayser Falls to address the reduction capacity of the existing well sources and replacing the existing groundwater treatment facility. In Connecticut, we are replacing 1970s groundwater treatment facilities in the
Speaker 2: facility and our largest water system. And in Texas, we're installing a number of water storage tanks to meet the needs of our rapidly growing service area. The tank picture is going into service this month. With that, I will turn the call back over to Eric. Thank you, Bruce. We know infrastructure investments are necessary to ensure high quality drinking water, reliable service, and a healthy environment.
Speaker 2: but investing in our people is just as critical to achieve our mission. We are fortunate to have high-quality talent that executes on our strategies and provides exceptional service to our customers and communities daily and we recognize our teams are affected by the same inflationary pressures impacting our business.
Speaker 2: We have a commitment to our people to be good stewards of their careers and to maintain a world-class culture. In response to the recent surge in inflation in 2022 and 2023 to date, we also invested in our workforce through wage and benefit adjustments.
Speaker 2: that exemplified our commitment to them and their families. Last month, SJW Group published a supplement to its 2021 Corporate Sustainability Report.
Speaker 2: The report is available at our website. Our 2022 report will be available later this year. These reports detail the work we have done and will continue to do to live up to our commitment to be exemplars of corporate social responsibility. We continue to have strong institutional
Speaker 2: nearly 10 million dollars in financial assistance for customers.
Speaker 2: who were in arrears on their bills through various state and federal programs.
Speaker 2: This assistance supplements already existing programs to ensure access and affordability to customers.
Speaker 2: within our service areas. In 2023, we're planning for the installation of additional solar arrays to offset our purchased electricity and we will begin the electrification of our vehicle fleet in California.
Speaker 2: We extend a warm welcome to Commissioner Karen Douglas on her appointment to the California Public Utilities Commission.
Speaker 2: and thank Commissioner Clifford Rexchoffen for his many years of dedicated service.
Speaker 2: We also congratulate Commissioner John Reynolds on his recent reappointment and confirmation.
Speaker 2: We look forward to working with the new commissioners and their staffs to address the water related issues facing California's regulated water utilities.
Speaker 2: I would like to take a moment to recognize our retiring leaders and their successors.
Speaker 2: I thank Maureen Westbrook for her leadership at Connecticut Water and SJW Group. Maureen retired as president of Connecticut Water in December after a distinguished 34-year career at the company. She was a champion for investor-owned water utilities and fought for policy and legislation that protected the company and its customers.
Speaker 2: We welcome Craig Patla as Connecticut Water's new president. He was most recently the company's vice president of service delivery. Craig has been with Connecticut Water for 32 years and has been a leader in our New England operation for nearly a decade.
Speaker 2: Craig's promotion is evidence of the high quality talent we have at every level of the organization and the success of our talent management program.
Speaker 2: I also want to thank Wendy Avia Walker for her leadership. Wendy is retiring next month as San Jose Water Company's Vice President of Finance, Assistant Treasurer and Controller at STW Group.
Speaker 2: Among Wendy's considerable accomplishments over her 17 year career was the integration of accounting teams and systems following our transformational merger with Connecticut Water. I am pleased that Rali Zohani will be assuming Wendy's duties. He joined us earlier this year as Senior Vice President, Principal Accounting Officer.
Speaker 2: Rally comes to us from Veolia, North America Regulated Utilities, where he was the Chief Financial Officer. Rally is a consummate professional with a deep understanding of investor-owned utility accounting and finance functions. His leadership style aligns well with our strong culture of teamwork, respect, and transparency.
Speaker 4: With that, I will turn the call back over to the operator. Thank you. At this time, we will conduct the question and answer session. As a reminder to ask a question, you will need to press the star 11 on your telephone and wait for your name to be announced.
Speaker 4: To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
Speaker 4: Our first question comes from the line of Angie Storozinski.
Speaker 1: support research partners. Angie, your line is open. Thank you. How are you guys? Good afternoon. Good results. Just two things. One is, and I know you said it in your prepared remarks, but I just wanted to confirm it. Do you have in your 2022 EPS a negative impact associated with the true up in the cost of debt?
Speaker 3: From the pending cost of capital proceeding I'm so sorry Yes, Angie. This is something that we have we've had factored into our Results because the were at least our guidance because we knew for with pretty high certainty that we'd only asked for that Amount of recovery related to our debt and it did have a 10 cent decline so But it is an actual results as well No, it's not. That's why it's not
Speaker 1: Okay, so that hands the 10 cents. Okay, and then the effective tax rate, 10%, that seems meaningfully lower than what you had expected, right? And I understand that it's only 100 bits delta year over year, but I think going into the year you had expected 16%, is that fair?
Speaker 3: Yeah, that's correct. And we were, we had slightly better results that came out of our studies on repair tax and some of the other items came out to favor the company.
Speaker 3: And what is embedded in the 23 guidance? What is the effective sex rate? It's similar to the tax rate that we have for this year. But it's higher.
Speaker 1: Okay, okay, good. Thank you. Those were the core points. And then I mean, do you guys have any guidance roughly when to expect a decision on the cost of capital? Has there been any, I don't know, outreach from the commission, any signs? So the ALJ is...
Speaker 2: is nearing an issuance of a proposed decision. Angie, this is Eric. I sure wish we could provide a little insight, but we've got no further indication of timing here. So.
Speaker 1: So we'll all find out together I suspect Okay, and and the The automatic 50 bits increase in the ROE which was triggered by the end of September you haven't filed for it, right? So the clock is ticking in a sense, right? So
Speaker 1: it's either going to be automatically embedded in the proposed decision or the final decision, or you will have to make a filing once the decision is out. Is that fair? So basically, it's not like it's going to be retroactive to 1.1.23. Andrew, do you want to… We don't know. Yes, Eric. I'll take that. –playanc Patterns-
Speaker 1: Just thinking out loud here, so there's been a slowdown in the housing market. You guys are clearly buying areas which should be prone to benefits from new construction. I know that that's probably a multi-year cycle to start with, but just...
Speaker 3: give us a sense how soon should we actually see any earnings contributions from those investments? Sure. And a couple things I'll say is for the investment from Kendall West, we already saw earnings contributions in 2022.
Speaker 3: It was a creative right from the very beginning and that's obviously very positive for the company. The other thing that I'll just highlight is while construction activity and housing sales have been reduced across the country and they have to some extent in Texas as well.
Speaker 3: we're still seeing activity and even during the last economic downturn while we did see absolute decrease in the number of sales happening we still saw growth even in the in the depths of the of the recession at the time. Okay and then one last one I know I said it was last one but so Andrew you're pointing out that the the growth is nonlinear.
Speaker 1: And is it mostly a function of the Connecticut rate cases? So basically almost as if every other year I have a weaker year as I'm trying to catch up on the cost side to a filing in Connecticut, and then the following year a little bit above growth, above, you know, I'm growing basically above that 5 to 7% CAGR, annual growth.
Speaker 3: Yeah, the way to think about it. So we've got.
Speaker 3: If you break up the divisions into California is a very significant division. While we do get inflation adjustments It never meets the actual cost that we we actually incur, right? So the the cost will will outstrip what the adjustments we do get so we get an uplift in that That's one of the one of the years right if it's a three-year cycle, and we're also going to
Speaker 3: the cost for those investments anyway, right? So you're kind of getting made whole on what you're making. So you're correct in thinking about Connecticut's going to have a negative impact for the years that we're out in terms of the growth rate but then it catches up. The same goes for Maine.
Speaker 3: And obviously to a much lesser extent actually Texas continues to have every solid growth. But as we continue to invest in Texas that same trend will continue as we need to think about the timing of the rate cases and hence why we can't have a linear growth rate because we don't have three equal lakes to our stool. We've got different lengths of the stool. Great. Thank you. That's what I have. Thank you.
Speaker 5: Hi, good morning. Can you hear me? Yes. Sure. Okay.
Speaker 5: Okay, great. We've covered a lot here, but on the circle back to Connecticut and the rate case strategy, you spoke to the three-year rate cycle. Just curious how you see that relative to, I guess, the tools available to you, and is it really the ability to roll in capital in the interim driving that? I guess what I'm asking from is we've had...
Speaker 2: mid-March. And Richard, I think it validates our overall strategy in Connecticut of providing for more frequent filings of a general rate case nature and keeping the request lower with fewer issues. In Aquarian's case they had been out nearly 10 years.
Speaker 2: and then come in and ask for about 27% phased in over a couple of years. And when you stay out that long, as we found out in the past, you just have a whole plethora of issues to contend with, and it was pretty clear from the tone and tenor of their case that they just couldn't get any firm footing.
Speaker 2: So we remain committed to that strategy. That being said, we're going to take careful note of this final decision and do our due diligence with policymakers and make any adjustments that we need to going forward. But again, I think it validates the need to go in more frequently, fewer issues, lower amount, and keep doing the good work that we do. Great, that's very helpful, Collar. And then circling back to the growth rate, just trying to parse this a little bit further.
Speaker 5: I guess I'm trying to think about walking to 24, given 23 is a little bit flatter in terms of the growth. Yeah, thank you, Richard. Andrew, I'll give you the first shot at that one.
Speaker 5: given 23 is a little bit flatter in terms of the growth. Yeah, thank you Richard. Andrew, I'll give you the first shot at that one. Thank you Eric.
Speaker 3: Yeah, Richard, I think the key is you've already highlighted it. Texas is not really big enough to paper over Connecticut at this stage. It's continuing to grow at a rate that that may change in the not too distant future, but we're not there today.
Speaker 3: There's also within Maine, we have 12 different rate divisions. That's the other aspect that you have to keep in mind. While we're going in for our largest division in 23 with rates that will be effective in 24, it's not something that will allow for an even growth leg.
Speaker 3: I think what we will do is we do our best to maintain a good cost control structure on our utilities for those years that were out of significant rate case activity. To Eric's point, we'll be focused on making sure that we create the best outcomes for the years that we are in for those rate cases. That makes sense.
Speaker 5: One final one for me just on the 23 guidance itself in cost of capital assumptions. It looks like there's nothing assumed around the trigger given the uncertainty here, but just wanted to be clear on what you have baked in for that, if anything.
Speaker 3: For that particular item, I'm just not going to comment at this stage given our kind of where we are from a rate case or cost of capital case perspective. So I will defer on that one. Fair enough, thank you for the time today. You bet, thank you.
Speaker 4: Yes, thank you, Richard. As a reminder, to ask a question, please dial star one one on your keypad.
Speaker 4: Our next question comes from the line of Jonathan Reeder with Wells Fargo Securities. Jonathan, go ahead.
Speaker 2: Hey, how's everyone doing today? Hi, Jonathan. So, good, good. So I think Angie asked most of my questions and then you just kind of punted on the cost of capital, but can you at least kind of reiterate what you did say around the cost of capital?
Speaker 3: You know, your expectations are what you mean by the constructive cost of capital ruling that's embedded in the guidance and the five to seven percent. I think I kind of missed that and you're prepared remarks. Sure, John . And then I think there's a couple things that, you know, we talked about in the prepared remarks of what we expected from a...
Speaker 3: cost of capital aspect. I think when you think about where we started just from an inflation perspective and where we started from an interest rate perspective which has a direct alignment to ROE, the interest rates have gone up dramatically. That's one thing to note. I talked about how the treasuries have more than doubled, a little bit less than doubled how we've had like a 90 times increase in the rates associated with the SOFR base rate. What I talked about, I said the interest rate environment certainly supports the higher ROE.
Speaker 3: And the other point that I made in here was that, you know, the California water utilities are actually lower than the national average. So as opposed to others that had a recent decisions on coffee, the capital that were above the national average, the water utilities are actually lower than the national average. That coupled with the fact that you have an adjustment that would theoretically take place all support the idea of an increased our we at this point, which matches with what our testimony was when we filed the case. Okay, so the fair to assume based on that like the guidance.
Speaker 2: Assumes the allowed R.E. You know, your current allowed is eight nine that, you know, it's certainly at least at that level if not higher. Yeah, I'm just not going to comment at this particular point given where we are, but, but that's, that's where I'll stop there. Okay, how about on the equity ratio because if I really call it, I think you're kind of asking for. Is it like 200 basis points in increasing your equity ratio from like 53 to 553? Yeah, I think where the equity ratio is ultimately likely to come as similar to where we are today. Okay, okay, that's helpful. All right, now thanks. The only other question I have is related to that six file and system improvement charging taxes.
Speaker 2: I know you said, you know, covers 14.8 million and that's invested since the beginning of 2020. Is that like all you could do under that mechanism? Or did you just file for a fraction of it, you know, in order to kind of manage customer bill impacts? What was kind of the rationale there? Yeah, thank you. Thank you, Jonathan. Bruce, would you like to comment on that one? Sure, thank you, Eric. And thank you for the question, Jonathan. And it's the latter of what you suggested. We were definitely able to file for more, but under
Speaker 2: customer affordability and what have you, it really tempered that and we expect to come back in and multiple filings potentially to capture that. Okay, so you could come back with another SIC filing later on, it doesn't have to get a full blown rate case. Correct, sorry to interrupt. That's our understanding of the mechanism and once we've filed this first one, once we get an actual order from the Commission, we have four years to come in and do a regular GRC and we could do subsequent SIC filings, if you will, between them. Okay, excellent. I appreciate that detail and yeah, good luck with the cost of capital, continue to wait every day for a proposed decision and appreciate the guidance and the long term growth update here. Thanks for your time.
Speaker 2: Great. Thank you, Jonathan. If you would like to pose a question, please dial star 1 1 on your keypad. If there are no additional questions, I would like to now turn the call back over to Eric Thornborg for his closing remarks. Eric. Thank you, Operator. Thank you everyone for participating in our call today. We really appreciate your interest in our company and your support of us. We're really proud of our people and their service to our customers, our communities, our shareholders, and one another. And we look forward to chatting with you in the not-too-distant future and keeping you apprised of our progress. So thank you all. Have a wonderful weekend.
Speaker 4: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. The conference will begin shortly.
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Speaker 3: Andrew Walters, CFO and Treasurer. Please go ahead. Thank you, operator. Welcome to the fourth quarter in 2022 Financial Results Conference call for SJW Group. I will be presenting today with Eric Thornburg, Chair of the Board, President and Chief Executive Officer, and Bruce Hawk, Chief Operating Officer. For those of you who would like to follow along, slides accompanying our remarks are available on our website at sjwgroup.com.
Speaker 3: Before we begin today, I would like to remind you that this presentation and the 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. These 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 recent forms 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission.
Speaker 3: copies of which may be obtained on our website. All forward-looking statements are made as of today. The 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 and as a reminder this webcast is being recorded and an archive of the webcast will be available until April 24th 2023. You can access the press release in a webcast at our corporate website. I will now turn the call over to Eric Thornburg. Eric? Thank you Andrew. Welcome everyone and thank you for joining us.
Speaker 2: I'm Eric Thornburg and it is my honor to serve as Chair, President and CEO of SJW Group. 2022 was a strong year for our company. We thank our employees for their passion to serve customers, communities, and each other while being good stewards of the environment. And they do so in a manner that embodies our core values and honors our culture, which is essential for long term success. Earlier this year, Bruce Hawk became our Chief Operating Officer. He joined SJW Group in mid 2022 and brought with him 26 years of industry experience and a leadership style that aligns with our company's values. He has already proven to be an integral member of our executive leadership team. And I'm pleased to have him join us today on this call to discuss regulatory updates.
Speaker 2: 2023 capital expenditures, and the growth of our Texas operation. After my initial remarks, Andrew will review the financial results of the company and our guidance for 2023. As I mentioned earlier, 2022 was a successful year for us. Our leaders and their teams expertly navigated challenges and delivered solid results. Firstly, earnings per diluted share of $2.43 per share. These results were affected by a number of factors including a delayed cost of capital proceeding and inflationary pressures, which the company successfully managed.
Speaker 2: Second, delivery of a $219 million in infrastructure investments, despite supply chain challenges. Third, a total shareholder return of 13.4% for 2022, which compares favorably to the S&P 1000 utilities sector total shareholder return of negative 0.6%. And fourth, we were just one of 11% of Russell 3000 companies to have a gender balanced board.
Speaker 2: One of our biggest achievements of the year was the Constructed Settlement Agreement that was approved by the California Public Utilities Commission. It not only addressed the water supply mix challenges in California that had impacted our financial results in 2020 and 2021, but also provided a benefit to customers. Given the meaningful progress achieved in our 2022 rate filings, we are pleased to provide a projected long-term growth rate of 5 to 7% based off of our 2022 diluted EPS. Andrew will now discuss our financial results and 2023 guidance in greater detail. Andrew? Thank you, Eric. Yesterday at the close of business, we released our fourth quarter and 2022 operating results.
Speaker 3: In the fourth quarter, we afforded revenue of $171.4 million and net income of $33.5 million, our diluted EPS of $1.09 per share. This compares favorably to the 2021 quarterly revenue of $139.7 million, reflecting a 23% increase.
Speaker 3: and net income of $18 million, reflecting an 86% increase, and a diluted EPS of 60 cents, reflecting an 82% increase. The significant increases were driven by the true-up of revenue for the prior periods this year and the fourth quarter due to the approval of the California General Rate Case.
Speaker 3: For 2022, reported revenue of $620.7 million and net income of $73.8 million, or a diluted EPS of $2.43. This compares favorably to 2021 annual revenue of $573.7 million, reflecting an 8% increase in consumer regrets for their treasure.
Speaker 3: net income of $60.5 million, which reflected a 22% increase, or diluted EPS of $2.3 reflecting a 20% increase. As you can see, the 20% year-over-year increase in diluted earnings per share for 2022 was primarily driven by revenue increases of $1.56 per share, which I will break down for you shortly. Thank you.
Speaker 3: The increase in diluted earnings per share is also attributable to production costs that better match our actual costs in California, contributing 21 cents. In fact, the recovery in owned water supply benefited customers in California, a welcome outcome for all. These increases were partially offset by an increase in water supply costs of 84 cents per share, which I also will break down shortly, as well as increases in depreciation due to prior investments. Inflation impacted the company's earnings in 2022, particularly due to investments in our employees that helped drive the increase in administrative in general as well as higher interest costs due to the interest rate increases, in addition to new investments in infrastructure that benefit our customers. As promised.
Speaker 3: a breakdown of the 8% increase in revenue compared to 2021. The revenue increase was mostly driven by $38.7 million in cumulative water rate increases and $20.7 million in the true-up related to the San Jose Water Company general rate case that was approved and recognized in the fourth quarter and retroactive to January 1, 2022. It's worth noting that customer growth has become a more significant contributor to revenue.
Speaker 3: particularly in our Texas utility, adding $5.1 million in total across our utilities. Partially offsetting the increases were decreases of $14.3 million associated with lower customer usage. As a reminder, San Jose Water Company continues to operate under a mandatory call for water conservation declared by Valley Water, our wholesale water supplier. The declaration called for a 15% reduction in 2022 water consumption as compared to 2019.
Speaker 3: During 2022, conservation by our California customers resulted in a usage decrease of 11% for residential customers and approximately 6% for business customers. Also as promised, some detail about the water production expenses for the year. There was a modest 2% increase in total water production expenses from 2021 that was primarily driven by increases in water and energy pricing of 28.6 billion. Partially offsetting the increase in expenses was 15.3 million decrease in production related costs to lower customer usage and increase in owned water supply in California that reduced costs by 7.3 million and an increase of 2.3 million in balancing and memorandum account cost recovery. The 10% increase.
Speaker 3: and total other operating expenses compared to the prior year was primarily driven by an increase in depreciation of $10 million, an increase in general administrative expenses of $6.6 million reflecting higher operating costs and labor costs, and an increase in maintenance costs of $4.7 million that included $3.7 million from the Order Institute investigation, and finally an increase in taxes other than income of $1.6 million due to increased assets in our utilities. A $2.2 million impairment of long-lived assets in the fourth quarter of 2021 did not repeat in 2022 and partially offset the increased expenses.
Speaker 3: $165 million was raised by SJW Group in 2022 through equity and debt issuances at competitive share prices and interest rates. Two of the debt issuances, Connecticut Water Company's $25 million Senior Note and San Jose Water Company's $70 million Senior Note, were funded on December 15, 2022 and January 25, 2023. At the end of 2022, we had $190 million available and $160 million drawn on our bank lines of credit for short-term financing of utility plan additions and operating activities. The average borrowing rate for the line of credit advances during 2022 with approximately 3.41%.
Speaker 3: The average borrowing rate for the same period in 2021 was approximately 1.32%. Of note, the SOFR, Secured Overnight Funding Rate, was 0.05% on January 4, 2022, which compared to 4.55% on February 16, 2023.
Speaker 3: Also like to highlight that over the same period the 30-year Treasury rate nearly doubled and were more than double at times during 2022. The effective income tax rate for 2022 was 10% compared to 11% in 2021. We are announcing our 2023 guidance of $2.40 to $2.50 per diluted share and updating
Speaker 3: The 2022 guidance range included the cost of debt adjustment in the company, included in its testimony of the CPUC. Factors impacting the 2023 guidance include no significant rate case decisions expected in 2023. The 2022 guidance range included the cost of debt adjustment in the company, included in its testimony of the 2020 guidance range.
Speaker 3: continued inflation affecting interest costs, labor costs, and other expenses, as well as a constructive cost-of-capital ruling in California. To spend a minute on inflation, in 2022 it drove significant increases in interest costs, labor costs, and chemical expenses.
Speaker 3: As I noted earlier, interest costs increased dramatically during 2022. We expect that 2023 will include the full impacts of those increases compared to 2022, which started with historically low rates. Labor costs also increase significantly in 2022 and will continue to increase in to 2023. Chemical spend increased at an estimated compounded rate of 20% since you are in 2020 and 39% from last year alone. While some of the chemical costs increases reflect the changing mix of water types and acquisitions, the universal factor was inflation across the utilities. As I've highlighted, inflation is a significant factor in the financing market.
Speaker 3: and the forward rate cases.
Speaker 3: that help offset some of the inflationary impacts. Our company plans to execute a number of rate cases that Bruce will discuss further that should help reduce inflationary impacts in 2024 and help with the recovery on and of investments made in our system. The company is instituting guidance for long-term EPS growth rate. The new five-year growth target is 5 to 7 percent, anchored off of 2022 diluted EPS of $2.43. Importantly, the year-over-year growth is not expected to be linear.
Speaker 2: given the relative contributions of each utility and rate case timing. With that, I turn the call over to Bruce. Thank you, Andrew. As was mentioned earlier in the fourth quarter, we realized the full benefit of the CPUC-approved settlement agreement between San Jose Water Company and the Public Advocates Office for the 2021 GRC that covers 2022 through 2024. We are now in the interim and outstanding revenue for 2022 of $25.1 million, as well as the recovery of memorandum and balancing accounts amounting to $18.2 million. We along with our other learning team about how we can increase our dryness performance
Speaker 2: fellow Class A water utilities in California continue to await a decision in the cost of capital proceeding. While we have seen higher than normal precipitation in San Jose Water Company service areas this rain season and Lake Ellsman, our largest owned California surface water supply is at full capacity. The state of California is still in a multiyear drought. Different rains have helped, but the drought declaration remains very much in effect. Regulatory mechanisms remain in place to balance the need to aggressively promote water conservation while providing the company an opportunity to earn its authorized return. Furthermore, the combination of the full cost balancing account...
Speaker 2: authorized in our GRC and our water conservation memorandum account afford the same benefit as would a full decoupling mechanism and should further minimize our earnings volatility and maximize the opportunity to earn our authorized R.O.E. Senate Bill 1469 restored water utilities' ability to request, to establish or reestablish a decoupling mechanism. In a future GRC application, we anticipate requesting decoupling in a future application. Given the drought conditions which demand a strong conservation response, we believe presumed decoupling will allow us to be aggressive on that front while also ensuring we can recover our fixed costs. Our advanced metering infrastructure project is moving forward. The $100 million authorized by the CPUC for this project is on top of the three-year capital budget approved in the GRC. There will be a modest expenditure in 2023.
Speaker 2: with a bulk of spend to occur in 2024 through 2026. In Connecticut, we filed for a water infrastructure conservation adjustment increase to recover $27.8 million in completed projects. If approved by the Public Utilities Regulatory Authority as filed, the increase would generate $3.1 million in annualized revenues and would bring the cumulative WICCA to just over 6%. A decision is expected in the first quarter of 2023.
Speaker 2: with any authorized entries effective on April 1, 2023. Last month, the Maine Public Utilities Commission approved general rate case applications in four of our Maine Waters operating divisions. The rate increases were all retroactive to January 1, 2023 and will generate $692,000 in annualized revenue. Step 3 of Maine Waters' multiyear GRC and the Bitterford-Sacko Division will be filed in the first quarter of 2023. This filing will reflect the operating costs of the new Socko River Drinking Water Resource Center that went online in the summer of 2022.
Speaker 2: Our Texas subsidiary, SJWTX, filed an application for a system improvement charge at the end of 2022. Since our last General Array case in 2014, the company has invested more than $43 million in drinking water and wastewater infrastructure that is in service and providing a benefit to customers. Our system improvement charge filing requests recovery of $14.8 million in improvements that were made between January 1, 2020 and September 30, 2022. The SIC charge, as submitted, would increase the bill of the average residential customer using approximately 7,000 gallons per month by less than $5 per month, or about $0.16 per day. A filing to expand our CCN with the PUCT is pending for the transfer of more than 500 acres of water service area and more than 300 acres of wastewater service area from the San Antonio Water System to SJWTX. San Antonio has already approved the service area transfer. No customers could be affected.
Speaker 2: In January , SJWTX filed applications with the PUCT to acquire KT Water Resources and KT Water Development. KT Water Development is a water utility that serves about 560 customers in southern Comel County with the potential to add additional customers. SJWTX's application requested fair market value and applied rate doctrine treatment to constructive regulatory mechanisms available to us in Texas. KT Water Resources is a wholesale groundwater supplier to KT Water Development. KT Water Resources, once interconnected with the SJWTX water systems, will significantly increase the efficiency and resiliency of our water systems, allowing us to meet projected customer growth through 2070. We anticipate PUCT decisions on these applications in the third quarter of 2023. SJWTX now serves more than 26,000 water and wastewater connections.
Speaker 2: between Austin and San Antonio. And its service areas are located in three of the five fastest growing counties in the United States. SJWTX has quadrupled its customer base in 16 years under SJW Group, providing service to about 76,000 people today. SJW Group has a $255 million capital expenditure budget for 2023 and plans to invest $1.4 billion through 2027. About $90 million is budgeted in 2023 for pipe replacement as part of our long-term goal to replace approximately 1% of our water mains every year. Approximately two-thirds of our infrastructure investments are forward-looking or recoverable through infrastructure recovery mechanisms, which helps to minimize regulatory lag. There are several key projects that support growth and reinforce...
Speaker 2: With that, I will turn the call back over to Eric. Thank you, Bruce. We know infrastructure investments are necessary to ensure high quality drinking water, reliable service, and a healthy environment. But investing in our people is just as critical to achieve our mission. We are fortunate to have high quality talent that executes on our strategies and provides exceptional service to our customers and communities daily.
Speaker 2: and we recognize our teams are affected by the same inflationary pressures impacting our business. We have a commitment to our people to be good stewards of their careers and to maintain a world-class culture. In response to the recent surge in inflation in 2022 and 2023 to date, we also invested in our workforce through wage and benefit adjustments that exemplified our commitment to them and their families. Last month, SJW Group published a supplement to its 2021 Corporate Sustainability Report. The report is available at our website. Our 2022 report will be available later this year. These reports detail the work we have done and will continue to do to live up to our commitment.
Speaker 2: to be exemplars of corporate social responsibility. We continue to have strong institutional shareholder services ESG ratings. Further, Griesbe's infrastructure assessment places SJW Group in the top quartile of our comparison group, which includes many of our water utility peers. In 2022, we helped secure nearly $10 million in financial assistance for customers who were in arrears on their bills through various state and federal programs. This assistance supplements already existing programs to ensure access and affordability to customers within our service areas. In 2023, we're planning for the installation of additional solar arrays
Speaker 2: to offset our purchased electricity and we will begin the electrification of our vehicle fleet in California. We extend a warm welcome to Commissioner Karen Douglas on her appointment to the California Public Utilities Commission and thank Commissioner Clifford Rexchoffen for his many years of dedicated service. We also congratulate Commissioner John Reynolds on his recent reappointment and confirmation. We look forward to working with the new commissioners and their staffs to address the water related issues facing California's regulated water utilities. I would like to take a moment to recognize our retiring leaders and their successors. I thank Maureen Westbrook for her leadership at Connecticut Water and SJW Group.
Speaker 2: Maureen retired as president of Connecticut Water in December after a distinguished 34-year career at the company. She was a champion for investor owned water utilities and fought for policy and legislation that protected the company and its customers. We welcome Craig Patla as Connecticut Water's new president. He was most recently the company's vice president of service delivery. Craig has been with Connecticut Water for 32 years and has been a leader in our New England operation for nearly a decade.
Speaker 2: Craig's promotion is evidence of the high-quality talent we have at every level of the organization and the success of our talent management program. I also want to thank Wendy Avia Walker for her leadership. Wendy is retiring next month as San Jose Water Company's Vice President of Finance, Assistant Treasure and Controller at SW Group. Among Wendy's considerable accomplishments over her 17-year career was the integration of accounting teams and systems following our transformational merger with Connecticut Water. I am pleased that Raleigh Zerhani has will be assuming Wendy's duties. He joined us earlier this year as Senior Vice President, Principal Accounting Officer. Raleigh comes to us from Vialia North America. He has a regulated utilities.
Speaker 2: where he was the Chief Financial Officer. Raleigh is a consummate professional with a deep understanding of investor-owned utility accounting and finance functions. His leadership style aligns well with our strong culture of teamwork, respect, and transparency. With that, I will turn the call back over to the operator. Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press the star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question is from
Speaker 1: comes from the line of Angie Storozinski with CPORT Research Partners. Angie, your line is open. Thank you. How are you guys? Hi, Angie. Great. Good results. Good afternoon. Good results. Just two things. One is, and I know you said it in your prepared remarks, but I just wanted to confirm it. Do you have in your 2022 EPS a negative impact associated with the true up in the cost of debt from the pending cost of capital proceeding? Yes, Angie. Andrew, go ahead.
Speaker 3: I'm so sorry Eric. Yes Angie, this is something that we have, we've had factored into our results because we're at least our guidance, because we knew for with pre-high certainty that we'd only asked for that amount of recovery related to our debt, and it did have a 10-cent decline. So, but it is an actual results as well? No, it's not. That's why. It's not. Okay, so that hands the 10 cents. Okay, and then the effective tax rate 10% that seems meaningfully lower than what you had expected, right? And I understand that it's only a hundred-bit delta year over year, but I think.
Speaker 1: Going into the year you had expected 16%. Is that fair? Yes, that's correct. We had slightly better results that came out of our studies on repair tax and some of the other items that came out to favor the company. And what is embedded in the 23 guidance? What is the effective tax rate? It's similar to the tax rate that we have for this year. Okay, good. Thank you. Those were the core points. And then, do you guys have any guidance roughly when to expect a decision on the cost of capital? Has there been any outreach from the commission, any signs that the ALJ is nearing an issuance of a proposed decision? Angie, this is Eric. I sure wish we could provide a little insight, but we've got no further indication of timing here. So we'll all find out together, I suspect. Okay. And the...
Speaker 1: market. You guys are clearly buying areas which should be prone to benefits from new construction. I know that that's probably a multi-year cycle to start with, but just give us a sense how soon should we actually see any earnings contributions from those investments. Sure. A couple things I'll say is.
Speaker 3: is for the investment from Kendall West, we already saw earnings contributions in 2022. It was a creative right from the very beginning, and that's obviously a very positive for the company. The other thing that I'll just highlight is while construction activity and housing sales have been reduced across the country, and they have to some extent in Texas as well, we're still seeing activity, and even during the last economic downturn while we did see a absolute decrease in the number of sales happening, we still saw growth even in the depths of the recession at the time. Okay.
Speaker 1: And then one last one. I know I said it was last one. So, Andrew, you're pointing out that the growth is nonlinear. And is it mostly a function of the Connecticut rate cases? So basically almost as if every other year I have a weaker year as I'm trying to catch up on the cost side through a filing in Connecticut. And then the following year, a little bit above growth, I'm growing basically above that 5 to 7 percent CAGR, not CAGR, annual growth. Yeah, the way to think about it, so we've got, if you break up the division into California is a very significant division.
Speaker 3: While we do get inflation adjustments, it never meets the actual cost that we actually incur, right? So the cost will outstrip what the adjustments we do get. So we get an uplift in that. That's one of the one of the years, right? If it's a three-year cycle, and we're also going to do Connecticut in a three-year cycle, the Connecticut rate case has one year where it goes up and being a historic test year, you will lose ground in those intervening two years, offset by our investments in infrastructure for WICCA. But you know, we're obviously carrying the cost for those investments anyway, right? So you're kind of getting made whole on what you're making. So you're correct in thinking about Connecticut's going to have a negative impact for the years that we're out in terms of the growth rate, but then it catches up. The same goes for Maine and and obviously to a much lesser extent. Actually, Texas continues to have very solid growth.
Speaker 1: But as we continue to invest in Texas, that same trend will continue as we need to think about the timing of the rate cases and hence why we can't have a linear growth rate because we don't have three equal lakes to our stool. We've got different lengths of the stool. Great. Thank you. Third oil half, thanks. Thank you, Andrew. Our next question comes from the line of Richard Sunderland with JP Morgan. Please hold while I promote him to propose his questions. Richard, your line is open.
Speaker 5: Hi, good morning. Can you hear me? Yes. Sure can. Okay, great. We've covered a lot here, but circling back to Connecticut and the rate case strategy, you spoke to the three-year rate cycle. Just curious how you see that relative to, I guess, the tools available to you, and is it really the ability to roll in capital and the interim driving that? I guess where I'm asking from is we've had, I call it a challenging data point out of the state recently for one of your peers, and I'm curious if that impacts your strategy at all.
Speaker 2: Thank you Richard, it's a great question. And first I'd point out the data point is a draft decision in the Aquarian rate case with a final decision expected in mid-March. And Richard, I think it validates our overall strategy in Connecticut of providing for more frequent filings of a general rate case nature. And keeping the request lower with fewer issues. In Aquarian's case, they had been out nearly 10 years and then come in and asked for about 27% phased in over a couple of years. And when you stay out that long, as we found out in the past, you just have a whole...
Speaker 5: plethora of issues to contend with and and it was pretty clear from the tone and tenor of their case that they just couldn't get any firm footing. So we remain committed to that strategy. That being said, we're going to take careful note of this final decision and then do our due diligence you know with policymakers and make any adjustments that we need to going forward. But again, I think it validates the need to go in more frequently, fewer issues, lower amount and keep doing the good work that we do. Great, that's very helpful, Caller. And then circling back to the growth rate, just trying to parse this a little bit further. So appreciate kind of the different legs of the stool and how that contributes to the non-linearity of growth. But just to look at this a little bit more in the near term, does that mean the right way to think about the trajectory within that CAGR is the three year rate cycle that you spoke to for Connecticut and California? Or do you see the growth in Texas you know, papering over that somewhat in the interim? I guess I'm trying to think about walking to 24 given 23 is a little bit flatter in terms of the growth. Thank you, Richard. Andrew, I'll give you the first shot at that one. Thank you, Eric. Richard, I think the key is you've already highlighted it. Texas is not really big enough to paper over Connecticut at this stage.
Speaker 3: It's continuing to grow at a rate that may change in the not too distant future, but we're not there today. There's also within Maine, we have 12 different rate divisions. That's the other aspect that you have to keep in mind. While we're going in for our largest division in 23 with rates that will be effective in 24, it's not something that will allow for an even growth leg. I think what we will do is we do our best to maintain a good cost control structure on our utilities for those years that we're out of significant rate case activity. To Eric's point, we'll be focused on making sure that we create the best outcomes for the years that we are in for those rate cases. That makes sense. One final one for me, just on the 23 guidance itself in cost of capital assumptions. It looks like there's nothing assumed around the trigger given the uncertainty here, but just wanted to be clear on what you have baked in for that, if anything. For that particular item, I'm just not going to comment at this stage given where we are from a rate case or cost of capital case perspective. I will defer on that one. Fair enough. Thank you for the time today.
Speaker 3: You bet. Thank you. Yes. Thank you, Richard. As a reminder to ask a question, please dial star 11 on your keypad. Our next question comes from the line of Jonathan Reader with Wells Fargo Securities. Jonathan, go ahead. Hey, how's everyone doing today? Hi, Jonathan. Thanks. Good. Good. So I think ANGS, most of my questions, then you just kind of pointed on the cost of capital, but can you at least kind of reiterate what you did say around, you know, your expectations or what you mean by the constructive cost of capital ruling that's embedded in the guidance in the five to seven percent. I think I kind of missed that and you're prepared remarks.
Speaker 3: Sure Jonathan, I think there's a couple things that we talked about in the prepared remarks of what we expected from a cost to capital aspect. And I think when you think about where we started, just from an inflation perspective and where we started from an interest rate perspective, which has a direct alignment to ROE, the interest rates have gone up dramatically. That's one thing to note. I talked about how the treasuries have doubled, a little bit less than doubled, how we've had a 90 times increase in the rates associated with the SOFR base rate.
Speaker 3: So what I talked about, I said the interest rate environment certainly supports the higher ROE. And the other point that I made in here was that the California water utilities are actually lower than the national average. So as opposed to others that have had recent decisions on coffee capital that were above the national average, the water utilities are actually lower than the national average. That coupled with the fact that you have an adjustment that would theoretically take place all support the idea of an increased ROE at this point which matches with what our testimony was when we filed the case.
Speaker 3: Okay, so is it fair to assume based on that, like, the guidance assumes the allowed are we. You know, your current allowed is 89 that, you know, it's certainly at least at that level, if not higher. Yeah, I'm just not going to comment at this particular point, given where we are, but. But that's where I'll stop there. Okay, how about on the equity ratio? Because if I recall, I think you're kind of asking for. Is it like 200 basis points increasing your equity ratio from like 5,333 to 5,500? Yeah, I think where the equity ratio is ultimately likely to come as similar to where we are today. Okay, okay, that's helpful. All right. No, thanks. The only other question I have.
Speaker 2: is related to that SICK filing system improvement charge in Texas. I know you said, you know, covers 14.8 million and that's invested since the beginning of 2020. Is that like all you could do under that mechanism or did you just file for a fraction of it, you know, in order to kind of manage customer bill impacts? What was kind of the rationale there? Yeah, thank you. Thank you, Jonathan. Bruce, would you like to comment on that one? Sure. Thank you, Eric. And thank you for the question, Jonathan. And it's the latter of what you suggested. We were definitely able to file for more, but under customer affordability and what have you, we really tempered that and we expect to come back in and multiple filings potentially to capture that.
Speaker 2: Okay, so you could come back with another SIC filing later on. It doesn't have to get a full blown rate case. Correct. Sorry to interrupt. That's our understanding of the mechanism and once we filed this first one, once we get an actual order from the commission, we have four years to come in to do a regular GRC and we could do subsequent SIC filings, if you will, between that.
Speaker 3: Okay, excellent. I appreciate that detail and yeah, good luck with the cost of capital. Continue to wait every day for a proposed decision and appreciate the guidance and the long term kind of growth update here. So thanks for your time. Great. Thank you, Jonathan. Thank you. If you would like to pose a question, please dial star one one on your keypad. If there are no additional questions, I would like to now turn the call back over to Eric for his closing remarks. Eric.
Speaker 5: Thank you, Operator. Thank you everyone for participating in our call today. We really appreciate your interest in our company and your support of us. We're really proud of our people and their service to our customers, our communities, our shareholders, and one another. And we look forward to chatting with you in the not too distant future and keeping you apprised of our progress. So thank you all. Have a wonderful weekend. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.